 This is Mises Weekends with your host Jeff Deist. Earlier this week I joined my friend John O'Donnell on his power trading radio show for investors. We had a great conversation about trade, tariffs, money, Karl Marx, and even why the labor theory of value seems to endure no matter how many times it has been refuted. So it's about 30 minutes. You'll enjoy it. Stay tuned. There's so much misinformation out there both in the media and even in academia on the difference between what we'll call mainstream economics, perhaps of the Keynesian kind or perhaps the Chicago school versus the Austrian school of economics. Now I believe we can agree and you would know this better than anybody being the Grand Poupa there at the Mises Institute that the Austrian school of economics is probably the fastest growing school of economics in the world. And that's primarily thanks to the work of the Mises Institute for all these years. But what I'd like to do today is to differentiate for our audience in just common speak and let's differentiate what is different about the Austrian tradition versus mainstream economics. And maybe let's just start with a couple of either principles or unique characteristics and see if we can't give our audience the cliff note version of what is uniquely different. Let's start with just the concept of money, fiat money versus real money. How would you define that and differentiate that under our cliff note version? John, the first thing about money is that historically it rose in the marketplace and it was often aided and embedded by kings and monarchs but the money had some sort of value to the marketplace recognized and throughout a lot of history that meant gold or silver but it didn't always mean those things. But when we say fiat what we mean is that generally a government or a central bank can issue more of it or issue it at all without having anything backing it. In other words, you don't trade in your money for gold or silver the way you once could in Western countries. The government just issues it as it sees fit to try to regulate that portion of the economy so as a result of that we have political money as opposed to marketplace money and what I mean by political money is that central bankers like people at the Fed, good smart people are nonetheless influenced by the political and economic climate out there and so they often times have an incentive to do things with money to make the economy feel better or at least seem better on paper and what that also means is that when they choose to create more money and that's in the United States anywhere that's a bit of a roundabout process. They don't just print it up as some people accuse the Fed but they increase both the monetary base which is basically the money that banks have with the Fed but also the broader money supply. When they do that there's no new stuff out there, there's no more new goods or services created so creating money in and of itself doesn't make us any richer. It just means we have more money to buy the same existing stock of goods and services that are out there. So what we ought to be concerned with in this country is productivity, how productive our economy is, how much it produces using the capital that's available to it, not how much money there is. An easy example is that if you gave everyone a million dollars every US citizen a million dollars tomorrow prices would adjust rather quickly and the next day none of us would really be any better off. So manipulating the money supply which is a hallmark of fiat money or what I would call political money is something that politicians do to make themselves look better but it's not something that makes us any wealthier or better off. You know when I ask that same question of Dr. Ron Paul he made a very bold statement from an Austrian perspective and philosophy I believe which is that honest money that is money backed with goods like gold or silver has historically been the foundation of civilization because voluntary exchange trade is an accelerant to the growth of civilization. But yet the mainstream economists would tell us that look our civilization's been doing pretty good with fiat money system going back to say 1913 with the Federal Reserve System our economy's growing we got more goods and services in our home today. I remember quite vividly as a working as a paper boy and working in my father's pharmacy in Hannibal Missouri where our coinage was minted of silver and but I would make the case that I could buy a lot more units of gasoline today with one dollar worth of silver coins minted pre-1964 than I can with one dollar of fiat money and it's all about having a higher quality lifestyle through trade and having an honest medium of exchange to facilitate that trade at a better ratio what do you think well it's true and we are certainly better often we were a hundred years ago here's the catch is that you know ordinarily we would think of the economy as as one of exchange where both parties think they're better off and that's great and we are better off if we didn't have money we'd be forced to barter and you'd be forced to go find somebody who had something that you needed to trade with you in exchange maybe for one of your online course so that would be a difficult thing to do and it wouldn't could impose a lot of costs in society would make you worse off would make you poor so money arises as a as a medium of exchange that makes society richer the problem is that one half of the equation the money we use to purchase a good or service is essentially manipulated politically so it's value can be changed radically it can be devalued very rapidly in a way that's awfully hard to do with with what we would call sound money gold or silver so you know while we examine very closely sometimes the good or service that we're going to buy it my wife and i just had the misfortune of buying a new air conditioning unit for our house so believe you me we looked along and hard at the options available before we decided uh... which one to buy but the air conditioning company got our money and since we're here in the united states and there are legal tender laws and incurred the law that pretty much the only uh... former payment they could accept uh... so they accepted that but they don't have much of a say in the quality of those dollars whether that the fetish good and that treasure going to inflate in the near future uh... whether those dollars can appreciate or depreciate in value because that's all controlled politically and that's outside the reach of your average air conditioning uh... repair company so i would argue that they have to break in to their cost into their estimate they gave us some uncertainty with respect to that dollar and and what's