 This is Jeff Deist, and you're listening to the Human Action Podcast. Ladies and gentlemen, welcome back once again to the Human Action Podcast. We are continuing our walkthrough of Mises' magnum opus titled Human Action, of course. And we have worked our way up to part five of that book. And our guest this weekend is our friend, the editor of Mises.org, and also an economist in his own right, Ryan McMagan. Great to hear from you, Ryan. Hello. It's great to be here. Well, so people who are tuning in, as you know, if you've been following the series, we've been trying to get you interested, you, meaning the layman, interested in reading this book and wrestling with it, and especially if you have maybe some extra downtime as a result of the coronavirus shutdown. And if you recall, we've already gone through part one of the book, which was really about human action and philosophy and epistemology with David Gordon. We walked through the second part of the book with Dr. Bob Murphy, who's about human action within society. Part three of the book on economic calculation, which got into some really interesting concepts of value and marginal utility. That sort of thing was with our friend, Pair Byland. And then part four of the book, which was lengthy, we broke that up into three separate podcasts because it was hundreds and hundreds of pages. And we had our great friends, Jeff Herbner, we had Mark Thornton, the Mises Institute, and also Dr. Joe Salerno, the Mises Institute. So we walked through all kinds of things about catalactics and exchange and monetary calculation and banking and business cycles and all that sort of thing. So if you're thinking about this as sort of both a philosophy book and also a textbook, that's the structure laid out so far. And part five is a shift. So part five is very short. It's comprised of just chapters 25 and 26 in the book. If you're following along in the scholars edition, it's pages 685 to 711. So literally only about 25 or 30 pages here, which is fun. And so I thought I'd ask Ryan to join us and walk through stuff here because, so I think what Mises is doing here, Ryan, structurally in the book anyway, is that he's shifting. He's set up some constructs in the beginning part of the book. And even when those constructs are imaginary, they help us understand the world. So he set up like the idea of a Robinson Crusoe society where you're not acting catalactically exchanging with others, but you're sort of making decisions on your own as to how to spend your time. And then he gets into the imaginary construct of the ERE, the evenly rotating economy, which is where supply and demand meet perfectly at a set price and these prices don't change. Factors of production, inputs, outputs are static and that gives us a model with which to sort of better understand a world that is not an evenly rotating economy. And now he's giving us another construct. And in fact, Ryan, chapter 25 is called the imaginary construction of a socialist society. So give us, I guess, your overall thoughts on the chapter and where it sort of fits in the book. Well, you know, you sometimes forget when you're just engaging Mises in general and not thinking about him in terms of specific books. You forget that what's in some books and what's not in some others. And so I was reminded by reading this that most of his discussion of why socialism doesn't work and so on is covered in socialism and in some other works. And he's really building more of an edifice about markets here. And so it's this interesting short chapter where he's engaging this issue of what is the socialist society? Just to paint a picture of if we just completely got rid of the markets, what would it look like? And he offers really a nice summary here, because as you know, it's really quite short. So if you wanted just to get a sense of what's Mises a general thinking on could you do an economy without markets, how would you do that? And of course, you can't really do that, but he offers kind of what an attempt would look like and what some of the attempts have led to in the past just in a brief summary. And this imaginary construction idea, of course, he covers this topic in lots of different places and the necessity of having imaginary constructions of markets and societies and so on and its uses, but also that there's significant drawbacks and what this might lead to in terms of errors and so on. So he provides a lot of historical context here in the chapter, beginning with this idea of the state has long inhabited in people's minds this concept of something that is above and beyond the individual. And this goes way, way back at least to the ancient Greeks, of course, probably to the quote, unquote, Oriental despotisms of old. This idea that the state offers insights and a view of the common good that selfish individuals cannot provide. And so Mises starts in with that of, well, we're starting from a flawed place already with many people because many people already believe this idea and this is pre-modern. This isn't just something socialists came up with. This idea that you've got individuals and they pursue their own little things and that's flawed because those people, they're not thinking of society overall. But fortunately, we have the state which can offer a broader view and has a more dispassionate view of the common good and what needs to be done and the state can guide us then to a better, later good. And Mises doesn't care for that at all and rejects it whether it's being offered up by socialists or traditionalist conservatives or any other group out of the past. Well, yes, he does start out here with a section on the origins of socialism and he particularly points out the social reforms of the 18th century and he draws some parallels between monarchs and kings and also the church and clergy and how these come together. And oftentimes I think in modern sense, again, he's writing this in the 1940s, people say like, well, capitalism sort of comes out of feudalism and monarchs but he says in this great, I always like to point out his language, in this great sentence here at the top of page 687, again in the scholars edition, he says the essential characteristic of the imaginary construction of this king's ideal regime is that all its citizens are unconditionally subject to authoritarian control. So in the absence of markets, in my eyes or to my mind, he's actually positing socialism as the progeny of monarchs when in fact I think a lot of people think capitalism is what flowed from monarchy. Right and just this without the idea that you could have people