 This is Jeff Deist and you're listening to the Human Action Podcast. Okay, ladies and gentlemen, welcome back once again to the Human Action Podcast. We are getting deeper and deeper into our walk through this incredible book, Mises' Magnum Opus, Human Action, which he wrote in the 1940s, and we're now moving into part four of that book. We have joining us our great friend from Grove City College, Dr. Jeffrey Herbner. He is, of course, the chair of the Econ Department there, a great friend of the Mises Institute. He's been there a fair amount of time. He knew the late Hans Sennholz. He received his PhD from Oklahoma State University and is a very prolific writer and speaker for us and for Grove City as a well-known Austrian. You know, Jeff, as I look at part four of this book, which is really very, very meaty, has some very meaty sections. And we've been trying to get people interested in reading along. We provide some links with the show here to get the book itself very, very cheaply. You can read it for free online in HTML format. And a lot of people are home right now. A lot of people have some spare time. A lot of people are wondering what to do or how to think about what's going on. We have both a fiscal and a monetary policy that is absolutely crazed. At this point, the Treasury is getting ready to literally send checks to American citizens. The Fed is cranking up trillions of dollars in new money and credit. And we are simply untethering in people's minds the idea of how you get money and goods and services versus working and being productive. We're sending people checks in exchange for sitting at home. So this isn't World War II, folks. It's a very different and dangerous time in America. And I'm just seeing this morning an article of all places. My God, Teen Vogue, how we can never go back to capitalism after this. We can't go back to business as usual. I mean, we have an absolute epidemic of economic ignorance in this country, which is far beyond in terms of its threat, far, far beyond this virus, which we could handle, we could approach as a market and medical issue. We could quarantine the elderly and the affected and we could get back to work. So there's never been a better time in a sense to avail yourself of the truth, to avail yourself of economic knowledge, and to simply not be another dummy in society. That's a pretty low burden. And we all bear it. We all owe it to ourselves. We owe it to the wider society. We certainly owe it to our children and grandchildren to not be another dummy in society. So, you know, we didn't plan on this financial and virus meltdown happening during this series of podcasts on the book, but nonetheless it is. And our guest, Jeffrey Herbert, is feeling the effects because, Jeff, it sounds like, as we were saying offline, that your students are now at home. Your campus is shut down and you were teaching online. Yes, that is certainly the case. And I want to thank you for having me on today. It's an honor to be part of this. And I've got to tell you that in sort of rereading these chapters, skimming over them for this session, it was ever more apparent to me how insightful Mises is in application to this crisis that we're facing. His insights just sort of popped off the page, one by one, that are directly applicable to this terrible, awful government imposition that we're facing in this time. Well, there are quotes throughout these sections that we could apply today. I'm curious, though, do you recall how and when you first heard of this book and when you first read it? I heard of this book after my graduate studies. I had been always a free market economist, but didn't know the Austrian authors before that. And through a colleague, I got involved in reading some Hayek. And so Hayek making references to Mises, then it was just a progression to Mises from there. So I was a young professor when I first encountered Human Act. So what era are we talking here? 80s, 90s? Yes, that's correct. In the mid-80s, yeah. Okay, so section four, or should say part four of the book. We've been through some earlier parts, some of the more philosophical stuff with David Gordon. We've had Bob Murphy on the show. We've had your colleague Sean Rittner on the show. We've had Pair Beland on the show. So now we're getting into part four of the book. And let's start with, so it's called Catalactics or Economics of the Market Society. So right off the get-go, I'm sure for a lot of our readers and listeners, we have this unfamiliar term. So what's the definition because there seem to be more than one definition floating around and there's a way that Mises uses it that perhaps is not the textbook definition. What is Catalactics? Right, so Mises uses the term Catalactics to refer to some of the activity that takes place on the market economy. So it's basically exchange, the division of labor, and all of the ancillary activity connected with the market economy. And the reason that he defines it this way is apparent when you look at part three. So in part three, he's talking about economic calculation, which is the phenomena of the market economy in decision-making about resource use. And so now, given that his background, he wants to jump into the functioning of the market economy itself, how entrepreneurs are able to use economic calculation in order to make efficient decisions about resource use for society at large. And so this chapter, he stresses at several points the concept of monetary calculation. So does that mean that Catalactics is something that's beyond Barter? Catalactics occurs when we are using money to exchange for goods and services. Yeah, exactly right. And that's what he emphasized in part three. The economic calculation is always monetary calculation. And as he explains throughout these chapters, the reason for this is that all human action, even market activity, is based upon a rank order evaluation. But rank order evaluations are subjective in the minds of people. And therefore, there's no possibility of interpersonal comparison evaluation. And because of that, we can't use these valuations in order to make decisions about how to use resources in a division of labor in the most value enhancing way. Because we can't compare the subjective value that some consumers would get from the use of resources with the subjective value that other consumers would get from a different use of the resources. The only way that we can proceed is to have monetary calculation, have all of our preferences expressed for and against money. And then we can tell who values things more relative to money than other people value the same things relative to money. And this can guide entrepreneurs in efficient resource use. But for those who listened to part three with Per Bieland, he recalled that Per said this was a huge civilizational achievement, maybe on par with the development of the wheel or something like that when people could actually start to calculate and think about things in monetary terms as opposed to barter, let's say, which is obviously a very difficult system, that this actually has huge ramifications for human society. And how many sociologists, I know you teach sociology as well, how many sociologists or political scientists ever even think about this, monetary calculation is a human achievement, probably not many. Right. This is unknown