 OK, I have one o'clock, so we'll go ahead and get started. I realize this is a talk about statistics right after lunch. And so in effort to keep anybody from falling asleep, I want to start off with a joke. And the level of laughter after this joke will tell me how much time we need to spend on the econometric slide in this PowerPoint presentation. So here it goes. Three econometricians go deer hunting. So they get out into the woods, and they come upon this meadow, and they see a deer. A deer approaches them. So the first econometrician gets his rifle ready, and he takes aim and shoots. But he misses three feet to the left. So the deer doesn't run off for some reason. That's how the joke goes. And the next econometrician takes aim and shoots and misses three feet to the right. The third econometrician starts jumping up and down, saying, we got it, we got it. So, OK. I deserve no applause. This is not my joke. But there was a decent level of laughter. Maybe we can do the econometric slide pretty quickly. The first thing that I want to do before we get into talking about the differences in the way Austrians and mainstream economists deal with statistics and data is I want to immediately dispel this stereotype that Austrians have, that we're afraid of numbers. Has anybody seen that or at least heard jokes about that? Austrians are Austrians because they are bad at math, or they're afraid of numbers. They're afraid of how they can handle all of the math that is involved in mainstream economics. And I've been thinking about this over the course of the week while I was watching the lectures. Austrians actually have a healthy respect for numbers. And if you consider the two big contributions that the Austrian school has, namely the socialist argument or the impossibility of economic calculation under socialism and also our business cycle theory, numbers are very important in both of those stories. So if you think about the socialist calculation debate, the whole point that Austrians make is that entrepreneurs have the wrong numbers or they don't have numbers. They don't have the numbers that they need to calculate profit and loss. And therefore, they make all of these errors and we can't satisfy consumer demands. And it's because of a lack of good numbers. It's because of a lack of the data that entrepreneurs need. And the same applies to Austrian business cycle theory. So there's this, the central bank increases the amount of money and the economy and it goes through credit markets and this depresses interest rates below the pure time preference rate of interest and it causes all of these other problems. So it's because there are errors in the numbers that entrepreneurs are receiving that they make all these mistakes and consumers over consume. So it's not quite right to say that Austrians are afraid of numbers we don't do a lot of math and we'll talk about why in just a moment. But it's not fair to say that we're just afraid of numbers because you could see the numbers are very important in two of the main Austrian contributions. So another thing, another preface here. I've got some essential reading for you. We're at day three of Mises University so I'm sure everybody's reading list is about yay-hi and here's some more for you. So I have Murray Rothbard's toward a reconstruction of utility and welfare economics. This is one of my favorite papers by Murray Rothbard and I think that if a lot of mainstream economists would read this they might start to reconsider the way that they do especially consumer behavior and consumer economics. He bases utility and welfare on demonstrated preference as opposed to utility functions and he also bases it on what's called the unanimity principle. So it's a very foundational paper. I recommend everybody read it. Another paper that I'd like to recommend is by Roderick Long. It's called Realism and Abstraction and Economics, Aristotle and Mises versus Friedman. And here Roderick Long makes a distinction between precise and non-precise abstractions and he shows how a lot of the errors that come from the mainstream way of doing economics come from the fact that they make precise abstractions which is to say they have this idealized formal model of the way a consumer behaves for example and a lot of things are specified as absent. So there are no extra frictions. There are no changes in psychology. There's no other things that might change the way the consumer will behave. And so we model behavior, we model consumer behavior based on this equation. Anything else that might change what consumers actually do are outside of the system and we can't really deal with that. And so a lot of times it's interpreted as irrational behavior or market failures or something like that. As opposed to the Austrian method in which a lot of the specifics of action are intentionally left unspecified. So it's a non-precise of abstraction. We say it doesn't matter what's in the different slots on the preference ranking. It doesn't matter if it's apples or oranges, diminishing margin utility applies no matter what. And so those are the sorts of abstractions that are made in the causal realist tradition. So I highly recommend that paper. I have this page range from Human Action, the scholars edition. This is where Mises walks through the difficulties and issues in using math and economics. Another paper, this is actually a chapter in the economics and ethics of private property by Hans Hermann Hoppe. He goes through two different ways that we can interpret econometric results. And so there's one safe way of, or innocuous way of interpreting econometric results, which is that you've got one variable and another variable, possibly more. And when you run the regression and you estimate the slopes on these, or yes, yeah, you estimate the slopes, what you found