Mises and Austrian Economics

0:00This is going to be difficult to explain the law of Austrian economics and Mises' role in a short period of time. I'll try to my best. First place, about Austrian economics. Contrary to many impressions, it has nothing to do with Austria. I know nothing about the economics of Austria. Doesn't mean it's not a viable subject. I don't know much about it. Also, there are very few Austrians left in Austria. Yeah, they're all here. Austrian economics began in the University of Vienna with Carl Menger. The early Austrians were indeed located in Austria and then the doctrine permeated outward.

0:49The essence of Austrian economics of Economics is based on, in contrast to all other schools, including alleged free market schools of economics, Austrian Economics is based on an analysis of individual action, of individuals doing things, having purposes and goals, and pursuing them. This immediately sets us apart, because all the other schools of economics deal with aggregates, groups, classes, I have to start with, I can easily make this about 5 hours instead of 45 minutes, so I am going to try to truncate this.

1:35Ocean economics basically builds on an earlier tradition of French and Italian, especially French continental tradition. beginning with the Spanish scholastics in the 16th century and then proceeding on to France with Cantillon and Turgo in the 18th century. This was buried for various reasons. This knowledge was lost to economic thought and superseded by the British classical school, by Smith and Ricardo and their followers. So this immediately starts a new history of thought, because most economists, I think, still think that economics began sort of out of the forehead of Adam Smith in 1776. He sort of created it like Athena springing from the brow of Zeus.

2:23Actually economics not only predated Smith by several centuries, but also was much better than Smith. In other words, Smith was the reference of the Klein. At any rate, the British Classical School, Smith Ricardo, etc., John Stuart Mill, focused on aggregates and groups and classes rather than the individual, number one. Basically you could sum up the Classical School as several key fallacies, and this was dominant until Menger came around in 1871. One of the value, economic value, price, was determined by the cost of production, the

3:29He kept inventing great things, like the radio and television and all that, except that it had already been invented 20 years before, so he didn't know about it. So he was a great inventor, he just invented the wheel and whatever. Too late. But he was working, he must have put in 100,000 labor hours into these inventions. How many of these sell? Obviously zero. So the economic value would not obviously depend on his quantity of labor hours. The classical school had to dismiss as unimportant a whole group of economic goods and not able to explain their value, namely, non-reproducible objects, goods that are not being produced anymore, like Rembrandts. I mean, Rembrandt put in a certain number of labor hours, I suppose, but the price of Rembrandts keeps fluctuating since then, not in accordance with somebody's input on hopes, otherwise it would be forgery.

4:21So what determines the value of Rembrandt's? Well, they couldn't figure it out. They just had to leave it aside as unimportant. They couldn't deal with consumers either, with consumers that came up against the famous value of paradox, which history and economics always tell us of that, that Smith was Buffalo by the value of paradox. The peculiar thing was he solved it himself about 20 years before, so it's a really odd kind of situation. In the Wealth of Nations, he sets forth a value paradox. A terrible thing, you can't understand it. On one hand, there's diamonds, let's say. On the other hand, there's bread or water, you can use either one of the two. Bread is a staff of life that's philosophically extremely important, very necessary, and yet it's very cheap on the market. In other words, the economic value is zilch.

5:07That's where it's cheap, not zero. Water is the economic value, it used to be zero. And on the other hand, we have diamonds, which are mere flippery, a luxury item, and so forth and so on. Adam Smith, being a good Calvinist, said they have zero value, diamonds, and yet they're very expensive. They have very high economic value. So he couldn't figure that out, the value of paradox. Here's bread, which is extremely useful, yet has very low economic value. And diamonds, which are useless, or almost useless, and have very high economic value, and he concluded The economics can't solve this. There's just a split between value and use and value and exchange. There's no way to solve it. We have to deal with exchange value and forget about use value. And you see right away, this sets up the conditions for the whole bunch of left-wing thoughts in the late 19th, early 20th century.

5:55I think it's still going on, I suppose. The separation between value for use and value for... I mean, production for use and production for profit. That's what immediately sets that up, but somehow it's a big distinction. He said therefore we have to, we can't deal with consumers, we can't deal with non-reproducible goods, we have to deal with reproducible goods. And we can only talk about, since we can't talk about consumers, value must come from something inherent in the object, namely labor hours. Another reason to use labor hours is that he and Ricardo were trying to measure value all the time. Because science meant measurement, even in those days, for these people. And so therefore, how do you measure value and how do you measure changes? Like, looking for some hard quantity and they concluded labor hours was about the best thing they could get to. So that was one big fallacy, one big dominant fallacy in economic thought when Menger started to write.

6:45The other big, another big fallacy is that they, since they couldn't deal with individuals at all, they were dealing with classes, they had a separate thing called distribution, theory of distribution, trying to figure out, this is Ricardo in particular, Who decides how much of the national output goes to wages, how much goes to profits, how much goes to landlords? And so the way he set it up was there's a class struggle between these three mighty groups. In other words, the good is produced somewhere, so they produce it, and then they fight for who gets the different shares of income. The laborers get messed up here. The laborers are the dirty end of the stick. Wages are determined by the Iron Law of Wages, the Malthusian Iron Law. It's down to subsistence levels. We all know we're sitting here living at subsistence level at the Anaheim Hilton.

