The Free Market

0:00Our guest for this hour is Dr. Mark Thornton from the von Mises Institute, and the reason I kind of have you up today is because I tripped over an interesting article you wrote comparing the exact title of which it was, I believe, something to do with Gatsby and Prohibition and how would the movie up right now, and I thought it was a good substitute movie review It's great to be with you here this afternoon. Thank you very much for the invitation to be on the show and to discuss the article and the great movie.

0:53website time as we can but and as an old friend of Murray Rothbard's I recall its founding as a matter of fact but basically tell them what the Von Mises Institute does. Well I'll admit it, I'm an economist but I hope you and your audience don't hold that against me. We'll try not to, we usually have them shot. Yes. They should be. I'm not a mainstream government economist. I'm an economist from the Austrian School of Free Market Analysis. It's a very traditional form of economics that harkens back to the classical school of Adam Smith. And we're the oldest continuously existing school of economics. We're the smallest school of economics, but we're the fastest growing school of economics.

1:43and I think that puts fear into the hearts of economists like Ben Bernanke at the Federal Reserve and Paul Krugman at the New York Times and I have the good fortune to work full time now at the Ludwig von Mises Institute in Auburn, Alabama and it's the worldwide center for research in Austrian economics as well as teaching programs to college students, high school students and the general public and we do that through a variety of means, the The most important of which is our website, which is mises.org, and it's got the world of Austrian economics down there, and there's everything from daily articles like my book review on the Great Gatsby, right on up to the grand treatises of famous Austrian economists like Ludwig von Mises, the namesake of the Institute, and also Murray Rothbard.

2:37We hold all of his books and we sell his books and all of the materials that he wrote over his career. We've brought all of that back into print and it's all available through either the Mises Institute for free or through our bookstore at highly discounted prices. Now, there were some great students of Mises and probably the best known one of the people on the conservative side and the libertarian side is that it would be Friedrich Hayek. Oh yes. Friedrich Hayek was a grand scholar, a direct student of von Mises in Vienna. Mises was the chief economist at the Chamber of Commerce in Austria. He set up a business cycle institute and hired Friedrich von Hayek to run that institute. He was subsequently hired at the of the London School of Economics and eventually the University of Chicago.

3:32But in 1974, he won the Nobel Prize in Economics, and that was a tremendous surprise for all of us in the Austrian School. But he won it for his work on business cycle analysis that he did under the tutelage of Ludwig von Mises, and basically he took Mises' theory of money and theory of the business cycle. And he made some tremendous elaborations on what actually was going on when the Fed or the central bank injects money and lowers interest rates. You know, Mises gave a general pattern of what would take place, but Hayek really went in there and really fine-tuned Mises' analysis.

4:18And as a result, we have this tremendous tool, the Austrian Theory of the Business Cycle, which allows economists from the Austrian School to see these tremendous economic crises coming, whereas the mainstream economists are always, you can always tell things are going to get bad really quickly when you hear a mainstream economist saying, you know, we've killed off the business cycle, we've slayed the dragon of the business cycle, we now control the economy, it's a new era, and so on and so forth, that's when you know to really tighten up and hunker down. Epistemological Problems of Economics, A Critique of Rational Positivism and I kept a hardback copy of that on a coffee table for years just with a couple of bookmarks and just so people would think I was smart.

5:25Oh yes, very, very impressive. And it is a very good book. It was a great title. By the way, the problem with Mises himself was, of course he had to flee, because I believe he was part Jewish, and he had to flee, which made you all Jew to the Nazis, Austria in the 30s, and he came to the United States and nobody knew who he was, and he had to to learn English as a second language and much of his works are written when he was probably what, close to 60? Yes he was, but he was already fluent in several languages, he wrote in several languages and he could read in several languages and he could speak in several languages so he picked up a rough German accented English fairly easily once you reach the United States.

6:18But you've got to remember that Ludwig von Mises was the most important free market economist in all of Europe in the 1920s and the 1930s. Whenever socialism would erupt in Austria or in the Hungarian Empire, Mises was there to shut it down. And so, you know, the Russians hated them, they were communists, the Nazis hated them, they were socialists, the National Socialist Party. And so when the Nazis... Don't think he did real well with Mussolini either. No, no, that's true. But the Nazis invaded Vienna, while Mises had already left. But the Nazis took all of Mises' books and papers and even his furniture and brought it back to a secret warehouse in Berlin to study, to figure out, because Mises had shown and the Real Socialism was Impossible.