is a correlation between one or more variables. And that's it. It applies to those subjects. It applies to that time period. And it's just a correlation. Another way of interpreting those econometric results is a more, it's incorrect, would be to infer causation from that correlation, which is famous. But Hoppe also shows how a lot of times when people are interpreting econometric results, they not only imply causation, but they also say this correlation applies for all peoples. So not just for the subjects at hand, and also for all time. And so a lot of times people think that they found this universal relationship between two or more variables and econometric results when Hoppe shows that you can't make those sorts of conclusions. Finally, I have three from Murray Rothbard. In statistics, the Achilles' heel of government, this is in economic controversy. So I highly recommend you get a copy of this or find it online. It's online for free. Great compilation of Rothbard's papers. In this article, he shows some of the nefarious things that governments can do with data that they have. Two more from Rothbard. There's the Austrian definition of the supply of money. So here you can get a good, this is a good example of an Austrian economist taking an approach to data, taking an approach to statistics. What can we do with statistics? What is the best way that we can think of statistics based on our economic theory? So it's a good example there. And then finally, you see a great distinction between theory and history or economic theory and economic history in America's Great Depression by Rothbard. So Rothbard shows a proper way of using statistics in this example. Okay, so I've got two little snapshots here. One from Austrian economics and another one from the mainstream. I literally just did a random pick. I did not do any searching here. I just, I used what I found first. And so I took man economy and state, opened it up to a random page, found a footnote, and lo and behold, we got a great example of Rothbard using logical deduction, using the method of the Austrian school. And so in this footnote here, I don't want to read all of it. He's showing what happens if we have discrete goods that are being exchanged in a market. And he talks about if we have this, then that implies this. If we have the opposite case, then that implies this. And so it's qualitative. It's logical. This is the way that Austrians come up with good economic theories through this logical deductive method. In the mainstream, however, the backbone of economic theory is mathematical models. So we stipulate that humans behave in a certain way. And you see the results. So this is just the first article that I could find that was in one of the, I think it was from the National Bureau of Economic Statistics, National Bureau of Economic Research. They're working papers. It was one of the first ones that I found. And it just sort of looks like Galbi goods. So you think that economics, if it's a science of human action, of people making choices, it should be at least a little bit intuitive. It should make sense to us because we do this sort of thing on a day-to-day basis. We make choices. So which one looks more intuitive to you? Which one seems like it represents the way you make choices on a day-to-day basis. And so I would argue that the left-hand side wins. I wanna spend a little bit of time just reviewing quickly mainstream microeconomics, mainstream macroeconomics and econometrics because in so doing, we'll see why the mainstream has the statistics that they have and why they use them in the way that they do. So here's just mainstream microeconomics. I'm looking specifically at consumer behavior in a nutshell. So we have individual agents selecting bundles of goods to consume and their consumption of those bundles allows them to achieve a certain level of utility. And the way that this is graphically represented is with an indifference curve. So here we have an indifference curve in the top right. So some consumer can achieve different levels of utility. However, there's certain combinations where if you increase one good and decrease another then you can attain the same level of utility and all the points that satisfy that condition are called an indifference curve. And so what the consumer does, as you can see in the bottom right hand, is they take their budget set, which is a linear combination. It's a linear relationship. And they try to achieve the highest level of utility that they can by finding that tangency between the budget set and the indifference curve. So they consume as much as they can constrained by their budget. And so what this means is that all consumer behavior in mainstream microeconomics can be boiled down to a simple calculus, well, it's simple depending on your perspective. It can be boiled down to a simple calculus problem. So we engage in constrained optimization. We have one function and another function. How do we maximize this one subject to the constraints of this one? And a lot of times here, I have one example here of a common utility function called a Cobb-Duckless utility function. So this consumer's utility is based on the consumption of two goods X and Y and it's based on X to the alpha times Y to the beta. And so, and then there's a separate function that describes their budget set. Compare that to how we conceive of consumer behavior or human action in the causal realist tradition. So you'll notice just by looking at the slide, it's more qualitative, it's more verbal. And so the individuals act to bring about a preferred state. Preference is only demonstrated in action. Action is the use of means for a purpose, the attainment of an end. In action, less important ends are foregone to attain more important ends. And that just about sums up what you can, what