Senior Economics Seminar

0:00It's a pleasure to be here and thank you for the invitation. It's always good to get out and meet a new group of students and faculty and one of my favorite topics is to talk about the Austrian School of Economics and as I was driving up here I realized that it's kind of a funny school in economics in that it's the oldest continuously existing school of economics. It's the smallest school The Austrian School of Economics in terms of the number of professional economists who claim to work out of the Austrian tradition, and it's also the fastest growing. And so that's a very unusual combination to be the oldest, the smallest, and yet the fastest growing School of Economics. And I'm going to try to explain a little bit of that, give you a little history of the school, and show how Austrians approach problems different from the mainstream of economic thought.

0:54I'm going to have plenty of time, I hope, for questions and answers, well, at least some questions. Hopefully, I'll be able to come up with some answers as well. Now, the school starts out in 1870, and do you offer a history of economics course here? No. No? Okay. No. Well, this is a long time ago. And the school starts out with a guy named Carl Menger, who was a journalist who covered the stock and bond market in Vienna, Austria. And in looking at markets, he devised a theoretical approach to how to understand why stocks and bonds go up and down. And he did so by going back to the very fundamentals of economic action. And in doing so, he brought into economics marginal analysis, price theory, and the idea of opportunity costs, things which are now in the first couple of chapters of any economics text.

1:57And so the school starts with him, Menger goes on to become the tutor of the crown prince of Austria and gets the main professorship at the University of Vienna. So the school is an early success. Two of his students went on to become famous economists of the time, Friedrich von Wieser, don't try to spell these on your own, and Eugen von Boehm-Bawerk, who went on to become the finance minister of Austria, and Wieser replaced Menger as the lead professor in Austria. So the school had a lot of initial success in terms of making break through contributions in economics, making economics what it in part is today.

2:47Then the school went into decline. Basically, with the advent of World War I and World War II, it basically destroyed the Austrian school as it had flourished for about 45 years. World War I, a lot of the Austrian economists were drafted into the military. Ludwig von Mises Von Mises himself was drafted into the military as an artillery officer, was wounded in action, but several of them were killed, and of course whole classes at the university were cancelled. So that sort of snuffed out the Austrian school. And then later, even though von Mises himself was becoming prominent, was the lead economist for the Chamber of Commerce in Vienna, in Austria, a very important position, it would World War II was on the horizon, the rise of Nazi Germany, and that also broke up the Austrian School.

3:50The Austrian economists were very prominent in Austria at that time, but in the 1930s they started leaving because of the threat of Nazism. And sure enough, the Nazis invaded Austria, they invaded Vienna, and of course they snuffed out a lot of opposition to fascism. And interestingly enough, Mises had made it out of the country, and one of the first things the Nazis did when they came into Vienna was go to Mises' apartment, and they confiscated all his papers, all his books, all his furniture even. And we in the Austrian School thought that all that had been destroyed actually until a few years ago when they found his furniture and papers in Moscow.

4:40Now how does that work? Well, the Nazis came in, Mises was the big opponent of socialism and fascism, so they gathered all his papers and all his belongings to look for some clue as to Mises' theories of Why Socialism was Impossible and Why it was Chaotic Economically and so forth. And then, when the Russians took Berlin, they confiscated those papers and brought them back to Moscow, thinking the same thing, that they could figure out some way of improving the economic performance of socialism if they only had von Mises' papers. And so when the Soviet Union broke down, we found the papers. Basically, the Austrian School had been decimated at these time periods.

5:29The remaining Austrians had been spread around the country, around Europe, around mostly to the United States actually, but very few were at degree-granting institutions in terms of PhDs, and there were no, there were very few people working in terms of directing PhDs, And so there were no new Austrian PhDs in the United States and when I went to graduate school hoping to study Austrian economics, I was told that Austrian economics was being phased out. There was only a few Austrians still alive and still teaching and none of those were at PhD-granting universities. So that's one of the reasons why your professors and most professors in economics are not exposed to Austrian Economics because it had been essentially phased out.

