How This Recession Has Battered Mainstream Economists: An Austrian Opportunity

0:00It was relatively late in my career, probably only ten years ago, that I discovered a physiological truth. I've never seen it violated and I believe it is biologically built into the human race. That is, you will never see a lecturer yawn during his speech. And yet an extraordinary thing takes place that in the group this size there will always be at least one person who can't stop. So what I'm going to do today is attempt as best I can to keep as few of you yawning as possible and take you through what I think is truly an opportunity, unique opportunity, that lies ahead of us.

0:53We have heard from Dr. Murphy about the extent of the transformation of the banking system that has taken place just in the last two years. Unprecedented change that has taken place even in wartime was not on a scale that this most recent change has been. We've now heard from Mr. Denson about the effect of the terrible crash, boom and crash, of the 1720 era, both in France and in Great Britain, and it shaped both countries.

1:39The reaction shaped both nations, and surely did shape this nation, in the hostility that took place, a wave of hostility that took place against that destruction of capital. Destruction of capital is not a pleasant topic. And you can hedge yourself to some limited degree, safer place, gold and silver, all the traditional focuses of people's concern. You get very concerned about how to protect myself, but in the breakdown of the division of labor, there is no safety. And in a complete breakdown, that is the total breakdown of the monetary system, should that happen, you're really calling into question question the ability of some large cities even to survive because if they can't deliver trucks with food into the major cities for as little a period as a week or two weeks you have crisis because there must be constant replenishing of the food and other things that we're completely dependent upon And if the money system breaks down, how do you gain the cooperation of the suppliers of the cities?

3:10Now, I think the Federal Reserve is aware of this. And I think the Federal Reserve is aware of the threat that a real breakdown would cause. And I hope they are aware of it. And I hope at some point they will finally put on the brakes. They have not yet, but they will put on the brakes, because if they don't, then you're talking about a catastrophe. But in any case, what we are seeing now is unprecedented in terms of what the Federal Reserve has done. In a period of one month, it doubled the monetary base, just exactly two years ago. One month! Now that was not Keynesian policy.

3:55There's nothing in canes that you can find that would justify a doubling of the monetary base in less than a month. That was do something fast, anything fast, it's going down. This was a last gasp measure, coupled with the bailout provided by the Congress. Unprecedented amounts of money were thrown almost randomly into the system. This was not any kind of traditional Keynesian, Chicagoan, rational expectations, any school of thought that existed exactly two years ago this week, really.

4:48There was no school of thought that would, two months before, have justified in terms of its own theory what the Federal Reserve and the United States Treasury did between September and the end of October of 2008. There was no plan. There was no organized body of opinion within Western economies which would have justified those actions. And yet in retrospect what we are seeing is that it has been justified in terms of Keynes and his theories. The Keynesians are taking whatever credit has been taken for what they say was the bailout and salvation of the financial system.

5:40They're taking full credit for it. Remember, what we have seen in the past 24 months, I have never seen as an adult, and that is an almost complete abandonment of all other schools of thought in deference to the Keynesians because no school of thought had any justification in terms of theory to justify what the Federal Reserve and the Treasury did and only by really stretching System. Could you justify it? And so we have seen, unfortunately, an almost total capitulation within the academic community, within the financial community, a capitulation to the Keynesian worldview. And the Keynesian worldview can be be summarized in four words. Federal deficits overcome recessions. That's it. And the defenders can't do much better than that. Of course, you can add two words. Big federal deficits overcome huge recessions. And that's the one we're in now. All they have done since 1936 is to add two words to the four-part syllogism. Federal deficits overcome recessions. That's it. That's what we're up against. Four very simple words.

7:21Now, I'm in marketing. I've been in marketing a long time. That's called a unique selling proposition, the famous USP. And you'd better have a USP for your business, your career, whatever it is you're trying to promote. You need a USP. After almost half a century, within the last couple of years, Walmart came up with its USP. That one is lower prices live better. Tremendous. Brilliant. They probably paid a lot of money for that one. Worth every penny. And the variation may be save money, live better. But you get the idea. Four words. Four powerful words.

8:10And to those four words of the Keynesian system, the entire academic community collapsed. Save one group, us. We did not because we never accepted the premise. Now I have a proposed USP that I think is saleable, marketable, gripping, can be converted into support. Our four words are, Tax, Cuts, Increase, Liberty. That's our.

9:00And I believe that over the next 15 to 20 years, the fate, economically speaking, of our civilization is literally going to be between those separate, totally rival, four-word USPs. Why do I think this is coming? Because we have been told in those four words that federal deficits overcome recessions. We've been told that by the Keynesians since 1936, and it has been believed widely one way or another ever since.

