WEBVTT

NOTE Nationalökonomie

1
00:00:00.000 --> 00:00:07.000
Ladies and gentlemen, welcome to our eighth installment of the seminar on the lifetimes and work of Ludwig von Mises.

2
00:00:07.000 --> 00:00:14.000
We are approaching the end. We are just one and a half days away from the end of the seminar.

3
00:00:14.000 --> 00:00:23.000
And so it's only befitting that we now come also to the treatise which is at the end of Mises' work achievement in his European years.

4
00:00:23.000 --> 00:00:27.000
He moves to the United States in 1940. We've already mentioned this.

5
00:00:27.000 --> 00:00:37.000
and he spends there the last third of his year and correspondingly tomorrow the day will be dedicated to this period of his life.

6
00:00:37.000 --> 00:00:47.000
He worked on this treatise of economics which finally appeared under the title National Economie

7
00:00:47.000 --> 00:00:53.000
during the six years that he spent at the Graduate Institute for International Studies in Geneva

8
00:00:53.000 --> 00:01:02.000
The book finally appeared in May 1940, so the very month that Mises later called the worst month in European history.

9
00:01:02.000 --> 00:01:09.000
He did not even seem to take exception for his book, but I must assume he must have taken exception for his book.

10
00:01:09.000 --> 00:01:15.000
In any case, it was bad timing, not only because he could not really enjoy its publication,

11
00:01:15.000 --> 00:01:22.000
being surrounded by the German armies approaching from the north and the Italian armies approaching from the south.

12
00:01:22.000 --> 00:01:34.000
But also because while the war disrupted the intellectual division of labor, many of the copies that Mises sent to his friends and colleagues never reached their destination.

13
00:01:34.000 --> 00:01:44.000
The publisher went bankrupt shortly thereafter. So it was a book that certainly would have disappeared in the history of thought and would have been only of antiquarian interest

14
00:01:44.000 --> 00:01:57.000
had it not been for his immigration to the US and had it not been for the subsequent publication of Human Action in 1949, which raised again interest for this predecessor.

15
00:01:57.000 --> 00:02:07.000
Now, the fact is that both books are essentially similar. They have the very same structure, the very same arguments.

16
00:02:07.000 --> 00:02:15.000
There are, in fact, very few significant differences about which I will come to talk a little bit later.

17
00:02:15.000 --> 00:02:25.000
Let's first talk about the structure of the book and what I say now holds true for both books, Nationale Economie and Human Action.

18
00:02:25.000 --> 00:02:35.000
Both books are systematic treatises. In this respect, they distinguish themselves from the usual textbooks of the time

19
00:02:35.000 --> 00:02:38.000
and the usual textbooks that are still published today.

20
00:02:38.000 --> 00:02:42.000
Again, I refer to those who are economics students among you.

21
00:02:42.000 --> 00:02:47.000
You know that a typical textbook in microeconomics or microeconomics

22
00:02:47.000 --> 00:02:53.000
is usually a juxtaposition, consists in a juxtaposition of different models

23
00:02:53.000 --> 00:02:58.000
and different ideas that are not compatible, contradict one another,

24
00:02:58.000 --> 00:03:01.000
that do not necessarily build on one another.

25
00:03:01.000 --> 00:03:23.000
The better textbooks authors today are finally approaching something like a logical structure, but they are far away from the standard that Mises reached in 1940 with his book which is not only systematic but also encompassing and which leads the leader through an entire system of economic thought because it builds an argument step by step.

26
00:03:23.000 --> 00:03:33.000
Mises starts from the most fundamental, most basic or most generally applicable considerations to more and more refined considerations.

27
00:03:33.000 --> 00:03:43.000
So I'll just give you now the system in an overview and thereafter we'll come to talk about six major contributions.

28
00:03:43.000 --> 00:03:51.000
There are more, six major contributions in this book, six defining characteristics, namely its anti-psychologism,

29
00:03:51.000 --> 00:04:01.000
its insistence on the rationality of liberalism and capitalism, its theory of entrepreneurship in the context of a theory of equilibrium and profit and loss,

30
00:04:01.000 --> 00:04:12.000
interest theory in conjunction with consumer sovereignty, business cycle theory and an update on the socialist calculation debate.

31
00:04:12.000 --> 00:04:23.000
Okay, so first now the system in an overview. In the introduction, which is virtually identical to the one in Human Action, Mises sets the agenda for the book.

32
00:04:23.000 --> 00:04:37.000
The treatise would present the system of economic science in the light of two central problems that had been neglected in all previous works in the field, namely epistemology and value theory.

33
00:04:37.000 --> 00:04:43.000
He then offered his system in 751 pages, organized into six parts.

34
00:04:43.000 --> 00:04:50.000
Now all his previous discoveries could appear in the correct context, in the proper place,

35
00:04:50.000 --> 00:04:55.000
along with the new elements that he had developed during his Geneva years.

36
00:04:55.000 --> 00:05:02.000
Part 1 deals with the features of human action that exist under all conceivable conditions of action.

37
00:05:02.000 --> 00:05:12.000
After our first chapter, in which he gives an initial characterization of action, emphasizing in particular the distinction between behavior and action,

38
00:05:12.000 --> 00:05:17.000
Mises deals with the epistemological problems of the signs of action, Chapter 2.

39
00:05:17.000 --> 00:05:27.000
So first comes the first analysis of human action, and he distinguishes in particular the difference between behavior and action.

40
00:05:27.000 --> 00:05:37.000
Behavior and action. Behavior, we might say, is the movement of the human body through time and space, the physical things that are being done, the activity, let's say.

41
00:05:37.000 --> 00:05:51.000
But action is more. Behavior is just a part of action. Action also involves ends that are being pursued by this activity, and it involves the foregone alternatives.

42
00:05:51.000 --> 00:05:56.000
We must see always what is being done in conjunction with what is renounced to.

43
00:05:56.000 --> 00:06:03.000
There is choice. That's precisely this a priori aspect of economic science.

44
00:06:03.000 --> 00:06:10.000
It puts what we can observe, observable behavior, in context with the choice alternatives

45
00:06:10.000 --> 00:06:16.000
that necessarily must have been foregone because you cannot do all things at the same time.

46
00:06:16.000 --> 00:06:24.000
And again the example, I give my lecture, so I have to renounce drinking my coffee or dancing on the first floor, etc.

47
00:06:24.000 --> 00:06:31.000
And then only in the second chapter, Mises can talk about the epistemology of the science of human action.

48
00:06:31.000 --> 00:06:38.000
First, presentation of the subject matter, then discussion of the epistemological features.

49
00:06:38.000 --> 00:07:02.000
Then in Chapter 3 he turns to a more detailed analysis of action in which he argues that phenomena such as exchange, price, costs, success and failure, and profit and loss are in a fundamental sense not given only in the context of a market economy, but are features of human action in general, they are categories of action.

50
00:07:02.000 --> 00:07:09.000
In Chapter 3, he also deals with the categories of means and ends, end of preference.

51
00:07:09.000 --> 00:07:15.000
Mises did not follow the terminology of the older Austrian School in speaking of value.

52
00:07:15.000 --> 00:07:24.000
Instead, he used the term preference, which better conveys that the category of action is rooted in human choice.

53
00:07:24.000 --> 00:07:39.000
This terminological decision certainly helped to avoid confusion, especially since Menger, the father of Austrian value theory, had emphasized that value had nothing to do with human free will, something that we talked about on the first day.

54
00:07:39.000 --> 00:07:52.000
According to Menger's principles, economic science studies the relations between man's needs and the economic goods necessary to satisfy these needs.

55
00:07:52.000 --> 00:07:59.000
In Varaz's elements, as well as in the mainstream of the 1930s and 1940s and up to the 1980s,

56
00:07:59.000 --> 00:08:05.000
economic science was essentially about prices and quantities traded on the market.

57
00:08:05.000 --> 00:08:17.000
But in human action, respectively national economy, the true object of the science was understood to be human action and in particular choice.

58
00:08:17.000 --> 00:08:34.000
Choice. Let me repeat this, maybe again I insist on this point. So for Menger, economic science concerns the causal relationships that exist between human needs and the satisfaction of these human needs through material means.

59
00:08:34.000 --> 00:08:42.000
And value is a particular relationship that exists between different means for the satisfaction of human needs.

60
00:08:42.000 --> 00:08:48.000
Choice does not enter the picture. Human action does not really enter the picture.

61
00:08:48.000 --> 00:08:53.000
We have a theory of needs and satisfaction of needs.

62
00:08:53.000 --> 00:08:59.000
That's the quantum leap that comes with Mises' theory, in particular with Human Action.

63
00:08:59.000 --> 00:09:05.000
Suddenly the emphasis and the crucial juncture is choice itself.

64
00:09:05.000 --> 00:09:15.000
In another noteworthy passage of part one, Mises presents for the first time the law of diminishing marginal utility as a praxeological law.

65
00:09:16.000 --> 00:09:20.000
It has nothing to do with the psychological phenomenon of satiation.

66
00:09:21.000 --> 00:09:29.000
Rather, the law concerns the simple fact that larger supplies of a homogeneous good can serve more ends than smaller supplies.

67
00:09:29.000 --> 00:09:39.000
Yet these additional ends are by virtue of the very fact that they are additional ends less important than those that are already served with a smaller supply.

68
00:09:39.000 --> 00:09:51.000
Here Mises departs from all other economists, most notably from Mises who had adopted Gossens psychological interpretation of the law.

69
00:09:51.000 --> 00:10:03.000
Mises draws a sharp line between praxeology and psychology and he emphasizes the ramification of this in other important passages of the book.

70
00:10:03.000 --> 00:10:07.000
We'll come to talk about some of these later on.

71
00:10:07.000 --> 00:10:14.000
Now part two of the book. Again, Human Action and National Economy.

72
00:10:14.000 --> 00:10:21.000
Here, Mises deals with those features of human action that come into play whenever an individual interacts with other individuals.

73
00:10:21.000 --> 00:10:28.000
Later in the book, he analyzes the particularities of three fundamental types of social systems.

74
00:10:28.000 --> 00:10:38.000
The Market Economy, that's part four. Socialism, part five. And the Hempard Market Economy, part six.

75
00:10:38.000 --> 00:10:48.000
So you start from the fundamental level of what is most general, all the features of human action that hold true under any circumstance.