7:34Everybody gets the lowest possible wages that takes care of the workers, and capitalists and landlords fight it out for the rest of it. But usually landlords are winning out because they get an increasing share of these unproductive group of people getting an increasing share of income. Well, this obviously led, this analysis seems to be led logically straight away to Marx and Henry George, two different sets of thinkers, but each focusing on different aspects of it. Marx focusing on the alleged surplus value going to the capitalists against the workers, and somehow capitalism conspiring to keep the wages of people, keep them down to subsistence level. On the other hand, Henry George focusing on evil unproductive landlords getting an increasing share of the national product and they should be expropriated.

8:21Now, of course, Smith and Ricardo did not believe they should be expropriated in thinking those terms. It seems to me it's pretty logical that if you're interested in justice rather than only economic analysis, you will wind up as either, if you're a Ricardian, you'll wind up as either a Marxist or a Georgist. Some people, of course, take both paths, sort of moxo-Georgists. The second big dominant force in British classical economics, the third thing is asking how can they be so wrong, how can they focus on this unreal situation, labor hours, and by the way the labor theory of value, I should backtrack slightly on that, this is pure speculation but I think it's probably true that it's no accident that only in Scotland does the labor theory of value originate.

9:09Nobody in the continent, nobody in France, Italy, none of the Spanish scholastics ever thought in terms of, they said labor comes from consumers, consumer demand, they didn't talk in terms of labor value. It seems to be not an accident because Scotland, of course, was the classical home of Calvinism and Calvinist doctrine is that people, labor is a key thing, everybody is doomed to work, consumer enjoyment, by the way, is evil, and as Adam Smith said, diamonds are useless. The only reason you consume many things is to allow you to keep working because of God's commandment, to suffer or keep suffering. So this sort of Calvinist anecdote leads pretty quickly, I think, to a labor theory of value. So that's two big fallacious aspects of British classical school. Labor theory of value or cost theory of value. One, two, classes or aggregate class struggle over shares of income.

10:00And the third thing is to focus totally on non-existent, unreal, long run equilibrium. This is done right now by modern microeconomics and macroeconomics for that matter. Current neoclassical economics focuses solely on the reason that I mentioned before, they don't talk about entrepreneurs. It's very simple why they don't talk about entrepreneurs. They don't talk about entrepreneurs because entrepreneurs deal with change and uncertainty. You make a profit if you can forecast better than the next guy. You make losses if you can't forecast. In long run equilibrium, you don't have to forecast anything. Nothing ever changes, since nothing ever changes, everybody has perfect knowledge as they call it, perfect knowledge, everybody is in perfect competition, there's no uncertainty, there's no risk, there's no profits and no losses.

10:48And so the entrepreneur then becomes a pain in the neck, it becomes a messing up your neat mathematical system. And this again stems from British classical school, they didn't have the mathematical diagrams or anything, but they had the essence of Ricardo in particular, focusing only on and Long-Run Equilibrium

11:34The quantity of money only determines the general price level. If you increase the money supply, prices go up. It has no impact on production, on profits, on interest, on relative prices or anything else. It's like two hermetically sealed spheres. There's a microsphere where things are going on, so it's fairly understandable, supply and demand, prices and all that. Then there's the macrosphere, totally cut off in the micro, where you have money and places bouncing up and down with no relationship between the two. Okay, it was in that kind of British classical school dominance. By the way, it now turns out that not everybody was a Ricardian from 1819 to 1871. The British themselves began to peck away at Ricardianism shortly after he died.

12:22By 1830, there were no Ricardians left. But what happened was that John Stuart Mill resurrected Ricardianism, his famous principles, in 1948, and he had such tremendous moral authority by the public that he was so revered, almost anything he said was accepted as gospel truth. And so he restored Ricardianism to a dominant, he replaced it with a dominant pedestal. And he did it because he was brainwashed by his father, who was a toprocardian and so on and so on, so I'm not going to get into that can of worms at this point. Anyway, it's in that atmosphere that Carl Menger, the founder of Austrian Economics, writes his great, path-breaking, magnificent book, Principles of Economics, in 1871. The way he does it, he builds on the earlier continental tradition, but essentially he develops this whole path-breaking system.

13:13What is it? To sum it up, the Austrian system is created by Menger and a student von Boehm-Bawerk at the University of Vienna. Essentially, it's based on methodological individualism, in other words, focusing on the individual first, the individual's actions. The idea is the individual has a purpose, has goals that he or she wants to pursue. In order to pursue these goals, you have to use resources or means to pursue them, and it takes time to do all this, etc., etc. etc. You start with crusoe and you work on up to different individuals and exchanges and building up the whole economic analysis from the individual. And it hadn't really been done before, it had been done partially but it had never been done systematically as Menger did it and as Boehm-Bawerk did developing it even further especially in capital theory and entrepreneurial theory.

14:03So looking at it that way you realize that the purpose of production is consumption. The idea of the reason why the inventor worked 200,000 labor hours is that he hopes that somebody will buy it, and so value is conferred by the consumers, by the demand of consumers, and goes backward from the subjective valuations of consumers down through to the factors of production that people receive income. So you have, in other words, the demand theory or the consumer demand theory of value, the subjective value theory, instead of the cost of production doctrine. And now, of course, we immediately explain why Rembrandts are now, it might be two million dollars now, one million dollars ten years ago, because consumers are paying more for it. They're willing to pay more for it now than they were before. Their valuations are higher, either because of general inflation, they have more money, or because Rembrandts are now preferred more to other art than they were ten years ago.