9:48For a brief period in the 1970s, because Keynesian policies did not overcome the recessions, and because we began to have serious price inflation during the 1970s, In the 1970s, there was a period of time in which the Chicago School of Economics gained traction with other scholars and even with the financial community. And they continued to say that the key factor is the money supply and that it was out of control, which indeed it was, That if the Federal Reserve could just be brought to obey a basic rule of not allowing the money supply to increase more than, and there was always the debate of the figures, but the standard figures were between 2% and 5% per annum.

10:47If the Federal Reserve would just stick to a monetary policy that was predictable, and simultaneously if the federal government would begin to reduce taxes and reduce regulation, We would not need to have booms and busts. Now that goes back a long way. That Chicago idea goes back certainly to the turn of the century. It goes back to even before the time of Milton Friedman and the growth of the famous Chicago School of Economists. There was a free market tradition that did understand that you cut back on regulation, You need a stable money supply.

11:32And certainly in that tradition, going back really to the time of Mises' first book on The Theory of Money and Credit, you had defenders saying, well, you could do this actually without gold and silver. That was the position. And the great promoter of that was a man named Irving Fischer. And you can find in 1911, that was his position, and you can find in The Theory of Money and Credit, a response by Mises. He immediately saw the threat to the idea that the government can have safe control over the money supply, and that you could trust the government to do it. And so, of course, he was in favor of contractual relationships and gold and silver coins, a gold coin standard.

12:22So Mises saw almost immediately, literally within months, that Fisher was promoting a concept that was intolerable in terms of the defense of liberty because Fisher was ultimately promoting a concept of money and banking which would be run by brilliant economists with statistical techniques completely in the hands of the government without any connection to gold or silver. and a war began, an intellectual war began in 1912 with the publication of Mises' Theory of Money and Credit and that war extended all the way through the twenties, the thirties, all the way through the seventies and eighties and it was always the Austrian school following Mises saying you cannot trust the government, you cannot trust the central bank, you can trust contractual relationships If those relationships lead to the gold standard, which we think it will, you must put your trust in markets and contracts and not in brilliant economists and statisticians and central bankers.

13:36That was the position. That has always been the position for almost a hundred years. That has been the position since 1912. I believe that over the last 24 months, Irving Fisher's physician has died in operation. Because we have seen the extent to which we dare not trust the Federal Reserve, the statisticians, the government planners, all those who would pull authority under their administration for the Benefit of the Public, because when push came to shove, it was throw money at the problem, we got no theory to solve it, just write the checks.

14:29That's all it was. There was no theory. The theory's gone. There was only ad hocery on trillion dollar sizes. Ad hocery of $700 billion, bam, one shot. A trillion plus dollars in one month that the Federal Reserve pumped into the system. That's ad hocery. That's the denial of economics. That is only one thing that I can see, a valued attempt to support, four words, federal deficits overcome recession. and they gave us a deficit that was horrendous and they are going to continue to do it.

15:21The lowball estimates are a trillion dollars a year between now and 2020. Those are the lowball estimates and remember that doesn't count the Social Security and Medicare obligations. That's just the run of the mill on budget, admitted deficits, a trillion dollars a year for the next decade and after that they don't tell us. And they quit making the predictions after 2020. I dare say it will not go from a trillion dollars deficit in fiscal year 2020 down to say no deficit whatsoever in 2021. I think that's a fairly safe bet. So what we have seen in the last 24 months is the complete and utter routing of all opponents to the Keynesian system within the financial community, the political community and I think even the theoretical community because there's no way to justify what was done other than to say massive ad hocery, we didn't know what we were doing, we tried anything we could and apparently the thing hasn't completely collapsed, therefore let's have more deficits

16:36And if necessary, a whole lot more quantitative easing. She's quantitative easing. You know, in my mind, as I said earlier this week, the image that comes is an enormous problem of diarrhea. That's quantitative easing. Over 50 years ago, Senator Wallace Bennett, who was a really good senator, was at a conference It's not different from this, but with a lot of really first-rate people. Mises was there. I think Hayek was there. I think Friedman was there. They brought in the big guys. Bennett came in and they were talking about monetary theory and price controls. And Bennett said this, he said, I mean, he's in with these scholars.