6:25And so that's sort of the origins and the fall of Austrian Economics. And I'm going to talk about the resurgence of Austrian Economics a little bit later. But I wanted to get into some of the basic differences of Austrians versus mainstream economics, sort of lumping together most other schools of economics. And I don't want this to, it's going to sound confrontational, you know, this is what we do and we're better and this is what they do and it's not so good. But Austrian economics can work together with mainstream methodologies as well. I myself have published articles with econometrics in it, with mathematical economics in it, with experimental economics, with survey data and all the rest.

7:11and I work at the home of Austrian Economics at Auburn University, and I haven't been thrown out, so it's an open-ended approach in that you can be an Austrian or you can be a mainstream economist and understand Austrian Economics and use that as a way of helping your own research and your own understanding. Okay, well, in terms of the differences between the two schools, on the concept of rationality, are people economically rational? Everybody knows that they themselves are economically rational, but there are other people who are not quite so rational.

7:59And so the Austrians have a more reasonable view of rationality and that it's based on what you would normally see out there in the real world. The mainstream uses a concept of rationality where humans are rational calculators, where They work at this margin and they rationally calculate things. And even if they're not quite rational, there's enough of us in markets in general so that markets turn out to be rational. So we have a more weaker view of rationality, where everything turns out to be rational even if it doesn't look so good on the surface, like getting addicted to drugs.

8:52That doesn't sound rational, but you can rationalize why people do it or how it occurs. In the mainstream, people have stable preferences. That's a requirement for a lot of mainstream methodology. And one thing you're going to find in mainstream economics is a lot of mathematics, statistics, econometrics, those sorts of things. Whereas the Austrians view all of that with a lot of skepticism. Because we view people as not having stable preferences, that people can change their minds and do so often, that people can be fooled and are on a regular basis.

9:42The goal of mainstream economics is, I see it, and has been sort of handed down from from the grandfathers of mainstream economics is prediction. The mainstream wants to be able to predict. The famous saying of the econometric society, for example, is science is prediction, and that everything else can take a back seat to that. We can use unrealistic assumptions in our models as long as it helps us make better Predictions. Austrians are, per se, not interested in prediction.

10:27We're interested in understanding. So those are some basic differences. In other words, Austrians sit down with paper and pencil and logic and deductions and try Try to generate economic analysis, try to generate understanding of economic phenomenon and economic policy. The mainstream brings a lot more powerful tools to bear in terms of large data sets, computers, programming software, and so forth, in order to try to use some theory in order to create empirical models which will generate predictions.

11:28So those are some of the basic differences, and I'm going to give you a microapplication and a macroapplication of some of those differences as I see them, and the microapplication is going to be to the concept of prohibition, things like alcohol and drug prohibition, And this is what I did my PhD dissertation on. Now the basic mainstream price theory approach to prohibition is fairly straightforward. I know you're all familiar with that.

12:19Where you have a particular product which is deemed to have socially negative consequences. So how do you address that? You create a prohibition which drives up the price. Prohibition with law enforcement and penalties, prison sentences, confiscation of assets, that all creates risk for the entrepreneur or the drug dealer or the moonshiner or whatever. So that price in the market becomes considerably higher with the prohibition. In the price theory of prohibition, you introduce a penalty, you decrease the supply, you increase the price, you decrease the quantity consumed, so therefore you reduce those social problems.

13:24So you achieve your goal in that manner. And that's essentially how alcohol prohibition was introduced, at least at the academic level. And we're going to be talking about one of the most important American economists of all time, Irving Fisher. He's basically the architect of modern mainstream economics. And he's the only American economist from the first half of the 20th century who's still discussed in the mainstream, the top level mainstream journals.

14:10And Irving Fisher was a promoter of alcohol prohibition. He held a symposium at the American Economic Association where he brought out several prominent economists to speak in favor of prohibition. And at the end he said that he had invited any member of the American Economic Association to come forward and oppose alcohol prohibition. He said he got no responses. So in contrast today, back then economists were proponents of alcohol prohibition with The idea being that if we can stop people from drinking, they'll show up for work more often. And they'll have more money in their paycheck to give to their family.

14:58And so we'll solve a lot of social problems simply by limiting the intake of alcohol on the part of basically male laborers who did drink a lot back then. So with Irving Fisher, the idea of prohibition is productivity, along with other things like enhancing health, reducing crime, those things, health, crime, violence, guys go out to bars, Drink, Fight. And you also, he attributed the booming economy of the 1920s to two things.

