Theory and History

0:00I looked deep into my own soul and asked myself whether I wanted to listen to that myself and came to the conclusion I have to tone that down a little bit. Nonetheless, as the topic indicates, a little bit of abstractness is absolutely necessary to cover this topic. What I want to do is I want to give a speech that indicates the importance of theory, that means in particular the importance of economics, for history and for historians and for historical explanations.

0:47It is possible that you can do pure economic theory without knowing anything about history, But what I want to show is that under no circumstances can you engage in history without knowing something about economic theory. Let me just explain why that is. It is comparatively easy to collect all sorts of data And it is also comparatively easy to place these various data in historical time.

1:32What is difficult to do is to interpret these data, to make some sort of sense out of them. And let me give you some examples in order to illustrate this. For example, we would all be very quickly agree on the following description. In the United States in the 19th century, the living standards were comparatively low, so were taxes and so were regulations. In the 20th century, however, living standards were high and so were taxes and so were regulations.

2:22The question then is, are we in the 20th century richer because of higher taxation, because of higher regulations and so forth? or are we richer despite the fact of the higher taxation and the higher regulation in the 20th century? In other words, would we have been even richer if we would have maintained the low level of taxation that existed in the 20th, in the 19th century and the low level of regulations that existed in the 19th century? Now the data do not tell us this, whether it is despite of it or because of it or, as the third alternative, whether these things just have nothing to do with each other.

3:18I'll give you another example. Welfare payments and crime in the 1950s in the United States were comparatively low. In the 1980s and 1990s, welfare payments and crime were relatively high. Again, the question is did crime rates rise because of higher welfare payments or in spite of higher welfare payments or do these things simply have nothing to do with each other? Is that just a coincidental Relation. Take another example. In the 19th century, Germany and Italy, for most of the 19th century, were splintered up in numerous entities. Germany consisted of some 39 independent political units, and similarly in Italy. But standards of living were low in the 19th century.

4:26In the 20th century, Italy and Germany are centralized states and standards of living are high. So is centralization the cause of these higher standards of living? Or is it the case that standards of living in Italy and Germany arose despite the fact that centralization took place? Or, to say it differently, wood standards of living in Italy and Germany have been conceivably even higher if they would have remained splintered in these numerous independent units that existed in the 19th century. As I said, the data, the sequence of events, so to speak, do not tell us anything about it.

5:19We can look at the same data and come up with completely incompatible interpretations and explanations for it. Now there are some people, some historians in particular, who believe that theory must come from data, that is, the data have to reveal, so to speak, what is caused by what and what is not caused by what. But as I indicated, this is an impossible task. Some mathematically inclined economists and historians, in order to get out of this predicament, have come up with a glorious solution, that is, they have said, what we have to do is, we have to adopt the post-Hoc-argo-procter-Hoc principle This is the idea that whatever occurs later is caused by, because something occurred later, it must be caused by what is occurring earlier.

6:30But as you all know, of course, the posthog ergo proptohog is not a principle, but it is a plain fallacy. So much of what you get presented in modern history, so to speak, is based on a fundamental fallacy. The only ones nowadays in the social sciences who believe that there is a way out of this predicament are in a way Austrian social scientists who take the opinion that there exists theory or theoretical propositions that allow us to make a decision between these rival and incompatible interpretations of the same sequence of data.

7:25But in order to be able to make a clear-cut decision, these theories have to have a special characteristics that must be theories that are not themselves also derived from historical experience. Otherwise, we are back in the same predicament from which we started. And the Austrians say, yes, there exists such propositions that are independent, so to speak, of historical experience, that we can grasp as being universally obvious, universally true, and these statements then can help us to make the decision as regards these interpretations. Let me just give you a number of examples of what Austrians consider to be theoretical propositions that are helpful in deciding these matters that I indicated at the outset.

8:23First, some that sound almost completely trivial, then gets a little bit less trivial. Human action is an actor's purposeful pursuit of valued ends with scared means. It is seemingly obvious that this is something that seems to be universally true about all actions. Another one, no one can purposefully not act. If you would try to not act obviously you have a purpose. Another example, every action is aimed at an improvement. If you would try to refute this statement so to speak and do something to refute it that would indicate that you obviously think that this will make you better off.

