 My name is Chris Coyne and I'm the F.A. Harper Professor of Economics at the Mercatus Center at George Mason University and the Associate Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics. Today I'm joined by Robert Higgs who is a senior fellow in political economy at the Independent Institute and is the editor-at-large of the Institute's quarterly journal, The Independent Review. Bob, welcome. Thank you very much, Chris. So in addition to understanding the historical episodes and providing a alternative history compared to the conventional view, one of the the main takeaways that I think comes out of this strand of work is that when the government engages either in warfare or in security or defense, whatever you want to call it, it has to pull real resources out of the private sector, it has to redirect the entrepreneurial alertness of private actors and it redirects those things from satisfying consumer wants, private consumer wants to satisfying the government. I think this is an important point beyond the episode of World War II because a lot of people to this day make two related arguments. One is one you brought up earlier which is the military Keynesianism type argument which is that government spending on military or defense related activities somehow contributes to economic growth by stimulating spending. The second one is that government spending on security, defense, what have you creates opportunities and products and services that otherwise wouldn't exist because basically the government is sponsoring or subsidizing scientific research. Do you see that this relating directly to some of the insights that you raise in this body of work? I do. I think the idea of regime uncertainty is a general idea. In fact I've been applying it to events since 2008 and I've written a number of, in this case, fairly small scale articles to demonstrate that the same kinds of evidence I deduced to show regime uncertainty in the late 1930s have shown increases in regime uncertainty since 2008 as well. So I think that has something important, I don't know how much, but something important to do with the slow rate of recovery from the recession that began in the beginning of 2008 and in some ways has not ended yet even though we're now in 2016. So this is a great duration of its own. It's not comparable of course with the magnitude of the 1930s Great Depression but it's similar in kind and I believe it has to some extent a similar explanation. Now another thing I haven't touched on that that's that you're now raising here is the question of how people react when the government increases the level of regime uncertainty and it's not simply that they reduce the volume of long-term investment it's that what they do undertake is different in character. Obviously some people will try to butter their bread by producing things the government wants and if for example the government is subsidizing certain kinds of products or certain industries then that will attract resources to be invested in those places. So nowadays for example the government subsidizes so-called green businesses and green enterprises and this almost always turns out to be just a way of wasting money on paying large amounts of money to corporate cronies but it you know it can be environmentally allegedly environmentally friendly automobiles it can be solar panels or it can be all sorts of things that fly under this banner but the fact is that now you've got investments being you're changing the structure of the capital stock in ways that would not be viable without these government subsidies. So even though you've had in both the late 1930s and since 2008 you've had a higher level of regime uncertainty and that has discouraged long-term investment in general you've also had in both cases a distortion of the capital stock because of where people choose to restore the stock when it becomes old or depreciated obsolete do they do they reinvest in some cases they would but for the regime uncertainty in other cases they make new investments even long-term investments that they wouldn't make except that the government has mixed the regime uncertainty with subsidies and changes in regulation that make these investments look as if they're potentially profitable so so there when government intervenes it creates many kinds of effects and economists often sees on one or another of them but but there are multiple effects and they interact because when you distort the structure of production you have an effect for example on the relative costs of raw materials and intermediate products in the industrial sector and that is in some ways a bigger part of the economy than the final goods and services part there's been some research to show that in fact there even attempts not systematically take into account how much economic activity is going on at the intermediate levels that don't get taken into account by GDP accounting where we we look at only final final goods and services when we add up the so-called total output of the economy but but of course a lot of action takes place within the capital structure itself and when the government either creates uncertainty or or distorts production with with with tax changes with with subsidies with with regulatory changes that affect different industries differently it distorts the capital structure and that has effects on operation of unrelated activities and different kinds of outputs so you know the economy is such a complex and delicately interrelated web of evolving relationships and connections that that it's it's really impossible for anybody even the most dedicated Austrian to identify all of these connections they're almost endless and that's one of the reasons why the the proposal to intervene represents a level of hubris cannot withstand critical scrutiny economics has become very interventionist ever since the 1920s and not just the United States but all over the world and certainly macro intervention is swept the field since the 1940s but the intervention is always based on a very impoverished conception of what the economy is and how it operates a very simplified mechanical small scale highly aggregated view it's like this simple machine oh you put something in here and something pops out there but in fact the real economy is this countless millions hundreds of millions billions of people all doing things that if you track them close enough relate to one another we're all related it's not just that we all come from Adam and Eve related that way we we're all related right now in this huge world through the intricacies of the the great division of labor that that Adam Smith visualized for us perhaps well for the first time and others particularly Austrians have and visualized in a more precise way since then but but Austrian economics does not lend itself well to interventionism because it's aware of the hubris that has to sustain those