15:52One was alcohol prohibition and the other was how the Federal Reserve was managing the and Money Supply. That's also going to be important later on. Austrians see this a little differently. This is all true to a certain extent, but when Austrians look at going from an open and Marketplace to a prohibition, the thing that goes from being the most important aspect of economic analysis goes to becoming the least important item of economic analysis, and that is the price of the product.

16:37And I know that you've had many classes where the price of something is sort of, we're zeroing in on that all the time because we're usually talking about markets of various kinds all the time. But prohibition takes us from one world of the marketplace to another world which is completely different. And so price becomes the least important component of economic analysis of prohibition. All institutions in the marketplace are radically altered. They're basically completely changed as a result of prohibition. So it really doesn't matter what happens to price and quantity.

17:26That's still debated today. The modern version of Irving Fisher is actually another very famous economist, Gary Becker, who realizes that Fisher's prohibition was wrong-headed, and he instead proposes that We place a very large excise tax on alcohol. Now note that the, in this blackboard view of the world, if we were to scrap the prohibition and go back to the marketplace, the price then falls, the quantity increases, the quantity Consumed increases in all of those social problems involved with alcohol and drugs would essentially double here, going from this quantity to this quantity.

18:32If there was a relationship between the quantity consumed and the amount of social problems that existed, then all of those social problems, in terms of health, crime, violence, disease, would also double. The Austrians don't see it this way. We see the institutional changes, those radically changed institutions of prohibition as being the major culprit of a lot of those social problems. What does prohibition do? Well, it takes away the legal structure from the marketplace.

19:20It takes away the property rights structure of the marketplace, two very important components of well-functioning markets. So drug dealers are not held responsible for their products in the same way that Wal-Mart is or that Winn-Dixie is. If a drug dealer sells a product that has been contaminated with dangerous components, or if the product is altered in such a way as it causes whatever, death, seizure, stroke, heart attack, birth defects, the drug dealer is not liable.

20:09There's no court, there's no lawsuits or anything like that. Now if Walmart did something like that, they'd be sued. They could be put out of business. If there was one day where McDonald's restaurants around the country put out one hamburger each that made people end up in the hospital. What would happen to McDonald's? They'd be faced by thousands of lawsuits. And not only that, what have they lost? Say they have 5,000 restaurants, 5,000 lawsuits, and million-dollar awards for all of those losses.

21:03What else have they lost?

21:08Their business. Who's gonna wanna go back to McDonald's when everybody, every hometown in America has seen somebody that got rat poison in their hamburger and ended up in the hospital?

21:23That doesn't happen to drug dealers. They can just vanish, surface someplace else. It's a secret business. So that's completely out of the picture. So that a lot of the problems are because the legal structure has been eliminated. And then, of course, there's the property rights structure. There are no property rights enforced by the government in black markets or in underground economy. So as a consequence, in terms of enforcing contracts, enforcing sales territories, a lot of the business concepts that go over to the underground economy, they aren't enforced by the threat of the government or the sheriff coming in and settling this dispute.

22:18How are they settled? It's in the newspaper every day. People shoot each other. People shoot each other. The gangs in this country exist in large part as enforcement mechanisms for drug distribution chains. Large drug distribution chains use street gangs to just be the final The Federal Distributor and to enforce their little territories, their little contracts. None of that would be going on if Wal-Mart was selling marijuana.

23:04That just wouldn't happen. And another thing that doesn't happen in the market economy, that does happen in the underground In the black market economy is the issue of miners, people who are 18 years or younger. In the market economy, miners can't make valid contracts. Any contract they do make, they can back out of at any time without any recourse. So if a 17-year-old went into a car dealership and said, yeah, I want to buy that car over And the dealer went along with it. The person could drive that car for 30 days and then turn it back in. No problem. Minors aren't allowed to make contracts. They're not allowed to be conducting certain transactions without the consent of their parents or guardians.

24:07You can't get a credit card, you can't rent a car, you can't make a real estate transaction, you can't get a professional license because the law protects minors. Most pharmacies don't allow minors to pick up prescriptions unless they're in the presence of an adult or guardian. You're not allowed to buy beer or wine or liquor. You're not allowed to enter the armed services without permission of your parents. So that's what the marketplace does. That's what the legal system has been doing for hundreds and hundreds of years. But in an underground economy, if you're 17, the drug dealer is not going to make any distinction between a 17 and a 19-year-old.