7:09And so they wanted to figure out if there was any trick that Mises had left behind to make socialism work, because they were having lots of problems. And so we thought all of Mises' early papers were gone. And then in the 1980s, researchers discovered all of Mises' papers in a secret KGB warehouse in Moscow. The nice thing about those guys is they never destroyed any paper. That's right, but the Russians, when they invaded Berlin, they recognized Mises' work is important in terms of understanding socialism and maybe how to fix it. So they took all that stuff and they brought it back to a KGB warehouse where they studied it, but eventually they realized that there was no trick to solving the problems of socialism. And so we finally were able to rediscover the pre-World War II papers of Mises when He was really the hottest thing in Europe, and when he came to the United States, he had a small following, but it was nothing like it.

8:09I mean, he had an unpaid teaching position at New York University, and people like Henry Hazlitt had to help him restart his career and had to help fund his position at New York University. So, you know, those were two unbelievably great minds. Henry Hazlitt wrote for Newsweek. He was the economics editorial writer for the New York Times when it was a sound... Real newspaper, yeah. Yeah. And, you know, and so he was, and he was writing all these books. He even wrote a very impressive book on philosophy. And so those were two giants of a man. I believe at one time Ludwig von Mises served in the Imperial Austrian Cavalry.

8:56In the army? Yeah. Oh yes. He fought for the Austro-Hungarian Empire in World War I. He was a commander of an artillery unit, an important one, I think, guarding the capital or something like that, and he actually was injured and had to return to Vienna to heal himself. He's got all sorts of medals at the Mises Institute. We've got a lot of the memorabilia of Mises that people like to come and visit us and see these things, but he's got a whole pile of war medals, decorations, honorary doctorates from various institutions. He was a very important man, and of course his major work of all time was Human Action, and Yale University Press published that, it was one of the leading economics publishers in the world at the time, and still is, and they had to reprint the dying thing several different times.

9:58So, and of course, we get back to Hayek, Hayek was the one who wrote The Road to Serfdom, which sold over 100,000 copies and was a reader's digest choice, and you know, so these were Big Important People. And these were Mises and Hayek were the inspirations for politicians like Margaret Thatcher and Ronald Reagan. Now, of course, we don't agree with everything that they did and how they did it, but those two were the most conservative free market politicians probably within our lifetimes. And maybe the last ones we ever see, it seems But they, like, miss us, and answer to answerookie, miss us, and higher to catch as we got chest, the instance- jump- in again- meant-There!

10:49to libertry Nice again, this into the for me The 70s and 80s, and by the time I went to graduate school, there was almost no Austrian school left in the world. There were only a few handful of practicing economists. The Mises was dead, and Hayek was retired, Haslett was retired. They all signed on to the mission of the Mises Institute, but they were very old men at that point. And there were very few Austrian economists anywhere. I gotta take a break, Mark, but one thing I want the audience to grasp about this, this is the kind of, you know, the 40,000 feet up kind of a view as opposed to the practical gut fighting we were into the last hour.

11:52But there's absolutely no question anyone who has studied politics and economics and and all the deep implications of what's going on. Ludwig von Mises was probably one of the more relevant people living and producing thought on these subjects of the 20th century. Absolutely. He wrote from the very highest levels of philosophical discourse right down to kitchen table economic stuff that was relevant for policy. The trouble with reading Mises is you have to stop every three pages and say, hey, wait and think about what he just told you. Tom, I have a question for you on deficits. Let's go for that before we get the gastronomy. Mark, can we deficit spend another 17 trillion dollars without hurting ourselves?

12:42Well, Tom, we certainly could run up the deficit by another 17 trillion dollars, but every dollar, every additional dollar is hurting us. is hurting us. It's taking money away from wealth creators, and it's giving it to various government programs which are just consuming up these resources. So deficit spending, you know, the Keynesians think that it stimulates the economy because it drives up the GDP number, which sometimes is true. But the real matter of fact is that it's taking away money from from wealth generators, capitalists, entrepreneurs and labor and just basically consuming that amount of money. So deficit spending is highly destructive to the economy and when the whole debate about raising the debt ceiling came up and everybody was saying, should we raise it or how much should we raise it?

13:39And I wrote an article on Mises.org and I said, you know, what would happen if we lowered it?

14:15and all of a sudden create a tremendous sense of stability that America the world's leading country and the world's largest economy had woken up and decided to do the right thing and so I think that just passing a law that said we're going to start to reduce the national debt overall would have been the type of stimulus that were actually really would have gotten people excited and not just Deficit spending is a drawdown on the economy. It's obviously weakened in the economy. It's actually hurt the national, our government's credit rating, and we're headed for another downgrade of the credit rating. And this is undermining the entire financial system. So it's totally a negative. And all we hear out of Washington is, when should we raise it?

