Mises in One Lesson

0:00Thank you very much, Lou. This is a real pleasure. It's going to be difficult to explain all of Austrian economics and Mises' role in a short period of time. I'll try to my best. First place, about Austrian economics. Contrary to many impressions, it has nothing to do with Austria. I know nothing about the economics of Austria. It doesn't mean it's not a viable subject, but I don't know much about it. Also, there are very few Austrians left in Austria. Yeah, they're all here.

0:47Austrian economics began in the University of Vienna with Carl Menger, and the early Austrians were indeed located in Austria and then the doctrine permeated outward. The essence of Austrian economics is that it's based on, in contrast to all other schools, including alleged free market schools of economics. The Austrian Economics is based on an analysis of individual action, of individuals doing things, having purposes and goals, and pursuing them. This immediately sets us apart, because all the other schools of economics deal with aggregates, groups, classes, holes, one sort or another, without focusing on the individual first and building up from there.

1:45I have to start with, I could easily make this about five hours instead of 45 minutes, so I'm going to try to truncate this. Austrian economics basically builds on an earlier tradition of French and Italian, especially French continental tradition, beginning with the Spanish scholastics in the 16th century and then proceeding on to France with Cantillon and Turgo in the 18th century. This was buried for various reasons. This knowledge was lost to economic thought and superseded by the British classical school, by Smith and Ricardo and their followers. So this immediately starts a new history of thought, because most economists, I think, still think that economics began sort of out of the forehead of Adam Smith, you know, in 1776, he sort of created it like Athena springing from the brow of Zeus.

2:44Actually economics not only predated Smith by several centuries, but also was much better than Smith. In other words, Smith represents a decline. At any rate, the British classical school, Smith-Ricardo, etc., John Stuart Mill, focused on aggregates and groups and classes rather than the individual, number one. Basically you could sum up the classical school with several key fallacies, and this was dominant until Menger came around in 1871. The value, economic value, price is determined by the cost of production, the cost of production embodied in some fashion in the product, and specifically by the quantity of labor hours embodied in it.

3:34We can pretty well see, almost automatically, if we look at this thing in a clear-eyed fashion there's something wrong with it, because I could work, I remember there was a movie, it was a kind of charming movie, a grade Z movie came out about 20 years ago, I forget the title, but the essence of it was some great inventor somewhere in the west of England, living totally isolated, and he kept inventing great things like the radio and television and all that, except that he had already been invented 20 years before, so he didn't know about it. So he was a great inventor, he just invented the wheel and whatever, too late. But he was working, he must have put in 100,000 labor hours into these inventions, how many of these sell? Obviously zero. So the economic value, they're not obviously dependent on his quantity of labor hours.

4:21At any rate, what the classical school had to do was dismiss as unimportant a whole group of economic goods and not able to explain their value. Namely, non-reproducible objects, goods that are not being produced anymore, like Rembrandt's. Rembrandt put in a certain number of labor hours, I suppose, but the price of Rembrandt keeps fluctuating since then, not in accordance with somebody's input on hopes, otherwise it would be forgery. So what determines the value of Rembrandt? Well, they couldn't figure it out, they just had to leave it aside as unimportant. And they couldn't deal with consumers either, with consumers that came up against the famous The value of paradox. Smith was Buffalo by the value of paradox. The peculiar thing was he solved it himself about 20 years before.

5:16It's a very odd kind of situation. Anyway, in The Wealth of Nations, he sets forth the value of paradox. It's a terrible thing. You can't understand it. On one hand there's diamonds, let's say. On the other hand there's bread or water. You can use either one of the two. And bread is a staff of life that's philosophically extremely important and very necessary, and yet it's very cheap on the market. In other words, economic value is zilch. It's very cheap, not zero. Water is the economic value. It used to be zero. And on the other hand, we have diamonds, which are mere flippery, a luxury item and so forth and so on. And Adam Smith, being a good Calvinist, said they have zero value, diamonds, and yet they're very expensive. Very expensive. They have very high economic value. So he couldn't figure that out, the value of paradox. Here's bread, which was extremely useful, yet has very low economic value. And diamonds, which are useless or almost useless and have very high economic

6:10value. And he concluded economics can't solve this. There's two, just a split between value and use and value and exchange. There's no way to solve it. We have to deal with exchange value and forget about use value. And you see right away, this sets up the conditions is for the whole bunch of left-wing thought in the late 19th, early 20th century. It's still going on, I suppose, the separation between value for use and value for, I mean, production for use and production for profit. That's what immediately sets that up, but somehow it's a big distinction. So, he said, therefore we can't deal with consumers, we can't deal with non-reproducible goods, we have to deal with reproducible goods, and we can only talk about, since we can't talk about consumers, In order to measure values, value must come from something inherent in the object, namely, labor hours.

6:57Another reason to use labor hours is that he and Ricardo were trying to measure value all the time. Because science meant measurement, even in those days, for these people. And so therefore, how do you measure value and how do you measure changes? Looking for some hard quantity, and they concluded labor hours was about the best thing they could get to. One big fallacy, one big dominant fallacy in economic thought when Menger was started to write. Another big fallacy is that they couldn't deal with individuals at all. They were dealing with classes. They had a separate thing called distribution, theory of distribution, trying to figure out, this is Ricardo in particular, who decides how much of the national output goes to wages, how much goes to profits, how much goes to landlords.