causal realist economists, what Austrian economists say about human action. And so very different. One criticism that I see sometimes is that it's oversimplified. So here, I've just summarized human action in four bullet points. If you compare that to what this screen looks like, which is the basics of neoclassical microeconomics. One criticism that I see is that this method here, the neoclassical one is more sophisticated. So since it's more sophisticated, there's more numbers, we can do more with it. However, I would argue that what we achieve with these four bullet points here, and you could arrange them in different ways, what we achieve is better. We achieve like this on an epistemological grounds, more rock solid foundations. We can do more and say more, we're more free because we know the boundaries of what we're able to say with this sort of description of the way humans behave, as opposed to having all of these precise abstractions, all of this math that allows us to do math problems, but doesn't actually describe the way real humans behave. So quickly, just some immediate observations on the differences between these two methods. The two approaches are answering different questions. So in the mainstream, they're modeling behavior to make good predictions. This is very important. So from the starting point, the two different strains of economic thought have different goals. In the mainstream, they're trying to make good predictions. And in the cause of realist tradition, they're trying to explain and understand real world phenomena. So we look at how actual humans make actual choices based on their condition, based on the state of the world that they find themselves in, and then they seek other states of the world through action. So they're doing different things. The two different strains of economic thought are doing different things. Or yeah, they're answering different questions. They're also doing things in very different ways. So in the mainstream, consumers use or act as if they use math to make decisions. I've got this meme here. So here's a young couple. They're trying to decide if they would like to have some children. And so the man asks his wife, should we have more kids? The wife says, let's consult our utility function. And then they think really hard. They do lots of math in their head. They plug the numbers into the utility function. And then instantaneously out pop a couple kids. So this is a strawman. Neoclassical or mainstream economics or economists would not necessarily say that we actually do this. So that would be a very large assumption. We don't actually do math as we're walking down the grocery store aisle. What they would say is we act as if we do. And what that means is that, I'm going down a rabbit trail here. What that means is whenever we don't act as if we're using math, and that means we're acting irrationally, which means that there's some possible way that for governments to intervene to correct our choices because we're acting in an irrational way. The elements are conceived in different ways. So in the mainstream, continuous goods are consumed to achieve a certain level of utility. It has to be continuous so that you can take derivatives so that you can do that constrained optimization problem. However, in the real world, in the real world, goods are not continuous. And so in the cause of realist tradition, we say that there are discrete goods that are consumed to attain a certain ordinarily ranked end. So we seek some qualitatively defined state of affairs that we would wish to see and we combine means to attain that end. The scope of the consumer's knowledge is also very different. So on that indifference curve, there's every possible combination of goods that can be consumed by the consumer. And what that implies is that in order for consumers to make a rational decision, they have to rule out all of the other possible alternatives and know about them, know those combinations, as opposed to in the cause of realist tradition, all that the consumer necessarily is thinking about is what state of the world do I want to achieve or attain and what state of the world am I foregoing by pursuing action in this way? Okay, now a brief overview of mainstream macroeconomics going fast here. So that was a whole course on microeconomics 10 minutes maybe. Mainstream macroeconomics is really all based on this circular flow diagram. So just a quick primer on this, we've got firms and households are interacting with each other in two different markets. So households and individuals are trading with firms, they're trading goods and services and they're also trading factors of production. So we get this flow of money all the way through the economy and the flow of spending as we'll see later is a national income. So it's the same flow all the way around and what GDP seeks to measure is this flow of spending. There were a few models in between but the circular flow model led to the income and expenditure approach by Keynes and the ISLM model. And then finally to the aggregate supply and aggregate demand model that we see here in the top left. Some other big models in macroeconomics of the solar growth model and dodginess growth, the dynamics stochastic general equilibrium model which is actually I think decreasing in popularity these days and we'll see why later and also New Keynesian model. So these models that you're applying shocks to the economy and seeing how it reacts but the economy is once again just an equation. So you change the number really fast and you see how long does it take for this equation to reach another equilibrium after you apply that shock. The short story here is it's all math. It's all equations, it's all math and so that's why as we'll see the mainstream economists find the statistics that they find and