24:58If they've got 20 bucks, 50 bucks, 100 bucks, they're going to get the drugs. No problem, no questions. There's no drug dealer who discriminates on that basis that I know of. Of course, I don't know any, but that's pretty much a pretty good assumption. As a matter of fact, the drug trade actually encourages young people not just to consume drugs, but to deal drugs. Because if you're caught when you're 15 or 16, the penalties for being a retailer of Illegal Drugs is much lower than if you were 19 or 20. So the prohibition is actually dragging minors into the illicit underground criminal economy.

25:46So where the mainstream blackboard price diagram shows that legalization would cause significant increases in social problems, and I know there's a lot of mainstream economists who don't buy that. But as far as their lesson gets into the policy debates, that's exactly what would happen. If I advocated prohibition be eliminated and something be legalized, the first response on the part of whatever my opposition opponent would be, would they would say if we legalized it, it would become and less expensive and more people would be tempted to consume it and I don't buy that.

26:34Has anybody tried heroin in here? Okay, now if it were legalized and became real cheap, is anybody in here really interested in doing heroin? Come on. No guts, no glory. Of course not. And I've asked that question to rooms of 2,000 people and everybody all of a sudden realizes, well gee, you know, it's not going to be running for the door type legalization. So that's why we, that's how But, couldn't you say that a lot of people in this room would say they wouldn't want to do it because it was socially not right, but if it was legal, then socially it's acceptable to them, wouldn't more people probably be willing to say, oh yeah, maybe I would?

27:46But again, there are a lot of things in place, as you mentioned, you know, is it socially acceptable? Would it be acceptable to your employer? When you take that drug test and they find out you've been doing heroin. I don't think so. The market imposes some very stern consequences on drug users. You're not even allowed into certain professions or certain jobs. And people who abuse drugs or alcohol don't get nearly as many promotions or opportunities for pay raises. They always get left behind. So there's a very significant penalty paid.

28:31It's sort of secret, but it's out there. And there's been studies that have been done that show that that is the case. There is a few studies that show that people who drink more earn more, but that's really kind of a flawed study and I know who the author of the study was and he just likes to drink and he got this thing published. But generally, people who abuse drugs and abuse alcohol pay a significant economic penalty in the marketplace, even though that's not well known out there. When you sit back and think about it and you explore your group of people that you have known, your friends, your relatives, your classmates, you'll see that that is the case.

29:21The Legalization in and of itself is not going to solve the problems of drug abuse. We have have a social safety net in the United States, as do most advanced countries or developing countries even have social safety nets that include things like public housing, welfare, food assistance, unemployment insurance, right on down the list.

30:08Other countries even have more extensive social safety nets than we do. Public health departments, access to hospitals, emergency rooms, this is all part of the social safety net. But it's that same social safety net that cushions not just people who fall through the cracks for unexplained reasons, but it cushions the blow of abusing drugs and alcohol. Because if you get into a car accident, the government is going to pay for an ambulance to show up and bring you to the emergency room and get you into that hospital and fix you up if you get into a crash. If you lose your job, you'll have benefits.

30:56They're not great, obviously, and I certainly don't recommend that, but that is there. And so to really get rid of the problems of abuse, you'd have to lock down on all that business as well as on who gets to use the public roads. And a lot of people just aren't willing to even consider those kind of changes. But within the Austrian School, you think in those terms, you know, what would a complete Marketplace, what would be the constraints that people would be under, versus what we have right now, the myriad of policies, and what constraint does that place on individuals?

31:45So that's the micro-application of how Austrians view things a little bit differently. And obviously, this is a caricature almost of mainstream economics, there's so much research The Macro Application is about the business cycle, which is kind of a timely topic for graduating seniors when within the last few weeks or so everybody has changed their mind and said a recession is coming. I graduated from college in 1982, which was the last really severe economic downturn, which is also the reason why I went to graduate school, because I couldn't get a job, and after that I was just lucky.