7:44The way he set it up was there's a class struggle between these three mighty groups, in other words, the good is produced somewhere, then they fight for who gets the different shares of income. The laborers get messed up here, the laborers are the dirty end of the stick, because wages are determined by the iron law of wages, the Malthusian iron law, it's down to subsistence level, as we all know, we're sitting here living at subsistence level at the Anaheim Hilton. Everybody gets the lowest possible wages, that takes care of the workers, and capitalists and landlords fight it out for the rest of it, with usually landlords winning out because they get an increasing share of these unproductive group of people, getting an increasing share of income.

8:29Well, this obviously led, this analysis seems to me led logically straight away to Marx and Henry George, two different sets of thinkers, but each focusing on different aspects of it. Henry George is focusing on the alleged surplus value going to the capitalists against the workers and somehow capitalism conspiring to keep the wages of people down to the subsistence level. On the other hand, Henry George is focusing on the evil unproductive landlords getting an increasing share of the national product and they should be expropriated. Now, of course, Smith and Ricardo did not believe they should be expropriated in thinking those terms. So it seems to me it's pretty logical that if you're interested in justice rather than only economic analysis, you will wind up as either, if you're a Ricardian, you'll wind up as either a Marxist or a Georgist. Some people, of course, take both paths, sort of moxo-Georgists.

9:19Okay, so this is the second big dominant force in British classical economics. The third one, well, the third thing is asking how could they be so wrong? How could they focus on

10:03and the classical home of Calvinism. Calvinist doctrine is that labor is a key thing. Everybody is doomed to work. Consumer enjoyment, by the way, is evil. And as Adam Smith said, diamonds are useless. And so, the only reason you consume anything is to allow you to keep working because of God's commandment. To suffer, keep suffering. So, this sort of Calvinist attitude leads pretty quickly, I think, to a labor theory of value. At any rate, the third, so that's one, two big fallacious aspects of British classical school. Labor theory of value or cost theory of value, one, two, classes or aggregate, class struggle over shares of income.

10:49And the third thing is to focus totally on non-existent, unreal, long-run equilibrium. Now this is done right now by modern microeconomics and macroeconomics for that matter. Current neoclassical economics focuses solely on reason that Lew Rockwell mentioned before, they don't talk about entrepreneurs. They know it's very easy, simple why they don't talk about entrepreneurs. They don't talk about entrepreneurs because entrepreneurs deal with change and uncertainty. You make a profit if you can forecast better than the next guy. You make losses if you can't forecast. In long run equilibrium, you don't have to forecast anything, nothing ever changes, since nothing ever changes, everybody has perfect knowledge, as they call it, perfect knowledge, everybody's in perfect competition, there's no uncertainty, there's no risk, there's no profits and no losses, and so the entrepreneur then becomes a pain in the neck, it becomes a messing up your neat mathematical system, and this again stems from British classical school, they didn't have the mathematical diagrams or anything, but they had the essence of Ricardo in particular,

11:53Focusing only on long run equilibrium, as a result of the fourth of the three, the fourth thing which goes along with this, is again, Mercado's contribution of economic thought, co-contribution unquote, is to separate, divide totally, the macro from the micro sphere, of course we're all familiar with that, those of us who take current economics, is micro the first term or the second whatever, second term, Macro, you learn about supply and demand or whatever, and then suddenly you leap into macro and nobody talks about supply and demand, they all talk about growth curves and velocity and all that, totally different. And this whole split starts with Ricardo also. Okay, and so with Ricardo, the quantity of money only determines the general price level. If you increase the money supply, prices go up.

12:42There's no impact on production, on profits, on interest, on relative prices or anything else. It's like two hermetically sealed spheres. There's the microsphere where things are going on, so it's fairly understandable, supply and demand, prices and all that. Then there's the macrosphere, totally cut off in the micro, where you have money and prices bouncing up and down with no relationship between the two. Okay, it was in that kind of atmosphere, set up, dominant, British Classical School dominance. By the way, it now turns out, not everybody was a Ricardian from 1819 until 1871. The British themselves began to peck away at Ricardianism shortly after he died. By 1830, there were no Ricardians left, but what happened was that John Stuart Mill resurrected He restored Ricardianism to its predominant pedestal, and he did it because he was brainwashed by his father who was a top Ricardian and so forth, so I'm not going to get into that kind of worms at this point. At any rate, it's in that atmosphere that Carl Menger, the founder of

14:01Austrian Economics, writes his great, path-breaking, magnificent book, Principles of Economics, in 1871. What he does, he builds on the earlier continental tradition, but essentially he develops this whole path-breaking system. Okay, well, what is it? Well, to sum it up, the Austrian system is created by by Menger and a student von Boehm-Bawerk at the University of Vienna. Essentially, it's based on methodological individualism, in other words, focusing on the individual first, the individual's actions. The individual, the idea is the individual has a purpose, has goals that he or she wants to pursue. In order to pursue these goals, you have to use resources or means to pursue them. And it takes time to do all this, etc., etc. The concept of the Manga is that you start with crew-selling and work on up to different individuals and exchanges, building up the whole economic analysis from the individual.