going to be worth down the road so it's up it's a very strange uh... is set of conditions were basically half of every transaction i eat the money being exchange for the good or service on the other half is is subject to manipulation control politically uh... it in other words we would all be a gas if the government sat around and decided how many bushels of wheat would be provided this year would be produced this year in america and who should produce them and how much of a farm worker who who uh... produces we should be paid and where the week should be distributed and what town should get how much we would all feel that sounds very communist that sounds like central planning but that's sort of what we do with the dollar we have a uh... a board of governors at the fact that we have an open market committee sits around and and talks about how much money there ought to be what the interest rates uh... which people borrow it ought to be so it's it's uh... not capitalism in the sense of private property as i know it well while we're on the topic of money of course the austrian school of economics other than mainstream economics has always been a champion for entrepreneurship and we've seen over the last seven years the entrepreneurial rise of the cryptocurrency space uh... i don't know that the austrian school of economics has published uh... a position paper on this but uh... well i'll just ask you what is the austrian perspective if there is one uh... the official line from the austrian school of economics because the mainstream economists are having a real problem with that it seems like uh... but yet it is emerging uh... it's had some road bumps but it shows great prospect with the new blockchain technology but what is the austrian official position on the emergence of cryptocurrencies well there's a lot in official position i'll just say unofficially that uh... i think people are excited and happy to see some sort of competition to political currencies arise there's a lot of rigorous debate over whether it has with a crypto currency is not blockchain technology the crypto currency themselves have any existing value independent of their exchange value and if they do not whether that matters uh... this all harkens back to uh... a concept that would have got me to that called the regression theorem that this money ought to or money arises because that's some sort of pre-existing value is commodity and not everyone except that i certainly do but there's a lot of debate even within within austrian circles and then within within broader circles about whether crypto currency is real money but uh... if you read hyac he uh... free to cut hi absolutely believed in uh... created competition in money competition currency and and the idea that people have some things some some uh... uh... methods to purchase things other than with dollars or euro or swiss francs whatever it is i think it is uh... is a benevolent development so i'm i'm very interested in cryptos i read a lot about them i follow uh... various countries but but more importantly to me uh... the blocking chain technology behind it uh... has a lot of promise for eliminating middlemen and intermediaries in our in our world because so many of our transactions uh... we have extra expenses baked in because of lack of trust like for a particular cell your house and someone else buys it while you have to have uh... some some title insurance and you have to someone has to search and make sure that you don't own that house free and clear without any mortgages someone has to check and see whether there are leans on that property or whether there are certain zoning restrictions or or maybe even from orange county or whatever it might be and then uh... someone has to check and make sure the furnace in the roof or okay and all that sort of things for this if you're dealing with selling your house to a stranger there's a lot of issues surrounding trust so that's why we have a pretty expensive title insurance and and uh... escrow process and and the block chain this is just one example of the block chain has some promise to eliminate much of that to create uh... a trail of a ledger of transactions that would would uh... make make up these purchases frictionless and and less costly with lawyers and that sort of things so it it's a fascinating time i i you know i we can't say but the future will bring but here but there's a reason why we can't say with the future will bring that's because money really ought to be up to the market the marketplace ought to decide what is good money and what is bad and by the marketplace we mean seven billion people on earth getting up every day and doing what they do so when someone says well john cryptos going to be worthless it's going to go to zero with all the big scam with someone else's old john you'll get by as much bitcoins you can't out because one bitcoins and they work a million dollars and ten years that those are interesting i think to think about but you you or i don't decide that the marketplace does the market size what what's money even and in this instance uh... the market is doing that outside of government which is what's so fascinating let's get to the next topic jeff which is trade i am so disgusted i can't believe even the canesian mainstream economists get on a bed every morning and say you know what we need for global growth is a trade war i want to talk about let's go back to adam smith although i guess we can't call him an austrian the austrian school of economics has done an incredible job of articulating the concept of comparative advantage where is all this consternation in washington dc coming from plan trade uh... not free trade but nothing that resembles a freer flatter fair playing field uh... for trade why can't they embrace simply in the wisdom of adam smith comparative advantage yet interesting because what different about us is exactly what makes us wealthy in other words uh... you and i benefit because somebody else had a capacity for an appropriate to attend med school and maybe he or she becomes a good surgeon and maybe at some point in our lives we need a shoulder knee surgery so we're awfully glad they did that and maybe uh... that doctor uh... and you want some online trading advice and and comes to a ptr academy so that that you know the fact that we have different skills and interest in abilities and inclination is a good thing and allows us to to swap good services with one another and when you go beyond national borders and take that into into the broader world it becomes even better if if somebody can make it a t-shirt that halfway decent in china that's good enough for us and we go by to the gap on sale for six bucks uh... that's a good thing that it's not twelve