who were just subjected to the arbitrary will of some ruler. I don't think socialism is possible and that's a point that he wants to make sure and make is that you need to have the seed of this idea in the thought that it makes sense, that it's reasonable, that it's rational even and that's kind of a point he notes is that this idea of well, the market is chaos but the state is rational and as long as you've got that idea which he is saying emanated from monarchical authoritarianism from previous centuries then that's a necessary component of transferring over to socialist management and of course there's a lot of variety that was originally available in Europe. It's not like all these regimes are exactly the same but a lot of them really carried this basic idea that the state can hand down these managerial decisions and manage society but of course Mises is demonstrating a wide variety of ways that having one person at the top deciding which direction society should go in is not sustainable and it doesn't work on many, many levels. Well it's interesting a lot of listeners will probably know of Mises's personal atheism and I think his liberal worldview you'll get I think drips and drabs of you'll catch glimpses of hostility perhaps to religion in his writing and there's some evidence that that might have changed at the very end of his life or toward the very end of his life slightly but you certainly get a couple of jabs here on 688 and 689 where he's talking about socialism is like a religion it requires self-deification, the state becomes the overall government and it especially points out that the state becomes omniscient and omniscience is of course something we normally attach to deities so I think he's having a little bit of fun with us here but what's interesting though Ryan is he's writing this again in the 40s but he does not point out the distributism of Catholicism that we normally associate with the late 19th and early 20th century which was a you know Chesterton and was a thing by the obviously by then that he would have been familiar with but he doesn't mention that he's talking more about the 18th century social reformers so I mean does your sense that he's not thinking of the Catholic Church here? No I think he's taking a much broader view I don't think he has any actually specific access to grind when it comes to religion I think Mises has this general idea of rationality that many liberals of a certain type embraced and not just Mises in any way because I mean you could apply this general idea I mean he's coming down against this throne and altar I think ideal of political rule and I don't think that applied to any specific time or place in his sort of modeling that could have been post-Reformation in lots of places could have been medieval you could look at the absolute estates of England which was Protestant or France which was Catholic and those would all seem to apply to what he's talking about here and so then he notes interestingly this idea of how you can create this state that has all of these attributes which are some sort of mystic ideal and the irony he notes is that it was the liberals who came up with this model of the ideal society but to liberals it was just a model so the liberals wanted to be able to create this model which would show which would help critique then these authoritarian models that existed at the time and to show why they were wrong and didn't work but then the socialists and the other authoritarians took it a step further oh look it's possible to have an ideal society it's possible to have an ideal state and let's figure out how to do it and Mises of course thinks that was a step in the wrong direction because that's something he keeps coming back to is what is practicable in terms of government action and noting that the purpose of action in the marketplace or whatever it is that the state is doing cannot really ever be some sort of metaphysical ideal it's the best you can do with current conditions and technology and knowledge at any given time and to then pursue this idea of some sort of ideal is a mistake but that's exactly what the socialists do they're taking this concept of the ideal society that the liberals invented and then saying oh well we can actually produce that and that leads to lots of errors and to the deification of the state which he talks about well we're certainly experiencing that today these issues are not going away I'm just reading today about a congressional plan to just start sending everyone in the United States two grand a month until the crisis is over so it's not like these ideas are just being studied in some kind of museum, they're right in front of us you know Ryan what's interesting is obviously some of the parallels between the faith based view of government which aligns a lot like religion you have deities, you have sacred texts you have all of these things and I'm not sure that everyone in our audience might understand what academia was like in the 40s and 50s and how radical this was this gutsy stuff to be writing this about socialism and in fact he lists later in the chapter the three dogmas of socialism and we mentioned these oh gosh way back about a year ago we did a podcast on Mises's book 1922 socialism with Dr. Sean Rittenauer and we also touched on his earlier essay called economic calculation the socialist commonwealth if you want to go back and look at those so he talked about you know the socialist dogma which was still very very strong in the 1940s and 50s was has sort of three components first that society or there's as you alluded to earlier there's this omniscient and omnipotent thing above and beyond us as individuals second that socialism is inevitable which is still believed by an awful lot of people today it's inexorable it's going to happen and that progress and socialism are sort of synonyms and finally third that you know there's a deterministic arc to all this that socialism means going from worse to better conditions and this is always happening and that this is of course moral and these dogmas are still very much alive I mean you can really feel them in the Bernie movement or in AOC or in a lot of places in America yeah I enjoyed that nice point that Mises makes here about what Marx came up with and what he didn't come up with he's careful to note that socialism is quite old predates Marx considerably this idea that you could abolish markets and just come up with this socialist idea not something Marx invented at all and notes that Marx's real innovation was yep as you noted it's inevitable and it's the march