14:56And it hadn't really been done before, it had been done partially, but it had never been done systematically as Menger did it. And as Boehm-Bawerk did, developing it even further, especially in Capital Theory and Entrepreneurial Theory. So looking at it that way, you realize that the purpose of production is consumption. The reason why the inventor worked the 200,000 labor hours is because he hopes that somebody will buy it, and so value is conferred by the consumers, by the demand of consumers, and goes backward from the subjective valuations of consumers down through to the factors of production that people receive income. So you have, in other words, a demand theory or a consumer demand theory of value, the subjective value theory, instead of a cost of production doctrine. And now, of course, we immediately explain why Rembrandts are now, it might be two million dollars now, one million dollars ten years ago, because consumers are paying more for it.

15:47They're willing to pay more for it now than they were before. Their valuations are higher, either because of general inflation, they have more money, or because Rembrandts are now preferred more to other art than they were ten years ago. So secondly, looking and focusing on individual action, we can see that individuals make their Evaluations and Marginal Units. This is the so-called marginal revolution. In other words, they don't take the bread-diamond paradox, which Menger and the other marginalists solved, namely, nobody is confronted in real life, so you're looking at real life action. Nobody is confronted with the choice of all the bread on the world versus all the diamonds in the world. In other words, if the angel Gabriel came down to us tonight and said, you know, captured nationwide television, worldwide television, and said, people of earth, listen, you're not confronted with a choice

17:37Another thing that Austrianism focused on is that economics is not really a quantitative subject. It's not really a subject where you can make correlations and quantitative measurements and that sort of stuff because value is subjective and can't be measured. How much do I prefer, for example, Wonder Bread to Tasty Bread? How much? Who knows? be pointless for me to say I prefer 3.8 times as much as a loaf of tasty bread and everybody's got different... You certainly can't add up people's subjective preferences. Preferences are ordinal. They're rankings. They're rankings sort of thing. I prefer a little bit of tasty bread, et cetera.

18:26So by looking at this, we see that with Austrian, we look at any Austrian book, you can almost tell an Austrian book by looking at it, thumbing through it. There's no math in there, almost none. And one of the reasons is because it's not really a mathematical subject, it's really a philosophic subject. Okay, and the distribution front, I saw the British classical school talk in terms of a class struggle between different classes of income receivers. Again, the Austrians focus on each individual, individual factor owner, the individual laborer, individual capitalist, etc. By doing that, they were able to explain individual factor prices, which the classes has never The Free Market, through competitive action, entrepreneurial action, tends to impute to each individual factor how much is the productive share of a product, a so-called marginal product or marginal value product.

19:21Each factor tends on the market to earn its marginal value product, its contribution to the actual goods being produced. So there's no longer any split between production on the one hand, distribution on the other. John Stuart Mill said, the theory of production is all worked out, it's totally separate from the theory of distribution. This of course leads very quickly to a socialist position, because you can say, well, we're in favor of production, we'll allow people to produce, no one will grab this full income and divide it. Equal shares, or more to people six feet tall, whatever theory of distribution you've got. With Austrian economics, you realize there's no separate process called distribution, distribution comes right out of production. People earn what they contribute to the production. It's very simple, then. And also, Boehm-Bawerk pointed it out for the first time, and Frank Fetter, the American Austrian, developed it, clarified it.

20:14The interest, long-run profit, is determined or comes from time preference. This is something, by the way, the poor anti-usury people could never figure out, the Catholic Church theologians, who tended to be in favor of the free market.

20:59Capital takes time. Production takes time. Capital is a time structure. Some goods are very close to consumers, like, you know, producing wonder bread. The retailer, of course, is very close to the consumer. On the other hand, the machinery that goes over, the iron ore that goes into making the machinery that produces wonder bread is way up the structure. It takes a lot of time to get and so the earlier stage of production, so to speak, or a higher order of production. So we have then production taking time, we have capital, not as a homogeneous lump which modern economics still tends to say, just add more capital and this is if it's somehow a blob out there. Capital is a lattice work, it's a network, a structure which all has to fit in together and by the way only the free market can fit it in, only entrepreneurs, Profit and Loss Test, Profit and Loss Incentive and Free Price System can do the fitting.

22:00One of the problems with socialism, for example, is they can make some stuff but they can't fit it together. Often in Russia, you have a situation where the bristles, the toothbrush shortage, all of a sudden the toothbrush, why is there a toothbrush shortage? Well, the bristles are in omsk and the handles are in tumsk and they just didn't, they never fit the bristles together by the handle. In the free market, you never have this problem. Everything fits because there's a constant feedback mechanism, so to speak, a profit

22:56which equilibrium economics doesn't talk about and so therefore the entrepreneur becomes a key figure in the whole process the profit and loss system the incentive to make profits and to avoid losses and so the capitalist entrepreneur in Austrian theory earns a two-part return one as an entrepreneur by forecasting better than the next guy and be able to forecast the future forecast what demand will be for his product what cost will be and also two as a Capitalists saving up money and paying workers right now in advance of their production and sale for which the workers, in a sense, pay him a discount. They pay him the interest return and they're happy to do it because they don't have to wait five years for payroll. So these are the two basic functions of a capitalist entrepreneur, entrepreneurship and capital saving investment.