32:45So, within the business cycle, business, there are a lot of mainstream theories, or there There are a lot of theories within mainstream economics over the last 75 years, but in large For the most part, they all come down to psychology, that the economy should grow like this.

33:38It should just grow, or maybe just stay flat, or if institutions aren't all that great, it should just decline. But generally speaking, we expect market economies to produce economic growth over time. And it's only psychological factors, sometimes external shocks, But basically psychological factors which cause certain periods of time to be where investors are over-exuberant and there's a bandwagon effect where people see people making profits so they make investments and this piling on of investments creates super profits And that's basically based on psychological factors which sort of snowball in the economy, creating what Austrians call a boom.

34:42A boom in investment, a boom in the economy. And then, for whatever reason, and that phrase is used very often by Keynesian economists and their offshoots and Behavioral Finance Analysts, they'll use this phrase for whatever reason and then people become less optimistic. They start cutting back and then that snowballs or just gets going in the negative direction. Everybody starts pulling back in terms of investment.

35:29They start saving too much money and consumer spending goes down and then the whole economy goes down. So the economy is actually characterized by a wave where you have, again, what Austrians call booms and busts in the economy. Now, mainstream economists, even the terminology that they use is psychologically based, right? A bad time in the economy is a panic. The economy collectively has a panic attack, or it goes into depression.

36:18Now we use more moderate phrases like recessions and slowdowns, try to take the edge off of those things like panic and depression, like bum people out. From John Maynard Keynes and people before him to Ben Bernanke, they attributed problems in the macroeconomy in the business cycle to psychological reasons. Ben Bernanke, his view is that structural and psychological problems in investing in finance markets, they get started and they get out of control and then they have effects in the real economy. So So there's these financial markets which are not perfectly stable and they can get a little bit out of control, panic can set in and all of a sudden the financial markets signal problems to the real economy that things are wrong and so the real economy starts to contract.

37:34Then you can also have external shocks, especially smaller economies can have external shocks The Austrian view it differently. We have a different sort of set of cause and effects. We don't think that the business cycle is psychologically caused. There are psychological aspects to the business cycle, but it's not psychologically caused. We have a different sort of set of cause and effects. We don't think that the business cycle is psychologically caused. There are psychological aspects to the business cycle, but it's not psychologically caused. The business cycle is a result of the government adjusting interest rates above and below the market rate.

38:22The rate that would exist in the marketplace had there not been any intervention by the government. The Federal Reserve, the central bank, as you know, targets interest rates. The central bank targets interest rates. It targets the federal funds rate and the discount rate. And it's like a price control for the interest rate, at least the short-term rates. And if that rate is set too far below what would have happened in the marketplace, what necessarily must take place?

39:07That means that the Federal Reserve is interjecting or injecting credit into the economy. gives banks the ability to make more loans than they otherwise could. So what must happen as a result of this injection of money if the banks are lending it and people are borrowing it, then generally speaking they're investing it. And when they invest it at these below market rates, Austrians view these as mostly male malinvestments, and girls you'll be able to remember this, that means bad investments.

39:54That should stick with you, not you, but others. And it's these investments that later on turn out to be bad investments. When the interest rate rises, maybe rises above the market rate, that all of a sudden people are trying to pay back these loans at the higher rates and the projects just aren't simply paying off. So the Austrians have a view of the business cycle where it's caused initially by the central bank. It's intervention in interest rate markets that lead to bad investments, which ultimately have to be washed out of the system.

40:47Does that sound familiar to anyone? I mean, to me, I've been exposed a bunch to Bill Friedman. I don't see, like in your micro-example and your little macro-example so far, to me it's like Chicago school. Well, Milton Friedman was exposed to the Austrians. Now, in his technical analysis, he's very Chicago, macro, almost Keynesian in the overall methodology.

41:33But I think he blames the Fed, I think, in her government intervention, the Fed, for instability. I mean, it's fixed money, so I think he blames the Fed, you know, it should be a fixed road where the money supplies, who to talk about. That's a perfect point because I want to take us back to the Great Depression and what happened there. What happened in 1929? There was a stock market crash. The economy had been booming up to that point, and then it stayed in a contracted form, in a depressed form, until after World War II.