of progress and every current age we're in is better than the previous age by virtue of the fact that we believe that as time marches on people just become better and society becomes better so this automatically makes socialism superior to what came before it which was capitalism and there's no use fighting it and if you're fighting it it's just because you're some sort of bourgeois troglodyte and that actually leads to the other innovation that Mises discusses and he only mentions it he doesn't really describe it at all is how Mises or Marx hatched out the doctrine of polylogism which I believe he discusses elsewhere in human action the idea that there are some people who are enlightened by virtue of the social class they're in or because they're a certain type of intellectual and so on these people can understand why socialism is good these people can understand that it is inevitable these people can understand why it works but if you're tainted mentally or emotionally by bourgeois ideals then you can never understand socialism you can never really understand how it works or anything like that so that when people opposed socialism it was really just because they were emotionally and spiritually deficient it wasn't because they had any sort of rational argument they just simply couldn't understand it because their tiny bourgeois brains weren't suited to understanding the new realities and he points out elsewhere that this is really a doctrine employed by racists which is that certain groups of humans can be rational but other groups of humans will always be slaves because they can't possibly comprehend the notion of private property and so on and as you can imagine he rejects that idea but then says look the Marxist just basically stole that idea and applied it to their own notions of polylogism so yeah he didn't invent socialism at all he just came up with these crafty arguments explaining why anyone who opposes socialism is therefore irrational or emotionally defective somehow and just refuses to embrace the new world that is hatching and so you don't even have to really address these people just ignore them because that's why they don't understand socialism because they're too stupid or they're wrong on other grounds not because they're making better arguments and so that helped immensely that Mises says here that that worked for a while and actually helped silence the critics of socialism for quite some time but as time has gone on the socialism actually had to address how will socialism actually work because they completely ignored that for decades and never actually argued Marx didn't argue this is how socialism would work and basically ignored it and notes other economists that tried to figure it out but failed and so now we're just now getting to the point of how socialism would work and they're still coming up with by now I mean in 1949 just now getting the idea of how it would work and they're failing miserably as Mises notes and says we've already seen a couple of experiments we've got the Soviet experiment, we've got the Nazi, the National Socialist experiment and those aren't working for the reasons I'm about to point out here That's funny one of the great things about being an Austro-libertarian is when someone says well how would that work what would that look like you can just say I don't know we're not trying to plan anything we're just going to let it go what would private money look like I don't know that's my favorite new expression in 2020 is I don't know I think our goal for 2020 should be for people in public places to have fewer opinions and voice them less frequently that's my hope for this year what's great here Ryan is that at the very end of the chapter 25 he brings up praxeology which is of course his notion of the actual study of human nature of human action of which economics is a subset but in socialism we're presumed to have sort of one director or one will across society so that's a real problem from a praxeology praxeological perspective and of course there's the question and throughout this book he uses the term division of labor almost as a synonym for social cooperation in other words it's a healthy thing it's all about earlier chapter in part four about social harmony and cooperation so this is something that Mises views as the very pith of civilization that this division of labor and social cooperation in fact he almost called the book social cooperation instead of human action so he asks this question can a socialist system operate as a system of the division of labor and that's really from a praxeology praxeological I keep messing this up from a praxeological perspective that's really the question that's a tough question right and we're seeing kind of shadows of that today in this whole well who's essential and who's non-essential and oh well we can all agree that people who work in grocery stores that's great but who else is essential and of course they have no idea they're just kind of grasping in the dark they're just selecting those things which seem to well obviously food delivery is good so I governor shall decide that's important but then you start to get down the production line a little bit and you start to wonder well what about people who make auto parts what about people who deliver auto parts are you Mr. Governor aware of all of the different things that go into making auto parts or repairing automobiles or maintaining a garage that keeps all of these delivery trucks and everything going and you start to get to the point where they don't know what sorts of labor are necessary and how it should be divided up among the population and yeah it might seem easy if you take a extreme case oh well we've decided that people who compose epic poems are unessential okay but how many of those people exist whereas you got a lot of people who do insurance insurance is pretty important to delivery of groceries in a variety of ways and bankers of course are important but they're okay because they'll always be kept solvent by the fed so alright but all those other things that people who are involved in the production of daily needs need other than simply that guy who delivers groceries in a truck this is an extremely complex economy and if you're just a socialist who says well we'll pick and decide what your job is and we'll figure out what's essential and what's not and what you'll get paid for and who doesn't need pay well you start to run into problems real quick not least of all because you're then also screwing up the economy in terms of people who are well suited to certain lines of