23:44Okay, in this atmosphere, in this kind of briefly sketch out Austrian economics before von Mises, Ludwig von Mises, Menger, Boehm-Bawerk, Fetter, Ludwig von Mises comes and born in 1881, a brilliant young student of Boehm-Bawerk's famous seminar at the University of Vienna. And essentially what he saw was that the Austrians had already fixed up these classical errors, the four big British classical errors, value distribution and equilibrium. But the one thing they hadn't done yet, one of the main thing they hadn't done yet, was He healed the micro-macro split. In other words, the Austrians still had only talked about micro. They weren't able to extend Austrian economics to the theory of money. So that was Mises' first great accomplishment.

24:31His magnificent first book, Theory of Money and Credit, came out in 1912. It's still the best thing ever written on money. What he did was he healed the split, this artificial split. He applied the marginal utility theory of Austrian economics to money, integrated it, he made micro and macro one whole beautiful integrated system of economic analysis. So he pointed out for example, when you get the money you don't use M and V, you don't forget about supply and demand, that the purchasing power of money, in other words the value of money can be decided on the same basis as individual goods and services, namely supply Supply and Demand. An increase of the supply of money lowers its value, just as in the case of bubble gum or coffee. An increase of demand for money raises its value, just like any other good. However, there's a big difference. In this he applies some of the Ricardian currency school insights. The big difference between money on the one hand and

25:32other goods on the other hand is that other goods are necessary to production, in other words, specific quantities. For example, if other things being equal, if you increase resources or increase the supply of goods and services, people's standard of living go up, that's a good thing, so to speak, to have more, to find new resources, to find new oil strike, or to increase productivity, okay. In the field, the sphere of money is very different, the only real use of money is exchange, you don't eat money, to put it bluntly, And once you have enough money to become money on the market, you don't need any more. In other words, any supply of money, which is arrived at on the market, is optimal. You don't need any more money coming in. So the only thing that increases the money supply does then, the only social effect, is to dilute purchasing power of each pre-existing dollar or gold ounce or mark or whatever the currency unit is.

26:29So, any increase in the money supply, increase in goods and services is good. It increases the standard of living. Increase in capital equipment is good. It increases future standards of living. An increase in the money supply is pointless, because all it does is dilute the purchasing power of the original or the existing unit. There's no social utility whatsoever. Now, under the gold standard, it does because the increase of gold supply has a non-monetary function. In other words, you can use more gold for jewelry, watches, teeth, that sort of stuff. But under paper money, of course, there's no social function whatsoever. It simply dilutes the purchasing power of a dollar. So, Mises goes into this and he shows, basically, that more money, an increase in money supply, beyond the amount of gold available or silver available, redistributes, destroys economic calculation, generally messes everything up, messes up the production system.

27:24What happens is a tax where the first receivers of money benefit the expense of the late receivers. It's pretty much like counterfeiting. As a matter of fact, it is. The Fed is essentially our legalized monopoly counterfeiter. And the effect of the Fed increasing the money supply on the Bank of England or any central bank is almost the same as any counterfeiter. You have a legalized counterfeiter pouring out money down here in Anaheim, you'll have the same sort of effect. An increase in the income of people in Anaheim, first of the counterfeiters, next of the people the counterfeiters spend the good money on, retailers let's say in Anaheim, they're in great shape, they love counterfeiting, right? And so then they begin to spend more, prices begin to go up, those of us who don't live in Anaheim who have a fixed income lose. So the inflation process is essentially a counterfeiting process, except it's not people on the run from the Treasury Department, it is the Treasury, it is the Federal Reserve

28:17doing it. Okay, so Mises also built on Carl Menger's classic article on the origin of how money originates and expanded it to show that money has to originate in this way, namely out of the free market, out of the voluntary actions of individuals trying to overcome the tremendous difficulties of barter. And he shows that money has to originate that way. Money cannot originate as a government edict or by some social compact where everybody gets together at one big convention and says, let's make that money. It can't work that way. It has to work out of a marketable market commodity. Unfortunately, of course, then the government can take it over and mess it up, but it has to originate as a market, valuable market commodity such as gold or silver, which have always out-competed all the other marketable commodities once it's given a chance.

29:09Also, Mises showed in The Theory of Money and Credit that fractional reserve banking is essentially an issue of fraudulent warehouse receipts to non-existent gold or cash, and it creates this whole process, and the ideal system would be 100% reserve banking. He believed, however, and I think it's true, under a genuine free banking system, in other The banks were compelled to meet their contracts, like everybody else is, forced to meet their contracts. They say, I'm going to give you gold on demand. If you don't give it to them, you go bankrupt. If that were true, we'd have a hard money, we'd have an approach toward a 100% reserve system. Unfortunately for us, it's never worked that way because the banks are always being bailed out one way or another.

29:59And also he showed in The Theory of Money and Credit that utility, he fixed up the marginal utility theory.

30:37The Theory of Money and Credit had a genesis. In a few pages, he outlined what would become his Theory of the Business Cycle, the Great Austrian Theory of the Business Cycle, the Misesian Theory of the Business Cycle. During the 1920s, he expanded on that, a work which has been translated since then, on manipulation of money and credit. Interestingly enough, what happened was that most of his students rejected this application of money in business cycles, because of the sound and so forth.