outside of economics, largely unknown. There are a few sociologists, professors here at Grove City College that do in fact grasp this important point. And Mises, again, peppers this point throughout this section where he doesn't refer to monetary calculation sometimes per se, but he talks about how capitalism is necessary for civilization. But in order to have capitalism, we have to have monetary calculation. Yeah, and it's amazing. We have a great friend of the Institute, John Lang, who's really into evolutionary biology and he reads a lot of Matt Ridley and that sort of thing. And he points out that when you go back and read these texts, they don't say anything about trade. You know, they don't even bring up markets and trade as sort of a way that DNA transmits across time and across society and how important money has been in human development, even biology. So, you know, what strikes me in reading chapter 14 is that he's talking about how we understand free market prices and how we calculate it, but to understand how prices truly arise as opposed to how we want to think they arise, it all goes back to human action and he's tying it back to the earlier chapters of the book. He's building from those early chapters and he's introducing then what he adds here in this chapter is the complexity of social phenomena. So, if you think about Roberts and Caruso allocating his resources to higher valued ends that he has and combining inputs in lower cost ways, that problem theoretically is pretty easy to analyze because Caruso can just make all these decisions in his head. But once we get to the social nexus and the division of labor, we have this huge extension of production through specialization of millions and millions of people and, you know, being organized in all of this production by entrepreneurs engaged in monetary calculation. And so, if you want to disentangle all the causal effects behind generating the array of prices in society, you have to have this method that Mises talks about of the imaginary construction. Yeah, so it's interesting. Again, he's setting up all kinds of foundational things and the lay reader might wonder, well, gee, Dr. Herbert, do I need to know all this stuff? He talks about imaginary constructions. He talks about the pure market economy, which we're finding out is a very imaginary construction in 2020 America. He talks about the autistic economy, which you earlier mentioned, Roberts and Caruso. He talks about the idea of a human actor, let's say, alone on an island and making trade-offs and decisions without other economic actors, without money. The evenly rotating economy and then the stationary economy. So just help us understand briefly, what are these constructs and how do they help us? Why does economics need imaginary constructs? Well, again, the basic reason is that real economies, which we're trying to explain, are exceedingly complex. I've already mentioned this a couple of times. The outcomes we see in our own economy are a complex web of effects that come from government intervention and monitoring fiscal policy and state-run enterprises and then some private property and market exchange. And so in order to see what is causing the phenomena that we're interested in, let's say inflation in the money supply or higher prices or economic progress or whatever, we have to be able to separate out these different causal factors. And so that is really what Amesis is starting that process. Now, it takes in the rest of the book to do this in full, but he wants to start with the pure market economy to separate out all government intervention, all state-run enterprises. He wants to limit the function of the state to simply defense a person in property and then see what would happen in an economy that was structured in this way. What would happen then to production and prices and economic progress? And would there be business cycles? And if so, what would they look like? How would financial markets develop and operate and so on? So do so-called mainstream economics textbooks like Samuelson, do they have these breakdowns? Do they ever consider the idea of a Robinson Crusoe economy? I would say not so much. They don't emphasize it. Typically, the mainstream textbook would have a little introductory chapter on basic principles of human action or at least basic assumptions or claims about economic theorizing about the economy. But typically, they jump right in. And the list of imaginary constructs, usually called equilibrium states that conventional economists have are different because their whole orientation as a discipline is geared toward describing the conditions of those equilibrium states where when you read through Mises, you see that he's using this technique of imaginary constructs to take the example of ERE. He's using this in order to contrast the real world with the imaginary state. So he sets up the ERE saying, what if we had a situation where no underlying factors were changing that would alter economic production processes? What if they just rotated over and over again? In other words, what if we eliminate uncertainty? And then he draws certain conclusions about the real world from contrasting it with this imaginary state. So it's a much different procedure than mainstream economists use. And it's another example. This really is a treatise. This isn't a textbook. This is a treatise that strips everything down to its bare essentials and starts with a real foundation. And of course, that's what economists don't want to do today. They want to just throw really complex mathematical models and a bunch of data and come up with gibberish that doesn't help anybody, they don't predict anything, but they all get paid. So that's why I think this book is so important. And as we go through it for Listers, I always like to point out as a fan of language, first of all, how not just technically precise Mises's language is. And again, he's writing this in English, a second language for him in the 1940s, but also how beautiful it often is. I mean, I wish I could write like this guy, but also how applicable to today's crazed 2020 political and economic situation it is. And if you want an example of that, people who are reading through, again, we're using the scholars edition here at the bottom of page 235. He has a section called the denial of economics, which is so spot on today. I mean, there are millions of people in this country on the left who just think economics isn't even a real science. That you can just command and control economies. Well, there's a lot of people on the right too. You can just command and control economies and you can create economic outcomes by legislative fiat. And there's no real laws of economics. There's a lot of people who believe that. So he was really spot on. But Jeff, at the end of the chapter here, we're about to move on. But he mentions these catalytic categories. We hear these all the time, the factors of production. We hear about capitalists and landowners and workers and consumers. But he makes, I think, the important point that these aren't silos. They're integrated with one another. As he calls it, they're functions that are performed by real people in the real economy. And so as he makes clear, one person could perform several of these functions. A person could, let's say, run a business and save up past