Economics and Public Policy

0:00I want to start by thanking Mark and Joe, who was responsible for the schedule, for putting the best at the end. I mean, everything this week has been kind of building up to my remarks here. Actually, what I would like to do is at least begin our discussion, you know, sticking to the contents of this particular chapter, but since this is our last time to be together in an organized fashion when we're not... What did Wood say? Not acting like wild beasts, but... Wild savages or something?

0:57Okay, so this is the last chapter. It's chapter seven of Power and Market, called Economics and Public Policy. It's a nice, certainly a very nice summary and conclusion chapter, particularly for the power and market section of the book, right? It deals with issues about the role of the economist in society, the role of economics in society and includes a lot of insights that are broader than strict praxeology. This is almost kind of a sociological character to some of the discussion, a sociological sort of historical character. In a sense, it parallels the last two chapters of Human Action, which also deal with similar issues about the character of economics, the place of economics in society, the importance of economics, and so on.

1:54Mises, of course, as we've discussed earlier, believed very strongly that the main problems facing society resulted from a lack of understanding of economics. and Politics. Mises believed that people supported bad policies because they didn't really understand the consequences of those policies and that through education, if the economists could explain or persuade people to recognize that they were not employing, that the means they had chosen were not appropriate to the ends they sought, that things would be a lot better. Rothbard, I think, was a little bit more, was focused more on issues like interest group dynamics, you know, so what people refer to now as public choice theory, or the ideas that even fully understanding that what they're doing is very harmful, certain special interests will pursue those harmful courses of action anyway, because they're interested in achieving some personal goal rather than some broader social goal.

3:00Principle. You know, some of the – there's four basic sections in the chapter, the nature and uses of economics, the failures of welfare economics, economics and social ethics, the market principle and the hegemonic principle. And again, this is sort of summary material because we've covered quite of this already. The little table that Bob reproduces in the study guide distinguishing the market principle from the hegemonic principle I think is very and you know I was thinking about this when David was in the last session was discussing the so-called libertarian paternalism and this idea that you know as Rothbard understands the concepts of freedom and coercion you know there it's a very blunt distinction right coercion is coercion plain and simple these so-called libertarian paternalists Sunstein and Thaler for example People argue that, well, we're not actually forcing people to choose X, we're simply requiring their employers or the restaurant owner to organize things in a certain way that people are more likely to choose X on their own.

4:16Whereas the Rothbardian would say, ah, but there's an act of coercion involved in requiring the employer to choose a different default retirement option than he otherwise would have, or requiring the restaurant owner to lay the food out in a different way than he otherwise would have. And that's coercion. By no means is that a less coercive state of affairs than the one in which people are simply forced to to eat this food or to choose this retirement plan or whatever. So Rothbard makes a very stark distinction between the order of the market, which respects private property and the non-aggression axiom, and the order of power, of hegemony and so on, in which coercion is part of the System. Just, you know, so what are some of the key insights and some important ideas, at least that I take out of the chapter. Rothbard has very candid and, in fact, much more candid than what you get in the typical economics textbook account of what economics really is and isn't good for, right?

5:27So he has this discussion of, you know, the role that the economist, the value of the economist to the businessman, which Rothbard explains is, yeah, I mean, just about nothing, okay? But economists just really aren't that, in the free society, the economist is not all that useful to the businessman. In fact, he says, well, sorry, we'll come back to things. He says, you know, I seem to have this discussion with people in the context of education reform. And, you know, I'm a college professor and it's certainly in my personal pecuniary interest to have as many students as possible going to college and as many employment opportunities as possible for economics professors.

6:25On the other hand, from the point of view of social welfare, I think there are vastly too many students in college and there are way more economics professors than there ought to be. Most of them are net value destroyers rather than value creators. So in a free society we would see a radical restructuring of the higher education sector Professor, and there'd be a heck of a lot fewer economics professors. I, of course, would continue to be employed, but all the marginal ones would just, you know, have to go into ditch digging or something like that. He has this discussion in the first section about, you know, the character of economic laws, and we've covered a lot of this already, namely that they're apodictically true. So that's a great Misesian word that doesn't can get used as much as it should in everyday conversation, you know.

7:17Tell my kids they should take out the trash, and that's, you know, an apodictically true statement. Right, so, notice that apodictically true doesn't mean that the laws may not be conditional. Right, some economic laws, like the law of diminishing marginal utility, are universal. But others, you know, that, you know, if demand above the current price is inelastic, then raising the price will increase total revenue. You know, a statement like that is obviously conditional on demand in fact being inelastic above the price at which we're discussing. There's a, you know, if-then statements. What that means, one thing that implies is that the application of economic law to specific historical circumstances is something of an art as much as a science, right?