use the statistics that they find in a certain way. Okay, so the first of these statistics that I wanna talk about is gross domestic product or GDP. You can open up any standard textbook and find this definition. It's the market value of all final goods and services produced within a country over a given time period. The reason it's the market value is because that's the common denominator that they can use. They can't use weight because some of the services don't have weight. So there's no other common denominator that they can use besides market prices. So they use the market prices. Importantly, intermediate goods are excluded. So it's only final goods and services that are included and they do that so that they can avoid a double counting problem. So if you count the flour that the baker uses to make the bread and then you count the bread which contains the flour then in their view you're double counting the flour that's the intermediate good in this process. So they try to exclude spending on intermediate goods. Also only domestic production is included. They're trying to net out the things that we consume here in this country that were produced in other countries because GDP is domestic products so they're trying to get a handle on what sort of things are produced in our economy, in our country. And it's a flow variable so it's over a certain time period, usually a year but you can also find quarterly GDP figures. Another equation that you'll see commonly with this GDP figure is the Y national income or GDP is the specific measure of national income is equal to C plus I plus G plus net exports or exports minus imports. The C is consumption spending, I is investment spending, G is government spending and then exports X and subtract out imports. All right, so I'm going to quickly go through these issues with GDP and the reason I'm going to go through these issues quickly is because you can find these in a lot of textbooks, mainstream textbooks even but on the next slide I have some that are particularly Austrian criticisms of GDP. So the first four here, household production is ignored. So I mown my own grass. That's a part of national product that's a, I'm working, I'm producing a freshly mown grass is something that I value but since I don't trade it on a market, there's no market price for that. It gets excluded in GDP. Black market transactions are obviously excluded or maybe they can be estimated. This can be really massive actually. I've seen estimates from 25% to 40% of the economy is under the radar. So this can be from tax evasion or can be the sale of illegal goods. So that can be a very huge gap in estimated GDP figures. This third point here has more to do with the way GDP is used as opposed to the actual figure itself and how it's calculated. A lot of times you'll see people use GDP per capita. So you take GDP and divide it by the population. They'll use that as a measure of happiness or wellbeing for the citizens of that country and then you can make inter-country international comparisons. And there are quite a few issues with that. One issue is that if you try to come up with a correlation of GDP per capita with what survey data says, how people have self reported, how happy they are. There are many issues with survey data as well, but you would expect that if they're measuring the same thing, they would be correlated. There is no such correlation. And so happiness, there is no measure of happiness and obviously GDP per capita is gonna have some issues with that as well. A fourth issue that you'll find in most textbooks is that leisure is valuable. So sometimes we voluntarily stop producing. So we have weekends. We only work a certain number of hours per day. So we stop producing because we value the alternative. We value leisure. We value sitting on the couch and binge watching stranger things or something. So we're not producing, but we're getting something that we prefer. We're getting something that we value. But this, if we engaged in more leisure, even though we're getting something that we want, this would result in a decrease in gross domestic product. Okay, so these three here are more Austrian specific criticism of GDP. Austrians are very good at pointing out that we need to disaggregate things. So we disaggregate the structure of production into its different stages. Austrians also say that GDP has an aggregation problem. So even though there's this common denominator of market prices, there's still an apples and oranges problem. The stuff that's inside GDP is heterogeneous. So you have consumption spending. You have some investment spending. And that investment spending is only the final capital goods that are in the structure of production. You have the government spending, which I have a whole nother point dedicated to. But the point here is that you don't, with one GDP figure, you don't see what's inside it. You don't see a growth potential. You don't see the distribution of wealth inside the economy. You don't see the distribution of income inside the economy. So there's an aggregation problem, even though there's a common unit. Austrians would say that a better measure of economic health would not be GDP, but the level of savings in the economy perhaps. So we would look at how much are people not spending on final consumption goods? How much are they investing? And this would give us a better picture of the growth potential for the country. Number six, consumption is exaggerated. And international trade is understated. So if you look at just GDP, since it's only including final goods and services, you're missing out on a lot of the spending that happens in the structure of production. And so if you just look at the components of GDP, consumption spending has a very large role. It's very large in proportion to the other