14:54So secondly, looking and focusing on individual action, we can see that individuals make their Evaluations and Marginal Units. This is the so-called marginal revolution. In other words, they don't take the bread-diamond paradox, which Menger and the other marginalists solved, namely, nobody is confronted in real life. See, we're looking at real life action. Nobody is confronted with the choice of all the bread on the world versus all the diamonds in the world. In other words, if the angel Gabriel came down to us tonight and said, you know, captured nationwide television, worldwide television, and said, people of earth, listen, you're not confronted with a choice, but

16:01and the other half is, if diamonds are very rare, each individual diamond is going to be worth a lot. In other words, these valuations take place in units, in so-called marginal units, in loaves of bread or pounds of butter or whatever. If you look at it that way, you'll see why water might be priced very highly in the desert and worth not much in a very high-water area. and so this solved the value paradox. It had been solved before on the continental centuries before but this is a much better, neater, and more fuller explanation. Another thing that Austrianism focused on is that economics is not really a quantitative subject. It's not really a subject where you can make correlations and quantitative measurements and that sort of stuff because value is subjective and can't be measured. How much do I prefer, for example,

17:25And one of the reasons is because it's not really a mathematical subject. It's really a philosophic subject. Okay, and the distribution front, I saw the British classical school talk in terms of a class struggle between different classes of income receivers. Again, the Austrians focus on each individual, individual factor owner, the individual laborer, individual capitalist, etc. By doing that, they were able to explain individual factor prices, which the classes have never even talked about. And it's pointed out that the free market through competitive action, entrepreneurial action tends to impute to each individual factor how much productive share of a product, a so-called marginal product or marginal value product. Each factor tends on the market to earn its marginal value product, its contribution to the goods being produced.

18:16So there's no longer any split between production on the one hand and distribution on the other. The Theory of Production is all worked out. It's totally separate from the Theory of Distribution. This, of course, leads very quickly to a socialist position, because you say, well, sure, we're in favor of production. We'll allow people to produce. No one will grab this for the income and divide it. Equal shares, or more to people six feet tall, whatever theory of distribution you've got. With Austrian economics, you realize there's no separate process called distribution. Distribution comes right out of production. People earn what they contribute to the production. It's very simple then. And also, von Boehm-Bawerk pointed out for the first time, and Frank Fetter, the American Austrian, developed it, clarified it. Interest, long-run profit, is a term that comes from time preference.

19:03This is something, by the way, the poor anti-usury people could never figure out. The Catholic Church theologians, who tended to be in favor of the free market, they couldn't figure out what the justification for interest is, interest in a pure loan. They could understand about risk. They understood about uncertainty and all that. They just didn't understand about why should people be able to charge 3% or 8% or whatever on a pure loan? And the answer is that people prefer a good right now to waiting for it or the present expectation of a good coming in a year from now, 10 years from now or 100 years from now. Everybody's got a time premium rate on present goods immediately available and a discount for the future. That determines the rate of interest. Also, von Boehm-Bawerk pointed out in Menger II, the capital, by the way, modern economics still is not learned. Capital takes time. Production takes time. Capital is a time structure.

19:54Some goods are very close to consumers, like producing Wonder Bread, and the retailer, of course, is very close to the consumer. On the other hand, machinery, iron ore that goes into making the machinery that produces Wonder Bread is way up the structure. Capital is a latticework, a network, a structure, which all has to fit in together, and by the way, only the free market can fit it in, only entrepreneurs with a profit and loss test, profit and loss incentive and a free price system can do the fiat money.

20:38One of the problems with socialism, for example, is they can make some stuff but they can't fit it together. Often in Russia they have a situation where the bristles, there's a toothbrush shortage. All of a sudden there's a toothbrush shortage. Why is there a toothbrush shortage? Well, the bristles are in omsk and the handles are in tumpsk and they just didn't, they never fit the bristles together by the handle. In the free market you never have this problem. Everything fits because there's a constant feedback mechanism, so to speak, of profit and loss and a free price system. Eugen von Boehm-Bawerk pointed out that the capitalist entrepreneur, and we focus on the entrepreneur in Austria. In other words, the equilibrium is a tendency that was never reached. It's a goal. It's an ever-changing goal and you never reach it. So Austrians focus on the process, the real-world process by which the economy tends to move toward equilibrium.

21:28And thereby, of course, we have the whole world of risk and uncertainty and change, which is the real world, which equilibrium economics doesn't talk about. So therefore, The entrepreneur becomes a key figure in the whole process, the profit and loss system, the incentive to make profits and to avoid losses. And so the capitalist entrepreneur in Austrian theory earns a two-part return. One is an entrepreneur by forecasting better than the next guy, and be able to forecast the future, forecast what demand will be for his product, what cost will be. And also two is a capitalist saving up money and then paying workers right now in advance of their production and sale, for which the workers in a sense pay him a discount. and they pay them the interest return and they're happy to do it because they don't have to wait five years for payroll. So these are the two basic functions of a capitalist entrepreneur, entrepreneurship and capital saving investment.