76
00:10:48.000 --> 00:10:57.000
Then you move to a more particular context, human action in the context given by the presence of other human beings, interaction.

77
00:10:57.000 --> 00:11:06.000
And then he moves on to single out or to focus on the particular types of interaction that there can be.

78
00:11:06.000 --> 00:11:12.000
Interaction within a pure market economy, interaction within a socialist economy and an interventionist system.

79
00:11:12.000 --> 00:11:21.000
He also restates here the third part, the theory of society that he had presented in socialism, but this time in its proper context.

80
00:11:21.000 --> 00:11:28.000
He stresses the Ricardian law of association and the crucial role of reason in shaping human society.

81
00:11:28.000 --> 00:11:41.000
Then comes part three. Here he completes 20 years of intellectual assimilation of his 1920 essay on the impossibility of economic calculation under socialism.

82
00:11:41.000 --> 00:11:47.000
In some 35 pages he finally offers a general theory of economic calculation.

83
00:11:47.000 --> 00:11:58.000
What is more, he presents it in its proper place, namely before turning to the analysis of any concrete system of human cooperation, which he does in parts 4 to 6.

84
00:11:58.000 --> 00:12:07.000
Of course, he had anticipated this architectonic necessity in the Essays on Value Theory that he had written in the 1920s,

85
00:12:07.000 --> 00:12:16.000
but it is one thing to stress the difference between valuation and calculation in a general argument, it is quite another to apply this insight in concrete analysis.

86
00:12:16.000 --> 00:12:26.000
So here we have it finally. And so we have here with this third part of national economy a great parenthesis that is closed.

87
00:12:26.000 --> 00:12:35.000
It's the first great research project that I talked about in my first, it was not the first, it was lecture number three when we talked about the theory of money and credit.

88
00:12:35.000 --> 00:12:45.000
It's the first great research project that started in the early 1900s and is now closed in 1940 with this third part

89
00:12:45.000 --> 00:12:58.000
This is the third part, which really sums it up, the general theory of economic calculation, which is the organizing principle of the entire book and, as Mises believes, of economic science.

90
00:13:02.000 --> 00:13:11.000
In part four, he deals with the market economy. This part is over 400 pages long, more than half of the book.

91
00:13:11.000 --> 00:13:29.000
Here, Mises restates a good number of the theories he had developed in previous works, the theory of monopoly, the theory of money and credit, his famous business cycle theory, the theory of wages and the doctrine of the harmony of interests of all market participants.

92
00:13:29.000 --> 00:13:36.000
But rather than simply repeating himself, he presents thoroughly revised versions of his previous thoughts.

93
00:13:36.000 --> 00:13:44.000
He expands the monopoly theory he first developed in socialism, placing special emphasis on the discussion of Marxist monopoly theory.

94
00:13:44.000 --> 00:13:55.000
He presents the theory of the harmony of interests in an entirely new formulation and rejects the Anglo-Saxon theories of Keynes and of Robinson and Chamberlain,

95
00:13:55.000 --> 00:14:08.000
The Theories of Imperfect Competition. In The Theory of Money, he brooks no exception to the rule that political modifications of the money supply are unwarranted from an economic point of view.

96
00:14:08.000 --> 00:14:19.000
This is also something that was still present in the first edition of The Theory of Money and Credit, on which he radically breaks with this previous view in Human Action.

97
00:14:19.000 --> 00:14:29.000
and finally, also in part four, he integrates his business cycle theory with interest theory, a subject he had never addressed before in writing.

98
00:14:29.000 --> 00:14:37.000
Besides interest, the central novelty in his analysis of the market economy was his emphasis on the role of the entrepreneur.

99
00:14:37.000 --> 00:14:45.000
Mises carefully distinguished between entrepreneurs as those who take successful action in an uncertain world

100
00:14:45.000 --> 00:14:50.920
World and on the other hand entrepreneurship in the sense of a

101
00:14:50.920 --> 00:14:57.200
fundamental economic function, namely the function of bearing risk under

102
00:14:57.200 --> 00:15:03.320
uncertainty. It is this economic function that gives rise to the specific income

103
00:15:03.320 --> 00:15:08.520
component called profit and loss. It was one of the great contributions of

104
00:15:08.520 --> 00:15:13.760
national economy to clarify the role of this entrepreneurial function in the

105
00:15:13.760 --> 00:15:17.760
and the workings of the market economy.

106
00:15:17.760 --> 00:15:22.760
Mises felt he could not achieve this without a somewhat roundabout exposition.

107
00:15:22.760 --> 00:15:28.760
To define entrepreneurship, it is necessary to give a proper definition of profit and loss.

108
00:15:28.760 --> 00:15:36.760
But for Mises, this was impossible without a clarification of the nature of equilibrium and its role in economic science.

109
00:15:36.760 --> 00:15:45.760
He therefore saw himself forced to start part 4 with a somewhat basic chapter dealing with the methods necessary for the discursive analysis of the market economy,

110
00:15:45.760 --> 00:15:55.760
with various equilibrium concepts in particular. Only then did he feel that the ground had been laid to explain the nature and significance of entrepreneurship.

111
00:15:55.760 --> 00:16:03.760
Okay, so in practical terms this means for those who have not yet read Human Action, you don't read this chapter first, okay?

112
00:16:03.760 --> 00:16:13.760
This will shock you or bore you in the worst of cases. It's a very academic chapter.

113
00:16:13.760 --> 00:16:21.760
The best way to read Human Action is to start, in fact, with part four because there he deals with the market economy

114
00:16:21.760 --> 00:16:23.760
and to jump the first chapter there too.

115
00:16:23.760 --> 00:16:28.760
As you directly start with chapter 15, which deals with prices.

116
00:16:28.760 --> 00:16:32.760
We go directly into the subject matter, you as entrepreneurs and so on.

117
00:16:32.760 --> 00:16:37.760
That's in any way the way I recommend reading Human Action for the beginner.

118
00:16:37.760 --> 00:16:41.760
Start there, read this fourth part and then you go back.

119
00:16:41.760 --> 00:16:46.760
Then you go back and read the first three parts.

120
00:16:46.760 --> 00:16:49.760
And then you read part four again.

121
00:16:49.760 --> 00:16:53.760
When you've done this, you move on to part five and six.

122
00:16:53.760 --> 00:17:01.760
In part five, Mises deals with socialist societies.

123
00:17:01.760 --> 00:17:05.760
He does not restate all the main findings of his book Socialism.

124
00:17:05.760 --> 00:17:09.760
Rather, he concentrates on the centerpiece of his refutation of the socialist program,

125
00:17:09.760 --> 00:17:16.760
namely the impossibility of economic calculation, wherever the means of production are collectively owned.

126
00:17:16.760 --> 00:17:20.760
Thus part 5 must be considered an extension of part 3.

127
00:17:20.760 --> 00:17:28.760
Mises discusses the schemes of socialist calculation developed in the 1930s, most notably in the Anglo-Saxon world.

128
00:17:28.760 --> 00:17:39.760
He refutes the idea of generating prices through an artificial market and also contests the notion that mathematical economics could overcome the calculation problem even theoretically.

129
00:17:39.760 --> 00:17:42.760
We'll talk about this later in some more detail.

130
00:17:42.760 --> 00:17:53.760
In part 6, Mises delivers a far more comprehensive and detailed discussion of interventionism than he had in his essays from the mid-1920s.

131
00:17:53.760 --> 00:18:02.760
The general line of the argument remains the same. Interventionism is counterproductive because it does not attain the professed ends of its authors.

132
00:18:02.760 --> 00:18:08.760
National economy featured entirely new and important contributions.

133
00:18:08.760 --> 00:18:14.760
Even in those places where Mises restates his older doctrines, he had revised them, often substantially.

134
00:18:14.760 --> 00:18:25.760
It was therefore highly unusual for Gottfeld von Haberler, his friend, to claim a few years later in a confidential evaluation for Yale University Press,

135
00:18:25.760 --> 00:18:31.760
which considered commissioning a translation of the book, that it contained hardly anything new.

136
00:18:31.760 --> 00:18:39.760
Now, that was not mean. We must take it that this was Abba La's honest conviction.

137
00:18:39.760 --> 00:18:45.760
Yeah, but one must have the impression that he had not read the book very well.

138
00:18:45.760 --> 00:18:51.760
It was not very different in the case of Morgenstern, was not a friend of Mises,

139
00:18:51.760 --> 00:18:57.760
but Mises had sent a copy of Human Action and Morgenstern said,

140
00:18:57.760 --> 00:19:05.760
Thank you. I've received your book on economic behavior and read it with great interest.

141
00:19:05.760 --> 00:19:11.760
But he formulated a title, he gave the wrong title of the book. So it was clear that he had not read the book.

142
00:19:11.760 --> 00:19:18.760
And the only question I asked myself was then whether this was consciously done,

143
00:19:18.760 --> 00:19:23.760
whether he wanted really to show his old master that he had no interest in the book.

144
00:19:23.760 --> 00:19:30.760
Okay, so that's the general outline of the book and we have the same structure again with the same structure in Human Action.

145
00:19:30.760 --> 00:19:35.760
There are three main differences between Human Action and Nationale Economie.

146
00:19:35.760 --> 00:19:45.760
The first one is that it concerns the first part of the book where Mises lays the foundations of the analysis

147
00:19:45.760 --> 00:19:56.760
and here we have also a discussion of epistemological theories and of methodology, how to approach the analysis of economic systems.

148
00:19:56.760 --> 00:20:04.760
Here Mises addresses the basic or fundamental tenets of rival approaches, rival theories.

149
00:20:04.760 --> 00:20:14.760
Now those rival theories that were important in the German language context in which he first worked were not necessarily the same that were important in his new context,

150
00:20:14.760 --> 00:20:22.760
in the new world in America. So in Nationale Economie, he discussed the approaches of Ottmar Spann, whom we have already mentioned,

151
00:20:22.760 --> 00:20:33.760
the theoretician of universalism, author of the most successful economics textbook in Germany, and of Karl Marx, also very influential.

152
00:20:33.760 --> 00:20:42.760
In the US, Spann was virtually unheard of. Marx was heard of but was not very important.

153
00:20:42.760 --> 00:20:49.760
What attracted the attention of the American economists and social scientists was the approach known as positivism.

