 All right, so this talk is going to be on this title, The Seen, the Unseen, and the Unrealized. So I'm going to start by asking, how many of you have heard of The Seen and the Unseen before? Raise your hands. Okay, so I have about one-third of my talk left, because you know the first two-thirds already. Okay, so seriously though, this is based off of my book from 2016, one of the two from 2016. The Seen, the Unseen, and the Unrealized, how regulations affect our everyday lives. I don't have a copy, because the store had a shipping snafu. But we do have these a little here and there. So if you want to order a copy, you can order it using this QR code. And the best prize in the world is from the Mises store. Okay, so I'm going to go through The Seen and the Unseen a little quickly, since you know the stuff already. And then we're going to move on to see where my analysis and my addition to this sort of differs from the standard take, and how I add to it. Okay, so this starts with Frédéric Bastiat, and you know him from mid-19th century, right? He's the liberal economist, the French guy who was a master on economic rhetoric. And he says, between a good and a bad economist, this constitutes the whole difference. The one takes account of the visible effect, the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal and the converse. Hence it follows that the bad economist, that's not me, pursues a small present good, which will be followed by great evil to come while the true economist, that would be more like me, pursues a great good to come at the risk of small present evil. So you can see how important this is, right? To not only look at what is going on, but also look at what would have happened otherwise. Okay, so he tells the story about the broken window, and when you hear broken window you probably think of Paul Krugman, and that's pretty accurate. So he tells the story about the broken window and how the shopkeeper's son breaks the window, and a number of people gather and at first they don't really... I think the shopkeeper's son has done something bad, something naughty, right? And then they realize, wait a minute, this is actually a pretty good thing because this means the shopkeeper needs to buy a new window pane. So it's more business for the glazer, which is a good thing, right? Because there's more spending in the economy and the wheels start turning and all this stuff. And as all students we don't really believe in wheels, but let's get to that. Okay, what it means is that every downside has an upside and vice versa, just like in Bastiat's quote before. And it's not really a zero-sum game, right? It's not really a game to destroy something either, right? So this is a story about opportunity cost. If you've read, not Bastiat, Henry Haslitz's economics in one lesson, you know that he's basically copying, plagiarizing, if you will, Bastiat, talking about the opportunity cost. And the one lesson is like 35 lessons in one and all of them are about this other side of the story that we have to consider because economics is all about the trade-off. It's about figuring out what is the true cost of something. And the opportunity cost we know that is what we could have done but didn't because we chose this other thing, right? And that's how we evaluate any situation, any choice that we make. Okay, so in this case, the Glacier's gain gains because the shopkeeper loses the window, right? That's what we see. What we do not see is that the shopkeeper would probably have done something with that money if he did not have to buy a new window. And in Bastiat's story, it's a, he would buy a shoe or a couple of shoes, I guess, a pair of shoes. You didn't get that one, did you? Okay, next time. In Haslitz's story, it's buying a coat or something like that instead. But that's what we do not see, right? He buys the window instead of buying what he otherwise would have bought. So you can't really say it is a gain that the Glacier gets to sell a window because at the same time the shoemaker does not get to sell a pair of shoes assuming that costs about the same. Okay, so we need to consider both. And if we do, it becomes obvious that this is not really a gain and it's not really zero sum either. It's a loss, right? Because the shoemaker gets to, does not get to sell. The Glacier gets to sell. That's plus minus zero, we can say. But the shopkeeper loses a window. So it's a net negative. Okay, so what is fascinating about this tail and how Bastia sets this up, let's look at this a little bit. Because what he says here is really that we maintain a sort of free market situation where the choice is voluntary, where the exchanges are voluntary and for mutual gain. Okay, which means he is pursuing what is highest on his value scale. So the reason he buys a window instead of the shoes is because that's higher on his value scale. He didn't need one before, but after he loses the window and there's a big hole in it, then he values that much higher than the shoes he would otherwise have gotten. So he's still following his preferences even though he lost the window. It's really a static view. It's a static view of that choice, that choice situation which is either with a window or without a window and how he would choose considering his son's rocks and playing with rocks. So it's an either or analysis. It's pretty standard. It's pretty mainstream even. Even in mainstream economics courses we teach opportunity cost and hopefully economics professors would teach you