components. It's like a 70% I think is the last number that I saw. So if you're looking at GDP figures and you're a politician or you're in DC and you're coming up with policy and you're looking at GDP, it looks like consumption is extremely important for the economy. However, if we look at all expenditure in the economy, including the intermediate goods in the structure of production, then consumption spending has a much smaller role to play in the size and the health of the economy, including that caveat about saving. And international trade is also understated. Let me go back to the equation here. So C plus I plus G plus X minus M. So the exports is added and imports are subtracted. So if we have $100 billion worth of exports and $100 billion worth of imports, that net export component is zero. And so likewise with the case of policymakers looking at the size of consumption and what sort of influence does that have on our economic health? If you're looking at net exports, it looks like this has a very minimal or insignificant role to play in the health of the economy. Whereas we saw earlier in the lecture on the division of labor and also the one on free trade and protectionism, international trade is extremely important for the health of the economy. So we need to exploit the international division of labor. So exports are important. All right, number seven. This is perhaps the most significant criticism of GDP that Austrians have. And we'll see that the way that Austrians have countered this or tried to get around this problem. Government expenditures are categorically different from the other components. Without market prices and the profit loss test, there's no way to measure what the government produces or the benefit of what the government produces. All government expenditures are also made possible by taking from the private economy. So we have this productive component of the economy where we're producing things that are in line with consumer demand. And then there's this other institution in the economy that's taking from that. And so since government expenditures and government programs are not subject to the profit and loss test, there's no way for us to say for sure that what the government is doing is productive or value productive. The best we can say is, I don't know. However, it's quite easy to say a lot of the things that the government is doing is actually destructive. And so we'll see how different authors have dealt with that. Like Bob Higgs, one of my favorite Austrian authors. Highly recommend his book Crisis in Leviathan. He has taken a look at GDP during World War II. And if you look at GDP during World War II, there's, it just skyrocketed in the beginning as the government started increasing its purchases of war goods. So we turn into this war economy and GDP skyrocketed. So it looks like, you know, we're having this great party. So if you consider GDP as a measure of economic health, oh boy, the U.S. economy looks great during this period. However, what Higgs does is he takes out the government spending component. And you'll notice there's a dip. So you see those black bars at the bottom. There's a dip in what's left over private product for the private economy after you take out the government spending. And this actually is more in line with what consumers felt during this period. So there was rationed consumer staples. And so people actually weren't better off. There was a huge restructuring of production away from what consumers wanted towards what it takes to wage a war. And so if you want a picture of how consumers are actually feeling, then this private GDP is a better figure. So this is just one example of the benefit of this exercise of taking out the government spending a component in GDP. Higgs also points out that if you look at the end of the war there's this major collapse in GDP. It looks like the worst depression that the United States has ever experienced. But if you actually looked at what people could consume, if you looked at private product, there was actually a huge boom. So the private domestic product, private GDP, there was an increase, a massive increase. It was great because all these soldiers were coming home. There was a restructuring of the economy away from producing war goods and back towards producing what consumers demand like butter and food, I like food. David Howden has also shown us an exercise in what we can say, what we can do when we take out government expenditures from GDP. And here he has also divided these figures by the number of private workers and the number of public workers. And the point of this exercise is to show, well, there are a few different points. First of all, you can say, you can see what happens during a recession. And it turns out that there's much more variation in the GDP or the gross private product per private worker during a recession as compared to just the public spending or G per public worker. And one I can speculate, he's in the audience, maybe he can correct me. One thing that we can say with this is that since the government programs, all these offices that these public workers are in, they're not subject to the profit and loss test, which means that during a recession, they're sort of immune to what's going on in the rest of the economy, then that's why we don't see the big decrease. So here's just another benefit of taking government spending out of GDP and seeing what you can say about real workers, real people in the economy. You can also, the black line, the top black line is the government spending per public worker. It seems very large, doesn't it? So this is, you can think of this as total compensation on average for all of the government employees. So one way that you can interpret this is that they're just vastly overpaid, another way, maybe a