earnings and then invest and be a capitalist in his or her own business. A lot of mom and pop operations are like this where mom and pop even supply their labor. And so to explain their behavior, we have to think of them theoretically both in their function as a worker and in their function as an entrepreneur and in their function as a capitalist. Yeah, and it's so irritating to hear the left's caricature of small business owners. I mean, they're taking their delivery. They're opening the boxes. They're stacking the shelves. They're doing the cooking. They're doing whatever they do because everybody who's actually owned a business knows cost of labor is huge. So as we get into chapter 15, typical Mises, he's got these ambitious titles. This is an ambitious chapter. It's just called the market. I mean, oh my God, this is an econ lesson in one chapter. And so he starts off talking about what I think is so important for those of us in our camp to understand that this is all a social system. The division of labor is important. And he quickly makes the point. This isn't biology. Social competition isn't some dog eat dog state of nature. It's actually helpful. It's cooperation in that it gives us a level of material affluence that socialism has never matched. He makes that point. Yeah, it's a great point. And you're right. That's sort of the running theme throughout this chapter is the features of the market economy. And he continuously makes these kinds of contrasts to socialism. And he's not scared to use the word capitalism. And it's also interesting that he has a lot of historical discussion about real world economic systems as well as using this conception of what he calls a pure market economy. And you're right. One of the striking points that he makes is the one you mentioned about competition where he insists that and correctly that competition in the market is done by people who are competing to be more cooperative with other people who are competing to better satisfy the demands and preferences of other people. And so it isn't law of the jungle, as you say, biological competition. Another very important distinction that he makes about the market that's mischaracterized by its enemies. Yeah, and he also makes the point that civilization and private property go together, their hand in hand, folks. A lot of people even at our camp want to downplay this idea or this point. But we're seeing this right now in real time. I mean, we're seeing the Trump administration tell people that they don't have to pay their mortgages or their rent for a while. And you wonder how you can organize an economy along those lines when people are that unsure of whether contracts are even honored. It's a crazy time. Yeah, he also mentions this about freedom. He also says the same thing with respect to private property is the foundation of freedom. And again, this is a very powerful point and very robust and applicable to our day and age. You can see that here in Pennsylvania that Governor Wolf has actually declared martial law in some counties and cities. And under penalty of arrest and fines, people are sequestered in their houses unless they're essential workers. And so, you know, what does the Constitution matter? What do the paper parchments have to do with restraining this sort of thing? If we don't have the property rights of freedom to use our property and move about and so on, well, we don't really have freedom at all. Yeah, and he shows very much his views here on freedom as something that is provided by the state. I mean, let's be clear about this. He's, you know, not a natural law guy. He's showing his utilitarian stripes and his conception of freedom or a hoppian or even a judge, Andrew Napolitano conception. It's a utilitarian argument that freedom's not found in the state of nature and that we have to sort of create the conditions and impose it, and we can get into all kinds of tangential arguments about that. But it's important that these are the kinds of points in the book where he demonstrates that he is a small d-democrat and that he is someone who believes in the role of the state, in the role being the protection of private property. And that's what makes it ever more interesting to read what he has to say about all of this because it provokes us to think about these issues from other angles as well and to see whether or not Mises is right to hold this particular concession. And one of the points he makes also in this chapter is something that's stressed by Hunter Hastings for those of you who listen to our Economics for Entrepreneurship podcast, which is the concept of consumer sovereignty, which he touches on at several points in the book, but he mentions it here, and that we have this this idea, this sort of strawman concept in the west of mindless consumerism, and we're just these consuming robots who want little trinkets and electronic pleasures all day long. And Mises throws the burden on us that consumers actually direct producers and capitalists. And I think certainly a lot of people in this country think it's the other way around. Yeah, that's a great point. It's a very powerful and provocative way of putting the argument where Mises points out that all prices in the economy and all incomes of all the producers, the profit and loss, the rate of interest, everything, production patterns and so on, every detail of the market economy is geared toward the satisfaction of consumers. And if we don't like what the market economy is doing, if we don't like the low wages of janitors or whatever, the reason is the consumers. It isn't the entrepreneur's fault. It isn't the capitalist fault. It isn't the fault of big business or any other boogeyman. It's us, as you say, as you rightly point out. And he also makes the point that unlike an equilibrium model where profits in a society have to equal losses, that in market economy it doesn't have to be a zero sum. It does have inequality as a feature, not as a bug, but nonetheless there actually is a, and this seems to be lost amongst the zero summers, but there's actually a capitalist structure where productivity in net gains are going up. Again, he presents these ideas in a very robust way, very provocative and I can only imagine what it would be like to be a lefty to read through this book and be stopped at every paragraph, shocked out of my senses. But he's absolutely right in pointing all of this out. As you say the inequality of wealth and income is a positive feature of the market economy. The market economy can't function unless this is permitted free play. Of course he spends some time contrasting that with what would happen to wealth and income under different systems where the power of the state is used to try to force the natural differences that exist among persons and land sites and entrepreneurial ability and so on tried by the force of law to suppress all that and make incomes equal. This can't work. This is no more effective than price controls or any other kind of government imposition. Yes, and I think throughout this book, again writing it in the 1940s in the US we have to think about the man in his own experiences. I think his view of the Nazi party in Germany as an Austrian infuses every part of the book having to flee Austria his beloved Vienna having then have to flee Switzerland. He has a little section