22:19Okay, in this atmosphere, in this kind of briefly sketch out Austrian economics before von Mises, Menger, von Bawerk, Federer, Ludwig von Mises comes and was born in 1881. He was a brilliant young student of Boehm-Bawerk's famous seminar at the University of Vienna. Essentially what he saw was that the Austrians had already fixed up these classical errors, the four big British classical errors, value, distribution and equilibrium. But the one thing they hadn't done yet, one of the main things they hadn't done yet, was to heal the micro-macro split. In other words, the Austrians still had only talked about micro. and weren't able to extend Austrian economics to the theory of money. So that was Mises' first great accomplishment and his magnificent first book Theory of Money and Credit came out in 1912 and it's still the best thing ever written on money.

23:12What he did was he healed the split, this artificial split, he applied the marginal utility theory of Austrian economics to money, integrated it, he made Michael and Mackle One whole beautiful integrated system of economic analysis. He pointed out, for example, when you get the money, you don't use M and V, you don't forget about supply and demand. Purchasing power of money, in other words, the value of money, can be decided on the same basis as individual goods and services, namely supply and demand. An increase of the supply of money lowers its value, just as in the case of bubble gum or coffee. An increase of demand for money raises its value, just like any other good. However, there's a big difference. In this he applies some of the Ricardian currency school insights. The big difference between money on the one hand and other goods on the other hand is that other goods are necessary to production.

24:00In other words, specific quantities. For example, if other things being equal, if you increase resources or increase the supply of goods and services, people's standard of living go up. It's a good thing, so to speak, to have more, to find new resources, to find a new oil strike, or to increase productivity, okay? In the field of money, it's very different. The only real use of money is exchange. You don't eat money, to put it bluntly. And once you have enough money to become money on the market, you don't need any more. In other words, any supply of money which is arrived at on the market is optimal. You don't need any more money coming in. So the only thing that an increase in the money supply does then, the only social effect is to dilute the purchasing power of each existing, pre-existing dollar or gold ounce or mark or whatever the currency unit is.

24:52So any increase in the money supply, as an increase in goods and services is good, it increases the standard of living, an increase in capital equipment is good, it increases future standards of living, an increase in the money supply is pointless because all it does is dilute the purchasing power of the original or the existing unit.

25:37It destroys economic calculation, generally messes everything up, messes up the production system. What happens is a tax where the first receivers of money benefit at the expense of the late receivers. It's pretty much like counterfeiting. As a matter of fact, it is. The Fed is essentially our legalized monopoly counterfeiter and the effect of the Fed increasing the money supply on the Bank of England or any central bank is almost the same as any counterfeiter. The legalized counterfeiter pouring out money down here in Anaheim, you'll have the same sort of effect, an increase in the income of the people in Anaheim, first of the counterfeiters, next of the people the counterfeiters spend the money on, retailers, let's say, in Anaheim, they're in great shape, they love counterfeiting, right, and so then they begin to spend more, prices begin to go up, those of us who don't live in Anaheim, who have fixed income, lose. So the inflation process is essentially a counterfeiting process, except it's not people on the run from the treasury,

26:35Department. It is the Treasury, it is the Federal Reserve doing it. Okay, so Mises also built on Carl Menger's classic article on the origin of how money originates and expanded it to show that money has to originate in this way, namely out of the free market, out of the voluntary actions of individuals trying to overcome the tremendous difficulties of barter. He shows that money has to originate that way. Money cannot originate as a government by edict or by some social contact, everybody gets together at one big convention and says let's make that money. It can't work that way, it has to work out of a market commodity. Unfortunately, of course, then the government can take it over and mess it up, but it has to originate as a market, valuable market commodity such as gold or silver, which have always out-competed all the other marketable commodities once it's given a chance.

27:23People know about gold and silver, if society knows about it, they will out-compete them. Also, Mises showed in The Theory of Money and Credit that fractional reserve banking is essentially fraudulent, essentially issuing fraudulent warehouse receipts to non-existent gold or cash creates this whole process. And the ideal system would be 100% reserve banking. He believed, however, and I think it's true, under a genuine free banking system, in other words, if the banks were compelled to meet their contracts, like everybody else is, forced to meet their contracts, In the theory of money and credit, he fixed up the marginal utility theory, he showed The other is ordinal and can't be measured. The other, Mimbaweck, was a little bit weak on that.

28:22He showed you can't, since it's subjective, you can't, you can't mathematics it. I mean, right now, micro-textbooks, look at any micro-textbook, they talk about utils. They talk about utility theory. They say, well, we have utils. Some people, some things are worth five utils, other things are worth eight utils. Those are things that you use, an extra util. It doesn't exist. The Theory of Money and Credit had the genesis and a few pages he outlined what would become his theory of the business cycle, the late Austrian theory of the business cycle, the Misesian theory of the business cycle.

