Producing Prosperity: An Inquiry Into the Operation of the Market Process

0:00Thank you very much, Mark. It's great to be here, and I'll just follow up on something that Tom DiLorenzo said about students being hungry for these ideas, and he said professors don't want their students to hear it. Actually, maybe I'm the opposite of that, but I will say, you know, one nice thing about the Mises Institute is there's a lot of literature that's online and easy for students to get, and they run into it. My students run into it without without my saying you need to go to this website and look my students run into this stuff and ask me about it all the time so it's just great that the institute has so much literature online and students are picking it up they're finding it on their own and if you're in my generation you're used to reading stuff you know paper paper stuff and and really I mean students these days don't do that I'll recommend sometimes that they read something and a student

0:56will come back to me and say, I've looked all over, I can't find it. So, did you look in the library? No, I haven't looked there yet. So anyways, I just, so, you know, get attuned to that's the way students think. I did bring a copy of the book, that copy looks like it's a lot bigger, and it's a brand new book, it's 2013, Producing Prosperity, and so let me just give you an idea about What's in the book and what motivated me to write it? Because it's really a book about economic analysis and analyzing 20th century economic analysis from an Austrian standpoint. But let's think about how well off that we are today compared to people 100 years ago, 50 years ago, 20 years ago.

1:51I've been around long enough. I can remember the first time I saw a microwave oven, and I do know, because I used to teach here at Auburn, I moved 25 years ago, wow. But I know nobody had a cell phone in Auburn when I moved away, because there wasn't any cell service in Auburn. Now everybody has one. We take it for granted, but you look at people in poverty today in the United States. They have microwave ovens, they have flat-screen televisions, they have cell phones, not to to mention, you know, electricity, air conditioning, indoor plumbing, they have automobiles. So you look at how well off we are today and it's because of economic progress and so what I wanted to do in this book is to try to align economic theory more with this idea about the economic progress that has actually produced prosperity because when you look at the development of Economics, and I'm not talking about the Austrian School, but you just look at the

2:55development of economics in the 20th century, and that development has been mostly trying to better understand the properties of economic equilibrium. And it hasn't always been that way. I do have a chapter in the book, it's about the history of economic thought, and if you go back to the 18th century, which is maybe the beginning of economic analysis, and I'll I'll use Mises as my source for that. If you read Human Action, the very first sentence in the book is economics is the youngest of all sciences, and he talks about how it's only recently that people have discovered this remarkable interdependence of economic phenomena. So if you go back to the 18th century, the big issue in economics was how is wealth created?

3:44and you look at the mercantilists who thought accumulating gold and silver was how you get wealthy, physiocrats thought wealth came from the land, you look at Adam Smith's book, The Wealth of Nations, the title tells you what he's talking about, actually the full, that Wealth of Nations, that's the movie title, the full title of the book is An Inquiry into the Nature and Causes of the Wealth of Nations, that's what Adam Smith was interested in, you know, how is wealth created, And that idea sort of came to an abrupt end, at least partly because of the ideas of Thomas Robert Malthus, you know, and so Malthus thought, you know, most people are going to be stuck at a subsistence level, going to be stuck in poverty because population growth is going to outstrip the availability of resources. So it just doesn't really matter how wealth is created if everybody's always going to be poor. And so you look at the development of economics in the 19th century.

4:39And one of the big issues, at least from the standpoint of economic theory, was what determines value. The labor theory of value that David Ricardo developed that you find in Marx on one side, and then with the marginal revolution and Carl Menger's ideas, subjective theory of value, demand side theory of value, a utility theory of value in contrast with the supply side, objective labor theory of value, what determines value. That was a big issue in the 19th century that was more or less settled, at least the way contemporary economists would view it, more or less settled in Alfred Marshall's Principles of Economics. And there's a section in Marshall where Marshall talks about, you know, what is it that determines values?

5:28Is it the supply side? Is it the demand side? says we might as well ask which blade of the scissors does the cutting? You know, it's both, it's supply and demand. And that answered the question, I think pretty much the way most economists would answer it today, but answered it in an equilibrium framework. So Marshall has this equilibrium framework, and if you look at the development of economics throughout the 20th century, it's been trying to better understand the properties of economic equilibrium. You look at microeconomics, and in microeconomics, the development of micro, we have this idea of a Pareto optimal allocation of resources, that's the best you can get, and so we look at all these problems of market failure, externalities and public goods and monopolies and things, and then we look for ways that we can solve those market failure problems, and once we do that, once we get to a Pareto optimal allocation of resources, then what?

6:24Well, that's it. That's what we wanted to do. So we're there. You know, we'd maximize welfare. The same thing is true in macroeconomics. If you look at macroeconomics, big issue there is instability. And the idea is, how do we get to a macroeconomic equilibrium of full employment and low inflation? And then what? No, that's what we wanted. That's the goal. Once we're there, that's the goal. And so throughout the 20th century, in microeconomics and macroeconomics, What economic analysis has done has been to try to better understand the properties of economic equilibrium. But when you look at, again, how well off we are today, is it because we're closer to Pareto optimality than we were before?