at the end here where he talks about the Volksvertskraft excuse my pronunciation where the sovereign nation's total complex of economic activities is all directed and controlled by the government which is of course the Nazi model and I think he's taking pains to point this out because it's so fresh. This book is very timeless. It doesn't have a lot of super topical or timely references to then current events. This is I think one of those points where it does. That's an interesting interesting point to make he you know he did have the opportunity to revise human action in the second edition and third edition. So he's almost well almost not well he's more than a decade after the first publication of the first edition and he didn't change any of those references so it is quite interesting. My take on it would be that he thinks that these are vivid illustrations of a more general category of problem. That's how I read his last section here on the market where he's talking about the national impulse and how this creates something that's antithetical to the market. Well as we move on and out of this chapter I want to give everybody a little nugget at the top of page 315. There's a paragraph about political parties which is absolutely 100% on point today if you're watching this battle in the senate and the house over this really wretched stimulus bill what Pelosi has been doing and what Chuck Schumer has been doing and what Mitch McConnell has been doing. He's talking about political parties promise their supporters a higher real income and always free stuff in other words. And he said, I love this line, each party considers it an insidious plot against its prestige and its survival if somebody ventures to question the capacity of its projects to make the group members more prosperous. So if you're going to read this book and not the easiest book to read we get that. You got to enjoy those little bon-mots that he drops from time to time. Moving ahead chapter 16 wow another ambitious title another long ambitious chapter and that's why we're breaking up part 4 of this book folks we're just doing the first few chapters and it will do the rest in the show next week but you know this is several hundred pages of material just in the first few chapters of this part and chapter 16 a similarly ambitious topic and title it's just called prices. So he gets into what he's touched on earlier in the book you know all we can do comparatively in terms of value is apply ordinal preferences for A over B. But that preference has to find its expression and make the leap from value to price and price market prices is how it finds that expression. So this this whole chapter sort of starts with that. That's correct so now he wants to get into the actual details of explaining how the pricing process functions conceptually. And that's the first issue right. What is the relationship between the subjective values we have in our minds as consumers and producers and entrepreneurs that all of our decisions are based upon we're just looking at alternatives and rank ordering what we think the value of them will be and choose accordingly and the actual objective cardinal prices come about through our interactions with each other. What is that connection that's what he's trying to grapple with and of course he makes the you know fairly standard kind of I mean his approach is not standard but he makes a fairly standard kind of a conclusion about that relationship that the prices of consumer goods are just reflections of the marginal value that's placed upon the good by consumers determined right at the market clearing point. Well help us to understand what higher and lower order goods are. Okay so there what Mises is referring to is the second step of the problem. Once you figure out how consumer goods are determined which is the easier explanation you have to then figure out the relationship between consumer goods prices and producer goods prices and then what you would do of course is you proceed with one production process and look at that but after you do that let's say it's consumers buying automobiles and then you look at the auto entrepreneur comparing costs with revenues in production and how the auto entrepreneur is demanding factors of production because the customers are providing revenue to the entrepreneur to buy the factors but then you have since all production is interconnected you have to go to the next step where you have to explain where the prices of the materials come from and assets come from that the auto entrepreneur has acquired and is using and so you have to move to these so-called higher orders and so that's the distinction between higher order goods would be goods that are earlier chronologically in the process of production like iron mined out of the ground or trees cut in the forest and then these go through sequential steps of production and exchange through the production of intermediate capital goods and then on down to the production of the consumer goods so we have iron mined out of the ground and then steel made and then fenders are the car and then the car is assembled and all of this is integrated and so what Mises' task here is to explain the connection in prices between consumer goods and then all of the higher order producer goods but we all play a role here right I mean we're the consumers we're buying so-called lower order retail goods if we go and look at a Honda Accord and we say well gee whiz I like it I think I'll pay 28 or $30,000 for it but if it's $35,000 that's kind of an ouch point and I'm not going to pay that much and I'm going to go look at another car so so our behavior at the end of lower order prices actually influences higher order prices that's exactly the point that he's trying to stress and notice again how this comports with with Robinson Garuso you see exactly the same kind of relationship between the subjective value that Garuso plays or puts on let's say having fish as a consumer good and the value that he places on a net for catching the fish and then the value he places on the materials that and the labor used in making the net so we can see that this connection is it's human nature it's built into the way in which we are as human persons but it's also doing damage isn't it to the labor theory of value and to the cost of production concept of value that the classical economists had I mean it doesn't matter how much it cost throughout the chain to make a Honda Accord if no one will buy it for 35 it's not going to be 35 so he has to overturn the cost of production theory and that's why his next section after talking about prices of the goods of higher order is to talk about cost accounting because what he's driving at in that section is to explain as they would say in finance asset prices pointing out that if Honda produces these Accords and ask the price of 35,000 and they don't sell and the losses are suffered and their costs are you know whatever 33,000 to produce the car whatever they are then what will happen is the asset prices that Honda is using in that production process since their generating losses will fall commensurately and then this will indicate what should be done with respect to those resources reallocated into you know the factories the equipment should be reallocated into a different line of automobiles or maybe even into