31:22Mises was a pioneer, scorned even in Austria in that situation. In Austrian business cycle theory, which developed during the 1920s, with F. A. Hayek as a famous major follower, but lots of other followers as well, basically what Mises did was he took his own money and banking theory, what determines the purchasing power of money, and he also took the currency school, the old Ricardian currency school insight, which is a famous The first model that if you increase the money supply, prices will go up and then you have a deficit in the balance of payments because prices will be too high and imports will go up and exports will go down. He realized with tremendous insight, this is essentially a business cycle theory.

32:09He's never talked about it as such in the textbooks. It was not only a theory of money and a theory of international payments, it was also a business cycle theory. It's a simple model. The banks pump in money, prices go up as euphoria, and then something happens, they have to contract Bankruptcies and Liquidations, and the Breaking Theory of the Business Cycle and essentially what it is, what it says is an increase in the supply of money and credit through the banking system, through central banking, not only it causes inflation, everybody will admit that, at least all the neoclassicals will admit that, excuse me, admit that, it also causes other disturbances, it's not just what Milton Friedman called a helicopter effect. Milton Friedman says we assume that everybody gets a proportionate increase in the money supply dropped by some magical government helicopter, so everybody gets 30% increase in their cash.

33:23It doesn't work that way, of course. If it did work that way, there would be no point to it. The reason why you start off, because we don't have an angel Gabriel doubling everybody's money supply overnight to try to improve their lot. What we have is legalized counterfeiters in Washington or in London, increasing their money supply first, and lending it out or spending it, and then it ripples out to the rest of the society. So they're always one leg up in this expropriation process. So at any rate, so Mises show that an increase in money and credit not only increases prices, it also disturbs, messes up the production system, the whole capital structure. And because one of the problems with the business cycle theory, there are two really basic problems which any business cycle theory has to explain.

34:11One is, how come entrepreneurs suddenly make severe losses? In other words, entrepreneurs are trained in forecasting. They tend to be great forecasters. If they're lousy forecasters, they go out of business pretty quickly. So successful entrepreneurs tend to be good forecasters. How come all of a sudden it turns out that all of them, or many of them, or most of them, went, go bankrupt? They didn't forecast successfully that their costs would be much higher than the selling prices. And it was sudden. There's a sudden cluster of entrepreneurial error. Now this doesn't usually happen, okay? And usually economists are trained, or Austrian is certainly trained, if something's really messed up in the system, you look at government. Government must be messing things The second thing which has to be explained is, how come there is a much greater fluctuation in capital goods than there is in consumer goods?

34:59In other words, there is a much bigger boom, let's say, in machine tools, construction, industrial raw materials than there is in retail sales. Contrarily, when a depression or recession hits, there is a much bigger crash in machine

35:43The Increase in Supply of Money and Credit disturbs the production structure, messes up the interest rate, because more money is pouring into business loans and would-have by voluntary savings, and leads to an over-expansion of capital goods, so-called higher order goods is a particular construction, raw materials, machine tools, that sort of thing, plants, basic plants, and underproduction of consumer goods. So what you have then is a malinvestment in a whole bunch of capital goods. And the longer the boom continues, the more, the worse the malinvestment gets.

36:32And so what happens is costs are bid up too high for the supply of savings available, and as soon as the credit expansion stops or slows down significantly, the recession hits Because then these malinvestments are revealed, it's revealed now starkly to the people, the entrepreneurs that they've now, they've overbid costs and wage rates too high and much too high for what they can sell to their buyers, not to the consumers so much, but to the other people down the capital good structure. What happens then is the recession, in the Austrian analysis, the recession is an unfortunate but necessary process by which the market returns, washes out the unsound investments and returns to a proper balance between capital goods and consumer goods. In other words, labor, land and capital resources are shifted back to consumer goods to a certain amount and out of these excessive capital goods.

37:26The recession is a necessary liquidation process, and any government interference in the recession prolongs it and makes it permanent, doesn't allow the recession process, adjustment process to work. Also, in particular, the key thing that has to happen is resources have to shift out of capital goods and into consumer goods, and this means that wage rates and capital goods This is essentially a capsule summary of the Austrian business cycle analysis and also explains The only theory that explains inflationary recession, because in every business cycle whether it was pre-World War II or right now, capital goods prices are always going up higher than consumer goods prices in a boom, and consumer goods prices are always going up higher relative to capital goods prices in a recession.

39:07First prices would be higher relative to capital goods prices than they were before, which is what you need in a recession. However, consumers loved it because their absolute prices were in money terms were cheaper. Well, now that we have a Keynesian monetarist, a semi-Keynesian takeover since the 1930s, the money supply has never permitted the fall ever, ever again. In other words, the Fed is always pumping more money into the system, sometimes a little and the last sometimes a little more. As a result, during a recession, we never had a fall in prices, ever, and so this healthy mask of the sugar-coating of the pill has now gone, so the consumer is in a recession now faced with two problems, one, unemployment and bankruptcies and all that, which they always were faced with, plus, of course, living keeps going up, because consumer goods prices are still going up relative to capital goods prices, except now they're both going up in absolute terms.