kinder ways, maybe we need good experts that deserve high wages in the government offices. Rothbard takes it a step further. He's very good at that, taking it a step further. So he doesn't just take government spending out of GDP, he subtracts it again. So it's like you take GDP, subtract G and then subtract G again, or government receipts or government expenditures. And so this is from America's Great Depression, and I have the page range down there at the bottom. This is a part of a very great discussion on some issues with national product statistics. But he, in Rothbard's perspective, the government spending is, it's not just wasteful, it's not just, I don't know, he considers it a depredation on the private economy. So they're actually moving resources, not just away, but moving them in a certain way that's actually detrimental to the entire economy. So he subtracts it twice. And he calls it the private product remaining. Okay, so back to comparing the mainstream macroeconomics and Austrian macroeconomics. And we'll talk a little bit more about this in my talk tomorrow. Here's the Austrian approach to considering all economic activity in an economy. So we have Bumbavrik's concentric circles in the stages of production, Hayek's triangle or trapezoid, depending on who you talk to. And then Rothbard has a similar sort of diagram in man economy and state. And then Garrison, Roger Garrison is credited with taking this triangle and turning it on his side. This is my tribute to Roger Garrison's wonderful PowerPoints, this is the best I could do, I guess. So here's Garrison's structure of production. The whole point of the structure of production is to show production existing in stages. So we start with natural resources, research and development. And we move them through a production process. So we have to refine these natural resources. We manufacture them into different shapes. We transport them across the country in different directions. And then we put it on the shelves in a retail shop. And then we're at the very end of the structure of production, we have total consumption spending. So this is how Austrians conceive of the economy, the entire economy, this is like the best way to summarize it, I would say. But what that means is there's lots of spending here in the structure of production that's not included in the GDP figures. And so this is where Austrians get what's called gross output. And Rothbard and Mark Scalson are big advocates for using gross output as opposed to gross domestic product. Because gross output includes the intermediate goods, the spending on intermediate goods in those stages. So this is total spending in the economy, not GDP. And one major advantage of this over GDP is that first of all, you'll notice that there's more variation in recessions. And it's because the spending on intermediate products is included. So that's what happens during a bust. So during a business cycle, there's this bust, there's this entire reshuffling of where capital goods are in the stages of production. And so there's a big collapse in spending as people abandon these projects. And so notice in the gross output, which is the top line is this big fall in total expenditures because it includes the spending on those goods, where you don't see that as much in GDP. So it tracks better with the business cycle. Another major advantage of gross output is it puts consumption in its place. So if saving and investment is what drives economic growth and in gross output, a lot of that investment spending is included now where it's not included in GDP. And so we actually put consumption spending in its place. I think it's around 25 or 30% in gross output figures. The official statistics for gross output didn't start until 2014. So this is a relatively new piece of data that we have. I encourage young researchers out there to take advantage of this. Another major macroeconomic statistic that is used in the mainstream is the price, CPI is the most popular measure of the price level. The price level is this idea, what is the level of prices in the economy? One specific measure of which the most popular specific measure is CPI, there are plenty of others. And I can go through this quickly as well. The main issue with coming up with one number for the price level from the mainstream economist perspective is there's no common denominator, there's no common unit, so prices are ratios. So unlike GDP, which is price times quantity, you'll notice here I've got this hypothetical economy with burritos and haircuts and Lamborghinis. So there's no units problem when you're calculating GDP. You see that in the calculation in the bottom. So here you get nominal GDP and the units cancel out. So the burritos in the numerator cancel out with the burritos in the denominator. And same with the haircuts in the Lamborghinis. And what you're left with is one dollar figure, total spending on the final goods and services, blah, blah, so it's one of those what some economists call happy aggregates because it's got a common unit. This is not the case for prices, so prices are dollars per unit. So when you go to buy a burrito at Chipotle, for example, down the road, you pay $10 for a burrito if you get the guacamole, which I highly recommend. And notice this is a ratio, it's dollars per burrito. So if we include the other, suppose in this hypothetical three good economy, we wanted to come up with something like the average price. We might take the price of the burrito, the price of the haircut, and the price of the Lamborghini, add them all up and divide by three. You get this number, 131,000. But if you consider what the units are, it's dollars per one third of a burrito and one third of a haircut and one third of a Lamborghini, which is just nonsense. It's meaningless. And so since you can't come