9:18There's also a universally true statement. Take something like this, a larger quantity of a good Good is preferred over a smaller one, that follows simply from what we know a good is. Of course, you can never get enough of something that is good, and you always prefer more over less. Production of goods must precede the consumption of these goods. What is consumed now cannot be again consumed later on. If the price of a good is lowered, either the same amount of the good is bought or more than otherwise would be bought.

10:09Let me just add something here. If we would observe, for instance, that the price of a good would be lowered, it is well possible that actually less of this good is bought in reality, but what we would say is less is bought, or we would say what we would have to add is then if the price had not been lowered, Then, in fact, less would have been bought than otherwise. Or take prices that is relevant in the California energy crisis here. If you fix a price below the market clearing price, then you will get a shortage.

11:02or another example if you have no prices for factors of production, if you have no property in factors of production then you have no prices for factors of production and if you have no prices for factors of production then you cannot engage in economic calculation, You cannot compare input and output prices and determine what is efficiently produced and what is inefficiently produced. Or some other examples, interpersonal conflict is possible only if things are scarce. We do not have conflicts, for instance, over the air that we breathe because that is not scarce.

11:51Another example, no thing can be owned exclusively by more than one person at a time. If more than one person at a time owns it, automatically conflict will result. Another example, something that I will come back to in my third lecture tomorrow, democracy is incompatible with private property. Majority vote is incompatible with exclusive control over certain goods. Another example, no form of taxation can be uniform. That is to say not all people can be equally taxed, so to speak. We do something with the taxes that we collect.

12:37In other words, there must be always some people who are taxed People who are taxed and other people who receive the taxes that we take away from them. They would not be taxpayers, but they would be tax consumers. Taxation is impossible to impose uniformly on everyone. Or something that is relevant when we consider the glorious achievements of Mr. Greenspan, property and property titles are different things. A car and a title to a car are different things. And an increase in titles without an increase in property cannot possibly make people richer, that can only lead to a redistribution of income.

13:30Now, what we see, what Greenspan tries to do is he tries to get us out of the recession by printing up additional pieces of paper. How can anybody possibly believe that by printing up additional pieces of paper, the society as a whole can possibly get any richer? Now, I do not want to explain these various statements in great detail, but what you can see is that we can somehow recognize that these statements reflect, so to speak, the nature of things, that they are necessarily true, that they are always true, that there can be no exception to it, that we cannot deny these statements without talking nonsense.

14:27Let me just illustrate that by giving you some other types of statements. which we can easily deny without talking nonsense for which it is necessary that we have to refer to historical experience in order to find out whether they are true and that can be refuted by historical experience statements like this, children prefer to eat McDonald's hamburgers over Burger King hamburgers That we can easily deny without talking nonsense. We can say children might prefer Burger King over McDonald's, or Germans prefer Spain over Greece as vacation destination.

15:15That might well be different. We would not automatically talk nonsense if we just deny this and assert the opposite. Or take consumer spending before Christmas is higher than after Christmas. That again is something that might be the case, might not be the case. I guess in an Islamic society that would not be the case. Catholics vote overwhelmingly democratic. That is true here, but who knows, it might be different at other places. Now, what I want to emphasize is then that theoretical propositions of the kind that I gave you before, we can only illustrate by historical events, but historical events do not either confirm these statements or do not refute these statements.

16:19These statements, these theoretical statements help us to order our observations. Let's say somebody would come from some expedition to Australia and he would say, I have seen there kangaroos that were red and green all over. What would we say to such an observation? We would say, no, that contradicts logical law. Something cannot be red and green all over at the same time. We would not go out and try to refute this statement by going out and maybe discovering kangaroos that are different from this sort.

17:09Now we would rule out this observation as a nonsense, as a nonsense observation from the outset. Another example, somebody would make the observation that the rich people consume more than poor people and would then report that because they consume more, they are richer. Obviously, they are not richer because they consume more. No, it's the fact that they are rich that allows them to consume more. Now, as I said at the beginning, theory is not sufficient to do the history, but it is necessary in order to interpret historical events correctly.