work and not well suited to others and who has talents for this and who has capital for that and it's you go down this road almost immediately of legalizing things that are seemingly necessary but might not be and then making illegal things that are actually necessary and end up impeding your ability to deliver goods and services and that's why it's so important to not have a single decision maker and he keeps coming back to that issue of there's this one will that will then guide the direction that the market goes but there's no good reason to assume that that is a rational or a good idea because people simply cannot know just one person what needs to be produced and what doesn't and what shortages that might lead to and how it could really bring the whole system to a standstill in some cases now of course there's enough leeway being allowed right now and historically in a variety of socialist regimes that describe themselves as socialists and weren't fully socialist they realized quickly we've got to at least allow some people to function freely here where things are going to lock up and that's that famous new economic policy experiment right where when the Soviet Union was new they locked everything down and then there were shortages immediately and famines were brewing and all of that and Lenin realized real quick oh well we better allow some flexibility here we're all gonna starve and so we're gonna so okay we'll loosen up there just as long as the state controls the commanding heights of the economy right the railroads and the huge installations and the factories and so on then we can still maintain state control but immediately they had to recognize that you can't just have total and real socialism because you'll quickly starve and what he's really the real problem there is is they were abolishing the division of labor and the free movement of labor from place to place and the movement of capital and allowing this quote unquote chaotic system to happen and that's the strain that leads us up right here as he starts out talking about well there's this problem where people think that the state is rational and the state offers control and the state offers order whereas markets are chaos because it's just people doing whatever they want but what he points out is that the real chaos isn't trying to control the markets in this way because people are just grasping around blindly and when you put one person in charge they really have no idea how to actually organize society yeah and a couple points in these two chapters he really uses the cool phrase anarchy of production which socialists don't like this idea of just anarchy production occurring by whim of the market they want to they want to run it but that's really about it for this very brief chapter 25 I would like to point out though at the very end of it he's got this beautiful little paragraph that just shows throughout it all I mean here's this magnificent man this brilliant writer not omniscient of course but nonetheless obviously a great mind and he's so humble and he shows that humility when he says toward the end of the chapter he says it's important to realize that this problem is nothing at all to do with the valuation of the ultimate ends and he continued meaning the one will socialist decision maker he says our problem the crucial and only problem of socialism is a purely economic problem and as such refers to means and not to ultimate ends so Mises the utilitarian liberal once again shows humility and says you know what folks I'm not even here to judge I've chosen are particularly even how those ends were arrived at but rather we're here as economists in a very free system meaning value free the German word to just study the connection between means and so even after all of his demolition of socialism decades earlier and again in that chapter you know he comes in with a little bit of humility and I thought that that was and I don't know why that struck me but it did well as an editor I always enjoyed when a writer sticks to the point and makes it clear what point they're trying to make and don't overreach and so yeah I think that's very valuable in his writing he's trying to be precise he's trying to say this is the actual argument I'm making it's not that he doesn't make other broader arguments somewhere else or uses other arguments elsewhere he's just trying to stay focused here in the text this is the problem this is the problem we're addressing here and that's I think that's what a good scholar does is they don't try to do everything all the time now of course if you're delivering a political speech or so on that's something else entirely but this is a book where he's trying to stay precise and focused and I really like how he does that and you're right that does require some humility because it's admitting that you're not solving all the world's problems here right now yeah there's one thing we need it's more humility and saying we don't know that's to me the whole point of austral libertarianism is allowing people the freedom to work these things out as so as we turn to the second chapter in this short part of the book chapter 26 the impossibility of economic calculation under socialism so that sounds a little bit more like what we're used to from Mises and Ryan I was struck he starts out with this idea of the director meaning the socialist hive mind or the one will or whatever it is and he gives us a very simple example rather than some grandiose public works program for the government to engineer or some war for the government to go wage he says let's just take a simple house the director wants to build a house well first they have to decide where you know what land and that has some opportunity cost and then they have to figure out since they don't have market prices they have to figure out materials and labor and how long it takes to build it and how much to pay the architect and all this and that so it's actually a very neat little example with just something as simple as a house and if you think about what goes into a house or building one it's pretty staggering and an awfully tough to command from far away yeah this reminded me too of how bonkers it's become in some sections of society where you you could imagine where someone is talking about building themselves a house and trying to decide some of these things about well should there be a bay window here what sort of materials should we use and what side of the hill should we build it on but then saying you know what let's just let's have an algorithm decide for me we'll just we'll feed a bunch