17:24These are the best free market economists in the world. And he said, well, I was driving with one of my tours on the voting trail recently and I stopped in a gas station. This was early 50s, during the Korean War, and there were price controls on a lot of goods because of the war. And he said, I got to talking with one of the gas station attendants. And we came up, what about inflation? What about price controls? He said, well, the attendant looked over to me and he said, the way I look at it is to understand price controls, it's like adhesive tape for the diarrhea problem.

18:19And I thought about that. I read this thing probably 20 years after he said it, and I don't think it's ever been described any better. I think that gas station attendant had made a breakthrough conceptually that really dwarfed the economists. So quantitative easing, yes, we're going to get it, and then we're going to get the adhesive tape. You can count on that too, and the results will be comparable. We are dealing with people at the highest levels who cannot think conceptually much beyond adhesive tape for the quantitative easing. And when that happens, then you get the real crises, the shortages that you cannot get the goods you need at the time that you need them.

19:07And then the hoarding begins, because you want to be able to get the goods you need when you need them. and if the monetary system and the price system is being controlled by the government then you must find alternative ways of supply. We are facing, I believe, a time in which it will be clear to large numbers of people all around the world that the solution to the problem is not massive deficits and Massive Increases of the Money Supply. They may not know what the solution is, and I think that is our problem. They do not know what the solution is, and they do not trust our position, which is tax cuts increase liberty. They don't understand that. But I'll tell you one thing, there are more voters who understand it than congressmen who understand it. And That's the hope that we have.

20:13And William Buckley's old line, done for a laugh, was accurate. All those years ago, where he said, I would rather be governed by the first 200 names of the Boston telephone directory than by the faculty of Harvard. We are beginning to see with the Tea Party Movement a sense of outrage in which little people without academic credentials, little people who do not have positions of power are coming to the town hall meetings and fighting.

20:59And I remember one of those meetings and remember with the joy, the magnificent joy of you two YouTube and people with camera phones, it all gets out there within 24 hours or less. One female senator saying, you people don't believe me, to which the crowd said, no. They can't understand what's happening. They are dealing with something they have never dealt with before. They are dealing with people who are beginning to catch on that the guys in charge do not know what they're doing and that they're going to extract wealth from the public on a massive scale and people are beginning to sense it. Now this country is divided and the world is divided. You have, in Great Britain today, you have a government that does not have a majority. You've got two parties really philosophically opposed to each other who are governing that History. You have exactly the same thing going on now in Australia. They don't have a majority government in Australia. There is enormous division. Now, we've lived through something.

22:12You probably have never looked at this, but I'm an historian by training. We had something that this country has never had before in its history. That is, we had back-to-back two-year presidents or two-term presidents of rival parties two terms of Clinton, two terms of Bush, that's never happened before in American history, always you can get a two-termer, but the guy who replaces him will not get two terms but this country is divided and divided in a way that I would not have imagined there is no agreement on what should be done and in this deadlock which I believe will become gridlock shortly, now you have an opportunity for the public generally to begin to sort through which direction we are going to go in because the political parties are divided and if the Democrats lose a lot of seats there There will be fear, finally, in the halls of Congress, because they are afraid of losing.

23:26Now this does us no good if people don't understand fundamental principles and why those principles are true. This is why the educational role of an organization like the Mises Institute is so important. Making noise, getting angry, is not a solution. Because we need to have a society of men and women, not who can read human action, but who can understand a fundamental principle such as tax, cuts, increase, liberty. They can understand that. Now there's another slogan that is close behind, which is, tax increases, increase pain.

24:23That's easy to understand. Tax increases, increase pain. And people are going to be in great pain as this thing plays out, enormous pain. And our goal in this environment is to persuade people that there is a reason why they are in pain. And the reason they are in pain is that at the very top levels of every single nation, there is the adoption of the Keynesian belief, which is federal deficits overcome recession. And now we have to fight this thing out in very simple terms. Because pain will be increasing and there will be a search for scapegoats.

25:13And the advantage that we have today is this. We have been on the fringes for so long that we didn't do it. And yet, as fringe people, you're beginning to hear words like, incredibly, the Austrian Theory of the Trade Cycle. You're beginning to hear that kind of language filtering into the ranks of educated people. So we're on the fringes, outside the normal realm of discourse. Prior to two years ago, we were outside the normal terms of discourse. And yet because of the crisis that has taken place at the highest levels and not just in this country but around the world and almost simultaneously, great doubts are now widespread.

26:11Doubts on how did it happen? The old line is if you're so smart, how come we're busted? And that's a legitimate question. Now this is not a new event. People change their minds, cultures change their minds, and they do it over a period of time where doubt builds up and then very fast there's a change. We've already heard one of those stories, doubts which were raised in 1720 in Cato's letters that did not come to fruition for a full generation, did not come to fruition until the aftermath of what was known as the Stamp Act crisis.