18:01that is to avoid nonsense interpretations of historical events or we can also say logic beats experience and the Austrian, the School of Austrian Economics has an entire reservoir of social, of theoretical statements that allow us to make sense of history and now I want to become a little bit more and use a few examples to show what I have what I have in mind the first the first subject that I want to touch upon is the relationship between state and war something that has come up over and over and over again now is the Is the relationship between states and wars accidental, or do wars take place because of states, or do wars take place in spite of the existence of states?

19:17So, to a certain extent, we can say wars are, of course, accidental. If there would not have been Woodrow Wilson in place, maybe the United States would not have gone to war. If Hitler and Stalin would not have been in place, maybe a war would not have taken place. That is, a historian, when he explains specific events, World War I, World War II, and so forth, of course has to look also at these sorts of accidental things. There was Stalin in place at this point, and Hitler was in place, and so forth. But what I want to show is there exists also a systematic relationship between state and war in such a way that even if Stalin and Hitler would not have been, and World War I would not have broken out, and World War II would not have broken out, Other wars would have broken out. It's just a matter of time, so to speak, until this happens.

20:14Now, how can we show this? No, just take simply the definition of what a state is. A state is a territorial monopolist of taxation, and a state is an agency that is, in all cases of conflict, the ultimate judge, including conflicts that involve itself. Now, if such an entity exists as a state and if we assume, as we can assume easily, that every person prefers, so to speak, to have more resources and then we can deduce that, of course, an agency that can tax individuals will have a tendency to tax them more and more and more.

21:06And we can also deduce from the fact that a state is the ultimate judge in all conflicts, that he will decide in the course of time, so to speak, all conflict cases in such a way that laws will be perverted in its own favor. That follows simply from the fact that he is always the ultimate judge. Now, what have states to do with war? Imagine this, if you can tax other people, then it seems to be quite clear that you will tend to be more aggressive than you would be if you could not tax other individuals. If I want to beat you up and I would have to pay my own expenses to beat you up, I might think twice about it.

21:59On the other hand, if I can tax him and him and her, then whatever inherent aggressiveness I might have will be stimulated, so to speak. I will more likely engage in aggressive ventures because I can externalize my cost onto others. So there is an inherent tendency, so to speak, of wars or states are war-like institutions. States are by nature more aggressive than institutions that do not have the right to tax other individuals.

22:47Continuing in the same, along the same vein here, We can also predict that if a state has a right to tax, he will very quickly also acquire other means by which he can enrich himself, that is, he will establish a central bank, that is, he will, and I will explain that in a lecture tomorrow, that is, states have a tendency to try to establish themselves as a monopolist of production Now, if you have a state and a state has a central bank at its disposal, then the likelihood of wars increases even further, because rather than having to tax a population in order to fund your war, you can simply print up the money to do it.

23:45It is not an accident, so to speak, that the United States engaged in World War I, that is the first major war, so to speak, far away in the European continent against big, mighty powers in Europe at the moment when they had successfully established a central bank in 1913. Another deduction we can make, we already talk in various lectures here about the fact that there seems to be a tendency towards political concentration. That is, a thousand years ago we had in Europe thousands of independent political units, in the meantime we just have a few dozen.

24:30How can we explain this type of phenomena? And again, with elementary theory, it's very easy to see. I already explained states are war-like machineries, so if states get into interstate conflict, there will be obviously an eliminative competition taking place. It is impossible that on the same territory you can have more than one agency that is the ultimate judge and an institution that can tax, that can be only one of this. So if they get into conflict, then there will be gradual elimination of political units and there is a tendency towards political concentration ultimately until you end up with one world state.