39:58They're not going down because of healthy deflation. So at any rate, we now have a situation where we're getting the worst of both worlds every time there's a recession. We've still got a big increase in the cost of living, plus we've got unemployment. This is the result of 50 years of fine-tuning by our beloved economic experts in Washington. Okay, to get back to Mises personally, Mises taught and developed his views at the University of Vienna. It's true. He never had a pay post at the University of Vienna. and he discriminated against even in Austria and he worked for the Chamber of Commerce or Department of Commerce I guess in Austria and his seminar, a very famous seminar was purely private, he held it in his offices in the Chamber of Commerce and this seminar was the one that attracted all the top young economists in Europe and philosophers and whatever and he converted very many of them, I mean I'll just list a few Hayek, Machlab, Haberler, Robbins, Vogel and Schutz and on and on.

40:58British Prime Minister Gateskull was a Mises seminar, was a Labour Party Prime Minister, it wasn't nearly as bad as the other Labour Party people, possibly because of Misesian influence. In addition to that, this is a tremendous intellectual force that Mises had and a so-called Mises Christ, which means Mises Circle. By the way, it must have been a wonderful thing, they used to go out, every group of intellectuals of Vienna in those days had their own café, in other words, two 2000 cafes and so each one has the psychoanalysts, the shrinks have their cafe and the positivists have their cafe and the Misesians have their cafe. So after the Mises seminar over they all repair the cafe and and talk and so forth over coffee whatever and it's been great. Also politically Mises single-handedly stopped the Austrian inflation in the 1920s, stopped it from becoming hyperinflation. There was a big inflation but it didn't get as bad as in Germany, largely because of Mises constant pressure by memos and political influence.

41:58He later in his notes in recollection said maybe he shouldn't have done that, maybe it would have been better if the whole thing collapsed earlier. But anyway, he was quite depressed at that point, as I mentioned in a minute. Another thing that Mises does is he warned about the Great Depression. In the 1920s was a period where essentially a Friedmanite period in many ways, a monetarist period. Benjamin Strong, the leader of the Federal Reserve Banks here, was putting into effect Irving Fisher's Doctrine, which is essentially pre-Freedmanite, and basically what it was is to keep the price level constant. That's just the key thing, to keep the price level, and the price level was indeed constant. Wholesale prices remained the same all during the 1920s, so they figured there's no problem with inflation. What's everybody complaining about? By definition, if the price level is constant, there's no problem. However, the Austrian position was, and still is, that the price level is not the key thing, Especially because in capitalist development, in free market capitalism, prices tend to

42:51fall because you have a tremendous increase in outpouring of goods and services, especially in productive goods, and so prices tend to fall in a free and unhampered market, thereby spreading the advantages of capitalist development to everybody in the country. We can see that now with specific things like computers and calculators, which calculators The Federal Reserve started off at $500 and had much better ones at $18, or TV sets or personal computers. Tremendous fall in prices during a tremendous inflationary period, by the way. And so what Mises pointed out was that the fact that price levels constant is not such a great thing, but they should be falling. And the reason why it's not falling is that the Fed and other central banks were inflating money and credit and propping it up and causing malinvestment, which will cause a recession, a big recession, even though prices haven't gone up.

43:37He was laughed at, considered ridiculous. Of course, the depression, the crash proved him correct. At any rate, he was doing that during the 20s, developing his business cycle theory. He did many other things during the 20s, unbelievable achievements, unbelievable decades for Mises. Socialism arises, of course, in World War I. After World War I, communism is really the same thing. and everybody has to start analyzing socialism, socialist economy. Everybody realizes then and now, by the way, that socialism has an incentive problem. That's clear to everybody. In other words, even socialists will admit this. Yes, yes, we have an incentive problem. The incentive problem is summed up in the famous motto, under socialism, who will take out the garbage?

44:23And that doesn't really work. Or who will go to Siberia, another way to put it, or who will go to Alaska, who's going to develop the underdeveloped, who will schlep out the underdeveloped regions and build it up? Well, you can't use economic incentive under socialism because either incomes are equal unless they're set by some government authority, the good communists get higher incomes, whatever, it's certainly not set by marginal productivity. So who's going to go to Siberia? Who's going to carry out the garbage? Well the socialist traditional answer is of course moral incentive. In other words, people will, or the creation of this is called a new socialist man. Everybody will be molded by socialist government to become totally altruistic and love the collective and do everything for the collective. In other words, slave labor will carry out the garbage and go to Siberia.

45:10So even socialists recognize that this is a problem. But what Mises saw was something nobody else had seen to the land, but there's another problem, an even deeper economic problem, even if everybody has the incentive, even if everybody has been brainwashed to be a new socialist man or woman and go out there and work for the collective, whatever the collective does, I'll do it, okay? I'll go to Siberia, I'll go to the salt mines, I don't care, as long as the state tells me I'll do it. How will the state decide what to tell them to do? That's the real problem of socialism. There's no way that socialist government can calculate and try to figure out who do we send to Siberia, how many people, What price do we set? Who's going to carry out the garbage? How many people should carry out the garbage? There's no way the socialist government can calculate because, as Mises pointed out, there's no free price system. There's no private ownership of the means of production by definition, and therefore there's no property titles.

45:59There's no free market in property titles. There's no way to set up a real price system. There's no way a socialist government can calculate. It's economic chaos. He pointed out in his famous article in 1920, which really upset the socialists in Europe. He also expanded his great book called Socialism a couple of years later, he dealt with other aspects of Socialism. At any rate, when I was going to college, too many years ago, the answer was that Oscar Longa had already solved it. There's no problem, because you have equations and all that, and the government acts as if it was a market. Well, as Mises already pointed out, this is a lot of nonsense. This so-called solution assumes perfect competition, perfect knowledge.