42:36Per capita consumption, per capita real consumption was the same in 1929 as it was in 1946. So this is one of the worst economic episodes in our history. Now Milton Friedman blames the Fed for the Great Depression, and so do we. So do the Austrians. Questions. What we have tried to show, in contrast to Friedman, is that we placed the blame during this period when the money supply was increasing, GDP was increasing at a above average level.

43:23Friedman places the blame right here, where the economy was contracting, the banking sector was under pressure, banks were failing, and the Fed did not do enough to save those banks. As a result, they collapsed and squashed the economy for a long period of time. Now the interesting thing is that the money supply did contract during this period of time. But the Fed was actively reducing the interest rate at this point in time.

44:12They were actively increasing the monetary base at this time. They were actively reducing the discount rate at this time. They had raised it leading into 1929. But once the stock market crash occurred, they reduced those rates and they increased the monetary base to a considerable extent. The problem was, is that banks had a lot of bad loans, they had to meet reserve requirements and things of that nature, and they just really weren't interested in lending, and no one really was interested in borrowing, that was credit worthy, which wasn't really a whole lot of people. Okay, yes? I think the feds are going to start saying they can't push on a string in the near future.

45:07That's what I mean. They've got to relearn and can't push on a string. I think they're thinking about these things at the feds and at the regional feds. Conditions are different in various regions of the country. But pushing on a string is that the Fed is a point in the business cycle where the Fed tries to increase the money supply, but it doesn't have much of an effect. Certain measures of the money supply, for example, right now, even with all these rate cuts, it's not expanding. Certain measures are not expanding. Would you say the Schumpeter might have something to say here? You had Omobils, the radio, etc.

45:53And you could argue that the Schumpeter cycle in the 20s was the over-investment period in these new industries?

46:15it does get put to use even if like I'm really smart and I know that this easy credit is going to lead to failures down the road somebody's going to borrow that Money. Right, and every major boom in our American history has basically followed that pattern, whether it was the canals, the railroads, electronics, and automobiles, The money is becoming super available so people take great risks and then bring new products onto line maybe quicker than they otherwise would be and so they all involve that because there's so much credit there's a lot of investment and in each case those investments in canals and railroads and electronics and technology went under a lot of them lost money what's that sure I mean yeah I mean it's the same thing except housing is really not technological mm-hmm and in the house the house troubles in housing is not this is the first this is not the We had a point, well that's another thing that happened in the 20s. We had a real estate boom in the West.

48:00In Florida? Yeah. In particular? In particular in Florida. Now, leading into this, again, the major mainstream economist was Irving Fisher. He invented modern macroeconomics and the empirical approach to economics. He created the rules under which Central Banks Operate. He didn't dictate these rules but he invented them, published them and they were adopted by central banks and basically those rules with some refinements continue to this day. On the eve of the stock market crash, Fisher was quoted in the New York Times as saying that the American economy has reached a permanently high plateau of of Prosperity. This was less than two weeks before the crash began. In 1928, Ludwig von Mises published a book called The Cause of the Economic Crisis, where he specifically went through Irving Fisher and showed where he was wrong about business cycle analysis and he predicted a depression would result.

49:21In 1969, Murray Rothbard, who was a student of Ludwig von Mises and Henry Haslett, who was an editorial writer for the New York Times and a friend of Ludwig von Mises, Mises was This is very old at this point. Both published articles saying in 1969 that the policies of the federal government were going to result in a depression, an inflationary depression. Arthur Oaken, who was the chairman of the president of the Council of Economic Advisors, published a book in May of 1970, claiming that the new Keynesian economics had made the business cycle obsolete, that there was no longer going to be a business cycle.

50:15That was March of 1970. He had just stepped down. In April of 1970, the stock market corrected and in the second quarter, we had negative economic, real economic growth, which ignited basically the stagflation of the 1970s, which had very high interest rates. interest rates, very high levels of inflation for America, very high levels of unemployment. The unemployment rate remained above the average unemployment rate for virtually the entire decade, some of the highest inflation rates in the United States during the 20th century.