a different line of production altogether and this of course then gets him into the thorny questions of the convertibility of these capital goods and so on and so forth but this is the basic way in which cost of production adjusts the wages that Honda pays and that the workers that Honda hires may not vary much when they're laid off and they have to find jobs in other auto companies you know demand for those cars produced there hasn't gone down but the assets used will fall commensurately with the losses that are involved do you think his little foray in this chapter into really an attack on mathematical or quantitative economics you think he overstates this case he's pretty harsh right and the reason he is is because what Mises is showing here is that this whole process of pricing in the market economy is entrepreneurial it's all speculative and it's driven by entrepreneurial foresight and this is the one feature well maybe there are others but this is the main feature maybe I should say that's completely eliminated in all mathematical treatments of the question of economics mathematics can only deal with the equilibrium states and Mises even takes time to point out that even if mathematical economists try to map out a step by step process by which the end state is met this is not an entrepreneurial process it's not done in real time it's not done by the judgment of actual human persons it doesn't incorporate mistakes that the entrepreneurs naturally make because they're fallible through the process it doesn't talk about the self-selection different people into the entrepreneurial ranks when some fail and so on and so forth all of the real dimensions of an actual economy are drained out yeah it's pretty bloodless and that's what's so great about this book is it really brings this stuff to life at least for me and as a lay reader it really is a fascinating read now he has a section several pages on monopolies and government mostly recognizes monopolies as arising from some form of state privilege he did have some ideas about natural resources and that sort of thing maybe mining but briefly discuss his treatment here of monopoly in government versus let's say what people consider Rothbard's later treatment some people think Rothbard improved upon or even corrected Mises when it comes to monopoly theory right so again kind of a technical point but what Mises argues is that the monopoly in order to be injurious to consumer sovereignty in order not in other words to as fully as possible given the costs and conditions of demands and so on to generate the most consumer satisfaction in the use of resources the monopolist must not only control the supply of some particular input let's say you mentioned the mining so we use that as an example like the beer is owning all the diamond mines in the world but when they offer for sale the diamonds in the next stage of production the demand Mises sees the demand is inelastic at what would be the competitive price which just means that the monopolist can restrict the price and hold some of the supply back from sale and the holding back of that supply is injurious to the consumers demands because their demands do in fact justify the use of that supply relative to other things so the consumers not getting that additional supply that's being restricted would shift and demand other things that they prefer less and so that's how Mises concedes the harm done by monopoly as you suggest he takes page after page here quite a bit of effort to categorize the different cases of course he sub divides as you've already pointed out between government imposed monopoly which always creates this harm to consumer sovereignty and market monopoly which almost never does it's a very special case and then what Rampard did was he criticized Mises I think on justifiably here on the ground that Mises's argument depends upon we as the economists being able to perceive what the competitive price would have been in the absence of the monopoly and that's something that we we cannot know there isn't any way for the us as economists to say whether or not some restriction of supply was generated by monopoly holding moving up a demand curve and restricting it in an inefficient way or just something like building inventory and anticipation of selling in the future there just isn't any way for us to ascertain this or to put the case even a little bit more strongly Rampard said look every seller no matter what the market conditions will always try to get the maximum revenue from selling the output once the costs are born and sunk once the all the cars are on the dealer's lot and the costs have been incurred the best solution is to price the product to get the maximum revenue and that will always be at the midpoint of demand it doesn't matter if you have a monopoly or you're in a industry with a thousand other firms all producing homogeneous units of a good every entrepreneur has exactly the same situation and therefore will act in exactly the same way they'll restrict their supply out to the point where they're maximizing their revenue and we can't then distinguish a monopoly restriction from any other firm. It is fascinating to think about it especially now we're in a digital age where we have companies which I view as pretty evil for the most part do they have some sort of digital monopoly I would probably argue no you bring up De Beers and De Beers have been around for a long time diamonds have been around for a long time so to me that's a little more interesting case because we can look at that over time and I'll just throw this out as an anecdote my wife happens to have an heirloom piece which contains a diamond which belonged to her grandmother that she cares about and went out took the setting which apparently is not no big deal and got a cubic zirconia fake diamond made for 50 bucks or something that fits in it so that she can put the real piece the real diamond in safe deposit box or someplace and use the cubic zirconia one so you know that's it's fascinating to think about how things work around I mean by all accounts cubic zirconia is actually flawless and better in not in a you know value is subjective I get that but in a certain pure sense of appearance color brilliance cut cubic zirconia is perhaps superior to a De Beers diamond so even if you're De Beers and you've been around forever and people have wanted diamonds forever and you know you're literally digging something out of the ground which is a very difficult process you still got trouble you still got trouble it's called the cubic zirconia people yeah that's an excellent illustration of the point the general point that Mises makes about the dynamic of the market and he makes this with respect mainly to cartels in this section but that's the point right if the monopoly is really getting this monopoly price then it just gives incentive for others entrepreneurs to spring up and offer some sort of a substitute and given enough time and technological development they'll come up with something and the monopoly gain is then eroded away he makes this point towards the end of the chapter about prices and this goes back we've already covered in previous episodes we went through his book socialism and his article about socialism and economic calculation he makes this point where says prices cannot be quoting