8:10So the applied economist, the economic historian, has the task of figuring out, well, in this particular place, at this particular time, with these real human beings acting and interacting, was it in fact the case that demand was inelastic and that therefore the total revenue, you know, rose or whatever the case might be. Okay, so economic theory is scientific in the sense that David was describing it in in the last session, but applied economics or doing economic history is not scientific in the same sense. It doesn't mean it's arbitrary or unsystematic, but applied economics doesn't have the same a priori truth status as economic theory. Something else that is typically forgotten by many economists is that economic laws in the Mangerian, Rothbardian, causal realist tradition are qualitative rather than quantitative Laws, and we've tried to emphasize that throughout the week with discussions of ordinal utility.

9:09I was just having a conversation with some people earlier today about the way that Rothbard, following Menger, writes the preference, an individual's preference ordering, and rather than writing, ranking the objectives one, two, three, four, five, I mean, when I teach I teach this to undergraduates, I try to use A, B, C, and D. A is preferred to B, B is preferred to C, C is preferred to D, rather than 1, 2, 3, 4, because then people naturally start thinking, well, so, you know, this one is twice as good as this one because it's twice as far on the scale as that one. No, that's not the characteristic, not the character of economic laws, right, they're qualitative. There are no mathematical constants in human action, as Mises, as Mises puts it, as there There are constants in the physical sciences. David did a nice job explaining Rothbard's view of the value freedom of economic analysis, that economic laws are, let's see if I can say it in Hoppean fashion, Wucht frei. Is that good? Wucht frei character of economic

10:14laws. No offense to any German speakers here who may find that an insensitive characterization. Okay, so what then do we say about applied economics? Well, first of all, what do we mean by applied economics? Well, in the Rothbardian system, all, you know, what most people, what mainstream economists call empirical work, is really economic history, right? Even if you're talking about prices that people paid in the market yesterday or this morning, it's still historical in the sense that these are actions that, you know, took place in the past, even if it's the very recent past, and economic history can involve quantitative relationships because we're not talking about apodictically true statements, but rather trying to make educated guesses about the quantitative magnitudes of certain phenomena, okay?

11:09You know, we know that, you know, looking at the, Doug was talking about the housing bubble, right? The Austrian Theory of the Business Cycle tells us that due to Fed policy, with monetary expansion and interest rates being below their natural rate, this will lead to malinvestment in particular sectors and its consequences and so on. But economic theory doesn't tell us how large will the malinvestment be if there's a way to come up with a reasonable way to quantify that. The Theory doesn't tell us, the only way to clarify that is to lead to a little malinvestment or a lot of malinvestment in a few sectors or many sectors, will the malinvestments take just a little time to be cleansed? I thought that was a great word that Doug used over lunch, wasn't it? That your position at the bank was a malinvestment that was either cleaned, I think was the word you used.

12:03So, will that happen quickly, or will it take a very long time for malinvestments to be corrected, and so on? But theory doesn't tell us. The only way to come up with reasonable characterizations, that is to look at the data, to look at the facts, both qualitative and quantitative data. I think someone, maybe it was Walter in an earlier lecture, said something about econometrics, that there are different views among Austrians about the appropriate use of econometrics. I think all Austrians believe that econometric, would agree with the statement that econometric analysis badly done is, is bad, okay, and there's a lot of problems with the way econometric analysis is typically done. There's actually an interesting book by McCloskey and Ziliak, they just published it in book form, but the articles have been around for a while, criticizing and what they call the cult of statistical significance, namely that researchers in so-called empirical economics or we would say economic history typically confuse tests of statistical significance or the idea of statistical significance

13:08with economic significance, right? That just looking at t-statistics and so on doesn't tell you whether phenomena are important, that there's way too much emphasis placed on significance testing and hypothesis testing and applied historical work. Now, some Austrians have gone even farther and argued that even well-done econometrics is, econometric analysis is misleading even as economic history, but I think that's a minority view among Austrian economists. Anyway, the point is that when economic historians or financial analysts or business forecasters do quantitative analysis, they're not acting as economists per se when they do that, right? They're acting as consultants or forecasters or historians, hopefully making use of economic analysis in doing what they do, but they're going far beyond economics, per se, in doing that sort of thing.