51:08We lost the gold standard, we lost the Bretton Woods standard, we had comprehensive wage and Price Controls in the United States. Things were nasty. Leisure suits, disco music, no The Japanese stock market is at 36,000. We were being told by people like Laura DeAndrea Tyson, who was President Clinton's Chairman of the Council of Economic Advisers, that if we don't adopt the Japanese method and system, that America will be buried, that we will be a second rate nation, a second rate economy, and that the Japanese stock market was headed for 100,000.

52:19Four months after Laura D. Anderson's published comments appeared, the Japanese stock market crashed and has been in a depressed state basically ever since. In the late 1990s, we were told by the mainstream macro-economists, the government forecasters, Wall Street, that technology was a new era, just like in the previous 1920s and so forth.

53:11That we were in a new era, and that the main problem we had to face is the possibility that there would no longer be the need for people to work that was the major problem that the mainstream theorists and outside of economics as well that was our big problem this technology thing was real it was building on itself because of technological reasons it wasn't the monetary system or anything else it was just technology was doubling every 18 months and you know all that kind of stuff. We'd never have another time where the business cycle was considered obsolete. Now the Austrians were, I have a paper outlining this where the Austrians were predicting in late 97 to into 1999 that this was a technological bubble and that it wouldn't last and that's essentially what came to pass, the Nasdaq lost about 80% of its value, just as what happened in the 1970s.

54:21I mean, all the hot stocks lost more than 80% of their value, and the stock market never even recovered in nominal terms for over a decade. And then, starting in late 2002, 2003, 2004, Austrians were calling the housing market in the United States and elsewhere a bubble, driven by monetary policy at the Fed. Everybody was making fun of us, essentially. They said, real estate never goes down. The best investment you could ever make is in your home. A lot of these sayings were out there, people have sort of forgot about those things now, but basically we were predicting during the boom itself that this bust must come to pass.

55:17Because it's not merely financial, it's actual structured investments that are being made during the boom, you just simply can't make those things go away, you can't make bad debts Let's go away. Somebody has to pay them. And that's where the real pain of the business cycle lays. So, Austrians disagree that the business cycle is caused psychologically. We agree that psychology is a big part about it. People get over-exuberant. They do get fearful. That's all part of it, but it's not caused by mass psychology. It's caused by by the Federal Reserve. And with that, I think I'll stop and see if we have any questions, I guess.

56:03Yes. It sounds to me as if, and I get this from other things I've heard about Austrian economics, which I don't know very much about, but that you're saying they want a hands-off approach from government, maybe even no government whatsoever, because it affects market behavior. And it kind of reminds me of, you know, the Heisberg in a certain sense or where you can mess with something and like just measuring something can affect the results. But then what would an economist do that was an Austrian economist because theorizing about it or talking about it or having it on the news would affect behavior. So, do they not see their own role in their policies or their theories that they put out that it would affect behavior as well, in the same way that government does?

57:16from causing a cycle. Austrians basically don't advocate anything. So we don't advocate any government. We just don't advocate. We just say, if you do this, this is what you can expect.

57:46What Happens Is What Happens

58:16track records who sell advice and that sort of thing. But generally speaking, the track record is very good. We don't make regular predictions. We only see big moves in markets. We don't see small moves in markets. That's where mainstream is more, you know, if the trend isn't changing, mainstream tools can pick up those spins and weaves along the trend much better than we could. What is Austrian liberalism compared to classical liberalism?

59:16Austrian school then were supporters of classical liberalism?

59:46but that's usually pretty rare. Or there's a lot of Austrian economists who don't even talk about their political orientations or their policy views. Mum's the word, so to speak, as in sort of a point to the previous question as well. Carol?

1:00:3520% of your gain. And that's the problem I have. A lot of people are forecasting woes. It's like sometime in the future, but you need, I mean, does that mean you don't invest in housing or stuff? I mean, I remember that. But you were predicting way too early. I said it would have to happen sooner or later. I know, but what does that mean? Well, I didn't mean 50 years, obviously. I'm just saying that, in my opinion, your theory is implicitly forecasting because I anticipate the housing crash, too. That's largely because I buy into a lot of your philosophy. So forecasting is implicit.

1:01:20Well, the Austrians do not have any tools available to them to time these changes, or even the magnitudes. You can only get a feel for magnitudes and timing. Austrians did start predicting the bubble of the 1990s. In 1996, James Grant, who is one of the most astute observers of the markets and who is Austrian, published a book in 1996, way ahead of everything that happened.