dollars it's also a good thing that doesn't have a two dollar tariff on it which isn't really doing anything to to help or hurt the chinese per se but it's giving us it's giving more power to uncle sam and our own government it's just a tax on us so that so many of the same people uh... let's say on the protectionist right sort of the pat you can and and i love that you can but sort of the pat you can line of thinking of the protectionist right and maybe the uh... you labor union line of thinking on the protectionist left uh... a lot of people would would complain mightily if you if you raise the income tax on everybody five percent but if you stop to care for something they're delighted but but at the end of the day at the same thing it's a tax paid by americans on goods coming in the country and word and that money goes to the u s government makes a u s government bigger and batter and and bolder uh... as opposed to staying in our own wallets where we use it uh... it as we see fit so i i'm i i'm a a true uh... free trader in the sense that i believe in unilateral unilaterally dropping parents i don't care what other countries are doing to u s imports if they want to tell us cheap stuff and take our dollars for it and we all feel we benefit because we buy it voluntarily than that's great and if they're if they're slapping ten percent import tariffs on ford cars or vehicles i don't necessarily like that i don't like the fact that they're hurting their own citizens but nonetheless that in and of itself is is no argument from my perspective to slap a thing a ten percent tariff on that imported t-shirt at the gap so a lot of people that let me be fair here a lot of people strenuously disagree with unilateral trade tariff reductions they say no no no jeff we have to have a level playing field and you know what about our manufacturing industries what about our our exports and this and that in other words there's a fetish for exports over imports which is kind of nativist and nationalistic and i get that i mean i i'd you know when i was a kid my dad worked for fire so tired rubber company which was directly tied to the health of the u s automobile industry uh... so i i get that but at the end of the day what we have to remember that the economy is not just exports it's imports to it's what we want to buy and no matter what your perspective i don't think sending more money the federal government here in america level of anything or or it hurts the chinese uh... so uh... uh... i i'm i'm a doctor there i'm i'm one of those guys that a lot of people on both the right left don't like which is a doctor there free trader i got it i'm with you we had uh... doctor richard ebbly gone yesterday on part trading radio for listeners if you didn't catch that show you might want to go back to the part trading radio archive we we spent the whole show just talking about international trade interrupts comparative advantage and really did a deep dive into that subject matter i think you'll really enjoy it let's talk about something of course that is very important uh... which is the division of labor that uh... the concept of the division labor as a young businessman i really struggled with i remember uh... when i started my first businesses i was very nervous about new employees as i worked into the marketplace and for other companies larger as they would bring in new employees i struggled with the whole concept personally uh... with the division of labor but yet by studying austrian economics i got very very comfortable very quickly with the power of the division of labor and why it's so critically important to the development of civilization and uh... so give me your cliff note version on why we need more division of labor and and that gets it course into the product concept of pricing price controls wage kids wage controls uh... which is a real evil uh... seems to be championed by mainstream economics everywhere but the austrians have a very specific uh... for let let's say fair attitude also about wages so let's talk a little bit about the power of the division of labor and why it's so critical and central uh... to the austrian perspective well we have to look honestly at what humans do how they act and it turns out that human beings are not fungible we all have different abilities we all have different intelligence we all have different skills uh... and then we all go do different things with regard to our jobs are education whatever it might be and rather than lamenting that and trying to force everybody into the same pigeonhole we ought to celebrate that and and one way we celebrate that is is through wages we discover what people could do and what it's worth in the sense that uh... we you know the person who works for an employer um... provides at least somewhat more value than their than their paycheck so the division of labor is so important because it allows people to do uh... to specialize do with their best at it do with the couple with and and what they prefer that in all circumstances not perfect but but in most circumstances so it it's precisely our differences that make trade possible because if we were all the same if all countries around the world fall people are the one exacting abilities we might as well so our own shirts or cobbled together our own cars but but we're not all the same we have different strengths and weaknesses so so that's reflected in the division of labor not only here in the u.s. but but around the world and that's a good thing because if we were all the same there'd be no need to trade and without trade we wouldn't be you know making trade off that we think make us better off uh... so that the division of labor is very very important in and he where the Austrian school really differs it is where the entrepreneur enters the picture of other schools of thought sort of the mainstream neoclassical school the canvians uh... other schools of party don't really have much of a of a theory developed about who the entrepreneur is in other words the port person who makes calculations and takes risks and invest capital that he or she could lose that's very different that someone who who has a job for for a wage and that job can go away i'm not saying it it's so easy being an employee but if that's different than risking your own money to build something to the the the entrepreneur has a very unique role in that division of labor and the the best thing we can do in my view for both the entrepreneur and for the the people that he or she might employ is is to let them pay what they want um... i think minimum wage laws hurt the poor far more than they help and i think that we can we can look at that axiomatically and say you know all things being equal when you raise the price of