25:22And another thing I can explain, that is, why is it, most of the talks here were concerned with American history, why is it that America is particularly aggressive? For that there exists also a very simple explanation. So given that all states are aggressive and tend to go to war, the question has to be which state will win and which state will lose in these wars? Given that all wars require economic resources, and economic resources that are used by the state in order to conduct the war are produced by the civilian population, can say that a state that is relatively liberal in the European sense, that is relatively free market oriented, will of course have a more prosperous population, that is, there are parasites, so to speak, on a more prosperous population, and knowing that you will win a war only if you have a productive population, it is easy to see that internally more liberal states will be conducting a more aggressive foreign policy than states that are internally more oppressive.

26:41This is something that Randians have never grasped. They always thought, for instance, that it was the United States that was a nice country as far as foreign policy was concerned The Soviet Union was a terrible place. No, the Soviet Union was a terrible place internally, but precisely because it was a terrible place internally, prosperity in the Soviet Union was so low that all the leaders in the Soviet Union of course knew that they would never have a chance to win an extended war, whereas the United States of course realizes that by and large they are the biggest bully of all, and they will get away with murder. now the second the second example how much time do I have still okay the second example that I want to discuss is example of socialism we all know what What sort of mess socialism created? What sort of impoverishment socialism created?

28:03Was this, so to speak, accidental? Was this because of socialism? Was this in spite of of Socialism. Now there are certainly many reasons that contributed to the mess that was created in the socialist countries. Stalin had certainly something to do with the fact that Russians tried it first and and a history of a certain kind that might have contributed to it. Let me read you a little explanation here given about the mess of socialism by one of the leading lights of economic historians in the United States In order to indicate what comes or what will be the result if you have not the faintest idea about theory that is from David Landis, The Wealth and Poverty of Nations, a very popular, best-selling book.

29:30and in this book he has a few pages about communism and I want to show to you how this man has not the faintest idea why socialism failed. So let me give you a dose of landers, but he writes for instance, the striking feature of these command economies, a la Russia, was a contradiction between system and pretensions on the one hand, performance on the other. The logic was impeccable. Experts would plan, zealots would compete in zeal, technology would tame nature, labor would make free and and the benefits would accrue to all.

30:25Now I ask you, is there even a glimpse of understanding of the problem here? I cannot really see it, and then he goes on, then he writes something like this. And this is, so to speak, the most theoretical part of his entire argument. Although the Russian state was capable of mobilizing resources for specific projects, technique was generally backward and overall performance shoddy. Except for caviar, vodka and folkloric mementos, nothing Russia made could compete in the world market. And then on and on for another page.

31:11No, I do not deny that this is a correct description, so to speak, but why is all of this? What is the explanation for this? And now he describes what is the essence of communism that brings these undesirable effects about. And Landis sums it up in this way. Some see this endemic mess as a dirty secret of the system. Rulers nourished privation by way of rewarding favorites, building desire in the ambitious and dulling the rest in the tedium of endless cues. The capitalist economies stimulated labor by the prospect of reward. Communism offered singing to morals.

31:56The worst aspect of the system, however, was its indifference to, nay, its contempt for good housekeeping and human decency. Prosperity foregone was bad enough. In a world that had once created and still preserved some beautiful things, the new system mass-produced ugliness. So this is a theory. There were not decent housekeepers there. If Stalin would have been a nicer man and took care better of his normal housekeeping duties, then all of these things would have been somehow unnecessary.

32:42Now, again, if you know a little bit of economic theory, then of course it is comparatively easy to explain not the details of the mess that these guys created, but the general fact that a mess would have to result from it. So, Landis does not even describe what social, what so to speak, the definition of socialism is. What is the definition of socialism? That all factors of production, all land, all factories, every machinery, all capital goods are government controlled. There is no private ownership in factors of production.

33:31Now, if there exists no ownership in factors of production, then it is easy to see that certain things must necessarily result. The first thing is, of course, if there is no private ownership in factors of production, then the question is, will there be savings and capital accumulation? And it seems to be quite straightforward that if nobody owns any factory, if nobody owns any real estate, why should they save as much as people would if they would own something? That is easy to see that capital will be depleted, that people will not repair things as they otherwise would.