1:02:12In terms of timing, I always step outside the Austrian schools and use technical tools Because Austrian analysis doesn't give you anything that predicts timing and magnitude. That's all feel and technical analysis have to be brought to bear on that stuff. The only time I actually got something right in terms of timing it is I published a short article in the beginning of October 2005 where I said that this week might be the turning If you always get out before the top, you win in a long run.

1:03:11Where you screw up is wait, wait, wait, wait, and you get caught in the down-turn. But I disagree with that. I knew you would. I mean, Carol, I imagine if you have not been heavily in stocks for the last four years, if you had been, you'd probably be way ahead of it. Well, you know, there's a couple of prominent investors in history when asked, How did they make so much money? And they both said they got out too soon. Yes? How should the, if the Federal Reserve has caused a lot of problems in the business cycle, then what type of behavior should they correct? What's their problem?

1:04:01Well, they're setting interest rates. They could do a whole lot better simply by letting the federal funds rate float. I mean, if I was put in charge of the Fed, there's absolutely no chance of that. That's my first directive would be is I'd say I would announce to markets that in 30 days we're letting the federal funds rate float. That was my assumption, based on what you were talking about pre-1929, and that's my intuition to it as well, is that they should have let the interest rates reflect the market a little better, so that people can make their own choices as to how they invest.

1:04:58Standard, a gold and silver standard monetary system, along with 100% reserve banking, so that any checking deposit money, any money on your debit card had to be in the bank in some form or another, whereas time deposits would be lent out for investment purposes. We think that, you know, that that was the system that evolved into the marketplace hundreds

1:05:58It's largely an education and academic institution, but ideologically, the Institute likes the idea of moving society back to freedom, back to private property, and to sound money, and to free markets. because those institutions that evolved over long periods of time set the preconditions for a stable prosperous society and eliminates a lot of the problems that are involved with trying to institutionally structure society through the political process and we've been in business since 1982 when I went to Graduate School and when basically the Austrian School was disintegrated and today it's actually very vibrant.

1:07:01We have an academic conference every spring. It's grown every year. We get people from around the globe attending this conference from many different countries And the average age, not only is the Austrian school getting much larger and growing at a very fast rate, but it's also getting younger. Every year, we get younger and younger. As a matter of fact, you know, in 1982, I was just a kid and now I'm an old fart. Yes, yeah that's, well that's that's still a problem. That is definitely still a problem to be able to offer PhDs. Now George Mason has a concentration in in Austrian Economics, and there are now several young PhDs at PhD-granting institutions around the country.

1:08:13You can get information about that at our webpage, and there's also a Masters in Austrian Economics. So you just do Austrian Economics at Grove City College in Pennsylvania, and that's coming online next year, and by online I don't mean that the classes are online just yet, but eventually they will be. But we actually advocate that if students really wanted to get their Ph.D., that you go get a regular Ph.D. If you want to get into academia, you are going to have to know mainstream economics. And so it's not, you know, so go to Harvard. Actually, Harvard is one of the most free We market PhD departments now, and so we advocate, go to a good school where you know one of the professors work and do your best and study Austrian economics as well.

1:09:14Do you offer summer workshops for students or for Ed and Oliver? We have a program in the summer, it's called Mises University, students come for one week,

1:09:55World. And it's a really neat place to go because you get to see and interact with students from around the world and students who are thinking about going to graduate school and that kind of stuff. So it's a really good program. You all have a brochure about that. And we have other conferences. We hold conferences around the country, introductory conferences. But Mises.org is probably the biggest resource that you guys have missed out on. It's the world's largest and most trafficked economic The Federal Reserve, the SEC, the White House, even The Economist magazine, in terms of traffic, downloads, hits, all that kind of stuff, and everything is there, 24-7-365, everything is free except things you purchase in the bookstore, and we have a lot of things that you can buy in the bookstore, and we have a lot of things you can buy in the bookstore, and we have a lot of things you can buy in the bookstore, and we have a lot of things you can buy in the bookstore,

1:10:55Books online, articles, journals, you name it, you got it. So please go take a look at this, and if you have anything that you've got to write a paper about, go do a search of Mises.org. Thank you very much.