46:46The socialist government has the perfect knowledge already, of course, in prices, which obviously they don't have. That's the whole point. And also, no socialist government has ever tried to put the longest solution into effect. Never. As a matter of fact, what's happening is that socialist planning has broken down, Yugoslavia has gone, and Hungary has gone fairly rapidly toward a free price system, and even China has gone in the direction of a free price system. They realize this doesn't work. And this isn't true in a situation where they still have the world market, and world prices to which the socialist governments could refer, because they know what the price of wheat is. Mises pointed out that in addition to its other problems, socialism can't work. It can't calculate a modern economic system. Also during the 1920s, Mises put out a critique of interventionism, which shows that interventionism doesn't work.

47:36In other words, price controls create shortages, taxes cripple saving and investment, inflation causes problems, protectionism is destructive. and also he shows that interventionism tends to be cumulative, as we see all the time. In other words, interventionism, the government sets out to solve a problem. Somebody goes to the government and says it's a big problem. Too many people over 60 have hangnails. Let's say they have a big hangnail gap. So we need a multi-billion dollar hangnail solving federal funding. So the government then investigates hangnails towards billions of dollars, doesn't solve the hangnail problem, it creates other problems at the same time. I mean, too many side effects from anti-hangnail drugs or whatever it is. So we wind up that every time the government intervenes, it doesn't solve the original problem and creates two or three more problems at which the government can say, well, we have to have more intervention to solve the two or three others, or they can just forget the whole thing.

48:27So interventionism is unstable. It has a cumulative effect. Either you go onward towards socialism or you go back to the free market. What Mises has already shown is socialism can't work. So if socialism can't work, interventionism is unstable, and so Mises then becomes an uncompromising, hardcore laissez-faire capitalist, pounding away day after day on his question, making himself very unpopular as you might expect. And his great book on liberalism, which came out in 1927, since his 40s, he also shows in liberalism the political and civil liberties aspect, the economic, private property rights, free market, civil liberties and international peace are all inextricably tied together.

49:15They're all tied together, which is something pretty few of us even know to this day. So that's a book that everybody can read with tremendous profit. So this is, in addition to all this in the 1920s, we're not through yet with Mises's accomplishments, you also see there's a challenge to Austrian economics and the methodological and the philosophical front, and the challenge was twofold basically, and it's still there by the way, seeing two challenges. On the one hand, institutionalism, which Mises called anti-economics, and the idea that economic theory is no good anyway, there's no such thing as economic theory, and essentially economics becomes only history, a record of what's going on. Okay, so that's one form, this is very, quite dominant in the United States in the 1920s, institutionalist approach, and two, which has been the dominant neoclassical Logical Positivism The idea that economics has to be like physics, a quantitative, measurable science where you deduce things, you have full axioms as good as you deduce stuff from

50:12them and predict. The whole thing with the whole unfortunate econometrics mechanistic approach which we're very familiar with now, where people are treated as if they are stones and atoms, unfortunately people are not stones and atoms, they're people who have choices, they have consciousness, They choose their purposes and goals, etc., and so this whole neoclassical economics is totally off on a wrong track. And so he thinks about this, he sets forth his views on praxeology, what he calls the correct, what he calls praxeology, the correct analysis, the Austrian analysis of individual action, where economics essentially deals with the logical implication of the fact that people act. How do you know that people act? You just look at yourself, you look at other people, you see that they act, they don't like stones and atoms, they have purposes.

50:58In this knowledge, all of the economic theory is deduced. This is very unfashionable. It's even more unfashionable now than the free market is. You see, Mises had a tough problem. He not only had to fight for laissez-faire capitalism, which was unfashionable enough, he also had to fight for methodology, which is totally out of fashion, has been in a race to try to ape physics, to try to imitate physics and the success of nuclear energy and that sort of thing. So he sets forth this in his great book, Gunn, Problem, International Economy in 1933, which has been translated later, follows this up as Theory and History, a marvelous book he wrote in 1957, showing the difference between theory and history and what their roles are. At any rate, having done all this, as if he hadn't done enough yet, which is 20 times as much as the average economist accomplishes in a lifetime, he now proceeds, while he sets The fourth proper methodology is now his task is to do something with it. In other words, to construct a whole integrated system of economic thought based on the correct methodology. And he does it.

52:00He does it with magnificent crowning achievement, National Economy, which came out in 1940 in Geneva, which unfortunately was neglected. It was during the middle of the war anyway, so it was totally neglected. And then expanded it and rewrote it in English and expanded it in Human Action in 1949, which is the great work, as far as I'm concerned, of the 20th century. So, while he was doing this in the 1930s, things were happening with Misesian economics, so to speak. In 1931, Mises' follower Hayek shifts from Vienna to the London School of Economics. He's brought there by Robbins, who had been in the Mises seminar. He starts giving lectures and translating his books on Austrian or Misesian capital and business cycle theory, and he wows everybody.

