Ron Paul and Contemporary Economics

0:00Our next speaker earned his PhD in Intellectual History at UCLA. He's editor of the Mises Review, senior fellow at Ludwig von Mises Institute. He has a number of books, Resurrecting Marks, Filsovka Origins of Austrian Economics, Introduction to Economic Reasoning, which I believe we have out front. He teaches a number of courses in the Mises Academy. And And if you haven't have an experience in Mises Academy, please go to our website, Mises.org, go down to the bottom of the page and see what we're offering. Our next speaker has a number of very, very interesting courses that he teaches and it's a great way to learn economics. He's the editor of Succession, State and Liberty, author of The Essential Rothbard.

0:48He's speaking today about Ron Paul and contemporary economics and we always refer to him as the The smartest guy in any room. Please help me welcome David Gordon.

1:07I should say the reason I'm not standing behind the podium is I'm following the advice of my friend Walter Block, who's been kind enough to give me help on speaking over many years. You know, Walter is an amazingly prolific author. I understand he's working on a sequel to his famous book, Defending the Undefendable, which is going to be called Blocking the Unblockable. I have to speak to you today on Ron Paul and contemporary economics. When we talk about Contemporary Economics. Of course, there's a particular kind of contemporary economics that Ron Paul favors, and it'll come as no surprise that this is Austrian economics.

2:00Ron Paul has been a close student of the Austrian greats, including Ludwig von Mises, Friedrich Hayek, and Hans Senholtz. And particularly, he's been very close to Murray Rothbard, whom who he not only had read but had met personally. Rothbard thought very highly of him and Ron Paul tells the story that when he first met Rothbard, Rothbard was amazed that Ron had read one of his articles on monetary theory. So, Ron Paul is a real intellectual in politics. Now, Ron Paul uses Austrian economics to really resolve what I consider the most important issue facing economic policy today.

3:01It's a fundamental split. And the split is this, today there are very few if any economists who favor outright socialism since the collapse of the Soviet Union in 1991. Outright socialism is not really conceived as a viable option by anyone, perhaps the only The exception to that are to be found in members of English departments in various university faculties. But the real split is between those who favor relying on the free market entirely and those who say, no, although the market is good in its place, the market has to be guided and are being limited by the government. The government particularly is as advised by experts. So we have people who say the free market can people can operate on their own. They don't need the coercive so-called help of government to carry out their activities. And those who say no, no, we need the government to guide things. Ron Paul in his recent book defining In the remark by Oliver Wendell Holmes, probably the most famous of all American jurists, when

4:44he said that taxation is the price we pay for civilization. So we see Holmes was saying we need to have a government in order to run things people can't operate by themselves and taxation is the price we pay for this. When Tom DiLorenzo told that story about what Gary North had said about Alexander Hamilton, I couldn't help thinking that when Albert Wendell Holmes had been left for dead in the in the field of the Battle of Antietam when he was a very young man, and I can't help thinking it would have been better for American law had he not been found, but that's characteristically mean of me, so I won't go on along that line.

5:36Now we have a paradox, I said that Ron Paul uses Austrian economics to help resolve this question of which policy should we follow, should we rely on people operating by themselves on the free market or do we need government to advise us? So the paradox is how can Austrian economics help us answer that question if economics is, Mises and Rothbard characterizes is a value-free science, so how can we use Austrian economics to help us decide policy questions if it's purely descriptive science?

6:22I think the answer to this lies in a point that was made very effectively by Mises when he said that economists, without making value judgments of his own, can show that interventions in the market will fail from the point of view of their own advocates. So we can say that all measures of intervention in the economy won't succeed. So without the economists saying, well, I'm in favor of the free market, I like the free market, I don't like government, we can still make a scientific statement that these policies won't work. I think Ron Paul has very ably used the analysis of Austrian economics to show the manifold failures of government policies.

7:15I want to consider the most famous of his uses of Austrian economics, and this comes out in his long-standing crusade against the Federal Reserve system, probably found in most detail in his book, End the Fed. Now, what he, Ron Paul, follows the Austrian theory of the business cycle, which previous speakers have mentioned, and according to this theory, the cause of depression is an expansion of the monetary supply, expansion of bank credit, which drives the interest and the interest rate down, and as a result, investments are encouraged that don't really reflect consumer preferences, and so then these businesses, once the monetary expansion ceases, are bound to collapse, and that's the depression phase of the economy, when these businesses collapse.

8:21So, on this view, the government should not keep, needs to stay out of the inflation altogether and once these businesses do collapse, it should definitely not increase government spending because that will only delay the process of adjustment where these businesses that have been malinvestments need to be liquidated. So if that's the case, if the government shouldn't be in charge of the monetary supply, then the question actually arises, well, how should the money supply be run in a free market?

9:08And here, what Ron Paul says is, again, one of his most characteristic positions, is that we need to leave the money supply entirely to the free market. And in the free market, we find, historically, that money has been a commodity, particularly gold, and he's very well famous as an advocate of the gold standard. and then he's also suggested following Hayek that we should allow private competition in money and then whatever was the best money would be established on the free market and he leaves little room for doubt that what this money would be would be a gold standard.

9:58Now, given the cogency of Ron Paul's analysis of both the failures of the Federal Reserve system and the benefits of the commodity standard, particularly the gold standard, we need to face the question, why don't more politicians adopt this proposal? Why do they insist on Other theories, in particular the Keynesian theory, which says that what the government needs in times of depression to increase government spending, if the Austrian analysis shows this isn't going to work, it'll be counterproductive, why are they so anxious to increase government spending and why do they disregard the Austrian analysis?