up with an average price in this way, what the mainstream or conventional way of dealing with this is using an index. So the way they do this is they come up with a basket of goods and they use survey data. I think the Bureau of Labor Statistics conducts a survey. They try to figure out what's important to the average consumer based on the survey data. And this, the results of the survey give you a basket of goods that's important. They tally up the price of this basket from one year to the next. And each time they do that, they compare it to a one common year, one common base year, which means that we have a common denominator now. So this is how all indices are created. But the common denominator is the price of the basket in the arbitrarily chosen base year. And so this allows you to come up with different price indices. For example, the consumer price index, the price of each bundle, the price of each basket is compared to the price of the basket in the base year. Multiply by 100, I guess to make the numbers easier to work with and you get calculations like this. I'm going fast because I think everybody is pretty familiar with the way this is calculated. So what are some of the issues? This is where we're concerned. Even with indexing, there's an apples and oranges problem. So we've got haircuts and burritos lumped together. This is especially the case if you're looking at changes in CPI from one year to the next. So they redo this survey whenever the consumer preferences change, which is all the time. So every year there's a different basket of goods that's being compared to the base year. So in this year's CPI calculation, they'll include the price of a blue-ray player, but this was not included in the CPI that was calculated for 1957, obviously. So the basket that's being compared is different. The qualities of the goods are changing as well. So this has major implications. One important Austrian criticism of CPI and other price indices is that it hides canteon effects. So canteon effects are very important to Austrians because, well, mainly for the Austrian business cycle theory. So Austrian business cycle theory is a special application of canteon effects. And so if you're just looking at CPI, you don't see new money rippling through the economy bidding up prices. You just see the one number increasing. Another issue with CPIs that it hides changes in relative prices. So in the example that I calculated previously, the Lamborghini could have increased in price and the Burrito and the haircut could have decreased in price, which means that the relative prices are changing, but the CPI figure disguises that. You can't see that if you're just looking at CPI figures. Probably the most important Austrian criticism of the price level is the fact that it doesn't exist. So there is no such thing as the price level in economic theory. And in Manneconomy State, Rothbard says this can, and this is during a discussion on stabilization policy, which we'll talk about some more tomorrow. So arguments for using government policy to stabilize prices throughout the economy. And so Rothbard says this, this contention rests on the myth that some sort of general purchasing power of money or some sort of price level exists on a plane apart from specific prices in specific transactions. As we have seen, this is purely fallacious. There is no price level and there's no way that the exchange value of money is manifested except in the specific purchases of goods that is the specific prices. So the Austrian position is that the only way to think about the price level is as an array of all of the specific prices that people pay. It's not one number. It's all the numbers that are in the prices that we pay. There are quite a few different conventional statistics for the money supply. There's M1, M2, M3. And the way these are arranged and put together is based on liquidity. So you decrease in liquidity as you increase the number. I don't even know how high they go. I think I've seen M5 before. I'm not sure how high up they go, but as you go up these different money supply measures, the idea is that they're adding elements to the money supply that are less liquid than previously. And Professor Salerno and Murray Rothbard have done great work on this. They've come up with an Austrian definition of the supply of money. They call it the true money supply. Great name, by the way. So this is the true one. It's supposed to all the fake ones. So the Austrian true money supply, one way to think about it is you can think about it as M2 minus travelers checks, time deposits, and money market mutual fund shares. However, the money market deposit accounts are okay. And the reason, well, I guess I should back up and say why they include these things and not the other things. And the reason why is they're looking at components of the money supply that are immediately spendable. What is the final means of payment? So you exclude credit transactions, you exclude things where it looks like I'm paying for something now, but it's the final payment forward that actually comes later. So you can only include things that are the widely accepted medium of exchange, meaning what is used in the final payment for the good, not other things. US savings bonds can be counted, which sounds kind of intuitive, but they have to be included at a discounted rate. So if you can cash them out early, it's discounted, but it's immediately spendable. So it can go into the true money supply. The cash surrender value of life insurance policies, I recommend if you wanna talk about these, talk with Robert Murphy. And US Treasury and government deposits at the Federal Reserve are added. So anything that's immediately spendable, anything that's included is the final means of payment. Have I missed anything? Okay, good. Yes. One