29:12During the 1920s he expanded on that and the work which has been translated since then called on manipulation of money and credit and interestingly enough what happened was most of his from Boehm-Bawerk and most of his students of course rejected this whole application of money in business cycles because of the sound and so forth and Mises was a pioneer of scoring even in Austria in that situation. In Austrian business cycle theory which develops during the 1920s with F.A. Hayek as the famous The Theory of Money and Banking

30:12This is essentially a business cycle theory, never talked about as such in the textbooks. It was not only a theory of money and a theory of international payments, it was also a business cycle theory. It's a simple model, the banks pump in money, prices go up, there's euphoria, and then something happens, they have to contract and there's bankruptcy and liquidation. It's a very simple model of a business cycle. He combined that, Mises, with Wichsel's, Wichsel was a Swedish-Austrian, Swedish-Boehm-Bawerk follower, combined that with Wichsel's analysis of interest rates and how if a banking rate falls below the natural rate of interest or the free market rate of interest, it'll be inflation. He combined that and he wound up with an integrated, magnificent path-breaking theory of the business cycle.

30:58Essentially what it is, what it says is an increase in supply of money and credit through through the banking system, through central banking, not only it causes inflation, everybody will admit that, at least all the neoclassicals will admit that, excuse me, admit that, it also causes other disturbances, it's not just what Milton Friedman called the helicopter effect, Milton Friedman said, we assume that everybody gets a proportionate increase in the money supply dropped by some magical government helicopter, so everybody gets 30% increase in their cash, it doesn't work that way of course, if it did work that way, there'd be The reason why, because we don't have a benefit on Angel Gabriel doubling everybody's money supply overnight to try to improve their lot, what we have is legalized counterfeiters in Washington or in London increasing their money supply first and lending it out or spending it and then it ripples out to the rest of the society.

31:47So they're always one leg up in this expropriation process. So at any rate, so Mises show that an increase in money and credit not only increases prices It also messes up the production system, the whole capital structure. Because one of the problems of the business cycle theory, there are two really basic problems which any business cycle theory has to explain. One is, how come entrepreneurs suddenly make severe losses? In other words, entrepreneurs are trained in forecasting. They tend to be great forecasters. If they're lousy forecasters, they go out of business pretty quickly. So, successful entrepreneurs tend to be good forecasters. How come all of a sudden it turns out that all of them, or many of them, or most of them, went, go bankrupt? They didn't, they didn't forecast successfully that their costs would be much higher than the selling prices.

32:33And it was sudden. There's a sudden cluster of entrepreneurial error. Now this doesn't usually happen, okay? And usually economists are trained, or Austrian is certainly trained, if something's really messed up in the system, you look at government. Government must be messing things up somewhere, and sure enough, okay, this is... The second thing which has to be explained is, how come there's a much greater fluctuation in capital goods than there is in consumer goods? In other words, there's a much bigger boom, let's say, in machine tools, construction, industrial raw materials than there is in retail sales. Contrarily, when the depression or recession hits, there's a much bigger crash in machine tools, construction, and a higher order of goods than there is in retail goods. It should be just the opposite. If the Keynesians are right, it should be just the opposite.

33:20The first thing that should be hit would be consumer goods. Quite the contrary. As a matter of fact, during the 1929-33 depression, in fact, all during the 30s, retail sales were in pretty good shape. They only declined about 15-20%. It was other things. It was construction. Machine tools had declined 90%, 80-90%, 100%, almost 100%. And so you have to focus on trying to explain those two things. Only the Austrian, only the Mises Theory, only Mises-Hayek Theory explains these two problems. Namely, the increase in supply of money and credit disturbs the production structure, messes up the interest rate, because more money is pouring into business loans and would-have by voluntary savings, and leads to an over-expansion of capital goods, so-called higher-order goods in particular, of Construction, raw materials, machine tools, plants, basic plant, and underproduction of consumer goods.

34:16So what you have then is a malinvestment in a whole bunch of capital goods. And the longer the boom continues, the more the worse the malinvestment gets. And so what happens is costs are bid up too high for the supply of savings available. And as soon as the credit expansion stops, or slows down significantly, the recession hits. The recession is an unfortunate but necessary process by which the market returns, washes

35:32have to shift out of capital goods and into consumer goods, and this means that wage rates and capital goods prices have to fall so that, relative to consumer goods, so that people will shift, the resources will shift. To prop the wage rates up, which is what the New Deal did, of course, to prop them up, to prevent them from falling, totally destroys the whole adjustment process and prolongs the depression permanently, which is what happened in the 1930s. Okay, this is essentially the very, again, a capsule summary of the Austrian business cycle analysis. And also, by the way, it also explains our current stacked inflation. That's the only theory that explains inflationary recession. Because in every business cycle, whether it was pre-World War II or right now, capital goods prices are always going up higher than consumer goods prices in a boom, and consumer goods prices are always going up higher relative to capital goods prices in a recession.

36:23Well, it's still doing it, except in the good old days, that means before the New Deal period. During a recession, everything would fall. There would be a healthy deflation. In other words, prices would fall in general. Money supply fell because the banks were in bad shape. So the whole money supply would go down, prices would go down, but consumer goods prices would go down not as fast as capital goods prices. In other words, retail sales, furniture would go down 20% in price, let's say, and construction cement would go down 50%. So that still, consumer goods prices would be higher relative to capital goods prices than they were before, which is what you need in a recession. However, consumers loved it because the absolute prices, in money terms, were cheaper. Well, now that we have a Keynesian, monetarist, semi-Keynesian takeover since the 1930s, the money slides never permitted the fall ever, ever again.

