Entrepreneurship Under the Gold Standard

0:00It's truly wonderful to be here. So much, as others have said, so much has changed since 1983. A lot has changed for me personally. I wasn't even born in 83. I can see those of you who are doing the math thinking, wait a minute. And I should mention that I did get recognized in the airport. A guy ran up to me as I was getting my bags, and, oh, I'm so excited to meet you. I'm a great admirer of your work, Dr. Thornton, and I'm looking forward to talking to you. I said, no, no, the other tall, dark and handsome fellow is the one you're thinking of.

0:46Both Mark and Tom Woods mentioned Austrian economists as rock stars, and maybe in our I've been thinking about this because the real rock star, Senator Obama, happened to be giving a big rally on my campus last night. A large outdoor rally at the University of Missouri to get the students fired up to go and vote, you see. Fortunately, I missed the whole thing because I was on my way here. But there was something interesting in the local paper as they were doing a little write-up in advance of this rally. Usually the local paper will get a quotation from some University of Missouri professor or some local politician on the significance of an event that's coming up on campus or in the town.

1:39But it was a little bit different this time. Just to quote one line from the Columbia Daily Tribune, the Wednesday edition. The reporter says, Obama's planned visit had already stirred enthusiasm this morning. Walter R. Smith, a janitor, who this morning was sweeping the northeast corner of Broadway and 9th Street, said Obama's visit was, quote, super, super good. Quote, we need a change, Smith said. It's gone down as far as it can go, but one man can't do it by himself. He's only one person. We've got to join together. Close quote. Now at first I thought, I wonder why they interviewed a janitor. That's a little bit unusual. But as I thought about it, I realized that what Mr. Smith had said was every bit as profound as what you read in the New York Times or here on National Public Radio or editorial page of the Wall Street Journal.

2:33Journal. So maybe it does make sense to interview someone from the real world. You know, it is a very interesting time these days to be an economist. I imagine this is, you know, what it must, you know, what it would have been like to be an epidemiologist during the bubonic plague. You know, everyone wants to ask you what's going on, but no one's very encouraged by, you know, and other sorts of things that you have to say. Now, of course, I mean, it's an interesting time and a very challenging time to be a good economist, you know, one of us. I imagine it's much easier to be, say, Paul Krugman, maybe.

3:20You get to say, well, we've been telling you there's market failure everywhere, and here it is. Just like we said, the market broke down. We need more regulation. I should mention that, you know, there is one silver lining, or one of the silver linings in this whole mess is the downgrading of the reputation of, shall we call them, St. Alan the Wise. I mean, you know, like most of you, I'm no fan of the members of the U.S. Congress, but it was kind of amusing seeing Mr. Greenspan being grilled by the same men and women who for so many years praised him as the greatest central banker the world had ever known, cutting him off in mid-sentence and finally calling him to task for mumbling without actually saying anything.

4:14Remember, this is the man who was part of Ayn Rand's inner circle in the 1950s and 60s and actually wrote a couple pretty good articles in the 60s, one on the gold standard and one on antitrust, but the man who upon his appointment to the Fed Chair in 1987, as the New York Times reminded its potentially worried readers, this is the man who believes in laissez-faire, quote, at the high philosophical level. You know what that means, of course. That means in principle, he might actually support laissez-faire, but that would have no impact whatsoever on his policy decisions. In fact, Greenspan's kind of approach, his approach is the epitome of the kind of analysis that Austrians would say is exactly the wrong way to go about understanding or analyzing an economy, right?

5:04Greenspan was committed to no theoretical framework whatsoever, the man who had this reputation for pouring over reams and reams of data and thinking about the numbers and what the numbers really mean, but having no understanding of what are the causal mechanisms associated with economic change. I actually saw Greenspan not too long ago. I was in Washington, D.C. for a conference and a bunch of us went to lunch and went to a pizza place. And as I was waiting for my pizza, to pick up my pizza at the counter, I look over and there's Alan Greenspan. He's picking up a pizza. And he gets his pepperoni pie and the clerk says, would you like that cut into eight slices or ten?

5:51He says, he says, you know, I'm really, I'm extra hungry today, you better make it ten. Okay, I'm not here to talk about Alan Greenspan. I'm here to talk about the entrepreneur and the role that the entrepreneur plays in the economy, in the free economy, but also in the statist or interventionist economy that we have today. Mises describes the entrepreneur as the driving force of the market economy. The driving force. Now what did he mean by that? Why did Mises place so much emphasis on the entrepreneur? Why did Mises think the entrepreneur was so important? Well it's important to note first that Mises uses the term entrepreneur in a particular way.