of data into sort of AI and it'll come back and tell us what sort of house to build the reality of course is someone might get that recommendation but then they're likely to override it if it turns out that what they really do want is a bay window even though the algorithm tells them not to because so much of this just comes down to things that cannot be quantified what is the how do you want your house to be built what do you want it to feel like inside and not only can you not do this for yourself really in reducing everything to just an equation but you certainly can't do it for a thousand people or a million people or building houses over a hundred square miles in dozens of different locations and places and this idea that this could all be planned out ahead of time maybe even gears ahead of time with some five-year plan or something like that this I think this example here helps to illustrate just how unworkable that is. Yeah and he gets back to again the idea he's he's offered before in his book Socialism how important math is in all this and I believe it was back in part three with pair byland where pair said you know the idea of expressing valuations however subjective and however cardinal not ordinal using you know mathematical terms is actually one of the great achievements in civilization you know to have profit and loss and to have an accounting ledger and see where the money's being spent to allow that accounting function to help us better visualize how to allocate resources is actually a huge a huge part of civilization and he and I think he mentions this a couple different places on 697 where he says that you know this is the hundred year problem of socialism is you know this is the main issue behind socialism is the inability to plan because you don't have price calculation then he says he follows he says the mathematical economists are almost exclusively intent on the study of what they call economic equilibrium in the static state but when you're trying to use math to describe to arrive at a steady state formulaic answer in an economy that's never steady state it leads to problems right the idea of this this economy that has reached some sort of stasis some sort of equilibrium it's helpful as a model for describing some things much like the liberals idea of the ideal society and so on but once you start deciding that okay this is what society is now this is what all our needs are now so we'll build an entire production mechanism around it the thing is is that doesn't stay the same the weather changes there might be an early frost your demographics might change there could be any number of things that change the availability of some product and demand these are all things that happen all the time and something by the way that any business owner knows they know that there's all of these variables that are constantly changing and often you can't even really know what's changed or what people were thinking as to why they stopped buying that product and so on but you got to roll with it you have to make adjustments and a business owner knows this but there's interestingly this idea among many economists and scholars that nope you don't actually have to make those constant adjustments or we can somehow design a computer program that will do this but that's just not how the real world works that yes you want to have through the price mechanism you could also and of course Mises wasn't opposed to economic history in the sense of trying to reconstruct how the world has worked in the past and trying to have that help you into your decision making in the future but that's different from simply entering a bunch of numbers in about the current situation right now and then saying well this will be our guide for all future decision making about the economy because reality quickly changes from what the model says and then all of your attempts at then making those calculations become useless or extremely wasteful and in many cases that can lead to things like hunger and real shortages and a big decline in the standard of living. Yes and he has this interesting section in this chapter where he's listing out some of the different suggestions for economic calculation under socialism and one of those is just straight math. Differential equations and if we remember back to our calculus class in high school or college it's been a long time but I mean differential equations you've got a function which has generally some sort of physical quality and then you have a derivative which represents a rate of change and then the differential equation for which you're trying to solve defines the relationship between the two and there is I think we can understand the allure of functions and equations to solve human problems. I mean we like the idea of a nice neat math answer. So I don't think we spend a lot of time criticizing mathematical models in the Austrian world and of course models in general epidemiological models are being severely criticized right now because of the COVID virus crisis but you know there's something very human Ryan wouldn't you agree about trying to fit human activity into boxes and solve things using math I mean we can understand the appeal. Right I understand why people like math right two plus two equals four always that's very reliable and so why wouldn't you want to understand then immutable truths in that way by coming up with just more complex equations about how production takes place and what it is that people need and want and where those goods and services can be obtained and of course you can come up with when you go through a mathematical proof it's very beautiful in a certain sense and I always enjoyed geometry for that reason I love those geometry proofs that we used to do in 10th grade but the economy doesn't work that way because it's got so many unknowable variations and the conditions of the world change always and constantly and that's Mises's point is you don't really know what the variables are in these equations and if you were to do them you would have to constantly change them and so you would need to you'd probably need to spend more time inputting data into these equations and just getting on with your life and producing goods and services so why not just actually produce goods and services in the marketplace as best you can and devote your time to solving the problems of production which are substantial right because the physical world is constantly changing and the demands of people and their families and based on their different demographics and all of that is constantly in flux so