37:13In other words, the Fed is always pumping more money into the system, sometimes a little less, sometimes a little more. As a result, during a recession, we never had a fall in prices, ever. And so this healthy mask of the sugar-coating of the pill is now gone, so the consumers in a recession are faced with two problems, one unemployment and bankruptcies and all that, which they always were faced with, plus, because cost of living keeps going up, because consumer goods prices are still going up relative to capital goods prices, except now they're both going up in absolute terms, they're not going down because of healthy deflation. So at any rate, we now have a situation where we're getting the worst of both worlds every time there's a recession. We've still got a big increase in the cost of living, plus we've got unemployment, this This is the result of 50 years of fine-tuning by a beloved economic expert in Washington.

37:58Okay, to get back to Mises personally, Mises taught and developed his views at the University of Vienna, it's true. He never had a pay post at the University of Vienna. He was discriminated against, even in Austria. And he worked for the Chamber of Commerce, or Department of Commerce, I guess it is, in Austria. in Austria, and his seminar, the very famous seminar, was purely private. He held it held in his offices in Chamber of Commerce, and this seminar is the one that attracted all the top young economists in Europe and philosophers and whatever, and he converted very many of them. I mean, I just list a few of Hayek, Machlab, Haberler, Robbins, Vogel and Schutz, and on and on. Even future British Prime Minister Gatesgold, it was a Mises seminar, was a Labour Party Prime Minister, it wasn't nearly as bad as the other Labour Party people, possibly because of Misesian influence. In addition to that, this tremendous intellectual force that Mises had and the so-called Mises Christ, which means Mises Circle. By the way, it must

38:55have been a wonderful thing. They used to go out. Every group of intellectuals in Vienna in those days had their own café. There were 2,000 cafés and so each one had the psychoanalysts, the shrinks had their café and the positivists had their café and the Misesians had their Mises single-handedly stopped the Austrian inflation in the 1920s, stopped it from becoming hyperinflation. There was a big inflation, but it didn't get as bad as Germany, largely because of Mises constant pressure by memos and political influence. He later, in his notes in recollection, said maybe he shouldn't have done that, maybe it would have been better if the whole thing collapsed earlier. Anyway, he was quite depressed at that point, I'll mention in a minute.

39:41Another thing that Mises did is he warned about the Great Depression. The 1920s was a period where essentially a Friedmanite period in many ways, a monetarist period. Benjamin Strong, the leader of the Federal Reserve Banks here, was putting into effect Irving Fischer's Doctrine, which is essentially pre-Freedmanite. And basically what it was is to keep the price level constant. That's just the key thing, to keep the price level. And the price level was indeed constant. Wholesale prices remained the same all during the 1920s, so they figured there's no problem with inflation. What's everybody complaining about? By definition, if the price level was constant, there's no problem. However, the Austrian position was, and still is, that the price level is not the key thing. Especially because in capitalist development, in free market capitalism, prices tend to fall because you have a tremendous increase in outpouring of goods and services, especially in productive goods, and so prices tend to fall in a free and unhampered market, thereby spreading the advantages of capitalist development to everybody in the country.

40:40We can see that now with specific things like computers and calculators, you know, which calculators stole it all for $500 and have much better ones at $18, or TV sets or personal and Computer. Tremendous fall in prices during a tremendous inflationary period, by the way. And so, what Mises pointed out was that the fact that price levels constant is not such a great thing, but they should be falling. The reason why it's not falling is that the Fed and other central banks were inflating money and credit and propping it up and causing malinvestment, which will cause a recession, a big recession, even though prices haven't gone up. He was laughed at, considered ridiculous. Of course, the depression and the crash proved Socialism correct. He was doing that during the 20s. He was developing his business cycle theory. He did many other things during the 20s. Unbelievable achievements, unbelievable decades for Mises.

41:26Socialism arises, of course, in World War I. After World War I, communism was really the same thing. And everybody had to start analyzing socialism, socialist economy. Everybody realizes then and now, by the way, that socialism has an incentive problem. That's clear to everybody. In other words, even socialists will admit this. Yes, yes, we have an incentive problem. The incentive problem is summed up in the famous motto, under socialism, who will take out the garbage? That doesn't really work. Or who will go to Siberia? That's another way to put it. Who will go to Alaska? Who's going to develop the underdeveloped? Who will schlep out the underdeveloped region and build it up? Well, you can't use economic incentive under socialism because either incomes are equal or less than set by some government authority.

42:12Communist get higher incomes, whatever it is, it's certainly not set by marginal productivity. So who's going to go to Siberia? Who's going to carry out the garbage? Well the answer, the socialist traditional answer is of course moral incentive. In other words, people will, or the creation of this is called a new socialist man. Everybody will be molded by socialist government to become totally altruistic and love the collective and do everything for the collective. In other words, slave laborer will carry out the garbage and go to Siberia. So even socialists recognize The Theory of Money and State The Theory of Money and State The Theory of Money and State

43:10What price do we set? Who's going to carry out the garbage? How many people should carry out the garbage? There's no way the socialist government can calculate because, as Mises pointed out, there's no free price system. There's no private ownership of the means of production, by definition. And therefore, there's no property titles. There's no free market in property titles. There's no way to set up a real price system. There's no way a socialist government can calculate. It's economic chaos. He pointed out in his famous article in 1920, which really upset the socialists in Europe. They try to answer it all the 1920s and 30s. There was a famous calculation debate. He also expanded this in his great book called Socialism a couple of years later. He dealt with other aspects of Socialism. At any rate, when I was going to college, too many years ago, the answer was that Oskar Lange had already solved this. No problem, because you have equations and all that. The government acts as if it was a market.