154
00:20:49.760 --> 00:20:58.760
That is the idea of applying in social analysis the same methods that are applied in the natural sciences.

155
00:20:58.760 --> 00:21:09.760
So Mises changed the emphasis, cut out Spahn and brought in discussions of the Vienna Circle and to less extent of Popper and so on.

156
00:21:09.760 --> 00:21:13.760
and so on, often without mentioning them by name.

157
00:21:13.760 --> 00:21:22.760
The second big difference is an addition, an additional chapter 6 in the first part,

158
00:21:22.760 --> 00:21:29.760
in which Mises presents a theory of probability and of uncertainty.

159
00:21:29.760 --> 00:21:38.760
This did not exist in national economy and we must also speculate about the reason because he never explained why he added this chapter.

160
00:21:38.760 --> 00:21:49.760
But again, we must assume that he did this in order to take account of the new context given in the United States.

161
00:21:49.760 --> 00:21:58.760
Again, positivism reigns supreme, application of the quantitative methods that are used in the natural sciences.

162
00:21:58.760 --> 00:22:07.760
So, he needs a more in-depth, even more in-depth discussion going into the technical details, speaking about quantitative relationships that can prevail.

163
00:22:07.760 --> 00:22:19.760
So he talks about probability and he talks about uncertainty and he does this in critical discussion of the theory presented by his brother Richard.

164
00:22:19.760 --> 00:22:35.760
Now this might seem like a pure family feud and in fact it is so a little bit but just a little bit because as a matter of fact Richard von Mises' theory is the standard probability theory

165
00:22:35.760 --> 00:22:43.760
The probability theory is still taught today. Again, those of you who have a training in social sciences, whatever discipline, and yet your statistics class,

166
00:22:43.760 --> 00:22:51.760
and the probability theory, the relative frequency theory that you learn there, is the theory that has been first proposed by Richard von Mises.

167
00:22:51.760 --> 00:23:03.760
So therefore, Richard von Mises is an unavoidable step. You get some Mises always, and you have the social sciences, but here in Alabama you get especially Ludwig von Mises.

168
00:23:03.760 --> 00:23:20.760
And now Ludwig von Mises improves on the theory of his brother and he stresses in particular the presence of uncertainty which is absent in the treatment of his brother which is nothing to say about.

169
00:23:20.760 --> 00:23:31.760
And of course uncertainty is of fundamental importance because it's the one factor, the cause of profit and loss of a specific income component that cannot exist without uncertainty.

170
00:23:31.760 --> 00:23:43.760
Uncertainty, the difference between risk and uncertainty, risk is quantifiable probability and uncertainty is unquantifiable probability,

171
00:23:43.760 --> 00:23:49.760
something that evades, escapes our attempt at quantification.

172
00:23:49.760 --> 00:23:58.760
And Mises used somewhat different terms, the terms risk and uncertainty are the terms proposed by Frank Knight.

173
00:23:58.760 --> 00:24:16.760
Mises used the terms class probability and case probability, so class probability is the quantifiable probability and case probability, well, concerns just individual cases, cannot generalize, cannot form averages and so on.

174
00:24:16.760 --> 00:24:31.760
And the third main difference between human action and national economy concerns the conclusion.

175
00:24:31.760 --> 00:24:41.760
What is just a conclusion in national economy is elaborated into a part seven in human action.

176
00:24:41.760 --> 00:24:50.760
and this part seven spells out the cultural, social, philosophical implications of economic science.

177
00:24:50.760 --> 00:24:59.760
Let us now take a somewhat closer look at these main areas that I've singled out before,

178
00:24:59.760 --> 00:25:06.760
anti-psychologism, rationality of capitalism and liberalism, theory of entrepreneurship, interest theory,

179
00:25:06.760 --> 00:25:12.760
to Business Theory, Applications to Business Cycle Theory, and the Socialist Calculation Debate.

180
00:25:12.760 --> 00:25:21.760
Okay, first, anti-psychologism. So Mises stressed, again, in continuity with his previous works, stronger insistence,

181
00:25:21.760 --> 00:25:32.760
that economics and psychology, or we might more generally say, praxeology is the logic of human action.

182
00:25:32.760 --> 00:25:47.760
And psychology are two different fields, that's not to say that psychology is not important for human decision making, but economics is not about psychology, it does not depend on psychology.

183
00:25:48.760 --> 00:25:58.760
Let me give you a couple of examples. First of all, one praxeological category is means ends in all human action.

184
00:25:58.760 --> 00:26:04.760
We have the presence of means that are used to pursue ends, to pursue certain ends.

185
00:26:04.760 --> 00:26:10.760
I talk to you in order to convince you about certain things that I find in human action.

186
00:26:10.760 --> 00:26:16.760
You attend in order, hopefully in order to learn something about Ludwig von Mises.

187
00:26:16.760 --> 00:26:21.760
We eat in order to survive, but also in order to have pleasure and so on.

188
00:26:21.760 --> 00:26:26.760
So in all action we have the presence of means and we have the presence of ends.

189
00:26:26.760 --> 00:26:36.760
Now, there's also a psychological aspect to this, when different actors use different means to attain the same end.

190
00:26:36.760 --> 00:26:40.760
Some people eat bananas to fill their hunger, other people eat steaks.

191
00:26:40.760 --> 00:26:47.760
And that is because they feel different pleasures in eating bananas or steak, and also they might have different purses.

192
00:26:47.760 --> 00:26:57.760
Our opinions about the relationship between means and ends also have something to do with psychology.

193
00:26:57.760 --> 00:27:06.760
In our psychology, in our mind, we have a conviction that there is a causal connection between the means that we use and the ends that we seek.

194
00:27:06.760 --> 00:27:20.760
For example, we might climb up the ladder into a plane because we believe that this will be a means to bring us to a foreign country or another city and so on.

195
00:27:20.760 --> 00:27:33.760
But we might also climb up the ladder to the second floor of this building and jump out of the window because we think this will bring us eagle-like on our wings

196
00:27:33.760 --> 00:27:37.760
on our wings and we will fly off to California or whatever.

197
00:27:38.760 --> 00:27:41.760
So take this example as an absurd example,

198
00:27:41.760 --> 00:27:47.760
a completely wrong opinion about the causal connection between means and ends.

199
00:27:47.760 --> 00:27:50.760
I might be of the opinion, psychologically,

200
00:27:50.760 --> 00:27:54.760
going to the second floor and jumping out of the window will make me grow wings

201
00:27:54.760 --> 00:27:58.760
and I will fly off to California.

202
00:27:58.760 --> 00:28:11.760
Now this would be wrong, a particular psychological condition, but it has nothing to do with the fact, it does not alter the fact, that my behavior is a means for me to attain a certain end.

203
00:28:11.760 --> 00:28:21.760
So whether we are right or wrong about this, whatever the psychological aspect of these things are, it does not alter the fact that we always use means to attain an end.

204
00:28:21.760 --> 00:28:30.760
The praxeological category is there, irrespective of what the psychological aspect of the behavior might be.

205
00:28:31.760 --> 00:28:39.760
Another example, from Carl Menger we have learned that the market economy is geared toward the satisfaction of consumer needs.

206
00:28:40.760 --> 00:28:47.760
Now this holds true irrespective of the psychological condition, both of consumers and of producers.

207
00:28:47.760 --> 00:28:58.760
It holds true irrespective of what consumers like, that is, from a psychological point of view, for which kind of products or goods and services they are inclined.

208
00:28:58.760 --> 00:29:07.760
The market economy satisfies them. But it also satisfies them irrespective of the psychological inclination of the producers.

209
00:29:07.760 --> 00:29:16.760
Whatever producers might think about the importance of their activity and so on, we have a market process in which there is a selection

210
00:29:16.760 --> 00:29:25.760
The selection of only the most efficient or I say the most profitable firms, irrespective again of the psychological disposition of entrepreneurs,

211
00:29:25.760 --> 00:29:33.760
whether they like the activity or not, whether they believe themselves, it's very important or less important, it does not matter.

212
00:29:33.760 --> 00:29:45.760
Mises stressed the importance of psychology and information for example, information that different agents have,

213
00:29:45.760 --> 00:29:57.760
In particular, that there are information differentials, that's of course a fundamental point, consideration in Friedrich von Hayek's social philosophy.

214
00:29:57.760 --> 00:30:04.760
For Hayek, the market economy is a great mechanism by which information is most efficiently used.

215
00:30:04.760 --> 00:30:08.760
It's transmitted and communicated and used in the most efficient way.

216
00:30:08.760 --> 00:30:20.760
and that is because it's impossible to centralize information, to make all information available at a central place, to centralize it,

217
00:30:20.760 --> 00:30:29.760
but it is possible to communicate through the action of the market information from one place of the economy to another.

218
00:30:29.760 --> 00:30:38.760
Now Mises granted this, such information differentials exist and it's very difficult, if not impossible, to centralize information.

219
00:30:38.760 --> 00:30:46.760
But this has nothing to do with praxeology per se, it does not exhaust praxeology.

220
00:30:46.760 --> 00:30:53.760
Let's say even if there are no information differentials, if all market participants had the same knowledge,

221
00:30:53.760 --> 00:30:58.760
there would still be another component that comes into place, namely appraisement.

222
00:30:58.760 --> 00:31:05.760
People would still appraise the very same information differently. They would think it has a different value.

223
00:31:05.760 --> 00:31:21.760
For example, you might have two entrepreneurs considering an investment project and they both think correctly, let's say, that the investment projects will bring a return of 30%.

224
00:31:21.760 --> 00:31:44.760
Now, one of them might engage in this project and the other one might not, and the reason could simply be that one has a preference, 30% is a high enough return for him to warrant giving up leisure time, so he does this, and for the other 30% is not yet high enough, so he prefers staying at home, watching football and doing other nice things.

225
00:31:44.760 --> 00:31:52.760
You see, so even if there's no information differential, if all people are perfectly well informed with the same psychological precondition,

226
00:31:52.760 --> 00:32:01.760
then still other considerations come into play that will create a different reaction toward the same environment.

227
00:32:01.760 --> 00:32:12.760
The next major point that I mentioned before is Mises' insistence that capitalism and liberalism are rational.

228
00:32:12.760 --> 00:32:29.760
There are rational systems of thought and that completely revolutionized the mental attitude of man towards social organization.