6:40A way that's a little bit different from the way it's typically used today in the business press and by mainstream academics and so on. and so on. Nowadays, the word entrepreneur tends to refer to a specific job description. A person who is a self-employed individual, someone who runs their own business, or someone who is responsible for establishing a new company. But owners of existing enterprises, managers, sorry, owners or founders of large enterprises are not considered to be entrepreneurs, they're considered to be something else, businessmen. But Mises really has in mind not so much a job title or a type of firm, like a small firm or a startup firm or a technology firm, but he really has something more general in mind by the entrepreneur.

7:27The entrepreneurship to Mises is a particular economic function, a function that is performed in the market economy by entrepreneurs. What exactly is this function? Well, it's the investment of assets or resources today in the present, in anticipation of rewards that accrue in the future, in the uncertain future. Entrepreneurship thus includes the ownership of resources, it includes the bearing of uncertainty, and a sort of ultimate responsibility for decision making about the use of those resources. Each of us acts entrepreneurially to a certain extent every day as we go about our business. For example, you're investing your time and possibly your reputation in being here at this conference this weekend, but you're doing so because you anticipate that you will get some rewards out of here.

8:23You don't know this for sure ahead of time. You don't know exactly what the conference will bring, but you anticipate that the benefits will exceed the costs. Mises placed particular emphasis on a certain type of entrepreneur, what he called the capitalist entrepreneur or the entrepreneur promoter. These are owners of productive assets, resource owners, business people, investors, shareholders and so on, speculators, other decision makers who own and ultimately manage or govern business enterprises. It is the actions of these entrepreneurs that drive the market economy and historically are largely responsible for the economic prosperity that we enjoy today. Entrepreneurship in this sense is really a kind of responsibility.

9:11It represents an ultimate kind of decision authority that is exercised by those who own resources. And this ultimate decision authority cannot be delegated to someone else. We usually think of an entrepreneur as someone who doesn't work for someone else and take He said, well, it was something that my last boss said to me, what was that? You're fired. So this man decided to take ultimate responsibility. There was also a homeless man who asked to There's a passerby, he said, hey, I haven't eaten all day, can you give me 50 bucks?

10:00The passerby says, you know, I think you'd have a lot better luck if you would just ask for a dollar. And the panhandler says, look, give me a dollar, give me 50, but don't tell me how to run my business. The entrepreneur doesn't have anyone telling him how to run his business. Now, for our purposes here, we need to focus on how exactly the entrepreneur exercises this function. How does the entrepreneur run his business? Well, he engages in a particular practice or uses a specific tool that Mises calls calculation, economic calculation or monetary calculation. Now, what does Mises mean? Well, imagine a world without money. Imagine a pure barter economy where people trade goods against goods.

10:47In a world like that, it would be impossible for entrepreneurs to analyze rationally the expected benefits and costs of various business activities. Does combining one cow and one worker to produce ten buckets of milk make economic sense? Is that a profitable activity? Does it bring a net gain or a net loss? Is it more efficient to use one cow and two workers or two cows and one worker? Is it more profitable to produce milk or to produce meat or to produce leather? Without money, there's no way for the entrepreneur to compare those courses of action because you can't express the results in a common unit. You'd have heterogeneous things to add up, cows and workers and gallons of milk and pounds of meat and so on.

11:38On the other hand, with money and with prices expressed in money, The entrepreneur can calculate the benefits and costs of various activities in a common unit. He can add up these heterogeneous resources and outputs and use cost accounting to come up with total dollar figures for the cost of the inputs, the anticipated prices of the outputs, and so on. He can use accounting to compare the efficiency or effectiveness of various methods of production, various goods and services that might be produced, and so on. Now, when you hear the term economic calculation, you might be thinking about Mises' research on socialism, and the concept of economic calculation was formulated by Mises, at least in part in the context of the so-called socialist calculation debate.

12:30And as Mises pointed out in his famous 1920 essay in his 1922 book, under socialist central planning, the central planner of the economy is in much the same position as our entrepreneur thinking about the cows and the gallons, cows the workers and the gallons of milk. Because in the socialist economy, there are no markets, no exchange markets for goods and services, particularly for factors of production. So the socialist dictator has no way of comparing the various methods of producing what particular good or service to know which is the least costly or most efficient method of production. The dictator has no way of knowing whether it is economically efficient to produce a particular good or not.

13:15But my point here is that while this argument has sort of devastating implications for socialist central planning, it's a much more general and widely applicable concept than one that Applies Merely to Socialism. It is in fact the tool that entrepreneurs in a capitalist economy use every day to evaluate various courses of action. Now we talked about prices. Entrepreneurs need prices for goods and services that are exchanged on markets today. They find value in looking at past prices, prices that have been paid for goods and services in the past. and, of course, when we talk about today's prices, present prices, we really mean the prices of the immediate past, prices of exchanges that have just taken place.