10:50And what Ron Paul suggests is that the support for Keynesianism is very often motivated by the desire of those in government to gain power and to increase the role of the government in running the economy. It's not that they think in a disinterested way that Keynesian economics is better than in Austrian Economics. It's just that if you have a system where the government is told to spend a lot of money, this will produce an increase in power for the politicians who favor that policy. And in this connection he points out again in Defining the Liberty that when Keynes wrote his famous book, General Theory of Employment, Interest in Money in in 1936. He wasn't telling the government to do something that it hadn't been already doing. The government, say under Franklin Roosevelt, was already spending a lot of money.

12:05And what Keynes did was really give an intellectual rationale for what the government was doing Now, I think we can see one illustration of Ron Paul's excellent point that the advocates of Keynesian economics very often wanted to promote the role of the government in the economy simply to increase their own power. In a recent column by Paul Krugman, Krugman of course is the famous Nobel Prize winner and we're able to absorb his wisdom a few times a week in the pages of New York Times.

12:51Now what Krugman said in the column I have in mind was he was responding to the view I do that the policy, interventionist policy, such as those favored by the present administration really delay recovery because investors are reluctant to invest if they don't know what the government is intending to do. This, of course, is the famous notion of regime uncertainty that Bob Higgs will be talking about this afternoon. So, what was Krugman's response to this? Remember, the argument is that business people will not invest because they don't know what the government intends.

13:40They don't know. Maybe they'll think, well, if we invest, then maybe the government is going to tax away our profits, so we don't know what the government's doing, so we're not going to invest. So the argument then is that the spending policies won't work. So Krugman says, oh, this is really not a good argument at all, because what this argument neglects is that the government can simply create the jobs directly by spending the money. It doesn't have to depend on investors. And of course, what he's not mentioning is that if the government does that, then it's is going to be taking over those parts of the economy in which it's creating the job. So we can see here, just as Ron Paul suggests, that the Keynesian policies are designed to increase the power of the government.

14:38I must say after one reads Paul Krugman, he's certainly one of those professors that Oscar Mr. Wilde had in mind when he said that their ignorance is the product of long study. Now I think we can see in other areas of economics where Ron Paul has put the Austrian theory to Very Good Use. For example, in considering wage policy, he points out on minimum wages. He says, again, following standard Austrian here, also conventional mainstream economic Analysis. If you artificially increase the price of a good higher than the market price, then people will not want to, there will be a surplus of that commodity. So if you have minimum wage legislation that drives, results in certain workers. If you want to hire these workers you'll have to pay more than they're actually producing. They won't be hired. This is the point that Walter Block has emphasized a great deal. Ron Paul puts it this way, he Well, if a minimum wage is good, why not a minimum wage of $75 an hour?

16:21Wouldn't that be good? Then everybody could be earning a very high salary. But of course, the problem is, if people, if you had a minimum wage of that amount, then anyone who's not contributing to the product as much as that would not be hired by anyone. So here we see a perfect illustration of how the Austrian point that the intervention in the economy will fail of its own purpose. It's not going to be able to achieve the ends that people who favor it wanted because presumably when the people who favor minimum wages don't We don't want to produce unemployment for those who won't be employable at the minimum wage, but that's what's going to happen.

17:17And in like fashion, we can see that labor unions won't be able to raise wages beyond what the free market would have given them. only benefits certain workers at the expense of others. So in considering these various forms of intervention in the economy, I think Ron Paul makes another fundamental point in addition to analyzing the purely economic consequences of these various types of intervention. And this, I think, is one of his best insights. He thinks that there's a moral dimension to the various programs of government intervention.

18:10And here, when he says this, he's not speaking as an economist. Remember, economics is value free, but he's certainly free to give his own moral views when he's talking about economics. And he says, he talks particularly of moral hazard, which he takes in a rather wider sense than is usual among most economists. And what he suggests is that in a society in which the people rely on the government for their welfare, say, then we'll have a state of affairs where people don't act with with Individual Responsibility.

18:57They won't take responsibility for their own lives. They'll instead look for the government to help them out, to bail them out of difficulties. And he thinks that this, I think rightly, that this will lead to a collapse of the culture and society in which we live if people don't take individual responsibility. As an example, he talks in his latest book, Defining Liberty, refers to the famous case in 1979 of the bailout of the Chrysler Corporation. And since that time, we've had large companies and banks take very risky policies because they have good reason to think that the government won't let them collapse.

19:50doesn't always work, but it very often happens that the company will think, well, we're just too big to fail, so we don't have to worry about taking very risky policies, because then the government will just step in and rescue us. And I think he rightly suggests this is a very dangerous attitude to have, and he finds this really pervasive in society. And I think here we can compare him with another famous Austrian economist, Wilhelm Ruecke, who spoke of the moral dangers of inflation in encouraging people to disregard moral values, to not take responsibility, but just to take an attitude of only the present matters.

20:43We don't have to worry about the future, because that's, after all, a long way away, as Keynes's famous statement, in the long run, we're all dead. So people relying on the government tend to be improvident and not take account of their own, they don't take responsibility for what they're doing themselves. And I think in really in the way Ron Paul has applied Austrian economics to the various policy proposals today, he really counts as an outstanding intellectual in politics who's really made extremely good use of the lessons he's learned from Mises, Murray Rothbard and and the other great Austrian economists he studied so well.

21:41Applause