15:07How much should we raise it? And the reason is they've got money they want to hand out and the Special Interest Groups. They're not showing any concern for the average American in the real economy. They only seem to be concerned about themselves, their friends, and their pet projects and their special interest groups. And you know something, Tom, and Mark, that is something hard lefties, hard righties, and hard libertarians have all figured out. This is a crony scam operation, okay? Yes. It has been for a long time, it's a crony capitalist system that is now full-blown and it's fairly obvious that the big corporations are really in control of the government and they have no intention of giving that control up because it's a tremendous source of money for the large corporations.

15:59Look what happened with the banks, they got a big bailout. Look what happened to General Motors and the auto industry, they got a big bailout and The Theory of Money and Credit Mark, let's get to Gatsby for a minute.

16:58First off, I have not seen the movie, but Arizona Theatre Company did the play last

18:03The whole movie and the whole book doesn't really get mentioned until towards the end and there it's really just slipped in and it's not a major part of the book, it's not a major part of the movie, but the whole premise of the movie is based on the idea that we're in alcohol prohibition, which of course I didn't even recognize when I was in school, that alcohol prohibition was going on and that Gatsby, Jay Gatsby, was a dealer in this world of Money, and the World of Illegal Booze. He had a chain of pharmacies, and pharmacies could sell alcohol both to people who had prescriptions as well as divert it for other customers. And so this chain of pharmacies was actually a chain of, you know, front jobs for selling not just alcohol legally and not just alcohol illegally, but really good alcohol.

19:03It wasn't the bathtub gin, it wasn't the moonshine, it wasn't stuff that was made in a car radiator, it was made the old-fashioned way at a distillery, and doctors could write prescriptions. And so this chain of pharmacies was making tons and tons of money. The Walgreens chain, which I don't know if you have Walgreens out there in Tucson. Oh yeah. Yeah. In fact, there's so many Walgreens that they're opening Starbucks in the restrooms. They started in the early 20th century and by 1920 when prohibition went into effect, they had about 20 pharmacies in their chain in and around the Chicago area. By the end of the 1920s, in 1930, they had 500 pharmacies in multiple states.

19:58This was a way to get rich quick, basically, and so Gatsby is getting all his money and all his booze, and he's got, you know, he's built this tremendous mansion, and he throws these lavish parties with bands and fireworks, and I don't want to give away too much of this. Yeah, they had to do that in the movie. It was a little hard to do that on the stage and everything, at a 400-seat theater, but I get it, yeah. I would say it's a good movie and it would be a lot easier to tolerate the excess and to understand the story once you realize this is alcohol prohibition days and that Gatsby had become great by selling illegal booze.

20:43Have you ever seen the play? No, I have not seen the play. I struggled through the book. and I wasn't really intending to go to the movie but somebody else wanted to go so we went and had a great time. It's a good movie and they put a lot of money into it. There's a lot of fabulous cinematography and so it's definitely worth seeing. The 20's costumes and cars and all that good stuff would probably find it, that's why I love watching a lot of Brett's stuff just for the buildings they're in, and the clothes they're wearing and the cars they roll up in, you know? Oh yeah, the cars were really... The BBC stuff is actually going to be neat, I suspect this would be that way too, so that part would be most entertaining.

21:29Banking. But over and above that, again, the problem with that was there really isn't anybody in there you kind of like, you know? It's like some of those anti-Western things they made in the 70s where there's no hero and everybody's a sleaze and after a while you say, why am I bothering? But I get the point on the prohibition thing. Do you think Fitzgerald was making that point? Oh yes, you know they say that Fitzgerald and his wife are characters in the movie itself and it's sort of semi-autobiographical and they're all flaw characters and you know that's one of the things that Prohibition does is that where Prohibition is highly active, it tends to make for bad people and bad characters and it takes society and it turns all of the

22:57and People. And that's why when you see, even nowadays, in neighborhoods and cities and urban areas where the drug trade is rampant, and what you see is moral and economic decay in those areas. And it breaks up families, and it causes crime, and the politicians are corrupt. And so the Prohibition is not just selling an illegal drug and throwing people in prisons. It's people dying. Family is being broken up. It's people learning the wrong incentives. You know, inner city youth can learn that the only way out of this is to pick up a gun and start selling crack and other illegal drugs. That's the thing to do. And so it really does unnatural things to society, and once we get rid of prohibition, and everybody has to work for a living and some very flawed character like Jay Gatsby can't just come in and scam the system and make mountains of money and carry on with these hedonistic parties and things of that nature.