229
00:32:29.760 --> 00:32:53.760
Mises in his social philosophy stresses a point of departure that has been affirmed since the ancient times, since Plato and through the Middle Ages, Aquinas and all major philosophers have stressed the following point that the division of labor is more productive than isolated production.

230
00:32:53.760 --> 00:33:10.760
Two people hunting rabbits and collecting berries in isolation from another will not be as productive, taken together, if we add up the products, then if they cooperate, if they coordinate their productive activities.

231
00:33:10.760 --> 00:33:21.760
I could give you examples and those of you who will attend the second week, next week the Summer University, you will see my example, I'll demonstrate this in detail, but that's the fundamental fact.

232
00:33:21.760 --> 00:33:28.760
This is a fundamental fact. The vision of labor is more physically productive.

233
00:33:28.760 --> 00:33:33.760
There are greater quantities of goods and services available.

234
00:33:33.760 --> 00:33:38.760
Now, it follows from this, and this is the great inference that classical economists have drawn,

235
00:33:38.760 --> 00:33:43.760
it follows from this that individuals have an incentive to cooperate.

236
00:33:43.760 --> 00:33:48.760
Even if they do not like one another personally, or even if they hate one another,

237
00:33:48.760 --> 00:33:57.760
They still have an incentive, an economic incentive to cooperate. They still have an incentive to associate, thus to create society.

238
00:33:59.760 --> 00:34:13.760
Society therefore emerges without it being necessary that people be forced or coerced to behave properly and to respect one's fellow beings because each one has an incentive to do this.

239
00:34:13.760 --> 00:34:23.760
Of course, we know there are also incentives to violate the rules of society, not to respect one another, become a thief or become a murder, robber or whatever.

240
00:34:23.760 --> 00:34:30.760
Yeah, these incentives exist too, but it's not the only thing, it's not the only incentive that is present.

241
00:34:30.760 --> 00:34:41.760
It's also an incentive to respect one another, because one can profit from cooperation, and cooperation can take place only if I respect the property of my neighbor.

242
00:34:41.760 --> 00:34:49.760
Now, Mises stresses the significance of this discovery. He says the following in Human Action.

243
00:34:49.760 --> 00:34:58.760
The historical role of the theory of the division of labor as elaborated by British political economy from Hume to Ricardo

244
00:34:58.760 --> 00:35:07.760
consisted in the complete demolition of all metaphysical doctrines concerning the origin and operation of social cooperation.

245
00:35:07.760 --> 00:35:15.760
It consummated the spiritual, moral and intellectual emancipation of mankind,

246
00:35:15.760 --> 00:35:21.760
inaugurated by the philosopher of Epicureanism.

247
00:35:21.760 --> 00:35:32.760
It substituted an autonomous rational morality for the heteronomous and intuitionist ethics of older days.

248
00:35:32.760 --> 00:35:50.760
Law and legality, the moral code and social institutions are no longer revered as unfathomable decrees of heaven, they are of human origin and the only yardstick that must be applied to them is that of expediency with regard to human welfare.

249
00:35:50.760 --> 00:36:05.760
Now, in other words, before this discovery, before the classical economists had drawn this inference from the fundamental fact of the productivity of the division of labor,

250
00:36:05.760 --> 00:36:12.760
one had to explain what is the incentive that brings people together to form a society.

251
00:36:12.760 --> 00:36:21.760
Well, and then the case that was typically stressed was, well, okay, you have superior human beings and inferior human beings.

252
00:36:22.760 --> 00:36:26.760
The superior human beings cannot possibly profit from the inferior ones.

253
00:36:27.760 --> 00:36:33.760
Therefore, if they help them at all, then the least thing that the inferiors can do is to obey commands.

254
00:36:33.760 --> 00:36:47.760
So this, according to Mises, is a metaphysical doctrine, because he ignores this fundamental fact that even the superior ones, to the extent that they exist, profit from cooperation with the inferior ones.

255
00:36:47.760 --> 00:36:52.760
Again, the point that Jean-Baptiste Say had made, and before him, after him, others.

256
00:36:52.760 --> 00:37:00.760
Even if one nation as a whole is superior to our nation, the Chinese can do everything better.

257
00:37:00.760 --> 00:37:03.760
I repeat the phobia of my students.

258
00:37:03.760 --> 00:37:05.760
The Chinese can do everything better.

259
00:37:05.760 --> 00:37:09.760
Well, it does not follow that Chinese do not profit from our cooperation.

260
00:37:09.760 --> 00:37:14.760
Even if we are inferior, well, they are still better off when we are there.

261
00:37:14.760 --> 00:37:20.760
And as a consequence, we have, all of us together, we have an incentive to cooperate.

262
00:37:20.760 --> 00:37:28.760
to cooperate. But there's still another metaphysical approach to society which consists in what Mises called the collectivist approach.

263
00:37:28.760 --> 00:37:46.760
And here we pretend that society lives alive on its own. It is not what results when individuals cooperate, when individuals out of their own motive get together.

264
00:37:46.760 --> 00:37:53.760
But it's something that exists without being observable, touchable, knowable directly in any direct way.

265
00:37:53.760 --> 00:37:59.760
But we believe it exists, society as such exists and should live and is important for each of us.

266
00:37:59.760 --> 00:38:09.760
And this society is then threatened by the egoism or the egotism of the individual members.

267
00:38:09.760 --> 00:38:16.760
So for me the society is only what results from the cooperation of individuals.

268
00:38:16.760 --> 00:38:26.760
From a collectivist point of view, society is something that exists, something unknowable, metaphysical, something that exists apart from individuals.

269
00:38:26.760 --> 00:38:32.760
And individuals, well, definitely depend on society for their well-being.

270
00:38:32.760 --> 00:38:44.760
So, the inference is that, well, in order to make mankind flourish, we've got to protect society against the egoism of the individuals which seek to destroy it.

271
00:38:44.760 --> 00:38:57.760
Of course, now the question is, what are these interests of society that we no longer define depending on the interests of each individual who cooperates with other individuals?

272
00:38:57.760 --> 00:39:01.760
How do we know these interests? How do we know these necessities?

273
00:39:01.760 --> 00:39:09.760
So that's the point Mises makes, well since we cannot know them, there's only one solution to this riddle, to this metaphysical riddle,

274
00:39:09.760 --> 00:39:17.760
we need to have a special case of persons who are the high priests of society and who tell us what the needs of society are,

275
00:39:17.760 --> 00:39:25.760
what the interests of society are and then use coercion to force others into conformity with these alleged needs.

276
00:39:25.760 --> 00:39:49.760
Now all of this again is not the approach of capitalism and liberalism, both these elements of the social philosophy of liberalism and capitalism is rational, it is scientific, it is based on science, verifiable, refutable facts.

277
00:39:49.760 --> 00:39:57.760
All elements in the demonstration developed by the classical economists and their successors are readily verifiable fact.

278
00:39:57.760 --> 00:40:02.760
It's a fact that the division of labor is more productive than isolated production.

279
00:40:02.760 --> 00:40:05.760
It's a fact therefore that each individual has an incentive to cooperate.

280
00:40:05.760 --> 00:40:14.760
It's a fact therefore that society will emerge spontaneously irrespective of whether we have a high priest to tell us to get together or not.

281
00:40:14.760 --> 00:40:22.760
There's no metaphysics here, it's just rock bottom facts.

282
00:40:22.760 --> 00:40:36.760
The third major area in which Mises made a contribution was, as I've said before, the theory of equilibrium, profit and loss, and entrepreneurship.

283
00:40:36.760 --> 00:40:46.760
Carl Menger in Boehm-Bawerk again had explained how the structure of production or that the structure of production is geared toward consumer needs.

284
00:40:46.760 --> 00:41:01.760
But again, we have to recall that in Menger's and Boehm-Bawerk's approach, we have by and large a theory of the causal relationships that exist between needs and the means suitable to satisfy these needs.

285
00:41:01.760 --> 00:41:10.760
The question is, how does it come that the structure of production is created in a way suitable to satisfy these needs?

286
00:41:10.760 --> 00:41:17.760
We know that there are causal relationships, but who does, who is it that recognizes these causal relationships?

287
00:41:17.760 --> 00:41:21.760
Who is it that modifies the structure of production if the needs change?

288
00:41:21.760 --> 00:41:28.760
There was no theory of the sort in the writings of Menger and of Boehm-Bawerk.

289
00:41:28.760 --> 00:41:39.760
Now, a very important step toward the development of such a theory was presented in Joseph Schumpeter's Theory of Economic Development.

290
00:41:39.760 --> 00:41:46.760
We talked already about this and the central figure in this theory is the entrepreneur.

291
00:41:46.760 --> 00:42:02.760
The entrepreneur who for Schumpeter is essentially an innovator, an innovator who, as he later put it, creatively destructs the existing structure of production.

292
00:42:02.760 --> 00:42:13.760
The innovator overthrows the routine that existed up to now in the market, it brings up projects that are superior to the existing ones.

293
00:42:13.760 --> 00:42:20.760
And as a consequence some firms go bankrupt and these new innovative firms are put at their place.

294
00:42:20.760 --> 00:42:27.760
The structure of production results therefore from the activity of a special breed of mankind which is the entrepreneur, the innovator.

295
00:42:27.760 --> 00:42:33.760
Schumpeter went into some detail explaining the different types of innovations that come here into play.

296
00:42:33.760 --> 00:42:42.760
Most notably so the innovator develops new products, he discovers new markets both for his products and for his factors of production.

297
00:42:42.760 --> 00:42:49.760
He develops new forms of organization and he develops new production techniques.

298
00:42:49.760 --> 00:42:51.760
He is an innovator.

299
00:42:51.760 --> 00:43:04.760
Now, what Mises' argument amounts to is to say, well, first of all, the Schumpeterian contribution raised the following problem.

300
00:43:04.760 --> 00:43:08.760
How can we reconcile this with the traditional Austrian approach?

301
00:43:08.760 --> 00:43:18.760
For Menger, the structure of production suits the needs of the consumers.

302
00:43:18.760 --> 00:43:28.760
For Schumpeter, the structure of production results from innovation, of the entrepreneurial innovation.

303
00:43:28.760 --> 00:43:31.760
So is there a contradiction here? And Mises said no.

304
00:43:31.760 --> 00:43:43.760
He said no. He created the synthesis and said the profits realized by entrepreneurs are not obtained for innovation per se.