opportunity cost day one in the principles of economics course that you took, econ 101. Okay, so what we have then from an Austrian perspective is the value scale where the shopkeeper already has the window pane. That's what the check mark means. He already has that. That is satisfied already. So next on his list is a pair of shoes. He doesn't have that yet, but he's going to buy it. And then of course if he loses the window, then he's still going to go for what his highest unsatisfied wants on his value scale. So in that sense he's still just acting normally. No problem. Okay, now let's aggregate this or blow this up into a bigger example and I've chosen to just drop a few bombs in the city and I chose one at random to turn out to be addressed in Germany. Maybe in this crowd I should have chosen like Washington DC or something. But anyway, so here we have the same thing but on an aggregate level where you smash the whole city with bombs akin to breaking the window. No one dies. No one is harmed other than we lose this property. Okay, nothing really changes. After we lose the buildings, we sort of need a shelter. We need somewhere to live. So we will focus our energy on rebuilding the city rather than doing what else we would have done. Maybe we would have met up with friends in coffee shops or planned our vacation or whatever. But those things are not as important anymore. They're lower on the value scale, right? So after the bombs over Dresden, we're focusing on this unsatisfied want which is higher on our value scale. Of course we get really busy doing this because this is really high on our value scale. So not having a place to live then we would not consider leisure to be all that important anymore. So you would probably invest more of our time, more of our efforts, more of our savings, assuming we have any, and so forth into rebuilding the city. So there will be a whole lot more activity because we want just roof over our heads. This new activity is what Paul Krugman would call economic growth. We would not. This is simply a choice considering the opportunity cost. In this case, leisure is simply not very high on our value scale anymore. We don't have a home. So what does this mean then? Well, it means that our demand for construction materials goes up quite a bit. We have a whole city to rebuild. This means that we are willing to pay a higher price and build construction materials from the whole region. Well, I mean they can make money off of shifting their resources and transporting them into the rest for us to rebuild. Higher profits, hey, why not? Supply chains, they start pumping out even more goods and so forth. And all of this, of course, we see in economic statistics. This is not very strange, right? This is a pretty standard economic story. This is what we would expect. The market works. It directs resources to where they are most highly valued, which in this case is dressed in and reconstructing the city. There would also be, of course, disaster relief from all kinds of organizations, maybe even the government will help people out and so forth. This is the same story, right? They've suffered a loss, but they're still focusing on whatever is highest unattained value on their value scales. I think we can all agree on that, right? So the action is still, their voluntary action is, they're still following whatever it is that they value most highly, subjectively speaking, even on an aggregate level. So the economics of this, of course, is that, yeah, we have a temporary loss. We have a temporary setback. We lost wealth. It's the window or it's the city. One of the two, right? Prices suggest people's actions. They adjust them to. They shift their resources to where they do most good, which is where they have the highest value and so forth. This is a standard story for any economist, right? This is what we would expect. But let's look at something different. Let's look at, what about a regulation? Which is what my book is about. It's different. So far we talked about destruction. We don't have to talk about how that happened or anything, but what about regulations? Well, any regulation is really a restriction on how you may act or how someone may act, okay? It's a prohibition on specific actions. I think you agree with me. A lot of people on Twitter do not agree with this. So it can also be that you're prohibiting an action unless you fulfill certain criteria. But it's still a prohibition, right? You can't do unless you, either you can't do it all or you can do if you are licensed and you check all these boxes and what have you, right? That's a regulation, okay? So what this means is of course that a regulation is effective if it is an action that could have taken place. And this goes back a little bit to what Professor Engelhardt was talking about last lecture, right? Minimum wage, a minimum wage that is set much lower than the market wage doesn't really have an impact at all. So any regulation of course needs to regulate something that people would choose to do otherwise or it's ineffective. It doesn't have any effect, okay? So it must be something that is formally, physically and economically feasible for actors, okay? Well, that means that the regulation itself is not a destruction because it is a prohibition, it's a ban, but it's still destructive and let's look at what that means, okay? So let's assume that the CDC, and we all know what the organization that is now, let's say that they issue a ban on touchscreens because