14:06Rothbard doesn't say, he talks a little bit about applications of economic analysis to managerial problems, and he's pretty unimpressed with so-called operations research, which I think was pretty unimpressive at the time that he was writing. I think some areas of sort of applied quantitative business administration have gotten better in recent decades. Actually, personally, I'm a little bit more sympathetic than Rothbard to the usefulness or utility of economic theory in doing sort of applied work in business administration, in management, finance, accounting, marketing and so on. We can talk about that a little bit in the question period, if you like. But this is the way Rothbard puts it, with his typical succinct prose.

14:55What can the economist do on the purely free market? He can explain the workings of the market economy, a vital task, especially since the untutored person tends to regard the market economy as sheer chaos. But he can do little else, emphasis in the original. He can do little else. Contrary to the pretensions of many economists, he is of little use to the businessman. He cannot forecast future consumer demands and future costs as well as the businessman. If he could, then he would be the businessman, and I think that's exactly right. And it's funny how many academics in not only economics, but in management studies and so on, you know, make these sort of snide, dismissive remarks about business people and and their forecasting errors and, you know, it's easy to say, to sit there in one's ivory tower and talk about these foolish speculators and so on.

15:46I was at a conference recently with one of the keynote speakers was the CEO of one of my favorite companies, the Lego Company. I mean, that's just one of the greatest, you know, sort of feats of human creativity ever is the Lego brick and all the... Anyway, so the guy was talking about different things Lego was doing and, you know, he said, but, you know, really at the end of the day, you know, we have a toy where, you know, such that a small child can take these bricks and stick them together without any glue or without any tools and the pieces stick together. You know, the kid can throw it up in the air and it'll fall down and it'll still be stuck together, but then when the child wants to build something else, he can pull them apart.

16:32At the end of the day, that's what we have, that's our source of competitive advantage. That was pretty good. So, during the break, I heard these two management professors, you know, this guy, he thinks that having a unique product is the source of his competitive advantage. Well, of course it's not, because you can easily imitate that. He doesn't realize it's his strategy that's his source of competitive advantage. I just thought, wait a minute, you're talking about the CEO of Lego, come on. Why don't you guys go out and be in the toy company if you're so darn smart? Okay, so this emphasizes the point that we made earlier, right, that the economist can spin out all these keteris paribus qualified statements but doesn't know if keteris is really paribus in one situation or another.

17:21Now what happens in the mixed economy, right, where the government is very active at intervening in the Economy. Well then, there's lots for the economist to do in analyzing the effect of government policy, and in many cases, helping to design government policies. These are the guys who would be, you know, in really bad shape in Walter Block's Libertarian Nuremberg trial. Rothbard says, when government intervenes in the market, the usefulness, notice the The usefulness of the economist expands. In the realm of the free market, the economist must give way to the entrepreneurial forecaster, but government actions are very different. Because the problem is now precisely what the consequences of government acts will be.

18:07Here the economist, with his knowledge of the various alternative consequences, comes into his own. In other words, the trained economist, the praxeologist, is in a better position to analyze the effects of rent control, for example, than a practitioner in the housing market. So the practitioner may have much more hands-on experience and knows the nuances of particular markets and so on, but in terms of deriving general laws about how price controls work and so on, the economic theorist is, you know, in a pretty good position here. You know, some economists even try to write the rules themselves. Won't mention any names, except maybe someone who many of us know, Randy Krosner, who is a sort of libertarian, supposed to be a libertarian economist, who's now on the Board of Governors of the Federal Reserve System, and not only is on the board, but is actually the board member charged with designing all the new mandatory disclosure rules that will prevent, you know, the next housing bubble.

19:09And, I mean, he's a very smart guy, and I know him fairly well, but he has, you know, is reputed to be one of the leading libertarian, you know, economic analysts. So he should run away from Walter Block. Now, Rothbard doesn't go into a lot of detail about, you know, how the economics profession changed, how did, I mean, look, I just want to emphasize one other point that has been have been made a few times in the week that Rothbardian economic analysis, which is an extension of Mangerian, Boehm-Bawerkian, Misesian, causal realist economics, was not always in the minority. Even in the US, in the early 20th century, it was, if not the mainstream view, at least a viable contender among mainstream views.

20:03But now Austrian economics has been marginalized. And, you know, I don't have the exact numbers at hand, but, you know, if you look at the role of the enrollment, the membership roles, excuse me, of the American Economic Association, and I think this is true of other countries as well, you know, as many as a third or even a half of the professional economists are employed by government agencies. Okay, so on behalf of, obviously universities are major employers, but vast numbers of economists are employed by government agencies and they are not economists in Rothbard's sense of the word. They are government bureaucrats who may use economic analysis to do policy work and to do forecasting and policy design and so on.