305
00:43:43.760 --> 00:43:51.760
It's not just because we innovate, we do something new, something different from what has been done before, that we obtain profits.

306
00:43:51.760 --> 00:44:01.760
It's only for innovation that is useful from the point of view of consumers, that improves things from the point of view of consumers.

307
00:44:01.760 --> 00:44:11.760
So innovation, and Schubert was right in this, innovation disrupts the ways of the economy, establishes new forms of production and so on.

308
00:44:11.760 --> 00:44:18.760
But that's not necessarily good entrepreneurship, that's not necessarily what brings about profits.

309
00:44:18.760 --> 00:44:26.760
Profits only come into play if the innovation is useful. Not all innovation is useful.

310
00:44:26.760 --> 00:44:31.760
Not all technological advance is also useful for the entrepreneurs.

311
00:44:31.760 --> 00:44:40.760
And so entrepreneurs are rewarded only for innovation that is useful for consumers.

312
00:44:40.760 --> 00:44:51.760
we have here a market process. Now this of course raises, so we have a conjunction between entrepreneurship and profit and loss.

313
00:44:51.760 --> 00:45:02.760
Now this raises the next question, how can we define profit and loss? In particular, what's the difference between profit and loss on the one hand and interest payments on the other hand?

314
00:45:02.760 --> 00:45:06.760
Is this the same thing, is this different, a different name?

315
00:45:06.760 --> 00:45:18.760
And so here Mises stated the matter crystal clear much, well, in fact no writer before may put the matter so clear,

316
00:45:18.760 --> 00:45:24.760
so Mises said, okay, there is a difference between interest on the one hand and profit and loss on the other hand.

317
00:45:24.760 --> 00:45:31.760
Interest is a price spread between our selling proceeds from the point of view of an entrepreneur,

318
00:45:31.760 --> 00:45:35.760
of the selling proceeds on the one hand and our cost expenditure on the other hand,

319
00:45:35.760 --> 00:45:40.760
a price spread that exists that subsists even in general equilibrium.

320
00:45:40.760 --> 00:45:43.760
Now what is general equilibrium?

321
00:45:43.760 --> 00:45:47.760
General equilibrium is a situation in which no entrepreneur commits an error.

322
00:45:47.760 --> 00:45:54.760
All production decisions are optimal from the point of view of the acting person.

323
00:45:54.760 --> 00:45:57.760
He doesn't sink any money into black holes.

324
00:45:57.760 --> 00:46:04.760
that Ludwig holds and he is successful in his ventures, okay?

325
00:46:04.760 --> 00:46:06.760
That's the definition of general equilibrium.

326
00:46:06.760 --> 00:46:13.760
In such a situation there subsists a spread between selling proceeds and cost expenditure

327
00:46:13.760 --> 00:46:17.760
which is caused by time preference.

328
00:46:17.760 --> 00:46:21.760
We rather prefer present goods to future goods

329
00:46:21.760 --> 00:46:51.760
As a consequence, if we invest our present resources into an investment project and we could consume them right now, well, in order to do this, we need to be rewarded and otherwise we would not do it and so each individual entrepreneur invests only because of time preference if you can expect a spread, a surplus and because the same incentive exists for all other entrepreneurs

330
00:46:51.760 --> 00:47:02.760
This surplus cannot be arbitraged away. That's the Boehm-Bawerkian theory of time preference, the Boehm-Bawerkian theory of interest.

331
00:47:02.760 --> 00:47:13.760
Now profit and loss are additional income components that arise as a consequence of error.

332
00:47:13.760 --> 00:47:25.760
For example, if I invest too much money into the production of microphones,

333
00:47:25.760 --> 00:47:32.760
this means that I will pay prices for the factors of production needed to make microphones

334
00:47:32.760 --> 00:47:38.760
that are too high as compared to the prices that I can finally realize for the product.

335
00:47:38.760 --> 00:47:52.760
Okay, so I commit an error. I want to realize a certain surplus, I want to realize a certain interest, but I'm wrong about the amount of money that I can obtain for the product.

336
00:47:52.760 --> 00:48:05.760
So I pay now too much for the factors of production. So in this case we would have an income component that we call loss, that is a negative income component.

337
00:48:05.760 --> 00:48:10.760
We do not earn even interest, we earn less than the interest, and the difference is loss.

338
00:48:10.760 --> 00:48:17.760
But it can also happen that we make a profit, and profit arises if our competitors are wrong,

339
00:48:17.760 --> 00:48:24.760
if they do not perceive that there are profit opportunities or surpluses to be reaped in our line of business.

340
00:48:24.760 --> 00:48:31.760
Let's say there is a sudden additional consumer demand for lamps, and I'm a lamp producer.

341
00:48:31.760 --> 00:48:41.760
So, with increased demand the prices for LEMs go up and as a consequence the difference between my cost expenditure and my selling proceeds will increase.

342
00:48:41.760 --> 00:48:48.760
So, I make a surplus beyond interest and this surplus is called profit.

343
00:48:48.760 --> 00:48:58.760
It would not exist if my competitors had realized that the demand for LEMs increases because in this case they would have invested in my line of business.

344
00:48:58.760 --> 00:49:06.260
So they would have paid higher prices for the factors of production that are needed for lamp making,

345
00:49:06.260 --> 00:49:11.260
factors of production that I need too, suitable workers and raw materials and so on.

346
00:49:11.260 --> 00:49:17.260
So the prices would have gone up and because more lamps are on the market, the prices for lamps would have fallen.

347
00:49:17.260 --> 00:49:27.260
So the price, the difference, the spread between cost expenditure and selling proceeds would have been squeezed until we reach interest.

348
00:49:27.260 --> 00:49:39.260
The pure interest component only. So if I make an extra surplus because my competitors have erred, they were wrong,

349
00:49:39.260 --> 00:49:43.260
well then this income component, my income component is called profit.

350
00:49:43.260 --> 00:49:54.260
It has a very ingenious, very crystal clear distinction that Mises proposes here, but it's in fact, well, we can explain this today quickly

351
00:49:54.260 --> 00:50:12.260
Now, this presupposes, of course, then again, the crucial notion of general equilibrium that I've used before.

352
00:50:12.260 --> 00:50:26.260
Therefore, Mises stated the matter a little bit differently, he said in order to explain the situation in which no error occurs,

353
00:50:26.260 --> 00:50:39.260
we need to consider a special hypothetical situation that cannot possibly exist in the real world, namely a routine economy in which everything repeats itself from one day to another.

354
00:50:39.260 --> 00:50:43.260
and this routine economy called the evenly rotating economy.

355
00:50:43.260 --> 00:50:51.260
The crucial consequence of such an economy is that people do not err because they know what's going on.

356
00:50:51.260 --> 00:50:53.260
It's just the same thing as yesterday.

357
00:50:53.260 --> 00:50:55.260
So they cannot possibly be wrong.

358
00:50:55.260 --> 00:51:03.260
So Mises has then all elements in place to have a coherent theory of these three elements.

359
00:51:03.260 --> 00:51:09.260
All the three are needed and in dependence of one another, equilibrium, profit and loss, and entrepreneurship.

360
00:51:14.260 --> 00:51:20.260
The fourth major contribution that he makes in national economy concerns interest theory.

361
00:51:20.260 --> 00:51:23.260
That's a subject on which he had not yet written before.

362
00:51:26.260 --> 00:51:29.260
He had relied on the work of his teacher Boehm-Bawerk.

363
00:51:29.260 --> 00:51:43.260
Boehm-Bawerk had proposed a revolutionary theory of interest in which he formulated interest as resulting from human choice, resulting from human action.

364
00:51:43.260 --> 00:51:56.260
It's not a compensation for any goods or service. It is something that results, an income component that results from human decision making.

365
00:51:56.260 --> 00:52:03.260
Decision making, as Mises would later stress, well, we always prefer something to another, so we have a value differential.

366
00:52:03.260 --> 00:52:14.260
And so the fact that there is interest, interest payments on the market, results from the fact that entrepreneurs prefer certain goods to other goods.

367
00:52:14.260 --> 00:52:22.260
And in particular, present goods to future goods. Present goods are more valuable than future goods.

368
00:52:22.260 --> 00:52:29.260
As a consequence, if I have ever to invest for future consumption, well I need to be compensated.

369
00:52:29.260 --> 00:52:45.260
Now this theory was, Boehm-Bawerk combined this explanation, this time preference explanation of interest with a third factor that stressed the physical productivity of capital

370
00:52:45.260 --> 00:52:48.260
and it will lead us too far now to go into this detail.

371
00:52:48.260 --> 00:52:56.260
Before we come to Mises, there is one intermediate step, namely the formulation of a pure time preference theory of interest.

372
00:52:56.260 --> 00:52:59.260
Boehm-Bawerk, by the way, has not yet used the word time preference.

373
00:52:59.260 --> 00:53:08.260
This expression is due to Frank Fetter, an American economist, who was also the first one to propose a pure time preference theory of money.

374
00:53:08.260 --> 00:53:18.260
So he gets rid of this third element that Boehm-Bawerk had stressed, the higher productivity, physical productivity of capital,

375
00:53:18.260 --> 00:53:24.260
and he focuses entirely on time preference.

376
00:53:24.260 --> 00:53:31.260
Now for both Fetter and Boehm-Bawerk, time preference is a psychological phenomenon.

377
00:53:31.260 --> 00:53:46.260
We prefer present goods to future goods because as a tendency we underestimate our future, the future availabilities of goods.

378
00:53:46.260 --> 00:53:55.260
And so time preference has a psychological root.

379
00:53:55.260 --> 00:54:12.260
Now, what Mises does can be summarized in two steps. First, he rejects the psychological foundation of time preference and he proposes a praxeological foundation of time preference.

380
00:54:12.260 --> 00:54:24.260
And second, he links up this praxeological mechanism that causes time preference with consumer choices.

381
00:54:26.260 --> 00:54:28.260
So rejection of psychologism.

382
00:54:28.260 --> 00:54:36.260
And second, integration of synthesis between the theory of consumer sovereignty and interest theory.

383
00:54:42.260 --> 00:54:55.260
Like Boehm-Bawerk, Mises believed that time preference was the only proximate cause of interest.

384
00:54:55.260 --> 00:55:02.260
But rather than seeing the ultimate cause in certain psychological dispositions of the human being,

385
00:55:02.260 --> 00:55:13.260
He followed Frank Fetter and also Franz Joel in arguing that the ultimate cause was the necessity of consumption.