27:00Now if you know about it, people don't read it, it was in 1765, it was the first great tax protest of the United States. And the British government passed, that in the history of all taxation was the stupidest tax that had ever been passed, ever. And you never see this in the textbooks, but I figured it out real early, reading the Stamp Act crisis. They taxed two groups, lawyers and newspapermen. And there was hell to pay. The guys who could write and the guys who could litigate got together to say it is in our self-interest to roll back this particular tax and they did. They did roll it back and that of course as you know led within eight years to the beginning of the American Revolution. That took a generation of rethinking the Cato's letters to the beginning

27:58of the Stamp Act crisis. That's 45 years. Mises began his career in 1912, and he was Mises began his career in 1912, and he was an obscure man at the time, and he was recognized as a bright man, a cogent economist. You couldn't miss that. But what happened to Mises? Two years later, World War I broke out, and every country in Europe suspended gold payment precisely because every country in Europe knew that they would have to print money as never before to fund the war and all of a sudden Mises looked like a prophet because he was and he said what would happen if they destroyed the gold standard and it did happen and it happened with a vengeance in Europe and then of course the terrible inflations of the post-war period in Germany, Austria and Hungary totally devastating mass inflations, hyperinflations, and Mises looked like a prophet, and then in 1920 he writes that little essay on the economic calculation in the socialist commonwealth. Well, look at what he was facing.

29:11The Soviet Union had come into existence in 1917. You had, in the post-war period after World War I, 4.1, you had Bavarian and other revolutionary groups, Marxist revolutionary groups appearing armed. Now they were put down, but it looked as though revolution was spreading. And here is Mises for the first time with a cogent, clear, easy to understand argument that says socialist economic calculation is blind and it is irrational and it cannot survive. He is in the right place at the right crisis. What happened was that in the 30s, because of government policies, very much like our policies today, the depression got worse and worse and worse.

30:06In reaction against that, the world of academia, the world of policymakers looked for an answer. Mises had attracted brilliant men, Hayek was one, Repke was one, Oscar Morgenstern was another, you had Gottfried Habeler, you had Fritz Machlup, these were brilliant men, and Lionel Robbins, from Great Britain, and then as the Depression wore on, and on, and on, some began to defect, and began to abandon the position, Robbins wrote one of the finest books on the Depression And maybe the finest book on the Depression, just called The Great Depression, Mises Institute has reprinted it.

30:52Magnificent book, 1934, in his old age, not even his old age, before the end of the decade he repudiated the book. He said, I wish I'd never published it, never written it. That was 1934. By 1936, Keynes and the General Theory came into print. What did Keynes do? He justified what every government had been doing since 1930. And what had every government been doing? Federal deficits overcome recession. They were all doing it. They were all printing money. They were all imposing controls. They were all running massive deficits. There was no justification for it. None of classical economic theory justified any of it.

31:40And Keynes, looking over his shoulder, five years into this mess, sits down at the typewriter and cranks out the general theory. I think every economics student should be forced to read it. All of them, as a rite of passage. If you can haze a kid to join a fraternity, you can make economists read The General Theory. That's my theory. Incoherent. And you say, well, a lot of economists are incoherent. That's true. But Keynes wasn't. Because Keynes is the author of some of the clearest and most powerful writing ever.

32:27His essays in biography are magnificent. They really are. His economic consequences of the peace made him reputation in 1919, clear, straightforward. You could understand exactly what he was doing. You get to the general theory in 36 and you say, what is he saying? You know what he's saying? Federal deficits overcome depression. That's what he's saying. Only he did it with garbled language, shifting definitions, and jargon that he had never used before. And the world said, we are in a crisis. Standard economic theory does not explain this crisis. They didn't know Mises, really. They didn't know the Austrian theory.

33:16There was the battle with Hayek. Keynes and Hayek did fight it out. But Hayek decided in a strategic catastrophe in a career for the rest of us, he decided in 36, he was not going to bother to go line by line to refute the general theory. And the world was waiting for him to do it, and he didn't do it. Now think of Rothbard. Rothbard got his PhD in 1956. Absolutely the height of the Keynesian dominance in academia. He comes on the scene defending Mises, who now is completely forgotten, regarded as a dinosaur by those who remembered and few of them remembered, at New York University, which would not even pay his salary for 25 years.