44:03Socialists, as Mises already pointed out, this is a lot of nonsense, this so-called solution assumes perfect competition, perfect knowledge, the socialist government has the perfect knowledge already, of course, in prices, which obviously they don't have, that's the whole point. And also, no socialist government has ever tried to put the longer solution into effect, never. As a matter of fact, what's happening is that socialist planning has broken down, Yugoslavia has gone, and Hungary has gone fairly rapidly toward a free price system, Socialism and even China have gone in the direction of the price system, they realize this doesn't work. And this is true in a situation where they still have the world market and world prices to which the government, socialist governments could refer, because they know what the price of wheat is, okay? And in world socialist government, they wouldn't know that, they'd be totally at a loss. So Mises pointed out, in other words, in addition to its other problems, socialism can't work, it can't calculate in a modern economic system.

44:55Also during the 1920s, Mises put out a theory, critique of interventionism, which shows that interventionism doesn't work. In other words, price controls create shortages, taxes cripple saving and investment, inflation causes problems we've seen, protectionism is destructive. He shows, and also he shows that interventionism tends to be cumulative, as we see all the time. In other words, interventionism, the government sets out to solve a problem. Somebody goes to the government and says it's a big problem. Too many people over 60 have hangnails, let's say, have a big hangnail gap. So we need a multi-billion dollar hangnail solving federal funding so that the government then investigates hangnails towards billions of dollars, doesn't solve the hangnail problem and creates other problems at the same time, whatever, I mean too many side effects and anti-hangnail drugs or whatever it is. So every time the government intervenes it doesn't solve the original problem and creates two or three more problems at which the government can say well we have to have more intervention to solve the two or three others or they can just forget the whole thing.

45:49So interventionism is unstable. It has a cumulative effect. Either you go onward towards socialism or you go back to the free market. But Mises has already shown that socialism can't work. So if socialism can't work and interventionism is unstable, you're left with only one viable option for modern industrial world, laissez-faire capitalism. And so Mises then becomes an uncompromising, hardcore laissez-faire capitalist, pounding away day after day on his question, making himself very unpopular as you might expect. and his great book on liberalism which came out in 1927, since his 40s, he also shows in liberalism the political and civil liberties aspect, the economic, private property rights, free market, civil liberties and international peace are all inextricably tied together. Well tied together, something pretty few of us even know to this day. So that's a book that everybody could read with tremendous profit.

46:39Profit. In addition to all this in the 1920s, and we're not through yet with Mises' accomplishments, you also see there's a challenge to Austrian economics and the methodological philosophical front. And the challenge was twofold, basically, and it's still there, by the way, seeing two challenges. On the one hand, institutionalism, which Mises called anti-economics, and the idea that economic theory is no good anyway, there's no such thing as economic theory. Essentially, economics becomes only history, a record of what's going on. Okay, so that's one form, This is quite dominant in the United States in the 1920s, institutionalist approach, and two, which has been the dominant neoclassical approach, logical positivism, with the idea that economics has to be like physics, a quantitative, measurable science where you deduce things, you have full vaccines, it's good because you can deduce stuff from them and predict.

47:28The whole thing with the whole unfortunate econometrics mechanistic approach, which we're very familiar with now, where people are treated as if they are stones and atoms. Unfortunately, people are not stoned out. They are people who have choices, they have consciousness, they choose their purposes and goals, etc. And so this whole neoclassical economics is totally off on a wrong track. And so he thinks about this and he sets forth his views on praxeology, what he calls the correct, what he calls praxeology, the correct analysis, the Austrian analysis of individual action, where economics essentially deals with the logical implication of the fact that people act. How do you know that people act? You just look at yourself and you look at other people. You see that they act. They don't like stones and atoms, they have purposes, and in this knowledge all the economic theory is deduced. This is very unfashionable, it's even more unfashionable now than the free market is.

48:16You see Mises had a tough problem, he not only had to fight for laissez-faire capitalism which was unfashionable enough, he also had to fight for methodology which is totally out of fashion, has been in a race to try to ape physics, to try to imitate physics and the success of nuclear energy and that sort of thing. So he sets forth this in his great book, Gumpal-Blemer International Economy in 1933, which has been translated later. It follows this up as Theory and History, a marvelous book he wrote in 1957, showing the difference between theory and history and what their roles are. Having done all this, as if he hadn't done enough yet, which is plenty times as much as the average economist accomplishes in a lifetime, he now proceeds, while he sets forth the proper methodology, it's now his task to do something with it, in other words, and he constructs a whole integrated system of economic thought based on the correct methodology and he does it.