386
00:55:13.260 --> 00:55:19.260
The fact is that human beings cannot survive if they do not consume.

387
00:55:19.260 --> 00:55:26.260
Hence, there must be some time preference in human action or the human race would perish.

388
00:55:26.260 --> 00:55:31.260
This does not mean that time preference is the only factor determining human actions.

389
00:55:31.260 --> 00:55:45.260
It means that in order to survive, human beings must at some point prefer shorter production processes to longer ones, even though the longer ones would be more physically productive.

390
00:55:45.260 --> 00:55:59.260
Mises argued that one would always choose the longest production process if one could disregard the need for survival through time.

391
00:55:59.260 --> 00:56:10.260
It is the need to survive that prompts the acting person also to consider the passage of time and to prefer, at some point, sooner rather than later ones.

392
00:56:10.260 --> 00:56:14.260
Consider, as an example, three alternative fishing processes.

393
00:56:14.260 --> 00:56:23.260
The first one leads to catching one fish at the end of one hour, the second one to catching ten fish but only at the end of one day,

394
00:56:23.260 --> 00:56:29.260
And the third one to catching 100 fish, all of them at the end of a week.

395
00:56:29.260 --> 00:56:47.260
Assume we observe a person pursuing the production process leading to a catch of 10 fish at the end of a day.

396
00:56:47.260 --> 00:56:58.260
At the end of the day, Mises here explains the person did not pick the 100-fish alternative because his time preference was stronger than the additional gain he would have gotten from the longer process.

397
00:56:59.260 --> 00:57:13.260
He does not want to wait a week. The only reason he picked the 10-fish alternative at all rather than the 1-fish alternative is that in this case the attraction of the additional gain was strong enough to overcome his time preference.

398
00:57:13.260 --> 00:57:21.260
Let us highlight the significance of this explanation within his overall theoretical framework.

399
00:57:21.260 --> 00:57:25.260
Consumption here appears at the root of all economic phenomena.

400
00:57:25.260 --> 00:57:37.260
Carl Menger and his disciples had argued that consumer choices directly determine the prices of consumer goods and that indirectly they also determine the prices of producer goods.

401
00:57:37.260 --> 00:57:46.260
Now, time preference too, and with it the phenomenon of capital and interest, appear to be rooted in consumption.

402
00:57:46.260 --> 00:57:55.260
The great attraction of this explanation, at least from Mises' point of view, was that it did not stress any psychological dispositions of man,

403
00:57:55.260 --> 00:58:01.260
but relied on the fundamental fact that there can be no human action without consumption.

404
00:58:01.260 --> 00:58:10.260
The consumption theory of time preference thus seamlessly integrates the theory of capital and interest into the general theory of prices.

405
00:58:10.260 --> 00:58:16.260
In the field of interest, as in the broader market process, the consumer is sovereign.

406
00:58:16.260 --> 00:58:28.260
So Mises then systematizes something. Both Boehm-Bawerk and Menger had stopped short in creating the system.

407
00:58:28.260 --> 00:58:39.260
At some point, there was on the one hand subjective value, marginal value on the one hand, and there was the second element, time preference, on the other hand.

408
00:58:39.260 --> 00:58:44.260
So we have in fact two bases for economic analysis.

409
00:58:44.260 --> 00:58:51.260
Now Mises shows that ultimately it's only one element. In all cases we have consumer choice.

410
00:58:51.260 --> 00:58:57.260
The system is generalized.

411
00:58:57.260 --> 00:59:05.260
Now Mises applied this findings and interest theory also to business cycle theory.

412
00:59:05.260 --> 00:59:20.260
In one important respect that I had announced already when we spoke about The Theory of Money and Credit, to which we now come, namely to the explanation of the variations of the rate of interest.

413
00:59:20.260 --> 00:59:34.260
We have seen that in Mises' theory of the business cycle, the crucial consideration is that intertemporal misallocation of resources can take place if the interest rate is decreased.

414
00:59:34.260 --> 00:59:52.260
Below the level, well, below which level, right? So that's the question. In his Theory of Money and Credit, Mises had relied on the framework of Knud Wichsel, a Swedish economist, who had stressed the difference between a natural rate of interest and a monetary rate of interest.

415
00:59:52.260 --> 01:00:01.260
The natural rate of interest being the one that would be established in a barter economy, and the monetary rate of interest the one being established in a monetary economy.

416
01:00:01.260 --> 01:00:21.260
So if the same economy used money, now this implies a severe problem, namely, first of all, it cannot be readily conceived how a barter economy could ever have such a thing as a rate of interest.

417
01:00:21.260 --> 01:00:33.260
What is the rate of interest? I'll say 17%. Obviously, we need to have the same units above and below in the mathematical expression.

418
01:00:33.260 --> 01:00:47.260
We cannot say 17 oranges divided by 100 apples equals 70%. That's not the case. Only if we have the same dimension above and below.

419
01:00:47.260 --> 01:00:54.260
17 oranges divided by 100 oranges, we have 17 percent.

420
01:00:54.260 --> 01:00:58.260
Now how can this be in a barter economy? In fact it cannot be.

421
01:00:58.260 --> 01:01:02.260
We need to have money prices here.

422
01:01:02.260 --> 01:01:07.260
So we can speak meaningfully of a rate of interest only in the context of a rate of interest,

423
01:01:07.260 --> 01:01:13.260
of a ratio of interest maybe, of a rate of interest only in the context of a monetary economy.

424
01:01:13.260 --> 01:01:26.260
But even if we assume, now for the sake of argument, that rates of interest could exist in a barter economy, we still have the problem, an even more formidable problem, namely the presence of Cantillon effects.

425
01:01:27.260 --> 01:01:42.260
Money is not neutral. Money affects all prices, therefore it affects all profitabilities of production processes, it affects therefore what is being produced, what is being consumed, it affects all the incomes of the market participants.

426
01:01:43.260 --> 01:01:52.260
So what sense does it make to compare the natural rate of interest, if there is such a thing, to a monetary rate of interest?

427
01:01:52.260 --> 01:01:55.260
All things would be different in these two different economies.

428
01:01:55.260 --> 01:02:11.260
So it's not at all clear how this Vixalian approach could be fruitfully applied in the type of business cycle theory that Mises formulated in the early 1900s.

429
01:02:11.260 --> 01:02:25.260
But now he finds a way, he comes up with a solution, he says, well, no, we don't fold, that's not the relevant consideration, that's not the relevant comparison, not between a natural rate, a water economy rate and a monetary economy rate.

430
01:02:25.260 --> 01:02:37.260
The crucial consideration is the rate of interest as it would be established in an unhandled market economy and the rate of interest as it would result from credit expansion.

431
01:02:37.260 --> 01:02:47.260
Intervention. So we have again a greater unison also with this theory of interventionism,

432
01:02:47.260 --> 01:02:52.260
in which the relevant comparison is always between the operation of a market economy on the one hand

433
01:02:52.260 --> 01:02:57.260
and government interventionism on the other hand. Respect of property rights on the one hand,

434
01:02:57.260 --> 01:03:05.260
violations of property rights on the other hand. That's what we compare. And it now applies this also in the field of business cycle theory.

435
01:03:05.260 --> 01:03:16.260
We speak of a variation of the interest rate as compared to the interest rate that would have been established in an unambered market economy.

436
01:03:16.260 --> 01:03:40.260
And then finally, well there's also, I mentioned in passing, related improvement that we find in the Streatus Nationale Economie as compared to The Theory of Money and Credit, namely that he has now a pure cash balance approach for the demand for money,

437
01:03:40.260 --> 01:03:56.260
There is a demand for money, so he now gets rid of the error that we discussed before that was pointed out by Don Patinkin and which Mises seemed to accept Visa's theory that the value of money is exclusively determined by the value of the things that can be bought for money.

438
01:03:56.260 --> 01:04:02.260
Now in Nationale Economie, finally, he stresses, there is a demand for money per se.

439
01:04:02.260 --> 01:04:07.260
And of course, we do demand money because we want to buy other things with this money.

440
01:04:07.260 --> 01:04:15.260
But money renders us certain services, marketable goods, and it is for these services that we demanded.

441
01:04:15.260 --> 01:04:25.260
So the value of money is not exclusively fully determined by the value of the goods that we can buy for money.

442
01:04:25.260 --> 01:04:37.260
The last point that I should like to discuss very briefly is the update that he gives us on the socialist calculation debate.

443
01:04:37.260 --> 01:04:47.260
In the late 1920s and throughout the 1930s, several theoreticians with more or less left-wing orientations

444
01:04:47.260 --> 01:04:59.260
developed responses to the challenge he had given in his 1922 and 1922 works on the impossibility of socialist calculation in a socialist society.

445
01:04:59.260 --> 01:05:09.260
And there were in particular two new approaches that required a response.

446
01:05:09.260 --> 01:05:34.260
A response according to one approach socialist communities could create an artificial market by ordering the plant managers to behave as if they were employed in capitalist firms the idea was to combine the benefits of a price system and social control

447
01:05:34.260 --> 01:05:39.220
through government appointed managers, but without creating bureaucracy and monopoly.

448
01:05:40.900 --> 01:05:46.820
Such schemes had become fashionable during the 1930s and by the time nationale économie was

449
01:05:46.820 --> 01:05:53.140
published they were achieving the status of a new orthodoxy that would survive half a century.

450
01:05:54.820 --> 01:06:02.980
We might mention in particular the authors Fred Taylor, Carl Landauer, Dickinson, Lerner,

451
01:06:02.980 --> 01:06:27.980
and Oskar Lange. One of the new theoreticians, the Polish socialist Oskar Lange, thought some compensation for Mises might be in order, given that it was his powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy.

452
01:06:27.980 --> 01:06:42.980
Lange therefore proposed that a statue of Professor Mises ought to occupy an honorable place in the Great Hall of the Central Planning Board of the Socialist State.

453
01:06:42.980 --> 01:06:51.980
Very generous. But no socialist state was generous enough to follow up on this suggestion.

454
01:06:51.980 --> 01:07:01.980
But as I've learned from our friends here, the University of Wroclaw created a statue of Oskar Lange and preserved it into our day,

455
01:07:01.980 --> 01:07:05.980
which was surely a monument to the preranity of his message.