something and what we're talking about here is we're raising the price of of unskilled labor let's say uh... in in seattle where you have a fifteen dollar minimum wage i believe well you know when you raise the price of something you get less demand for it as a matter of fact uh... any jobs or would be jobs that it that people consider worth less than fifteen hours an hour either go on done they they occur in some sort of black market so it's it's uh... it's not always intuitive i understand the arguments for minimum wage and i understand you know the argument that everyone should go to college and these kind of things but it it turns out humans are are stubbornly different and and why do we why do we resist that rather than celebrate that is my question very good point and uh... for some reason the mainstream just cannot embrace that and unfortunately i think there's a lot of smart mainstream economists but they seem to get tied up in the politics of all of this and buying votes with some of this uh... jargon but but you'd like to think uh... that down deep they understand this debate rather rather clearly that gets down to our friend carl marks or she's me carl marks but it's a misspoke there for a moment uh... marks talks about the subjective uh... uh... theory of labor uh... that will that labor is the subjective uh... maker labor inputs into the production of a good determines value versus the austrians with carl minger and bc's go into great detail was very helpful for me in my business career to recognize no no that's not it at all and it seems to be that is marx's primary driver and bone of contention with capitalism among several others subjective value is that value is in the mind of both the producer and the consumer uh... to meet a particular need and that all value is in fact subjective and it really has nothing to do with how many units of labor going to the production of a particular good uh... how do you feel about that well absolutely this was not only carl marx's great error but it was also an error of the club adam smith and classical school they had the notion that that value the labor theory of value that value comes from how much spent to produce something in how many man hours went into it but but here we could look at a diamond that uh... came up from the ground on its own and that someone finds and and and it and it identical diamond that was mined at great expense and a great man hours and and take the two diamonds together and say well the beers would pay you the same for both and uh... that the other the other obvious uh... conundrum or problem with the labor theory of value is that there is lots of things that are difficult but people won't necessarily pay to do them and and this is this is uh... is this behind the idea of make work job to the government we could take inmates for instance in prison we can make them uh... move a pile of rocks the shovels from point a to point b and then the next day we could tell them to move them back and that that would be a uh... an arduous physical sweaty task for those prisoners but there'd be no value to society no one would care pay you to do that so uh... you know one one great thing that the that austrian understood was that value is subjective and and it exists on the margins in other words we care we might care an awful lot about how there's some people might care off a lot about having a fancy car for example and when if they find you reach a point like where they can go by that for our year whatever it might be that they really they really enjoy and they feel very happy and that they'd much rather have that for our even the hundred fifty thousand dollars whatever that they have to pay on it but and and so to them that that was a good trade-off but if if you start to collect for a reason you have three or five of them that that's worth a fifth one's worth a lot less to you than the very first one was and that means that that that shows what we call diminishing marginal utility you don't care as much about the fifth one doesn't make you quite excited and happy in glowing is that very first one did uh... and this applies in in big and small ways across the whole economy you need enough food and shelter and in basic safety to get by and then beyond that you start moving on to other things that satisfy different needs and what they're sort of higher up on that those hierarchy of needs i'm sure many of your listeners are familiar with that uh... but we we value certain things more and if we were starving or or very very thirsty we we would value food and water far more than we would value a Ferrari uh... we might we might if we were in dire enough straights we might trade our Ferrari for a meal or for a jug of water uh... so how can how can a Ferrari hundred and fifty thousand dollar Ferrari uh... be worth only a jug of water exchange will that shows you the value is subjective it depends on the on the people buying and selling it depends on the circumstances so uh... this this damnably human uh... instinct this human condition of all of us valuing different things uh... differently is is is enduring and we can't do away with it anymore than we can do away with human nature you could give me a billion dollars tomorrow and i wouldn't buy a Ferrari i i just would have no interest in a fancy car i would worry about scratching it or something i would feel silly driving it like it was looking at me and there are some people who don't even have a hundred fifty thousand dollars for the name of the nonetheless go out and borrow money to buy a Ferrari because they they wanted so bad and they're so concerned with having a party so that person is very different from me in in there this you know in what they like in a car and uh... this is this is just a fundamental point that economics didn't get and really until the eighteen hundreds until relatively recently late eighteen hundred so it's a fascinating thing to think about and it it it informs everything in economics unfortunately for marks getting that wrong we have marxian economics would they mark the end but then we have marxist political politics so because marx got that wrong and he felt that capital exploits labor that everything the capitalist makes off of selling something is just is just uh... money that ought to go to labor who created in in provided all the value but from that from that faulty understanding of value a lot of terrible things flowed and in including you know that the subject the labor theory value is one of the poor uh... fundamentals behind marxist political philosophy which you know i don't have to tell you what with that cause in the twentieth century subscribe to missus weekends via itunes you stitcher and soundcloud or listen on mrs dot org and you