14:03But that isn't enough. Remember that the entrepreneur realizes the full benefits of his actions only in the future, after production has taken place. In the Austrian account of the production process, unlike most mainstream accounts, production takes time. Production isn't instantaneous. Right? That's a counterintuitive shocker, isn't it? And so, you know, the entrepreneur has to anticipate or forecast or estimate future prices, future market conditions in making this decision about whether or not to engage in a particular productive activity. Now, these estimates of future market conditions aren't perfect, right? They can never be perfect in a world of genuine uncertainty.

14:49The entrepreneur relies on what Mises called his specific, anticipative understanding of the conditions of the uncertain future. And that's a process which, according to Mises, quote, defies any rules in systematization. In Human Action, Mises describes the entrepreneur this way. He says the entrepreneur is quote, a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits. His understanding can be neither taught nor learned. If it were different, everybody could embark upon entrepreneurship with the same prospect of success. What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and what is, but arranges his affairs on the ground of his opinion about the future.

15:43He sees the past and the present as other people do, but he judges the future in a different way. Now, some entrepreneurs, naturally, are more skilled at performing this function than others. All entrepreneurs are not equally successful. Some are quite good at anticipating future market conditions. They're very skilled in having this anticipative understanding of the future, and others are less skilled. Some entrepreneurs will earn profits, others will earn losses. In a private property regime, the institutions of profit and loss assure that resources will tend to be directed into the hands of those entrepreneurs who tend to be the most skilled at these particular kinds of activities.

16:36Entrepreneurs who systematically anticipate the future incorrectly will run out of funds and eventually cease to be entrepreneurs. And that's of course exactly what we would want to happen, right? and efficient allocation of resources requires that unsuccessful business activities not be repeated, right, that there is bankruptcy, liquidation, the cleansing of past error and opportunities to reinvest funds in new projects guided by new entrepreneurs, those who can better manage those resources than those who are unsuccessful. Gee, now what does that sound like? firms going bankrupt, borrowers having to default on loans, of course, if we have a bailout economy in which losses are not penalized, in which those who speculate are able to reap the rewards of success and able to pass along the cost of failure onto the hapless taxpayer, then we have a completely different situation altogether.

17:41I'm merely digressing here. I wrote a recent blog entry about the current mess and this problem with this almost Keynesian style aggregate thinking that everyone talks about lending, the volume of lending and banks, banks being successful or not. Firms have too many bad Assets on the books. Well, I mean, which firms? Which banks? Which borrowers? Which investors? Okay? I mean, this isn't news to you. It's probably news to people in Washington and, you know, sort of in New York media houses. But, you know, all borrowers are not the same.

18:28Some people actually shouldn't get a loan, right? Some investors really should go bankrupt. But you, of course, you wouldn't know that from reading the newspapers today. Now, what we've talked about so far is how economic calculation works in a free society, in a society with money that's produced by the free market, a gold standard, for example. Now, we should point out, and Mises is quite explicit, that even under a gold standard, economic calculation is not perfect. And it's not perfect not only because entrepreneurs will make errors in forecasting and estimating future conditions, but also because the purchasing power of money can change from day to day as the quantity of species changes and as consumers adjust their demands for money, their demands to hold cash balances.

19:25So the purchasing power of money is not stable in a free society under a gold standard. It fluctuates within modest limits. Now that makes the system of economic calculation less than perfect. It's possible that prices may rise or fall because of changes in the purchasing power of money, rather than real changes in the economy, which might distort the profit and loss signals that the price mechanism brings about. But these are relatively modest and not modest effects that aren't subject to strong concern. Mises says, quote, the aims of monetary calculation are such that they cannot be frustrated by the inaccuracies which stem from slow and comparatively slight movements in purchasing power.

20:13Cash induced changes in purchasing power of the extent to which they occurred in the last two centuries, this is Mises writing in the middle of the 20th century, with metallic money, i.e. gold, especially with gold money, cannot influence the result of the businessman's economic calculations so considerably as to render such calculations useless. Historical experience shows that one could, for all practical purposes of the conduct of business, manage very well with these methods of calculation. It is impossible to design and still less possible to realize a better method. Method. So economic calculation under free market money like a gold standard is the best of all feasible forms of business accounting. Now what happens with state controlled money?

21:02Well of course first in a status interventionist economy the role of the entrepreneur changes in many ways. Right? The entrepreneur is no longer an agent, solely an agent who performs Sometimes economic calculation to decide how to invest resources, but the entrepreneur must also become what they sometimes call a political entrepreneur, someone who lobbies, someone who tries to influence decision makers, and so on. Mises also points out in his 1944 book, Bureaucracy, that profit and loss signals under an interventionist system are less valuable, less informative than they are in a free market economy. Because of all the various interventions into the price mechanism, taxes and regulations that distort profits, laws that interfere with the affairs of business, hiring and promotions, production methods and so on, the constant threat of arbitrary antitrust or regulatory activity, all of these things render much less informative the tools that the entrepreneur would otherwise have.