people touch-touchscreens, this is pretty obvious, and they have germs on their fingers so there's a risk for spreading disease. So it's within the CDC's competence. So here we have Dr. Anthony Ipad Fauci. I'm pretty proud of this actually. So they issue this ban on touchscreens. So what is the effect then of this regulation? Well, let's assume that this is a user's value scale, the table down here. With new regulation, at the top of their list, they wanted to get an iPod touch. This might be before your time, I don't know. And as alternatives, they could get a Walkman, you might not know what that is, but that's sort of a portable cassette player, and a cassette was sort of a, well, never. Okay, so, or even lesser value is a portable radio. So those are my options because I want to carry music with me. And if I would be able to choose freely and let's assume that they cost the same and whatnot else, I would pick the iPod touch. Well, with CDC's ban, I can no longer pick the iPod touch because it has a touch screen. The other ones do not, okay? Which means that option is taken away from me, correct? It's not destroyed, it's not impossible. I didn't lose the window or the city. We didn't lose touchscreens immediately necessarily. We have the knowledge, we have the production facilities and everything, right? So this is not really a one-time loss, right? Reality is the same. Reality didn't change. Not like in the other examples where the window broke or Dresden broke. Here it's all the same. The only thing that is different is that a ban has been issued. So we can no longer use touchscreens. No one can use touchscreens because of the risk for disease. Which means an option is lost to us, right? But it's not destroyed. It means that someone who wants to replace their device or someone who wants to upgrade the device or someone like me who didn't have before but want to have music in my pocket, I can't get what is highest on my list anymore, correct? Which makes this different because I can no longer pursue the highest-valued attainable want on my list. Because I'm not allowed. That's different. And it means every time I purchase things that thing is still on my value scale, correct? Because I know it's possible and it was there yesterday which means every time I make a choice I lose that option. I have to go for something that is further down on my value scale. So I lose the difference every time until I update my value scale or I don't give a damn anymore, correct? I didn't lose anything, I lost the option so I lost the difference to the next highest-valued end, okay? Now, this is still fairly static but the economy is not, right? So the only thing we've done now is said well, with the regulation, yeah, the option is taken away from us so every time we make the choice we're gonna lose a little bit instead of with destruction when in one situation we lost a bunch of wealth or a bunch of capital, okay? The economy is different. Destruction doesn't repeat itself unless it's by a Keynesian. But the choices, we make choices every day. A lot of them. So unless we update our value scales we're gonna have this tiny little loss over and over and over again. But there's more to it because it's not about consumption. Consumption is not the economy, right? The economy is production. It's different. So producers are prohibited from selling touchscreens so producers of touchscreens they will either exit the market completely they will pull the plug on their businesses or they will reinvest in something else do something similar but there's not a touchscreen maybe they could have like a point screen that you point at from an inches distance or something like that but it still means that they will need to invest money and resources into changing the products because they can't sell the touchscreen anymore. Okay, well this means that we get more of other types of goods because that's where the resources go we of course get less touchscreens because they're not allowed to produce those so we get overproduction of other goods underproduction of the goods that we could have bought yesterday but can no longer. So the production structure is distorted. It goes away from what entrepreneurs had already figured out that consumers wanted to some secondary choice that entrepreneurs think that they might want. So that's a distortion because usually they would go for whatever consumers value the most. This is not a big surprise. This is sort of simple analysis. Yeah, regulations distort the production structure. Duh, tell me something I don't know. As Austrians we understand this mainstream is lost already. So we lose those options what is the unrealized then? What does this mean? Well there's something more to it since the market economy is a process and not a static state especially not a number of static states after each other. The problem is on the production side because innovation is not it does not come from nowhere at all like that and whoops a completely new thing. It is pretty evolutionary even though it's innovative and seems really revolutionary especially after the fact it's really a process itself with entrepreneurs building off of ideas from each other and borrowing ideas from other parts of the economy and using whatever knowledge they have from other areas and combining those bits and pieces and go whoa this is a possibility I'll try this. So here you have the evolution of the touchscreen devices in this case is the world of Apple brought to you by the