34:09They never paid a dime. That was all raised money from outside donors who paid that man's salary. He was only a visiting professor from 1944 until his retirement in 1968. He was an old man. He was about 87 years old when he finally retired. Still cogent. Didn't have good hearing, but he could communicate, he could argue, and retired. Cast aside, fringe. And in that environment appears Rothbard trying to take on the whole academic world and not just the economist, he's taken on the historians too.

34:55And he gave good credit, he gave good credit for his positions. He was a battler, he had magnificent ability for clarity, he was courageous, he would not and he hit his head against a brick wall virtually his whole career and then in the year of his death, in the year of his death, 1995, came the graphic user browser and that led to a total transformation of communication. And now we're in a position, because of the browser and the World Wide Web, to get this information into the hands of tens of thousands, maybe even hundreds of thousands of very bright people who are slowly moving from the fringe, at least to the edge of discourse.

35:59And the reason they are making this transformation is because the opposition has no answers, and cannot justify what they've done, and it isn't working. And when it works even less well than it's working today, they will find themselves having bet the farm on four words that don't work. They have gambled, they have rolled the dice to an extent that I would not have believed possible 24 months ago. They have tampered with the whole financial structure through massive intervention, massive expansion of the monetary base, and without much to show for it.

36:48Meanwhile, the public is getting hit, what is it, the last fiscal year that ended last month, final figure was what, 1.2, 1.3 trillion increase of admitted debt. And that doesn't count the increase of the unfunded liabilities of Social Security and Medicare. They have issued IOUs, political IOUs but way beyond political IOUs. They have issued civilizational IOUs and Greece began to break, as you know, earlier this year. It began to look as though the European financial system was going to come down. They are in the old language of skating on thin ice. That barely begins to describe it.

37:39And it's not just that they're doing it, it's that the public, the literate public is beginning to sense that they're doing it. And when confidence is broken in a society, and confidence is broken in the leadership of that society, then you see massive transformations, rapidly, because of a loss of faith. And these guys, since 1936 officially and certainly since the early 1930s practically have had no answers except print more money, run larger deficits, hike the taxes. That's been the answer since 1930. And as long as they've gotten away with it through the productivity of the society, yes, they've been able to maintain the control and Keynes is still dominant.

38:29And Keynes, I think, is even more dominant now, right now, Keynesian ideas are probably more dominant than they've been since 1956. Because there's almost no opposition. And if there's opposition, it's mumbling and grousing in the background. You don't see major Chicago school economists coming out and saying the entire system should have been allowed to go down. You don't see any of them saying that. The only people who say it should have been no intervention and let the market determine who survives, the only group that said that was the Austrian School. Only this group said that. Every other academically prominent, every other establishment, tradition of economics, all the other representatives of all the other schools said one thing.

39:22We had to do it. We had to do it.

39:30And they have gotten onto what I think is the Titanic. And the Austrians have got all the lifeboats. That's where we are now. And if it unfolds as it looks as though it will unfold, If you have controlled massive deficits, new rounds of expanded monetary creation, then maybe, I hope not, price and wage controls, uncontrolled expansion of the money supply, then either you get hyperinflation, and if you don't get that, you get misdirected capital on a historically unprecedented basis, you maintain 10% unemployment now and forevermore unless it goes to 11%.

40:17You don't solve the problem and the whole time people are saying it's not working, it's not working, it visibly is not working. And it's in this kind of environment that you see changes of opinion. And you have to see it based on a long tradition of people who said it won't work. That wonderful phrase that we never like to use, but is always in the back of our mind, we told you so. And that does gain credibility when federal deficits don't overcome recessions. That does gain credibility. We told you so.

41:03And it's not just that we told you so, because we gave you the reasons why. We gave you a developed, systematic, economic framework by which we told you so. Now what are you going to do? You're going to go back to Keynes that didn't work, to Chicago school that was mute? What's your alternative? And then you have, as I say, a USP I think people can respond to, and that is tax cuts Increase Liberty. And if people want liberty, that's a powerful argument. Now if people really don't want liberty, then it's Katie Barthedore.

41:49If people really don't want liberty, then we are in the crisis of civilization. Then it is the road to serfdom. But I think it's changing. And I think there is enough response out there to indicate to me that young people who are rethinking these issues do want liberty. They do want liberty. And if you can convince them that tax cuts increase liberty, then I think we've got a battle ahead, but a battle, I think, that can be won. And I think the Mises Institute is part of that battle, the digital power of this organization to put words on a screen in front of millions of people and to put videos in front of large numbers of people.

42:37The technology is on our side. This organization understands the technology and it has a well-developed body of economic opinion that can stand in front of this society and say, we told you so, so let's go tell them.