456
01:07:05.980 --> 01:07:12.980
Generations of students were taught that socialism was, in theory at least, a viable economic system.

457
01:07:12.980 --> 01:07:20.980
Some authors even went so far as to argue, statistics in hand, that the Soviet economies of Eastern Europe were superior,

458
01:07:20.980 --> 01:07:24.980
or about to become superior to the capitalist economies of the West.

459
01:07:24.980 --> 01:07:34.980
Here I like to mention in particular the various editions of the most important Western textbook of the post-war years.

460
01:07:34.980 --> 01:07:38.380
Paul Samuelson's Economics.

461
01:07:38.380 --> 01:07:43.280
Up to the very last edition that appeared before the collapse of the Soviet Empire,

462
01:07:43.280 --> 01:07:47.380
the 1989 edition, Samuelson stated the following,

463
01:07:47.380 --> 01:07:53.160
quote, the Soviet economy is proof that contrary to what many skeptics had earlier believed,

464
01:07:53.160 --> 01:08:00.060
the socialist command economy can function and even thrive, unquote.

465
01:08:00.060 --> 01:08:04.620
This notion evaporated in 1989.

466
01:08:04.620 --> 01:08:15.620
The fall of the Berlin Wall opened everyone's eyes to the stark reality that 70 years of socialism had created nothing but misery, pollution and slavery.

467
01:08:15.620 --> 01:08:21.620
The world learned the hard way what it could have learned in 1922 from a readily available book.

468
01:08:21.620 --> 01:08:30.620
In socialism, Mises had analyzed the idea of market socialism even before any socialist had thought of it.

469
01:08:30.620 --> 01:08:38.620
And he had already identified its Achilles Heel, moral hazard, and we talked about this yesterday.

470
01:08:38.620 --> 01:08:45.620
Artificial markets would make managers irresponsible. Some of the benefits of successful management would still be private,

471
01:08:45.620 --> 01:08:50.620
but all of the costs of mismanagement would have to be borne by the citizenry at large.

472
01:08:50.620 --> 01:08:58.620
As a consequence, the managers of the state would take on excessive risks. They would squander society's capital.

473
01:08:58.620 --> 01:09:17.620
18 years later, in Nationale Economie, Mises did not miss the opportunity to note the irony that, according to this proposal, the market economy was such a bad thing that it had to be reintroduced through the back door as soon as the new socialist regime is established.

474
01:09:17.620 --> 01:09:23.620
You went on to chastise the champions of artificial markets for narrow-mindedness.

475
01:09:23.620 --> 01:09:31.620
The problem of the allocation of resources is not primarily a managerial problem within each plant.

476
01:09:31.620 --> 01:09:36.620
It is a problem of choosing where to place available capital.

477
01:09:36.620 --> 01:09:40.620
Which of the existing plants should be expanded?

478
01:09:40.620 --> 01:09:42.620
Which ones should be cut back?

479
01:09:42.620 --> 01:09:45.620
Which new production sites should be established?

480
01:09:45.620 --> 01:09:53.620
should be established. These decisions lay in the hands of, as Mises said, capitalists, entrepreneurs and speculators.

481
01:09:53.620 --> 01:09:58.620
It was out of the question to extend the scheme of the artificial market to them.

482
01:09:58.620 --> 01:10:09.620
Restating the analysis of moral hazard along the lines given in socialism, Mises argued that playing capitalists would be completely irresponsible.

483
01:10:09.620 --> 01:10:16.620
No risk would be too high for the make-believe capitalists because they themselves would hardly bear any negative consequences.

484
01:10:16.620 --> 01:10:22.620
Such a system would be neither socialism or capitalism. It would be no system at all.

485
01:10:22.620 --> 01:10:25.620
Said Mises, it would be chaos.

486
01:10:25.620 --> 01:10:40.620
Mises then finally turned to another scheme that had been developed in the interwar period

487
01:10:40.620 --> 01:10:45.620
as a response to his critique of economic calculation and socialism.

488
01:10:45.620 --> 01:10:52.620
And according to this scheme socialist societies should use the equations of mathematical economics

489
01:10:52.620 --> 01:10:55.620
to solve the problem of economic calculation.

490
01:10:56.620 --> 01:11:03.620
Here Mises restates an argument he had presented in a 1938 French language article of the same title.

491
01:11:04.620 --> 01:11:09.620
Those mathematical equations describe a state of affairs that is already in equilibrium,

492
01:11:10.620 --> 01:11:15.620
but not the concrete steps through which any equilibrium could ever be reached.

493
01:11:15.620 --> 01:11:27.620
I quote Mises, it was an error to suppose that one could calculate the equilibrium state with data taken from an economy that is not in equilibrium.

494
01:11:27.620 --> 01:11:38.620
It was another error to believe that acting man for his present day calculations needs to know the evaluations and appraisals that would obtain in the equilibrium state.

495
01:11:38.620 --> 01:11:51.620
Now that's fairly abstract. Let me put it otherwise. In order to, so you have a system of equations that describes the relationships that exist between prices and quantities.

496
01:11:51.620 --> 01:12:02.620
Relations that must exist of some sort due to scarcity. There must be some relations. If I increase the quantity of boots that are produced, then necessarily I can produce less butter.

497
01:12:02.620 --> 01:12:07.620
So there will also be implications for the prices of boots and of butter.

498
01:12:08.620 --> 01:12:21.620
Now the question is, how can I use such a system of equations to make concrete investment decisions as a central planning board?

499
01:12:21.620 --> 01:12:31.620
And what Mises says is well, in order to give empirical flesh to it, we can only take those data, those information that are available now.

500
01:12:32.620 --> 01:12:38.620
But the presently existing economy is not one that is in equilibrium.

501
01:12:38.620 --> 01:12:42.620
It is an economy in disequilibrium.

502
01:12:42.620 --> 01:12:51.620
So the information that we get empirically do not help us in order to know how the equilibrium in economic would look like.

503
01:12:51.620 --> 01:13:00.620
And second, even if you knew what it looked like, it would not help us much because we would still not know what the next step should be.

504
01:13:00.620 --> 01:13:05.620
Even if I know, let's say, how the perfect equilibrium economy should be in 10 years,

505
01:13:05.620 --> 01:13:11.620
I still have the problem, the question, what should I do next?

506
01:13:11.620 --> 01:13:16.620
What's the first step toward getting there?

507
01:13:16.620 --> 01:13:23.620
And he argues, in this article that I just mentioned, he argues, well, in a real existing economy,

508
01:13:23.620 --> 01:13:26.620
entrepreneurs do not need to know this.

509
01:13:26.620 --> 01:13:34.620
They can operate with the existing price system, which has expressed the beliefs of their fellow entrepreneurs,

510
01:13:34.620 --> 01:13:37.620
beliefs that might be wrong, but it doesn't matter.

511
01:13:37.620 --> 01:13:42.620
They are bound up in a competitive process and their main task is to make a profit.

512
01:13:42.620 --> 01:13:50.620
If they make a profit, as we know from theoretical analysis, they must serve consumer needs, otherwise they could not.

513
01:13:50.620 --> 01:13:56.620
So if they make a profit, they necessarily bring the economy closer to equilibrium.

514
01:13:56.620 --> 01:14:05.620
In order to make a profit, they just can rely on the existing price system, imperfect and disequilibrium as it is.

515
01:14:05.620 --> 01:14:11.620
That's Mises-Argnar. So we do not need this in order to be successful in practice.

516
01:14:11.620 --> 01:14:18.620
And even if we knew it, even if we could apply, could develop equilibrium models of the economy,

517
01:14:18.620 --> 01:14:22.620
they would be of no use in practice.

518
01:14:22.620 --> 01:14:29.620
Mises then concluded that this fundamental conceptual problem made it superfluous for him

519
01:14:29.620 --> 01:14:35.620
to deal with the practical problems of central planning that Pareto and Hayek had raised.

520
01:14:35.620 --> 01:14:40.620
Pareto and Hayek had stressed the problem of centralizing knowledge

521
01:14:40.620 --> 01:14:45.620
and of communicating knowledge from one end of the economy to another.

522
01:14:45.620 --> 01:14:53.620
So, Mises did not deny that such a problem exists, and he did not diminish its importance, he just said, well, but that's not all.

523
01:14:53.620 --> 01:14:58.620
There's also this other problem, a fundamental problem of economic calculation.

524
01:14:58.620 --> 01:15:04.620
Okay, I'll stop here and give you 12 minutes for questions. Please.

525
01:15:04.620 --> 01:15:32.620
Well, Mises did not use this expression. This would have been disparaging when he said it was a step back. No, he did not say this.

526
01:15:32.620 --> 01:15:39.620
He said things like, that is just a practical problem.

527
01:15:39.620 --> 01:15:45.620
Hayek had raised the consideration of this practical problem,

528
01:15:45.620 --> 01:15:47.620
and he always said, but that's not all.

529
01:15:47.620 --> 01:15:52.620
In fact, you're right, the socialists, Lippincott, for example,

530
01:15:52.620 --> 01:15:57.620
they made the statement, well, what Hayek and Robbins are doing

531
01:15:57.620 --> 01:16:01.620
is typical of somebody who has, in principle, already considered defeat.

532
01:16:01.620 --> 01:16:06.620
and then moves on to raise additional practical problems.

533
01:16:06.620 --> 01:16:12.620
And Mises never did this. He said that Hayek and Robbins did not say Mises.

534
01:16:12.620 --> 01:16:19.620
The socialists were very well aware that Mises had not retreated from his position.

535
01:16:19.620 --> 01:16:37.620
Well, you might be right, I also believe that he believed it was a retreat, but he did not say it, okay, he did not say it.

536
01:16:37.620 --> 01:16:39.620
Yep.

537
01:17:07.620 --> 01:17:27.620
Yeah, Mises raises this possibility very briefly. I don't remember exactly where, whether, probably already in the Theory of Money and Credit, if not then in this 1928 book, and also in Nationale Economie, and he says, okay, what happens then is simply that certain investments would not take place.

538
01:17:27.620 --> 01:17:32.620
That's all, but there would be no waste of capital.

539
01:17:32.620 --> 01:17:40.620
So we remain below our possibilities, but we do not positively waste capital.

540
01:17:40.620 --> 01:17:48.620
If the interest rate drops below the equilibrium, then we have positive waste.