34:21If there is no private owner of things, then why would people produce as much as they would if they were a private owner? It's also very easy to see. And the most important argument that was developed by Mises is, of course, Look, if there is no private property in factors of production, then there exists by definition, so to speak, no prices for them. The government can shuffle around these goods from one place to another and give them to this group or that group, but no prices are ever paid for factors of production. I do not know what the value of this piece of land is as compared with this piece of land.

35:10And if I don't have any prices for factors of production, then I cannot possibly engage in cost accounting, that is, I cannot determine whether the resources that I used in order to produce something were more valuable than what the output is, or less valuable than the output is. These sources that are used in order to produce something were more valuable than what the output is or less valuable than the output is. In capitalism, with private ownership in factors of production, every businessman, day in and day out, compares, so to speak, the prices that he pays for the input with the prices that he gets for the output that he produces.

35:56And if the output prices are higher than what he paid for the input prices, then he knows, hey, I did not waste these resources, these scarce resources in order to produce what I produced. On the other hand, if he finds that the factors of production were more expensive than what he gets for the output, then he knows I'm wasting valuable resources in order to produce something that is less valuable than what went into it, and accordingly he will immediately Please stop it. None of this can be done under socialism, and Landers has not the faintest idea about it. That is, again, it is not an accident. It is not that Stalin was not a good housekeeper, but Trotsky might have been a far better housekeeper.

36:44Trotsky could not have done it any better than Stalin did it. The last example that I want to give has also something to do with socialism and again trying to show how theoretical propositions help us to understand certain things better than if we would not have SIS. In the last 20 years of socialism, communism, we observed that the life expectancy in Russia actually declined, that the health conditions in Russia deteriorated.

37:32Now, again, there exist, of course, many non-systematic reasons for this. The Russians drink too much vodka, and they smoke too much, and they might have lousy doctors, There might have been doctors and there might have been bugs that contributed to all of this, but there exists again a systematic explanation for this deterioration of health and decline in life expectancy. You realize, of course, that in the rest of the world, so to speak, life expectancy went up. Why did they go down in those places? Well, the theory that can be used to explain this is to go something like this.

38:18The Soviet Union and countries such as the Soviet Union were examples of what one might call public slavery. Slavery is characterized by the fact that the slave cannot run away, and that was the case in the former East Block countries. If people wanted to run away, they would be shot down, that is, they could be captured. And secondly, the second characteristic of slavery is, of course, that the slave owner can assign people to work, that is, they are not allowed to hang around.

39:06So in this sense, the Soviet Union fulfilled the qualification of slavery, but it was, of course, not slavery in the same sense as we had slavery in the United States, where we had privately owned slaves. If you own a slave privately, would you be able to explain that life expectancy and also things like abortions and so forth, that they would constantly increase? And the answer is of course no. Under private slavery, actually the tendency was for life expectancy to rise. That is in the interest of the private slave owner. Fertility rates, similar to regular population rates, is in the interest of the slave owner.

39:53Now, what is different in the Soviet system slavery is the slaves are not privately owned. Gorbachev and Stalin and Brezhnev and these guys, they could not sell you on the market and then keep the receipt or rent you out and pocket the money themselves. themselves. But what they could do of course was make use of you, assign you to this, assign you to that and so forth. And they had only temporary ownership, temporary caretakership of the population. Now if that is the case, if you are just a temporary caretaker without being a genuine owner of the slaves, what will you do? You will engage in capital consumption.

40:45That is to say, you will waste, you will waste people, you can replace them by others, you don't have to buy them in the slave market, they are already there. So if they die, you just take somebody else to do it. And this, again, this institution, so to speak, of publicly owned slavery, It's the explanation why we observe this anomaly of life expectancies going down. Just imagine how likely is it that a private slave owner will actually do the act of ultimate capital consumption, is kill the slave. The answer is that is a very unlikely event. After all, you also don't kill your cows if you are a cow owner.

41:35But if you are just a caretaker of the cow, you can make use of the cow but you cannot sell it in the market, then killing the cow might be something that is at least not as important to you as it otherwise would be. I think with that I'll stop and take some questions.

42:05Thank you very much.