world of hair. Again? Okay. Whatever. I won't try again. So Apple invented the iPod and the iPod Touch where you could have 10,000 songs in your pocket. Then they invented the iPhone which was basically the 10,000 songs with an internet connection. You place a phone call on it which led into becoming the iPad and now we're back to Anthony iPad Fauci. Okay. Well they're learning, right? They keep developing these products, keep innovating, keep developing new solutions and they learn in each generation they learn how to do it better and they figure out how to produce better things. It's not the case that suddenly someone was like you know smartphone. No. Because you had all these other products first and some of you might have heard of the Newton and things like that that Apple had way before the iPod too and they tried all these things and eventually they will figure out a product that actually is of value to consumers. Okay. So if we then apply our Austrian process perspective on this and realize that the market economy is an unfolding process that is uncertain, that is unpreneurially driven where whatever seems to work is where the resources are directed but they're still aiming for another point in the future still. Let's look at what this means then. Okay. So if there is a touch screen ban nothing will happen after the iPod and the iPhone is not possible because it has this touch screen. Imagine a smartphone without a touch screen. What the heck is that? It's just a big phone. It's not very useful, right? So you need to figure something else out, something completely different. You also would not have a tablet because it's also built off of what they learned from producing the smartphone. Instead, we get resources allocated into something else producing something that entrepreneurs think this is at least allowed to produce but without a touch screen. So we would get something different. That's true. But we will not get the knowledge necessary and the experience necessary to produce these other goods, those goods that we all have in our pockets pretty much. The smartphones and the tablets and whatever comes next. I have no idea what that is, but something glorious. Okay. This means also then that we don't get the jobs. We don't develop the expertise. We don't even get the organizations, the firms, the production facilities, the technology. None of that happens because of the ban on touch screens because there's no use in investing in all this stuff. Okay. So all of this stuff never happens. It never sees the light of day. All these business firms, maybe this new market niche, this industry never happens. Okay. So now we get to the issue of the unrealized. It's not the scene. It's not the unseen because that's static in the now, in the present, or maybe tomorrow. But over time, what happens, it's what does not happen that would have happened without regulations. Okay. So think about that. You need to be an Austrian to understand this because the market unfolds and is cumulative. Right. What is being produced for tomorrow is based off of what we learned producing for today. In the aggregate. Okay. So the market structurally from a consumer satisfaction point of view is very different. The whole economy is different. Correct. It's not simply, oh yeah, Apple is doing something differently. No. We just said that this affects the whole supply chain of touch screens. All the products that are made and could be made from touch screens. All the suppliers to these businesses, the jobs, the knowledge, the expertise, the technologies that come with it, they're not developed. Instead, we have these resources invested somewhere else. And that somewhere else is necessarily aiming for something that entrepreneurs think are lower on consumers' value scales than what they otherwise would have chosen. Right. Because of course they're going to aim for the highest value that they can imagine. That's pretty obvious. Right. So the whole economy is on a different value-creative trajectory. So it's aiming up here. But now with the ban, oops, no. It's down here instead. Which means we're going to get different type of growth, a different type of market. And we're going to be poorer. We're going to be less well off as a result. And we're going to get completely different goods, completely different careers for people. Right. So we have a choice situation when going to college, say, or when we graduate from college and we get out in the job market. Because of this ban on touchscreens, the jobs are different. The careers are different. Maybe it serves me personally, because I have the type of expertise and interest that fits with where the market is at now. But there's no way of saying, right? You don't even know what you lost. This ban was enforced maybe years ago, and then you had generations of investments all over the place. And the whole economy is different, structurally speaking. OK. So how do we use this then? Any ideas? This is probably where I should say, this is the end of my talk by my book. Thank you. But let's move on a little bit. OK. Let's talk about the sweatshop. Because I think that is a good example of this type of analysis. And why is that? Well, because it's usually discussed in terms of the scene and the unseen. But the unrealized is what's really important here. OK. So this is a page from my book on the sweatshop. Now, we all know what a sweatshop is. These factories or production facilities in the developing world where people are working in