24:11Prohibition, people don't understand the extent of the negative impact that prohibition has And it has on a lot of different people who have no idea they're being adversely affected, you know, that they, you know, teachers in public schools, you know, may be totally oblivious to the fact that their job is very difficult, very dangerous, if not downright impossible because so many of the kids are being drawn into this, these illegal drug systems. So it's something that we all need to realize that prohibition, it's really impossible. You can't stop the drugs. So it's much better to legalize it, put it back into normal channels, put it back into normal commercial channels where it can be regulated to the extent that we don't see families being broken up, prisons being overcrowded, courtrooms being severely delayed, violence Lots in the Street, street gangs, organized crime, political corruption, the list goes on and on and on and it all starts with Prohibition.

25:23Well okay, but let me devils advocate a tad on this. Boo's Prohibition made the mob, absolutely no question. I think I have a distant relative who was a wheel man up in Vermont when they used to The issue is the mob didn't go away at the end of Prohibition, they're still there. Yes, that's true. They just moved over into something else and actually they legalized much of what they had. Some of the better booze brands I told once upon a time were some of that high-end stuff Yes, but generally speaking, the alcohol during Prohibition was highly potent. I mean, Americans were beer drinkers, right? They did drink a lot of whiskey, too, but after Prohibition went into effect, beer became very, very scarce and very, very expensive on a per-glass basis, whereas all of the money, all of the production flowed into producing highly dangerous, highly The Theory of Money and Credit

27:04The number of health incidences during Prohibition when alcohol was supposed to be illegal actually went up. And so the health conditions actually went down because of Prohibition. Now, you're right about the mob not going away, and not all the street gangs went away, but things were much, much better throughout. Some of them ended up in Congress, by the way. Yes. Or their kids sure did. Well, John Kennedy made it there that way through his father, but a certain type of individual is attracted to prohibition and being in the underground economy and black markets. It's the same type of person that's attracted to politics, especially leadership politics, and you'll see that kind of warped personality in Gatsby when you see the movie is that he's It's kind of a broken type of guy with a lot of psychological issues and he's out to prove himself and he uses television to do that and you know so the mob did not go away but you know prostitution was still illegal, gambling was still illegal, there were a lot of public contracts that the mob tried to take advantage of and so there were still plenty of government and government prohibitions around for them to make money

28:30Believe me, the amount of organized crime and the amount of violence that was a result of organized crime dropped off dramatically. As a matter of fact, if you look at the statistics, the murder rate starting with 1920 doubled from five murders per 100,000 people to 10, and it stayed at 10 until 1933 when alcohol Prohibition was repealed, and then it fell over the next three years back down to five. And so five, you know, I don't know a lot of math, but five murders per 100,000 people is so much better than 10 murders per 100,000 people. Alcohol was just a big deal, was a big market, there were just enormous profits in it.

29:16Well, try this, just for a little econ and price analyzation. We figured out one time, back in my college days, when we drank the cheapest crap you could find, and at that time you could still bring in booze from Mexico without much of of Money.

30:15at the Walgreens drugstore, interestingly enough, that you brought up at Walgreens, but that was where you could buy the real cheap American vodka that you didn't have to strain through a loaf of bread, and it was about three and a half bucks, but, your figure of what the tax was on that $3.50, it was about $2.80. Oh yeah, yeah, I mean that's... Actually the Mexican stuff was more expensive when you took off the tax. Yeah, the taxes on alcohol, you know, alcohol has been a huge industry in the United States from the very beginning, and smuggling has been a big part of that. Yeah, and it was, by the way, it was the same tax if it was a $100 bottle of good cognac. It was based on the alcohol, not on the quality. Some of the founding fathers were smugglers of whiskey, and George Washington had the largest distillery south of Boston.

31:08So, I mean, alcohol has always been a big, big deal, and it's always been a big deal for taxes, you know, because it was the largest source of revenue for the federal government prior to the income tax in 1960. And what about the whiskey rebellion, and what was that all about? Yeah, well, George Washington, the owner of the largest distillery on the seaboard, was out with the largest army ever assembled in North America at the time to suppress whiskey

32:07and the government employees who saw their budgets shrinking and they knew that alcohol would be a big revenue source and so that was a big reason why alcohol was legalized or prohibition was repealed because the public sector workers joined the immigrant populations in the city with libertarians and conservatives to all oppose Prohibition

33:05History, and he made repealing alcohol prohibition his number one item on his agenda. And guess what his theme song was for his campaign, and it's the theme song of the Democratic Party. Happy Days Are Here Again, I guess we're talking about. Yes, because we're repealing prohibition. That song appeared in a movie several months before the election, and it was in the final I can identify. Now that you think about it, do you think the 1932 election turned primarily on the state of the economy or did it turn to a reasonable degree on the prohibition issue?