52:46In the middle of the Depression, the Depression hadn't been predicted by any orthodox economist. And Hayek managed to convert all the top young economists in England. Hicks, Lerner, Cowdor, Sir William Beveridge, it wasn't so young. But only these guys became Austrians at that point. If you read some of the literary journal articles in England, in the early 30s, they all sound like Mises. It was fantastic, for a great few years. And they accepted the Misesian analysis of the Depression. The question came about because of Federal Reserve and Bank of England, et cetera, central bank credit expansion and then was prolonged by New Deal intervention into the wage rates and public works, et cetera. Unfortunately, even Americans, in those days Americans thought essentially were followers of English. In other words, they looked at Britain as the biggest, England was the biggest, the center of economic thought.

53:35So with English economics becoming Hayekian, Americans began to pick up the bull. Alvin Hansen, a leader, became the top American Keynesian, was becoming sort of semi-Austrian and plus a few other people. And suddenly, bingo, Keynes' General Theory comes out in 1936. That's it. It sweeps everything in its path. And by the way, Keynesianism did not win out by patiently refuting Austrian economics. It did not work that way. As a side fact, Hayek can't be refuted. They didn't even try doing it. It was simply a change in hemlines, a change in fashion. Everybody forgets the old stuff and goes on to the new bandwagon. And all these people, except Hayek, all the people Hayek had converted shifted to Keynesianism, which was now the big fashion, which was totally the opposite in almost every way of Austrian thought. Hayek had previously smashed, literally, Keynes' previous great work, The Treatise In 1931, Hayek had two long reviews in Economica showing the whole thing as hogwash. It was so effective it came to go back to the drawing board and do something else. So when the general

54:40theory came out, Hayek made his great strategic error. He said, why should I refute this? It will be gone in a couple of years also. And so unfortunately he didn't try, he didn't do anything about it. And the rest is unfortunately history, where everybody was looking for a to Defend. Historically, economists have always been the ones to oppose inflation and deficit spending. And here, all of a sudden, deficit spending becomes a great thing, becomes economically required. And so, of course, all the governments loved it, and all the economists loved it, because then they could get good, cushy jobs in the establishment. So, while this is going on, poor Mises is now being hit as a refugee. He goes to... He flees Vienna, which had become in the 30s and goes to Geneva and when Germany conquers Western Europe, he and his wife flee to the United States. It was really like a movie scenario because they go just ahead of the German army. In his Notes and Recollections, which is an autobiography he wrote during 1940,

55:40he was very depressed as you can imagine, he writes that he didn't think when he started Mises comes to the United States, he's penniless, he's about 60 years old or so, he starts writing in a new language, and he can't get an academic post. This is an eternal blot on academia. This is a situation where every Marxist, semi-Marxist and three-quarter Marxist were getting cushy top chairs, a guy at Harvard and Princeton and whatever, and Mises couldn't find an academic post. He finally got one at NYU as a visiting professor with a salary pay for by outside businessmen and foundations.

56:43The same thing happened to Hayek. Hayek's salary at the University of Chicago was never paid for by Chicago. It was paid for by outside business groups. As a result, Mises was scorned at NYU. The dean was against him. The dean would advise people not to take his courses and things like that. See, here he was in a fantastically miserable situation. And yet, here's where I come in the picture, because I got to know him at this point. When he started a seminar at NYU, what was his spirit about this? How did he act? It was magnificent. I couldn't believe it. He was cheerful. He was never bitter. He never said an uncaring word about anything, any person. He was constantly trying, very sweet. He was constantly trying to urge people to be productive. Any spark of productivity in any of us clunks was immediately nourished by Mises.

57:28And he was dealing with people far below the level of Hayek and Haberler, etc. He didn't seem to bother them at all. Just great. and try to reestablish the seminar atmosphere of Vienna. We went out to Child's Restaurant, I think it was, afterward and discussed things. So, he was kindly, he was uncomplaining, he was never bitter and it was just a magnificent experience. I've told the story before but I'm going to tell it again because I think it's classic about Mises. People were very intimidated. First of all, half the people didn't know anything, didn't care. They were just there to get their automatic B or A or something. The rest of the people, those who were interested, the outside auditors mostly, were too intimidated. He's a great man. What do we know? How can we say anything? So what he'd say is, look, say anything you want.

58:15Because whatever you say, however idiotic it is, has already been said before you by some eminent economist. Of course, he was right. And he'd tell these great anecdotes about his friend Max Weber and things like that. In this situation, being scorned, etc., and not having any followers at the beginning, he likes Human Action, this great, crowning work. When Human Action came out, I was going up the fee at the time, which was the Foundation for Economic Education, which was literally the only free market outfit in the country. It's not like now, every Tom, Dick and Harry says he's in favor of the free market.

59:01They said, Mises, I haven't met Mises yet. They said he's coming out with a new book. I said, oh, what's it about? They said, everything. And sure enough, it's about everything. That's it. It's the whole world of wax. And I urge you to read it. It's more than I urge you. It's magnificent. So, and I think, but some, despite these conditions, despite the fact of these oppression under which he worked, there were many good people that emerged out Hayek died in 1972 and 1973 after a remarkably productive life. A year later, Hayek got the Nobel Prize, which sort of inspired other economists, who is this guy Hayek? Why is Why is he getting a Nobel Prize?

59:55And it's interesting that he got the prize specifically for his Misesian work that he did in the 1930s. Misesian business cycle theory, which swept away in the Keynesian Revolution. And since then, there's been a notable Austrian revival. And I think it's all due to Mises, and it's just unfortunate that he didn't get to see it. Thank you very much.