49:08And he does it with magnificent crowning achievement, National Economy, which came out in 1940 in Geneva, which unfortunately was neglected, it was during the middle of the war anyway, so it was totally neglected and then expanded it and rewrote it in English and expanded it in Human Action in 1949, which is the great work, final concern of the 20th century. Okay while he was doing this in 1930, things were happening with Misesian economics so to speak. In 1931, Mises' follower Hayek shifts from Vienna to the London School of Economics. He's brought there by Robbins, who had been in Mises' seminar, and he starts giving lectures and translating his book, Misesian Capital and Business Cycle Theory, and he wows everybody. First of all, it's the middle of a depression, a depression that hadn't been predicted by any orthodox economist, and Hayek manages to convert all the top young economists in in England, Hicks, Lerner, Caldor, Sir William Beveridge, it wasn't so young, but only these guys became lustrients at that point.

50:04If you read some of the Literate Journal articles in England, in the early 30s, they all sound like Mises, it was fantastic, for a great few years, and they accepted the Misesian analysis of the Depression. The Depression came about because of the Federal Reserve and Bank of England, et cetera, simple bank credit expansion, and then was prolonged by New Deal intervention into the wage rates and public works, et cetera. Unfortunately, even Americans, in those days, Americans thought, essentially were followers of English, in other words, they looked at Britain as the big, as England as the big, as the center of economic thought. So with English economics becoming Hayekian, Americans began to pick up the bull. Alvin Hansen, who later became the top American Keynesian, was becoming sort of semi-Austrian, plus a few other people, and suddenly, bingo, Keynes's general theory comes out in 1936, and that's it.

50:52And by the way, Keynesianism did not win out by patiently refuting Austrian economics. It did not work that way. Sci-Fi can't be refuted. They didn't even try doing it. It was simply like a change in hemlines, a change in fashions. Everybody forgets the old stuff and goes on to the new bandwagon. And all these people, except Hayek, all the people Hayek converted shifted to Keynesianism, which is now the big fashion, which is totally the opposite in most every way of Austrian thought.

51:51of Money, The Theory of Money and State, The Theory of Money and State, The Theory

52:21Mises Menger was ruled from economics and von Bawerk committed suicide because of World War I. World War I, ideals of liberalism, classical liberalism, international peace, and free markets. Anyway, Mises comes to the United States. He's penniless. He's about 60 years old or so. He starts writing in a new language, and he can't get an academic post. This is an eternal blot on academia.

53:09This is a situation where every Marxist and semi-Marxist and three-quarter Marxists were getting cushy top chairs, the guy at Harvard and Princeton and whatever, and Mises couldn't find an academic post. He had finally got one at NYU as a visiting professor with a salary paid for by outside businessmen and foundations. And the same thing happened to Hayek. Hayek's salary at the University of Chicago was never paid for by Chicago, it was paid for by outside business groups. As a result, Mises was scorned at NYU. The dean was against him. The dean would advise people not to take his courses and things like that. See, here he was in a fantastically miserable situation. And yet, what was his? And here's where I come in the picture, because I got to know him at this point. When he started a seminar at NYU, what was his spirit about this? How did he act? It was magnificent. I couldn't believe it. I mean, he was cheerful.

53:58He was never bitter. He never said an uncalling word about anything, any person. And he was constantly trying, very sweet. Mises was constantly trying to urge people to be productive, any spark of productivity in any of us clunks was immediately nourished by Mises, and he was dealing with people far below the level of Hayek and Hoppe, he didn't seem to bother them at all, just great. He tried to reestablish the seminar atmosphere of Vienna. We went out to Child's Restaurant, I think it was, afterwards and discussed things. It was, he was kindly, he was uncomplaining, he was never bitter, and it was just a magnificent experience. I've told the story before, but I'm going to tell it again, because I think it's classic about Mises. People were very intimidated. First of all, half the people didn't know anything, didn't care. They were just there to get their automatic B or A or something. The rest of the people, those who were interested, outside auditors mostly, were too intimidated.

54:48He's a great man, what do we know? How can we say anything? So what he'd say is, look, say anything you want. Whatever you say, however idiotic it is, has already been said before you by some eminent economist. Of course, he was right. He told these great anecdotes about his friend Max Weber and things like that. It was just marvelous. Being scorned, etc., and not having any followers at the beginning. He writes Human Action, this great, crowning work. When Human Action came out, I was going up the fee at the time, which is the Foundation for Economic Education, Mises, which was literally the only free market outfit in the country. It's not like now, every Tom, Dick and Harry says he's in favor of the free market. They said, Mises, I haven't met Mises yet. They said he's coming out with a new book. I said, oh, what's it about? They said everything. And sure enough, it's about everything. That's it. It's the whole world

55:37of blacks. I urge you to read it. I mean, it's more than I urge you. It's magnificent. And I think, but despite these conditions, despite these oppression under which he worked, There were many good people that emerged out of this Mises seminar, Professor Zenholz, Israel Kirzner, Sylvester Petro, Percy Graves, and many other people. And Mises has inspired much of the current hard money movement. I think it's really all due to him. He died in 1992, in 1973, after a remarkably productive life, and a year later Hayek got the Nobel Prize, which sort of inspired other economists, Who's this guy Hayek? Why is he getting a Nobel Prize? And it's interesting that he got the prize specifically for his Misesian work that he did in the 1930s. Misesian business cycle theory, which swept away in the Keynesian Revolution.

56:26And since then, there's been a notable Austrian revival. And I think it's all due to Mises, and it's just unfortunate he didn't get to see it. Thank you very much.