him constructed synthetically because they come from again quoting him a constellation of market data I thought that was fascinating because imagine how much wider and broader that constellation is in 2020 versus in the 1940s I mean the idea price setting is still with us and we can't seem to get rid of it we can't seem to disabuse politicians and bureaucrats of this notion but I thought the idea that it comes from a constellation of market data was really well put yeah it's another place where his rhetoric flourishes and really stimulates our mind to think about these things in ways that we haven't before and you're quite right the more the market develops and the more complex and advanced it becomes it's actually I think the case that we need the state less and less because we're so wealthy we have the wealth sufficient to provide for the poor we we're so mobile and so on and so forth and we have all this advancing capital accumulation that allows us to feed people more readily and shelter them and deal with their actual physical problems and what have you and the government is just plodding along interfering with this process at every turn imposing price controls and then entrepreneurs simply find ways to get around this to minimize their negative impact and people adapt and move on and it's just an interference it's just another road block and and Mises was quite right then to emphasize the development of the market as providing us an opportunity more and more opportunities to evade and get around these road blocks when we talk about the entrepreneur we talk about the structure of production we talk about higher and lower order goods and the time and the capital investment the risk of loss and all of these things to give me your opinion am I overstating this that outside of the Austrian tradition most economists really don't deal much at all with the structure of production and especially the intertemporal element of that the idea that capital is homogenous versus heterogeneous is that an overstatement or is that true is this something that historians have owned I think that's a fair statement about the only place where you see anything related to this issue of the capital structure or at least the interconnectedness of different production processes is in a certain micro economic analyses and so you know but it's not unusual to find a mainstream economists who will talk about the kind of secondary effects of price controls that they don't just impact the market they're directed toward but the wages of the workers in this market and then moving them into other lines of production let's say and then wages go down there so it is kind of a sense that the market is interconnected but as you suggest what's really missing most prominently is the intertemporal nature of the production process seems to be almost completely absent from mainstream treatments they may at Mises points out they may have some notion of time in their mathematical models but it's just a mathematical progression and it isn't it lacks the notion of intertemporal differences well as we get into the final chapter we're going to deal with today chapter 17 indirect exchange again we're getting his full treatment of a lot of topics he's covered in earlier books like theory of money and credit which we did on the show almost a year ago now so he starts out this chapter talking about well people don't want to barter barters inefficient they need a commodity they need a means so he really gets into a lengthy discussion of the media of exchange and he actually gives us a nice definition of a medium of exchange so this is a lot of this feels like a new expression of some of the topics from theory of money and credit right he wants to provide a more accessible organizational structure I think is what he's doing so you'll see at the end of theory of money and credit he's got enough I think it's in the appendix he's got a topology of media of exchange and he's doing the same thing here but he's using it in a slightly different context and so he's trying to introduce it sort of piece by piece until he talks about a medium of exchange as anything used to facilitate exchange and then from that notion he moves to money so money the general medium of exchange and he wants to make that distinction plain because the existence of money is the prerequisite for monetary calculation and so he wants to be able to explain how money comes about what distinguishes it from other media of exchange and then you know why this is important and basically again the distinction he's making is this distinction between the medium of exchange that's used for monetary calculation which is money and media of exchange that are not like he talks about secondary media of exchange like an example today would be bitcoin or cryptocurrency so some people use that to facilitate their exchanges but it's just a minor element of the overall exchanges in the economy and nobody thinks they can take bitcoin and use it generally that everybody accepts it and so on and nobody keeps their accounts in bitcoin this is all done by money and so he needs to be able to make this distinction and then show why this distinction comes about through the actions that people take. Why don't we think about Americans why don't we think about supply and demand for money the same way we think about supply and demand for other goods or services I think that lets politicians get away with a lot of nefarious activity Yes absolutely it does and so that's one of the main things that Mises develops or really just repeats this argument about this pioneering argument that he made back in theory of money and credit that we can in fact apply just regular supply and demand analysis to money and if we can do this this just means that we can explain everything about money it's purchasing power that is it's exchange value on the market it's demand and supply and so on and so forth it's production we can explain all of that in the same way that we explain every other good and its production and exchange and demand and supply and therefore we have a general theory of all market phenomena that stems out of the basis of human action itself and as you suggest it's this bifurcation it's this dichotomy to think of money as outside of that explanatory nexus that creates all sorts of both theoretical and policy problems yeah and one of those problems is that we tend to imagine the purchase the future purchasing power of our money will look something like its recent or past purchasing power and that may not be true and there are several points and places and times in history where that was decidedly not true and a lot of people suffered as a result inflation is and its city is killer literally and figuratively and hyperinflation is something we don't even want to think about how ugly that could be you mentioned bitcoin and he brings up a point where when we're talking about good or decent money, commodity money it needs a past that people have to have some past to see that it's been accepted and that it's held some value and such and such so I guess I'll put you on the spot a little bit what's the Jeffrey Herbner view on whether or not bitcoin has enough of a past or a commodity value to represent at least in the future potentially it's up to the market, it's not up to you or me but at least