that's a problem all of itself now I know some socialists would still say well I've heard them say this is well we have more powerful computers now and this is the era of big data and that'll handle it now but this brings me back to the issue of that political scientists have often had to contend with and the more savvy ones know it's a real problem is now kind of the holy grail in political science is democracy well we can have a just well functioning state if only we could get the kinks out of democracy but even then even the smarter ones admit how do you translate to the will of the people whatever that is some majority group or whatever actually into state action or lack of state action whatever how does it move from one place to the other and that's problems never been solved right how do we transmit the needs into state action that's here right how are we going to transmit the needs of production and consumption into these powerful computers that are then going to solve the problem for us because it's not like even here in the era of big data that we can just stop collecting data now because well we got we got 20 years worth of data so we got it all figured out now even they say well we got it we have to keep refining the model constantly and so I guess the idea here is that well we can refine the model well enough that we can address everybody's needs and so on but show me a place where that whole idea hasn't failed miserably I mean the current crisis is a case right here like I'm supposed to believe that people at the WHO or people in the Italian government well because it's the era of big data shouldn't they have been able to calculate these things that were coming down the road they failed miserably at it and but that's what we're being told is that we can see into the future now because we can we can see these things that happened in the past but of course they're always full of excuses anytime they fail to predict something oh it's because it's a black swan event and we couldn't predict it so therefore our model is to be excused well I think Mises might say the world is constantly full of black swan events some of them large and some of them small just because they may be smaller doesn't mean they don't matter and I think that's what they try to say with these models as well the smaller stuff we all got covered it's just the big stuff that we always failed miserably with well that doesn't offer me very much comfort well what's so interesting is as you look at the coronavirus crisis at least implicitly we think that data is faster now that we can hear about you know the number of deaths in Italy almost on a real-time day-to-day basis unlike 30 or 40 years ago we'd have to wait for the newspaper or once a week or something but yet we have more data and faster data than ever but it seems like we're missing the forest for the trees and we certainly done that with coronavirus because we're interpreting things out of whack there's no question about that and this whole shutdown is result of a gross misinterpretation of data and a false alarm basically a hysteria panic so data is not always what it's cracked up to be and you know I get your point about people now say well there's AI and there's this and that so Walmart is kind of almost a little country end to itself and it can figure things out it's socialist but people forget Walmart is using prices it's using prices for labor it's using prices for you know suppliers it's using prices for it's the property it buys it's using prices for everything it does so not so simple and when we get past math and differential equations Mises also offers at page 699 some other suggestions for socialist economic calculation I thought these were very interesting because occasionally he lists things and we all love a list right and so he mentions calculation in kind which would be sort of almost barter and he says you know that's instead of in monetary terms so he says that's very obviously very inefficient and no good and then he says well we could use the labor theory of value to determine prices in other words how much work and effort does something take he says well we've already you know we can go back to Bombay and they those guys you know blue to smithereens the Marxist labor theory of value but what I really like Ryan was number three he says the unit is to be a quantity of utility so I thought this was really interesting if we could somehow compare utiles or something other than a dollar some measure of utility almost like the way we measure energy or heat or something in physics and it almost reminds me of the old idea Esperanto the universal language where we could you know get scrap English and Mandarin and French and all these languages everyone could come together and speak one language and our own our great friend Dr. Leland Jaeger who died a few years ago who was a long time professor here at the University of Auburn a great friend of the Mises Institute he was actually a connoisseur who just spoke six or seven of them and including Esperanto by the way so he was very interested in this and this was kind of a faddish thing in the 70s that we're going to bring humanity together by creating this universal language in which we all speak and I don't know why that popped into my head when I read this but it did the idea that we're going to have a quantity of utility but Mises says no no no this is no good because in fact you know everything's about validation we prefer things you know based on our subjective desires for them and so you know there's a mistake when people think when two parties arrive at the price for something let's say you're selling a car someone else is buying a car and you agree to a use car for $15,000 and so we assume there's a problem in assuming that Mises valued the car at $15,000 and Mises reminds us as he pointed out earlier in the book is like no no no the buyer of the car values the car more than the $15,000 he's giving up the seller of the car values the $15,000 more than the car he's giving up so it's an imperfect way of measuring things but it's again very seductive if we could just come up with a utility function and so then Ryan he gets into this really interesting exposition which I think goes to your analogies about the Soviet Union and shutting things down and having but immediately just having the government run big things like railroads and leaving small things to the market even if that market is a black market he gets into the section about the quasi market and so what's he getting at here he's basically talking about attempting to