541
01:17:48.620 --> 01:17:59.620
That is, we not only remain below our possibilities, but far more so than if we had just stopped investing for a certain amount of time.

542
01:17:59.620 --> 01:18:22.620
We know that Mises saw that there was a difference between his treatment of the socialist calculation problem and Hayek's treatments.

543
01:18:22.620 --> 01:18:25.620
Did Hayek also see that there was a difference? That's a good question.

544
01:18:25.620 --> 01:18:29.620
I had the impression that that was not necessarily the case.

545
01:18:29.620 --> 01:18:35.620
From what Hayek later said in the later 1970s, after Mises' death,

546
01:18:35.620 --> 01:18:38.620
about how he perceived the importance of Mises' work,

547
01:18:38.620 --> 01:18:42.620
he said, well, often Mises did not put things quite right.

548
01:18:42.620 --> 01:18:52.620
And much of what he wrote in the 1930s and thereafter was meant to clarify the point that Mises had.

549
01:18:52.620 --> 01:18:57.620
So you always believe that Mises had a point, but not necessarily that he stated it correctly.

550
01:18:57.620 --> 01:19:01.620
And I think that was also his attitude to this question.

551
01:19:01.620 --> 01:19:08.620
He thought that Mises had a point, but the way he expressed it was not acceptable.

552
01:19:08.620 --> 01:19:14.620
Of course, from a psychological point of view, we can explain this by saying,

553
01:19:14.620 --> 01:19:24.620
by saying Hayek started from this Vizierian framework and so for him there could be no talk of an impossibility of economic calculation under socialism.

554
01:19:24.620 --> 01:19:31.620
Of course it was possible in principle. So the only difficulty that could he enter into place was a practical one.

555
01:19:31.620 --> 01:19:39.620
Mises had raised this practical difficulty also in his 1920 essay. So Hayek thought that he was just going to clarify matters,

556
01:19:39.620 --> 01:19:56.620
So, from the answers that you gave, one can infer that there was no correspondence between Mises and Hayek,

557
01:19:56.620 --> 01:20:04.620
what was their respective understanding of each other's argument?

558
01:20:04.620 --> 01:20:12.620
There is not much correspondence, there is a little bit of correspondence and I quote this also in the book, in the chapter that deals with the Geneva years.

559
01:20:12.620 --> 01:20:23.620
So in the context of the discussion of this 1938 paper in which he criticizes Hayek, therefore the paper is also interesting and has been reprinted a few years ago in the Quarterly Journal of Austrian Economics.

560
01:20:23.620 --> 01:20:29.620
So it's one of the few papers where Mises names names and says well Hayek is wrong in this.

561
01:20:29.620 --> 01:20:39.620
Yeah, and there wasn't ensuing a little correspondence on this, and they obviously also discussed this at conferences, but Hayek was unconvinced.

562
01:20:39.620 --> 01:20:45.620
So, somebody else before I give you the word again?

563
01:20:45.620 --> 01:20:53.620
What was Wichsel's justification for saying that an asset is just that?

564
01:20:53.620 --> 01:20:55.620
Well, Wichsel believed in the Wheel of Money theory.

565
01:20:55.620 --> 01:21:05.620
He believed that money just provided a monetary layer over the economy, but did not fundamentally affect what was going on.

566
01:21:05.620 --> 01:21:12.620
That's just a minor point. Why do you think Mises seldom names names?

567
01:21:12.620 --> 01:21:18.620
Why did Mises seldom name names? Well, that's another issue that I also have discussed in this book.

568
01:21:18.620 --> 01:21:32.620
Much earlier on, when he makes up his mind about attacking always ideas, never persons.

569
01:21:32.620 --> 01:21:39.620
It comes up in the context of a corruption affair and he could have the opportunity to indict the persons involved,

570
01:21:39.620 --> 01:21:45.620
but he wants to attack the ideas and say, okay, if I do both, then I would be mingled up in these affairs

571
01:21:45.620 --> 01:21:49.620
and these affairs and people would maybe think that I was just an X to grind with this

572
01:21:49.620 --> 01:21:54.620
but my task, my professional task as an economist is to fight bad ideas

573
01:21:54.620 --> 01:21:59.620
and so it's exceptional in this case too that you mentioned Hayek but probably well

574
01:21:59.620 --> 01:22:02.620
various possibilities why this was so.

575
01:22:02.620 --> 01:22:06.620
Did he ever make an exception and really nail a person?

576
01:22:06.620 --> 01:22:07.620
No.

577
01:22:07.620 --> 01:22:08.620
Never?

578
01:22:08.620 --> 01:22:10.620
No.

579
01:22:10.620 --> 01:22:17.620
Can you elaborate a little bit more on Mises' relationship with Morgenstern?

580
01:22:17.620 --> 01:22:23.620
Morgenstern? Mises' relationship with Morgenstern.

581
01:22:23.620 --> 01:22:28.620
Well, there's not much that I've found. There is no correspondence between the two.

582
01:22:28.620 --> 01:22:35.620
There is virtually no correspondence. I mean, the entire 50 years or so that they knew one another,

583
01:22:35.620 --> 01:22:43.620
There are maybe five letters that I have. They are usually of an informative sort, no exchange of ideas and so on.

584
01:22:43.620 --> 01:22:50.620
But it must be said that Mises in general did not use correspondence as a way of exchanging or developing, formulating his ideas.

585
01:22:50.620 --> 01:22:55.620
It was not his thing. That's why he wrote books and articles.

586
01:22:55.620 --> 01:23:02.620
Morgenstern, as I've said, he was the assistant of one of his rivals, Ottmar Spann.

587
01:23:02.620 --> 01:23:12.620
He was not necessarily, sorry, he was an assistant to Hans Maier.

588
01:23:12.620 --> 01:23:20.620
He was interested in economic theory but was inspired by the Viserian framework, was another Viserian.

589
01:23:20.620 --> 01:23:31.620
There was a certain proximity between Mises' thoughts and Morgenstern's ideas in that they both rejected the general equilibrium framework

590
01:23:31.620 --> 01:23:44.620
Work, Economic Analysis, and Morgenstern early on, so he writes his 1928 Habilitation Thesis in which he discusses problems of forecasting.

591
01:23:44.620 --> 01:23:58.620
He says because we have the interdependence of human choice, in order to make a correct choice, I need to anticipate what the other person is doing.

592
01:23:58.620 --> 01:24:03.620
For example, what customers are doing, but also what competitors are doing.

593
01:24:03.620 --> 01:24:05.620
But for him it's the same thing.

594
01:24:05.620 --> 01:24:09.620
In order for him to make a correct choice, he needs to anticipate what I'm doing.

595
01:24:09.620 --> 01:24:17.620
So we have the problem, I know that you know that I know that you know, that I know that you know, that I know that you know, and so on.

596
01:24:17.620 --> 01:24:26.620
And so because of this, he said, well, that's such a riddle that makes it impossible that we can ever apply general equilibrium theory.

597
01:24:26.620 --> 01:24:36.620
So we need to come up with something different, and that's the reason why he pushed into developing game theory, that's of course the approach with which his name is today associated.

598
01:24:37.620 --> 01:24:51.620
So there was some common ground in the rejection of this entire positivist approach, general equilibrium and forecasting and so on, he did not believe in this, but he delved into a completely different direction.

599
01:24:51.620 --> 01:24:59.620
Then as a person, I believe Morgenstern was not too much to Mises' liking.

600
01:24:59.620 --> 01:25:12.620
I believe he was very egocentric, very, very egocentric, and more subservient also than Mises to power,

601
01:25:12.620 --> 01:25:17.620
both in the time in the Vienna years and in the U.S.

602
01:25:17.620 --> 01:25:23.620
Of course, Morgenstern in the early Cold War era was a big time Cold Warrior

603
01:25:23.620 --> 01:25:28.620
and got lots of money for his research projects from the Department of Defense

604
01:25:28.620 --> 01:25:36.620
because game theory was held to have major applications in wartime planning and so on.

605
01:25:36.620 --> 01:25:37.620
and so on.

606
01:25:37.620 --> 01:25:38.620
Yep.

607
01:25:38.620 --> 01:25:39.620
The discussion of the profitability and uncertainty that are vaguely reminiscent of what I've

608
01:25:39.620 --> 01:25:40.620
come across in the portfolio theory of systematic and unsystematic risk.

609
01:25:40.620 --> 01:25:41.620
Is there some kind of a relationship or was there a discussion between Mises and the people

610
01:25:41.620 --> 01:25:42.620
that were in the portfolio?

611
01:25:42.620 --> 01:25:48.700
What are the three most important aspects in your theory of money and credit?

612
01:25:48.700 --> 01:25:55.020
Is it something that is vaguely reminiscent of what I've come across in portfolio theory

613
01:25:55.020 --> 01:25:57.340
of systematic and unsystematic risk?

614
01:25:57.340 --> 01:26:05.340
Is there some kind of relationship or was there a discussion between Mises and the people

615
01:26:05.340 --> 01:26:11.340
that worked in portfolio theory about that kind of thing?

616
01:26:11.340 --> 01:26:19.340
I didn't know, I did not find any evidence that there were, well, discussions of course do not survive on documents, I found no correspondence and nothing.

617
01:26:19.340 --> 01:26:23.340
Yeah, but certainly Mises read these works.

618
01:26:23.340 --> 01:26:34.340
And, well, portfolio theory, right, we have these distinctions between systematic and unsystematic risk, but fundamentally,

619
01:26:34.340 --> 01:26:41.340
New classical economists believe that any type of risk, whether it's systematic or unsystematic, can be quantified,

620
01:26:41.340 --> 01:26:48.340
on the basis of different theories of probability, Bayesian probability theory and so on.

621
01:26:48.340 --> 01:26:53.340
And that's precisely the point that Mises was challenging. That was his point.

622
01:26:53.340 --> 01:27:00.340
There are certain types of risk, case, or case probability that you cannot quantify,

623
01:27:00.340 --> 01:27:05.340
to quantify and which raise a fundamental challenge for quantitative economics

624
01:27:05.340 --> 01:27:10.340
and also then of course for purely quantitatively based investment decisions.

625
01:27:10.340 --> 01:27:15.340
Investment is not a mechanism. It would be nice if it were.

626
01:27:15.340 --> 01:27:18.340
Okay, we'll leave it here. See you tomorrow morning.