potentially in the future to represent a real day to day money well sure I think in principle it could become a money but this again is an empirical question really as to whether or not people would choose it or let's say on the other side whether politicians would suppress it like they do gold and so on as to whether it actually performs this function but yet right any tradeable good could start the process that Mises rehearses about Carl Menger's story of the origin of money, any commodity could start that process as long as it starts as a traded good it would then have to demonstrate or people would have to come to at least believe or perceive that it is superior in some respects to the money that they're using now and so I think the barriers against bitcoin, the practical barriers against bitcoin becoming money are pretty sizable but in principle I think it could become money and of course the IRS is treating it as a capital good so you need to pay a tax every time or at least suffer a gain or loss, potentially taxable every time you exchange bitcoin for something so that's just the compliance and the cost of tracking that is brutal you don't want to go buy a sandwich every day at Starbucks with bitcoin and have to figure out whether that was a gain or a loss Mises talks here about commodity money versus credit money he also gets into money substitutes which is really what credit money is and he says that's not bad per se there's nothing wrong with a money substitute, a certificate that represents a claim to money there's nothing wrong with that per se it's a man that on its own but once it loses its character as a claim an actual claim against a bank it risks becoming fiat money so help us with this concept of commodity money and credit money and money substitutes and then ultimately fiduciary media we all hear these terms but they're a little murky for some of us and of course he proceeds in the logical fashion starting with the more basic and explains commodity money and here of course the example he uses is the gold standard just to have a concrete idea in our head about what he's referring to but if we had an unhampered market economy and so the government is doing nothing but defending person and property then money production would be left to private enterprise and it seems reasonable to think that private enterprise would at least historically they would have produced commodity money gold coins or silver coins and then it follows from that if that happens it follows that the production of money is then integrated into the production of all things in the economy and therefore all the entrepreneurial decisions about producing money having a mining operation getting the gold out of the ground setting up a minting facility minting coins and so on is just as efficient as satisfying of consumer sovereignty is the production of anything else and so there we have we have a system where there's no monetary inflation or deflation every increase in the production of money has been justified by increased demand to have that money to the extent that the resources used to produce it are efficiently allocated into that production and so that's the baseline that he starts with and then he moves on to these other cases right so let's do money substitutes next so money substitutes we could imagine also developing just on the unhampered market economy as long as the claims were airtight so Mises says that a money substitute only exists on the unhampered market when it's a perfectly secure redemption claim so the person holding it can redeem it on demand at par no questions asked anytime against the issuing organization anytime that's in doubt then the money substitute loses its medium of exchange character and so as he so he speaks about money substitutes and then the fiduciary media is when the issue or the money substitute like a bank would issue a quantity of the money substitute that's in excess of the reserve that the money substitute can be redeemed into so this is where we get fractional reserve banking and Mises says that fractional reserve fiduciary media could be part of a market economy as long as banks are independent as long as we have competition competition in banks because then anytime a bank would over issue fiduciary media non clients of the bank would get paid by the clients of the bank in these claims and they would redeem them at the issuing bank it's also true that competing banks could hoard up fiduciary media of their competition and then present them all at once for redemption and so Mises thinks that there'd be a small amount of fiduciary issue in a genuinely free banking system but it wouldn't be progressing enough to generate business cycle difficulties so that's the basic analysis that he gives of money substitutes and then credit money he talks about as a theoretical type and as you pointed out this is a money that starts as a money substitute and then for some reason the redemption claim is broken and yet people continue to use it and unless the redemption claim is restored sometime in the future such a thing can become a fiat money and one example for everyone to think about with respect to this is the US notes that the Lincoln administration issued during the Civil War that's true that they started out as fiat money but remember in the 1870s congress passed the Resumption Act and promised to restore redemption of the US notes in gold by 1879 and when they did that then well in the interim before they accomplished that the exchange ratio between the US notes and gold moved toward par because people trading with this money substitute believed the claim that the US government made that they would redeem again with this note so we do have some examples of credit money and of course we do we also have examples of like the treasury department in the 19th century and then into the 20th century removing the redemption claim on treasury certificates and so we have that case of potential credit money that turns into fiat money yeah it's fascinating to watch this obviously we all have our concerns about the actual US dollar which is totally unsecured and not redeemable for anything with the US treasury it's still redeemable for goods and services in the general US economy still required to pay your taxes by the way I just wonder you know there's this whole concept of shadow banking it's a huge topic unto itself and it's a very underappreciated and under examined topic but in an environment like this you see Goldman Sachs issues its own bonds for example you see treasury bills and treasury it's almost starting to approximate money in a sense because they're traded almost as liquid a fashion as dollars are so once government gets involved as first of all the sole bank in a sense the sole provider of money in the economy and you know not backing that money by gold or anything else it's amazing how the how things get in a modern economy you know that's a really good really good illustration of this and once again to think about Mises's structure and analyzing this kind of thing this would just be another case a very interesting case before the government begins to interfere with the natural unhampered market the economy activity and every time they step up their interference people in the economy act in an entrepreneurial way to adapt to it and this means