33:59Well, certainly both. I mean, Herbert Hoover was a dry. He supported Prohibition. FDR was also a dry in 1932. But when they went to the Chicago Convention, it was deadlocked. And one of the candidates went to FDR and said, you know, I've got 30% of the vote. You've got 30% of the vote. If you agree to become a wet and to advocate repeal, then And I'll throw all my support behind you. So he got the nomination. He made repealing prohibition a number one agenda. When the plank of repealing prohibition was read before the Democratic Party convention in Chicago, the noise of the screaming and the loudness of the applause was so loud that windows were shaking and people could hear that noise miles away. And so he easily swept into office. And, you know, they talk about his first 100 days He also, and what's interesting about that, if you go back and look at the campaign literature, he ran as a conservative.

35:01He complained about the national debt, he complained about spending, and acted like, up to that time, 1932, the Democrats had a pretty good track record in many places of being the conservative party. Oh yes, I mean, the Democrats were conservative, the Republicans were both populist and there were liberal Republicans as well. And so, you know, then as of now, it's hard to figure out which party is which. I mean, you know, the Democratic Party has a better record overall in terms of things like balancing the budget and keeping the national debt under control, because one of their big groups is federal employees and government employees, and they want to make sure government is stable and that their paychecks are all stable. And so, but FDR, he did run as a conservative.

35:49He did do a few conservative things, but he had brought in a lot of very liberal and really actually socialist and communist into his cabinet. And so all those stimulative programs that Hoover had been trying, FDR just turned around and doubled the budgets of all those programs and renamed them so that he would get credit. And then, of course, he instituted a variety of new programs, things right out of, you And he ran as one thing, he turned into not just another but an extreme version of another who...

36:39And he's left us all this institutional government that is now, of course, threatening us. Security is something that, you know, if you look at the budgetary figures going out, that's one of the things that's going to crush the government or the economy or both. Well, the birth rate will take care of that unless we figure out some other angle. I've got about four minutes, let's take a call from Charles. Hi, in terms of ending prohibition and legalizing it and causing it to be regulated, I'm not I'm not sure that we have a model for regulation, i.e. would it then become the Bureau of Alcohol, Tobacco, Firearms, Explosives, and Stoners? Well, there are models, actually. I'm open-minded to that there might be, but I just don't know of a competent government agency, period.

37:29But I certainly don't know of an agency competent to tell people, tell stoners how much pot is in a serving, or whatever you call pot. I don't know. So after the 18th Amendment was repealed, with the 21st Amendment, what basically happened is each state got to establish its own regulation over alcohol products, and so some states just went back to a free market with higher taxes, but actually even with the higher taxes the price of booze fell. Other states used state stores so that they could regulate who was buying and how much

38:35What happened is that the Prohibition States eventually fit, you know, that idea just didn't work, you couldn't attract corporations and big investment, so the Prohibition States have gone away, and the state stores is now limited to, I think, the state of Pennsylvania and Alabama and so basically people have over time rationally turned to the marketplace, and in Alabama we've had several reforms over alcohol,

39:35Probably, they couldn't do it but turning over the regulation of the marketplace is something like Wal-Mart strikes me as a great way. I mean, if you're going to have meth in your society, at least Wal-Mart won't sell you a lethal portion in one dose or something. That's right. If you turn it over to corporate America and commercial america, they have to worry about lawsuits. So they're never going to sell a dangerous drug to somebody who's under 18 who has a minor. If they get hurt, they're in double trouble. If they hurt, their products hurt a minor under those circumstances. And so, there's going to be restrictions. I mean, you're not going to be able to walk into your church and start smoking marijuana. They're just private prohibitions. And imagine also, if Kmart did it, you know, imagine if Kmart did it and there was, you know, the blue light special on meth on aisle three.

40:25Yeah. Okay, guys, there's one thing I'm going to say about this because we only got about And that's for both Charles and you, Mark. The one thing you do learn from prohibition, and the big lesson you can learn, is, yes, it is possible to repeal stuff, okay? Absolutely. That's a lesson. You don't have to keep it forever. You can get rid of it, whatever it is, later on, if you really want to. and there's plenty of things like that that I'd like to talk about on future shows but I'd really like to come back on the inside track and talk about Murray Rothbard who is I think one of the most important persons of the 20th century that your audiences and most audiences had never heard about and I think if they learn about Murray they're they're going to learn. Mark, you got it because he was a dear friend of mine. All right, thank you sir. Mark Farton of the von Mises at Mises Institute. We're done. We ran out of time. Thank you for being with us.