mimic the market but in a socialist model right and that was invented as a necessary workaround because it just quickly became apparent that you can't have pure socialism and so Mises says yeah the older socialist still thought you could do that but okay we all admitted now you need to have some sort of market and the phrase he uses here that I enjoy is he talks about you want people to play markets as children play war railroad or school they do not comprehend how such childish play differs from the real thing it tries to imitate now anytime Mises mentions children I'm immediately suspicious because I wonder if he was ever in the same room as children with children in his entire adult life but in this case he is correct that imaginary play is extremely different from the real thing right obviously a war game is nothing like real war and I think that's an apt analogy here is they're trying to recreate a marketplace without having an actual marketplace and so of course people they behave completely different but it is this idea that okay we can set up something that's real similar to markets and we'll act like it's a market and then we can just proceed from there and to a certain extent that's that's what we're seeing from the central bank so much now is okay well we don't really have a market anymore in terms of stock prices or mortgage backed securities and so on because we as a government entity are creating new money and purchasing these things and constantly manipulating the prices and the demand but we have data we have spreadsheets that tell us like what might have happened and maybe what we should do to make it happen under more ideal conditions and so on and in that case you don't have a market at all and so of course Mises would explain the sort of bad things that result from that over time but to a certain extent that's very much the world we have entered into in the last well at least 20 years where the more regulation you have the more you have government subsidizing and purchasing things the more you are in an economy where we're just essentially trying to go through the motions of how a market behaves while not actually having a functioning price mechanism and so I think the the ultimate outcome is essentially a sort of interventionism but but he's talking here in the context of socialists trying to recreate socialism using this sort of interventionist method and it just doesn't lead to what you wanted to do because you just simply can't really know what is needed in terms of labor and consumption and capital and all of those things. Well I was struck reading page 702 and 703 that maybe the modern analogy is in the concept of transfer pricing where you have big multinational corporations and they have divisions and subsidiary companies all around the world and these companies all deal with one another sending parts and supplies around and labor around and so what they might try to do is kind of juice their earnings for accounting purposes or you know juice their tax payments for tax purposes by adjusting the prices that they use between each other and so in other words try to put all the profits into low tax jurisdictions and try to put a lot of the costs and deductions into high tax jurisdictions and by doing all this minimize their taxes and make their book accounting look as profitable as possible and that's why under both GAP rules and under IRS and other tax jurisdictions there are rules against transfer pricing so I guess this is a little bit of analogy you brought up AI earlier you know within a company like Walmart or within a giant company like GM with subdivisions and operating companies around the world and you know we've got the transfer pricing model there's still the right skin in the game in other words if we consider whether your Walmart or GM that the owner at the top is sort of like the government all all the way down through the organizational chart whether GM or Walmart it's it still rolls up into one entity so you don't have the right incentives you know sort of top to bottom yes I think this issue is very important takes us to Mises discussion of bureaucracy here and how that contrasts with the role of the entrepreneur so in the case of bureaucracy you've got managers and you've got CEOs and people who are running a company who they there are making decisions in terms of trying to minimize stock prices and or minimize tax tax burden and maximize stock price and they've got lots of things that they're trying to do however these people aren't entrepreneurs because they're trying to they're trying to manage a company and that is different from trying to really anticipate what the company is doing or rather anticipate what it is that consumers are going to want in the future anticipating what direction the market is going to go in overall and also these bureaucrats essentially what they are their private sector bureaucrats these people who are running this private bureaucracy they have skin in the game the way the entrepreneur does so when Mises is talking about the entrepreneur he's talking about someone who has some risks risk in this venture people who have perhaps put their time and energy into creating this enterprise and they're different from the people have been hired to run it and so it's the entrepreneur who is a very key person in actually dealing with the problems of the division of remember and dealing with changing conditions because yes we can have people who are running a company and they can certainly make decisions and attempt to deal with fluctuations and taxes and prices and and risk and all of that but they ultimately have different motivations and a different role than the entrepreneur does and Mises is careful to make that distinction here and he talks about this of course in his book bureaucracy as well and that the worker the planner the chairman of the board that sort of thing even though it is private sector these people should not be confused with entrepreneurs and that was a big reason which I should have mentioned earlier a big reason why things are constantly changing in the marketplace is because entrepreneurs come along and they see how things can be improved and they change it and then your whole market changes again the entire market environment changes and then your models again are useless because they of course almost by definition couldn't anticipate what some entrepreneur was going to come along and do and that sort of thing I mean I guess that's in a certain sense of black swan event of its own as you had this entrepreneur came along you saw a completely