that they take up what seem to be really strange practices that they would never take up in the unhampered market economy but they do it because they see it as a superior alternative to sticking with and bearing the imposition that the government is placing on them with their fiat money and central banking and so on I think what's going to happen in the coming months and years is we're going to start to ask ourselves again what is money and who says so I think those questions are going to you know these questions we thought we solved a long time ago he does get into the idea of money across countries and so you have different nationalities he's writing this coming out of the patchwork there's been a lot of shake ups in the map of Europe coming out of World War I and then World War II and so you've got a lot of different currencies this is of course prior to the Eurozone in the Europe so when we're talking about money's you know different nationalities different countries issuing money there was one good worldwide money called gold and as long as things were redeemable in that that provided a huge amount of coherence and certainty for people but once you sever that link things get a little more dodgy but nonetheless there certainly are advantages if you look at the Eurozone those of us who might travel to Europe it's kind of convenient not to have to have Deutschmarks and French Franks and you know exchange all these currencies for a little bit of fee every time you cross the border so there's something to be said for one money or one widely accepted money but there's also something to be said for competition because you have now all these different central banks and all these different countries going crazy and maybe if somewhere whether that's Switzerland they haven't been too good lately but Lichtenstein or somewhere you know maybe somewhere there's a central bank that is going to go less crazy and look better as a result so I think you know given what 60 years of hindsight since he wrote this 75 years of hindsight you know there's something to be said for competition amongst currencies even if it's not the kind of competition you and I might want to see private but national yeah I think that's right I think this is just another again another example of decentralization of political control that is in principle always advantageous to us so we can think of many different examples of this but it's always beneficial to us to have an avenue of escape a place where we can move out of more oppressive government control and flourishing where government control is less oppressive and you may remember Ralph Raco's great work on the Europe in the medieval age where that system the system of decentralized policies worked quite effectively to restrain the extent to which any one of the policies could exploit especially merchants who could move readily between these policies and so that same principle applies even in our world it's always beneficial to have the political power decentralize yeah we're even seeing that between governors in the US right now making decisions about whether they're going to impose outright martial law and nobody can go anywhere or whether they're at least slightly open for business it's a fascinating thing to think about I want to leave you Dr. Herbner with this at the end of this chapter he talks a little bit about the gold standard and why bimetalism failed and he also talks about why inflationists insist that expansionism yields prosperity and we're seeing a lot of expansionism with respect to the Fed's balance sheet that we're going to here I suspect it's going to go from about 5 trillion now to I would not be shocked to see the Fed's balance sheet by which I mean the monetary base go to 10 trillion over the next God knows how many bailouts over the next few years so talk about what is expansionism why is it always so politically favored and why doesn't it work this also calls it inflationism the idea that economic progress can only proceed if prices are generally rising and you know it's a naive businessman fallacy I suppose in one sense it could be that you know you have an entrepreneur who thinks that this is this sort of a structure of movement of prices is beneficial for business not realizing that markets will adapt to the financial markets in particular will adapt to expectations about the state of rising prices but more fundamentally of course since this is driven by politics since the politicians control the underlying cause of progressing price structure which is their control of money production they're doing it for their own interest they're thinking about how this affects their own interest and since well one aspect of this of course is that the federal government is a huge debtor and by engaging in this kind of steady price inflation they can at least for a while reduce the extent of the real extent of those debts so there's some impetus that way but as Mises points out in the chapter he does this conceptual example where he says you know suppose you had a situation like in the 19th century where there was general price deflation then what would the entrepreneurs think and he says well then the entrepreneurs would think you know this is great this is how business progresses because our cost structure keeps going down and we can then you know widen our market by lowering our prices and sell more and and this is great and how could the world be otherwise so so again I would come back to the driving force behind this being the the political interests that are involved and oftentimes it's this practical problem of bailouts that you've pointed out you know it's not so much that the politicians think you know steady price inflation is a good thing for paying off our debts they're just inflating in order to bail out their special interests yeah it's short-term thinking at its worst and of course what we need for once in this country is some long-term thinking so all that said ladies and gentlemen let's all thank Dr. Jeffrey Herbner for his time today really a fascinating discussion I appreciate I enjoyed it you can find the book at mises.org just look up human action you can go to our bookstore if you'd like to get a physical copy of it it's one of those books you ought to have in your hands on your bookshelf and not just on your Kindle in my opinion but I'm a little old fashioned when it comes to these great books we're selling at a very low price we use the code HAPOD which stands for Human Action Podcast to get a discount on the book and most importantly if you're just home you can read it for free in a great searchable HTML format very user friendly at our website so we encourage you to take some time with this book if you have a little extra time right now in your life and we'll be back next week delving even further into part four and eventually we're going to work our way through this entire book over the coming weeks it's a real blessing and an honor for me to just spend some time with it every week as I reread certain chapters and sections and that said Dr. Herbner we really appreciate your time thank you very much Jeff it's been a pleasure The Human Action Podcast is available on iTunes SoundCloud, Stitcher, Spotify Google Play and on Mises.org Subscribe to get new episodes every week and find more content like this on Mises.org