benefit of the true money supply is it actually accords with economic experience. So if you look at the relationship of the true money supply and actual financial crises and recessions in US history, there's a much tighter correlation. They go together. This image is from an article that Joe Salerno wrote. I think it was last year. I don't think he made this image, but it still shows changes in the true money supply and how the dips are timed with the financial crises or the bust of a boom bust cycle. And so here we see the fruits of using good, causal realist, Austrian theory to come up with a better statistic, a better piece of data, and how it actually, it correlates better with other pieces of data that we would find in the economy, like changes in real GDP or financial crises. Okay, I'm gonna skip econometrics because we're running out of time. You guys laughed so great at my joke earlier. I just wanna show some of the outcomes in the mainstream. So at the Federal Reserve with all of their high powered models, all of their great data that they have, they're still notably notoriously bad at making predictions. So here, one of my favorite graphs is this one on the right hand side. So this is the Federal Reserve predicting their own policy variable. They're predicting their own federal funds rate that they'll set or that they'll target. And you'll notice that they overestimated. And so one kind way to interpret this is that they're trying to have some sort of announcement effect. So they're trying to say the economy will be better because of our wise judgment and our wise policymaking. And it actually turns out to be. Another way to interpret it is that their models are junk and their data is junk. Here's another example of that. Here in this graph, you see the expectations of the different FOMC committee members. FOMC members should just say. And also it's compared to what the market expects. So you can actually get an implied prediction from markets where people are actually putting their money where their mouth is, where they're actually committing dollars to this prediction of what the federal funds rate will be. And you'll notice just in the text that the market expectations were closer than the always overestimated predictions from the FOMC. Here's a more recent example from this year. So the actual yield on a 10-year treasury note is mapped in black. And then they surveyed a certain number, looks like a couple dozen, top economists as to what their predictions would be at the beginning of the year. And you'll notice that they all were wrong and significantly so. Something wrong, I guess we can conclude. One final point that I wanna make is the Misesian distinction between theory and history. And this is what all of this discussion really boils down to, is what actually do Austrian economists do with data? So we're not afraid of data. We're not afraid of numbers. We can do math. I'm pretty good at math, I would say. But what is the role of data? What is the role of statistics in the way we do economics? And so this comes down to the Misesian distinction between theory and history. So according to Mises, economic theory is deduced logically. So we have praxeology, the science of human action. And we start with this action axiom and we develop the economic theory based on this through logical deduction. It pertains to all choices ever made by anybody. The particulars of the choice are not relevant. It goes back to the precise versus non-precise of abstractions. Specific motivations are not relevant. This all goes into why economic theory is so universally relevant to all choices ever made by anybody. Importantly, it's not falsifiable by observation or experience. So if you come up with something that's logically true from in praxeology, then there's no observation that you can make that would say, oh, actually, demand curves might slope upward. So there's no way that you can observe the world and refute or as a proof against what was derived logically. For the same example that the Pythagorean theorem explains this relationship between the length of the sides of a right triangle. So if you went out and you actually started measuring real-world right triangles, you might find a measurement that doesn't accord with the Pythagorean theorem. And so the question is, would you say, oh, I've just disproved the Pythagorean theorem or would you take a closer look at your ruler or maybe the thing that you were measuring wasn't actually a right triangle. So this is a good example of how Austrians think about theory and its relationship to experience. Our goal in economic theory is to come up with cause and effect, not look at mathematical equations and our goal is also not to make predictions. And some good examples of developing the edifice of economic theory you can find in human action and in man economy and state. This is contrasted to economic history or doing history in which we apply theory to the past. We can identify particulars, we can guess motivations. It's open to interpretation. We can use the good economic theory that we've developed to help us interpret and think about what has happened in the past. But importantly, what has happened in the past really only has indirect bearing on the way we do theory. So if we notice something is happening that might cause us to take another look at the theory. But that's as much as we can say about that. But there's still no constant relationships. So when we're doing economic history we can't say that this relationship, this correlation occurred in the past and it's not going to occur or will occur the exact same way in the future. So this distinction I would say summarizes the Austrian view of statistics because statistics is just experience, it's observation. And with that, we'll end. Thank you very much.