different way of doing things and he did it the market is totally different now and then of course he will hire if he's successful and he can build up a sizeable enterprise he's then going to need his own business bureaucracy that can then carry out his wishes to a certain extent but even then he's going to be constantly looking for how the market changes but he fundamentally is different from those people who are actually running the company and just carrying out the orders of the entrepreneur well I think that's actually a great point to end our discussion today on this idea of equilibrium because the notion that socialism can figure out prices for the economy equilibrium in a market economy is something which is never reached because supply and demand are ever shifting and consumer tastes are ever shifting and producer products are ever shifting so equilibrium is a tendency it's not something at which you ever arrive and so it's a mistake as Mises says to think that you could use math to compute the state of equilibrium because you're trying to find a static thing in a dynamic world and then I'll leave the audience and we'll cut out here with this quote at the very end of chapter 26 page 711 he says there is therefore no need to stress the point that the fabulous number of equations which one would have to solve each day anew for a practical utilization of the method would make the whole idea absurd even if it were really a reasonable substitute for the market's economic calculation and this is something I wonder if the AOCs of the world really understand the kind of minute day to day decisions that bureaucrats would have to be making about where to send goods and services how to price goods and services how much to pay people I mean it's staggering and in our modern economy, Ryan I think this is something that gives me hope in our modern economy we just turn on Netflix and we go to the grocery store and there's 10 zillion kinds of toothpaste I mean we're pretty spoiled we're pretty demanding and there's just no way that this could ever be done bureaucratically and I'm not so sure that today's socialists really get that. Oh it's so much more complex and I've noted that in a couple articles recently as because this shutdown has been so biased against so many small business owners and small entrepreneurs and even medium size that is the edifice we're building right now is one that favors huge corporations at the cost of more agile and innovative smaller firms because they don't get to be counted as essential in that sort of thing but those people of course appreciate just the level of planning and my new detail that must be paid attention to in order to make an enterprise function and you gotta lay people off almost immediately because the money's not coming in, you can't serve people there's no more cash flow, you're not making payroll anymore and you can't just take a month off and just ignore what's going on in the economy or the local economy in your marketplace and just ignore what your employees are doing and so on and just kind of put it on autopilot that's just not the way that enterprises function and large ones can pull that off for a little bit longer because they have reserves to go off of and they can kind of pretend to not be wasteful for longer but smaller ones they just go away quickly because they don't have that backup and that just really illustrates for us the number of businesses that may not be opening up ever again after these lockdowns are over will be a helpful illustration of just how actually tenuous and difficult it is to put an enterprise together and to keep it going and to keep people employed and to keep cash flow and to keep serving the customers in a way that they need and want it's not actually easy 90% of Americans don't do it because only 10% actually make their living from small businesses but I think we would be a different country if more people had experience with that and more people realized just how complex and difficult it is to do that and I think it's the fact that so few people know about it that we can even entertain this notion that yep we can just have a bunch of people maybe even thousands of miles away people in some government office building somewhere else deciding what it is that needs to be made and who needs to be employed and what they should be doing it's just completely unrealistic and of course you can you can limp along for a while as things become more and more wasteful as the standard of living declines but how long are people willing to tolerate that I know that in some of his essays Rothbard was always optimistic largely because he felt people simply wouldn't tolerate that sort of thing he felt that since the liberal revolutions of the 19th century people weren't going to sit around and let the government impoverish them like they might have done in years past I guess we'll find out what the tolerance level is for that to a certain extent although maybe when I come to that maybe the government institutions will become afraid enough of what might happen that they won't push it as far as they could but we'll see well I hope we don't see and I hope that this lockdown ends as soon as possible and that people get back out there doing what they do because it's very very scary times we live in and although in a sense people might feel like they should just be you know online all day reading about their town shutdown or something this is actually a great time as I mentioned earlier to use any extra spare time you've got to go back to first principles actually educate yourself and improve yourself during this lockdown and Human Action is the kind of once in a lifetime book that's actually going to make you a better person it's like eating your broccoli or going to the gym as I mentioned it's not a junk food book and so we've made it available in our store at a great discount just use the code HAPOD for Human Action podcast and you can get either the beautiful hardcover scholars edition or a very very cheap $5 paperback version of this book it's something you want to own and if you don't want to own it just go to mises.org type in Human Action you can find a beautiful HTML version you can follow along as we're going through these podcasts and so all that said that's part 5 of Human Action I want to thank you Ryan McMacon so much for joining us and I want to invite everybody to join us again next week as we begin part 6 of this book with our upcoming guest Dr. Peter Klein so Ryan you have a great weekend Thank you 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