what to us seems like horrendous work conditions. It's hot. They work long hours. It's terrible. Well, we would never pick a job like that. If they offered that type of job to you, you would definitely go for the Biden stimulus money instead. Well, that's the scene, right? That's how most leftists argue when they argue the sweatshop. It's terrible conditions. They should have higher pay. They should have more paid vacation. They should have all this stuff. Well, very often we would remind them that no, no, no, there's also the unseen. What would they do if there was no sweatshop there? Very often we know that the people working in sweatshops, they chose to. And very often when Western companies open a new sweatshop in these countries, people line up and they stand in line just as much as we do for the next Apple product. They do for the job in the sweatshop. And why? Because it usually pays a lot better. It's a much better job, better work conditions than the alternatives. So it makes them better off overall. That's usually where this analysis ends. But it shouldn't end here because we're still in the world of Milton Friedman and those static analysis types. Because what can we say? If there is a sweatshop actually created in one of these countries, it means that the economy can support sweatshops. Because they can build the building. There's enough logistics to and fro. The workers are there. The machines are available. All of this stuff. Then the question is why is there only one? Why aren't there a bunch of sweatshops? And of course if you have a bunch of sweatshops, what do they do? They compete for workers. How do they compete for workers? Well, they improve working conditions. They raise wages. They provide more health care benefits and paid vacation and stuff like that. Then the option that people have when they choose a job in the sweatshop, which tends to be toiling in the field, starving to death, prostitution, and all those nice options. The option is not that. The option they should have had is another job in a sweatshop. So they should be able to choose between two different jobs into different sweatshops where they're competing for their work and their time and their expertise or at least their manual labor. This is a very different situation. And we know the economy can provide this type of job because it does. But it only does in a few pretty rare sweatshops. Why not a whole lot more? It's not like Nike says, ooh, we can only have one sweatshop for Nike sneakers because Americans don't like to wear sneakers. They can sell billions of sneakers. So they can have another couple of sweatshops or Reebok and have one next door and whatever else they call the sneakers, companies. There could be competition for this labor in this type of production facilities because we already know empirically we can see that the sweatshop works and they can offer a much higher pay than any other alternative in this area. Right? So something is wrong and what is wrong? Well, here's how I describe it in the book. I say that the fact that there are no economic limitations means the market is mature enough to support this type of production, meaning simply that there is a sweatshop so obviously there can be a sweatshop that's the level of my imagination. We can therefore conclude that the standard of living in the village where the guy we're following in this example would likely have been at par with the standard of living you get when working in sweatshop. But the reason he chose that job is that he did not have a standard of living at that level. He had a standard of living that was much lower which was why his choice to work there was obvious because it was so much better than his alternative. In other words, the poverty experienced by the villagers is to a significant extent artificial. There's only one sweatshop and all the alternatives are so much worse means something is stopping sweatshops from being established because the economy can support this and obviously the company who has this sweatshop is making a lot of money too even at this much higher wages. So why aren't there more? And why didn't this happen before? Because it's not a technological breakthrough, right? It's artificial. So in this choice situation when it chooses between the comparatively high-paying job in the sweatshop and the other alternative toiling in the fields or waving baskets it's artificial. It's caused by something. It's not because the economy is in a certain state the economy is in that certain state for a reason and it's artificial. It's created. Something is limiting it. Well, what limits the economy? What limits the economy from getting to its potential? Regulations. Those are restrictions imposed on this and these might not be regulations imposed on just having a sweatshop in this village. This might be regulations somewhere else that distort the whole economy and make it impossible or very costly for entrepreneurs to pursue starting a new sweatshop or maybe the villagers to go get together and start their own sweatshop to compete with the one that already exists. See where I'm going with this? This poverty is not natural. This poverty does not come out of the market or the market economy. It's created because a limitation is imposed on the market. And that limitation might be anywhere because we said before that just banning touch screens has distortions all over the place and it changes the options for people basically all over the world because other