22:06But there are some aspects that relate very specifically to the problem of the value of money. Right now we've already had a little primer from Professor Woods earlier this afternoon on the Austrian Theory of the Business Cycle and I think he didn't do too bad, you know, for a history professor, he got it more or less right. But, you know, a critical aspect of the theory is this idea that the expansion of money or expansion of credit in the economy distorts some particularly important market signals, the interest rate in particular. In the expansionary phase of the boom, we tend to see substitution away from consumption expenditure towards investment expenditure, at least in the early stages of the boom. We see entrepreneurs investing in longer-term, more roundabout methods of production, as the Austrians would call it.

23:01Rothbard has points out in Man Economy and State that business accounting quote is traditionally geared to a world where the value of the monetary unit is stable so the entrepreneur in an inflationary world a world where the government is expanding the money supply increasing the quantity of credit has much less has information available that is much less useful than would be the case under market provided money. There tends to be an over-investment in particular stages of production, a distortion of investment resources toward particular projects, malinvestment as the Austrians would call it.

23:47There are additional problems associated with entrepreneurs trying to anticipate how fast the rate of monetary expansion will be to try to incorporate into long-term contracts, into their present value calculations, considering whether to make particular investments, how to factor in anticipated changes in prices, the results of unanticipated increases in and Money by the Central Bank, there's what economists have called relative price variability, meaning that when new credit enters the system, it doesn't affect all prices equally. So there are changes in relative prices, it's not just the price level that is important to entrepreneurs, it's just the prices of goods and services relative to other goods and services.

24:40All of those are distorted by the injection of new money or credit into the system. Now the Austrian theory of the business cycle teaches us that the boom that is ignited by the injection of money and credit into the system, the lowering of interest rates below their market levels, is not ultimately a sustainable boom. Gee, that's a shock, that credit-induced booms might be unstable. You wouldn't think anyone would doubt that today. And yet, while it is true, as Tom Woods reminded us, that people are taking the Austrian account of the business cycle more seriously than they did before, we have not yet seen a rush among mainstream economists to adopt it.

25:26And I should mention, it isn't, there's a misconception that the Austrian account of the business cycle doesn't give entrepreneurs enough credit, that it assumes that entrepreneurs Entrepreneurs are fooled systematically, that they're misled by credit expansion in ways that should be predictable and that entrepreneurs should be able to contract around. Why don't they recognize that the boom is unsustainable? Why don't they see that the bubble will eventually pop? Why can't they just adjust their behavior to avoid the consequences? You might keep in mind at first that in a world in which mainstream economists and journalists and Entrepreneurs and Politicians are constantly shouting that the boom will never stop, that the bubble will never pop. It's a little bit unfair to say, well, now, why don't entrepreneurs recognize that the boom is unstable?

26:15But the point is, even if they do, right, knowing that we're in the midst of an unsustainable credit boom is not sufficient information to tell you exactly what to do, right? I mean, entrepreneurs are still eager to benefit from particular phases of the boom while they can, right? You want to get out before the bubble pops, but you don't want to sit by the side. I mean, you may not want to sit by the side and not participate at all, even if you know that the boom is ultimately unsustainable. Let me close with a quote from Mises in an essay on forecasting. It's published in Economic Freedom and Interventionism. I think Mises explains this point quite well in this essay from 1956. Mises says, economics can only tell us that a boom engendered by credit expansion will not last.

27:01It cannot tell us after what amount of credit expansion this lump will start, or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. What they say in the attempt to anticipate future events makes use of specific understanding. The same method which is practiced by everybody and all dealings with his fellow men. Specific understanding has the same logical character as that which characterizes all anticipations of future events in human affairs. Anticipations concerning the course of Russia's foreign policy, religious and racial conditions in India or Algeria, ladies fashions in 1960, in 1960, the political divisions in the U.S. Senate in 1970, and even such anticipations as the future marital relations between Mr. X and his wife, or the success in life of a boy who has just celebrated his 10th birthday.

28:00There are people who assert that psychology may provide some help in such prognostications. However, that might be, it is not our task to examine this problem. We merely have to establish the fact that forecasts about the course of economic affairs cannot be considered scientific. Okay, so keep that in mind when you hear forecasts from the mainstream economists and the media pundits about exactly what will happen in the next month or the next six months or the next year. So, in conclusion, when we think about the differences between a system with sort of a market-based money, true money, like the gold standard, and the sort of inflationary fiat money regimes we have today, it's important to consider not only the sort of overall or macroeconomic effects but what people today call the microeconomic effects, the effects on the individual entrepreneur economic prosperity depends on entrepreneurship entrepreneurship depends on economic calculation and economic calculation depends on sound money that's the main point that's the main lesson of my talk

29:07you know if only somebody in washington or the New York media or the Ivy League universities were listening. Thank you.