7:10No, it's economic progress that improves our welfare. And so there's a mismatch between the economy that's described in economic theory and the actual real world economy that makes us as well off as we are today, progress versus equilibrium. I have another chapter in the book where I talk about the concept of equilibrium, but And I contrast that, and I look at what markets actually do, and when you look at the entrepreneurial nature of the economy, the economic progress that takes place, equilibrium really isn't descriptive of what an economy does.

7:56If you think about the concept of equilibrium, it means if you disturb the equilibrium, there's a tendency for the economy to return back to that equilibrium. But for the most part, that's not what happens. The things that disturb an equilibrium in an economy, in a growing economy characterized by economic progress, there are those entrepreneurial actions that change the underlying nature of the economy. So when an entrepreneur does something to disturb the economy, it never returns back to where it was before. There are new underlying conditions. Now, you know, we might say in a sense, well, the equilibrium is always changing, but that violates the concept of equilibrium, right? We don't have an equilibrium in the economy. We have continual economic progress. I really don't use the word equilibrium in my classes or in the book too much. I talk about concepts of equilibrium, but it is true that there's a tendency for the quantity supplied to equal the quantity demanded in all markets. I would call that market clearing, not equilibrium.

9:00So we can talk about the market forces that lead markets to clear, by which we mean the The quantity supplied equals the quantity demanded, but that's not an equilibrium in the sense that the things that disrupt the economy change the underlying conditions so the economy never returns back to what it was. And those disruptive forces in the economy, the big disruption is entrepreneurship. You have these innovations that take place in the economy as a result of the actions of Entrepreneurs and that creates this economic progress. And so what I'm arguing in the book is we need to change the framework of our analysis and actually in this room maybe I shouldn't say we, maybe I should be saying they.

9:50They need to change the framework of their economic analysis to make economic analysis more descriptive of the actual economy that creates this economic progress. So I do talk a lot in the book about entrepreneurship, and if you look at the actions of entrepreneurs, one interesting issue to consider that I talk about a lot in the book, and I might also give a plug to Dom Armantano's book, Dom is going to be talking tomorrow or later, because He has the same type of idea at the beginning of his book, but I looked at a whole bunch of intermediate microeconomics books to see what's actually taught in the classroom on several topics.

10:43I'll give you a couple of examples. One of them is product differentiation. So you look at product differentiation in standard microeconomics textbooks, and what you'll find is they'll tell you there's a trade-off. You get more variety in products, but firms are not producing at minimum average total cost, so you have higher cost in exchange for greater variety. That's the trade-off. But if you think about an economy in terms of economic progress, product differentiation is what creates economic progress. It generates welfare because firms aren't just trying to make their products different. That doesn't give them any special advantage. They're trying and also if you look at the model of pure competition in neoclassical microeconomics, if you just grab an economist out of any economics department and say, you know, tell me about pure competition, one of the things they'll tell you is competitive firms have homogeneous Products. But that's an assumption in the model. It's not a conclusion from the model.

11:56We assume they have homogeneous products in order to be able to add up the individual firms to get the total market because, like, you can't add up apples and oranges. But it's an assumption in the model. Actually, when you look at the actual process of competition, product differentiation is a feature of competition. Let me give you another example. Again, you look at a whole bunch of intermediate microeconomics in the US textbooks, and you look at competitive markets, and one of the things we find in competitive markets is all the textbooks say you can't do any better than just earn a normal profit. The best thing you can do is combine your inputs into outputs in order to earn a normal profit.

12:45You can't do any better than that. Then you read a couple chapters ahead in the book and there's a chapter on monopoly, on how, you know, if you have a differentiated product you can earn these monopoly profits. But wait a minute, let's go back to the earlier chapter. If you're in a competitive market and you want to maximize your profits, try to get some monopoly power and how you do that through product differentiation. So I talk about some welfare issues, and I'll just say since I'm running out of time, you know, the whole concept of economic welfare, there's this idea of a welfare maximum that's a Pareto Optima, but actually welfare maximization is a process whereby our standard of living continues to go up. It's not an outcome, it's a process, and so, you know, there's another in the area where I look at neoclassical economics and find some issues, I do have a chapter also on policy issues, so you might say, well okay, that's fine, but what difference does this really make to economic policy?

13:50I do have a chapter where I talk about economic policy, and again I'll give a nod to Dom Armantano, but you look at antitrust policy, and there's an example where a flawed theory leads to a flawed policy. So, what I try to do in the book is to lay out a framework where we can understand from this market process point of view how to look at economic phenomena, and in a sense, I look at it as laying out a framework where we can develop ideas for future research, and on that note, I'll just give a plug later on today, I'm in a panel where I'm presenting Thank you for giving me the opportunity to talk a little bit about my book.