careers, the careers that would have been there are no longer there. The lines of production that would have been there are no longer there. So the whole economy, the structure of the economy, the production structure is out of whack from the point of view of consumer value. Even worse because consumer value, we know that that is sort of uncertain what consumers actually want to buy. It's out of whack with where entrepreneurs would invest their money where they imagine that they would get the highest return. So if entrepreneurs are not maximizing, given their imagination of what might happen and what they're able to do, well, obviously something has impacted them. So why would they choose, oh, there are very few entrepreneurs who reason like this. So I could make a ton of money over here and just a little money over here, a little money. That's not how you reason. That's not how you choose. You don't go, ooh, I value these things in this order. I'm going to pick the lowest one or the one in the middle. No, you're going to pick the one of highest value. So the reason they're not pursuing these things is that they're not allowed or that the market does not support it. So which one is it? If the market does not support it, well, that's an argument, that's a free market argument. I have iPhones in 1850. You have no knowledge, you have no machinery, you have no nothing to produce those things at that time. But if you can't do it in 2021, something is stopping you from doing that. Those are two different causes that could lead to the same result or similar results. So if we look at the unrealized, the effect on the entrepreneurs is really important here, right? Because they cannot pursue producing the goods that they think would be of greatest value to consumers. And that's how they make their money. That's how they, that's their whole function in the economy. That's the role of the entrepreneur. They're the driving force of the market process. And they can't really do that the way they want to. They have to pick something else other entrepreneurs will pursue opportunities. Because the entrepreneurs who otherwise would have, they imagine things that are not allowed. They're not possible. So they cannot invest in where they get, expect the highest return. Some choose not to invest at all and others choose to invest in other places where they might not have enough or as good expertise and knowledge. So in either case they're going to distort the economic structure, the structure of the market. This of course means lower standard of living for everyone pretty much, unless you're really lucky because there are fewer and worse options for consumers than what the entrepreneurs as a class if you will would have pursued otherwise. This means that they are creating fewer and lower paying jobs for workers. Why? Well because they're pursuing a lower value so obviously they can't pay as high salaries anymore. So workers are worse off too and then overall the economy, the structure of the economy is no longer aligned with where entrepreneurs think that the highest value for consumers is at. Which means we have a whole bunch of goods and services and fantastic opportunities all over the marketplace that simply never happened. That we're not going to see because of this regulation that stopped a bunch of entrepreneurs in some place. And I think you can see now that the problem is not as we usually analyze this stuff, saying that oh we regulate this space, well then that's they're going to be effects in this space. Well because it distorts the structure of the market economy overall. The investments are going elsewhere well those are investments that should not, if you want to be normative that should not take place because that's not to the best satisfaction of consumers, at least according to entrepreneurs. So there's a problem here. A regulation way over here will have effects way over here and vice versa. So there will be ripple effects throughout the economy, basically in a sense production based Cantillon effects if you will. Changing and distorting everything because everything is connected one way or the other in the economy. So more of this in this line of production means less over here and vice versa. That's going to affect where workers go how workers educate themselves and so forth. So regulations as I say in if you want to google this and a few of my talks I say that even libertarians don't understand how destructive regulations are because most libertarians are Chicago school economists. They look at the static picture so they say oh yeah the scene and the unseen well you're missing the big cost of regulation which is the supportive effect of the economy. The economy is completely out of whack with the value creation that is possible. That's the unrealized. That's the major cost of regulations. And I think we need to think about that and use that more in our analysis and when we talk about this of course it's a hard case to make when you're arguing with someone on Twitter but we need to realize that there's a whole lot more than simply the scene and the unseen. And you need the process perspective as we do have as Austrians to realize no pun intended the problems with regulations and those types of restrictions added on the economy imposed on the economy in a limited way because it's going to have impact on the whole economy. So I'll leave you with just a book cover in case you're interested and I'll be happy to find it the next time we meet. Thank you.