20:54So how did this happen? This isn't in Man Economy and State, but it's an interesting story that is beginning to be told, but maybe needs to be told in even greater detail. And Joe mentioned this distinction that he has between vocational economics and professional economics. The vocational economics is a vocation as opposed to economics as a profession. And I highly recommend, particularly for young scholars, Joe's paper on the vocational economist. Is it published somewhere? No, it's on mises.org. But the increasing professionalization of economics has a lot to do with the problems of contemporary economics.

21:42And I would just add, I had to be talking about Salerno all the time because his ego is big enough as it is. He's got this really nice paper on sort of the decline in Austrian price theory, in Mangerian price theory around World War I and this sort of how the problems with the Austrian school really were really apparent then and the Keynesian revolution maybe, you know, struck the last blow but the Austrian school was already in pretty bad shape even before that because of various internal problems, internal contradictions and I think that story is right but there's kind We have a complementary story that places more emphasis on external factors. And this has been mentioned some this week, you know, like the growth in public universities, right, who are much more likely to employ interventionist economists than praxeologists.

22:37You know, GI Bill in the U.S. with this massive increase in public expenditures on higher education to an influx of marginally qualified economists into the profession, all the economists going to work for World War II. The formation of the American Economic Association itself is a pretty sordid tale. Most economists today aren't aware that the founders of the AEA in the late 19th century were explicit socialists and they complained that most economists were too laissez-faire and that economics needed to become more interventionist, more like its Prussian counterpart. They want to be more, they were all these guys, Richard T. Ely, after whom the annual distinguished lecturer at the American Economic Association is named, had studied in Germany and under the younger historical school, the bad guys, and wanted to bring that same style of economics to the U.S.

23:37And we talked earlier this week about World War II and all the economists, you know, from John Kenneth Galbraith and Milton Friedman who were employed by the federal government doing various activities in World War II. There's an interesting story about harm-to-management practice as well, that a lot of the stuff that what Rothbard described as operations research, that all came out of World War II procurement studies as well and a lot of those guys like Robert McNamara went on to apply those same harmful management techniques to to Ford and, of course, the Vietnam War and the World Bank and other institutions that he wrecked.

24:16So where does that leave us here in this group? Well, I mean, I hope that we haven't depressed you this week, but rather that we've inspired you to look for error and to fight against error and to help to spread the truth. And I think, you know, I've had conversations with some of you this week about your, some of you who are in graduate school and working on a thesis or trying to think about your career and what kind of employment opportunities are going to be available and so on. And, you know, sometimes you go to an Austrian conference, right, and it's all gloom and doom. It's all the mainstream is, you know, out to get us and we can't get jobs anywhere because all the Keynesians are blocking us or whatever.

25:02And okay, I mean, it's not surprising that that kind of discussion, those kind of remarks often come up in the discussion, but there's a lot to be optimistic about too, right? And just as the large public university deserves some of the blame for the harm done not only to economics but to other academic disciplines as well, the, you know, to put it nicely, the challenges facing the university are good for sound economics. I don't know if the word, maybe the word crisis is too strong, but particularly in the U.S., universities have many, many serious problems. They don't have the resources they need to carry on their current level of activities.

25:48Enrollments in many public universities are flat or even falling. The fastest growing segment of the higher education market is non-traditional, specialized, often vocationally oriented institutions. Some of you in the U.S. have heard of places like the University of Phoenix or DeVry University, which used to be called DeVry Institute as sort of a vocational school. Those are on the rise, distance learning has facilitated the rise of non-traditional forms of education and the university is sort of in bad shape. In the US, in secondary schools, high schools and below, the homeschooling movement has been a very important kind of alternative educational institution and there are many opportunities to get sound economic analysis into these non-traditional institutions.

26:41Personally, I think there is, I think the literature that I know the best, the mainstream is becoming more and more Austrian-friendly in my judgment. So yes, the challenges remain and so on, but there's an increasing appreciation for and sympathy to non-traditional ideas including those of praxeology in those fields and there are a lot of opportunities, potential opportunities there. I think the fact that so many, that financial professionals and even policy outfits are sort of all of a sudden a little curious about this Austrian business cycle theory is sort of a good thing for the movement, if not for the economy.

27:33And you know Doug was talking about this at lunch, but you know the Austrians have a better explanation for the housing crisis than most mainstream macroeconomists and this is beginning What theories do you have that can help us understand what's going on, and they don't have good answers to that, and the Austrians tend to have better answers.