 Our first speaker this morning is Dr. Walter Block. Dr. Block is the Harold E. Worth Eminent Scholar at Loyola University in New Orleans. He's a longtime member of our senior faculty here at the Mises Institute. In 2005, he was awarded the Murray N. Rothbard Medal of Freedom, and in 2011, he was awarded our Gary G. Schlarbaum Award for Lifetime Achievement in the pursuit of liberty. I think he's the only person to ever win both. His talk this morning is an Austrian critique of mainstream economics. Give it up for Walter Block, please. I'm supposed to be talking about an Austrian critique of mainstream economics. Instead, I'm going to be attacking Tom Woods. He cheated. He cheated. He's a cheat. What happened is I told him look away and I grabbed his rook, and he saw that he had no rook and he demanded it back. Now, I call that cheating. And once he exposed me in my cheating, I just sort of lost it, so he won fair and square. OK, Austrian economics. If I had to pick a synonym for Austrian economics, it would be praxeology. Because I see praxeology as the key element, the key essence of Austrian economics. There are others at other institutions, schools, who will tell you about Austrian economics. And they'll mention 15 or 20 different elements. And I'll mention 15 or 20 different elements. But they won't mention praxeology. And to me, praxeology is first and foremost, it's the defining characteristics. It's the essence. It's where we really distinguish ourselves from them guys. And it's the reason that people like Gary Becker, my old dissertation advisor at Columbia, and James Buchanan, another Nobel Prize winner, consider Austrian economics a cult or a religion because of praxeology. So what is praxeology? Praxeology is the logic of economics. Let me give you some examples. If I trade you my tie for your pen, it must mean that I value your pen more than the tie. And you value the tie more than the pen. Now, it might not be that you really give a rat's rear end about my tie, but you think I'll give you an A if you make the trade, and we don't know what's on our minds. And who knows why I want your lousy pen? But all we know is that if we're both voluntarily willing to make the trade, we each value in some sense what we're receiving more than what we're getting. Now, is this testable? Can you go out and make a test about this? Do it 1,000 times and see? No. If you understand the English language, you understand that this is sort of obvious and undeniable. But the mainstream economists have physics envy, sort of like penis envy, physics envy. And the way they see economics, it's sort of like an empirical science. What you do is you make a hypothesis. And you don't test, well, you test the hypothesis. And if the hypothesis comes flying through, well, then you provisionally accept it. But it's just a hypothesis. And it could be overturned by the next experiment. As it is in the case of the physical sciences, physics, chemistry, biology, what have you. But economics is very different. We don't test anything. We illustrate things, like with the tie and the pen. I illustrated it. But you can't test it. It's not falsifiable. Let me give you a few other examples to solidify our understanding of what this is. Humans act. Well, try denying that. And you're engaging in a human act. So it's sort of impossible to deny. It's not falsifiable. And yet what they see, the essence of economics is falsifiability. They're a bunch of logical positivists. We, Austrians, or at least the Mises Rothbard branch, not the Hayek branch, don't see economics as an empirical test. We see it as a branch of logic, similar to symbolic logic or geometry or mathematics, which is an anomaly because we do criticize math and economics, and yet we are like math in economics in the sense that it's a deductive system. Not an inductive, but a deductive system gains from trade. If I trade you the tie for the pen, I make a profit of the difference between the lower value of the pen, rather the higher value of the pen for me and the lower value of the tie for me. You make a profit because you gain the better thing and you give up the worst thing, so you gain the difference between them. We make mutual profit. Again, this is not falsifiable. Another one is that there's a tendency for profits to equalize in all industries because if profits are very high in industry A and not so high in industry B and we forget about risk, well then there's a tendency for money to go out of the lower profit area and into the higher profit area. Now at any given time, the profits might be different. So you might think that that's falsifying it, but it's not falsifying it because we just say there's a tendency and a tendency means that there's a move in that direction. There's an impetus for it. It doesn't mean that we'll always reach it. Minimum wage. We say that if you have a minimum wage, the unemployment rate for unskilled workers will be higher than it otherwise would have been had you not had a minimum wage. Now look, there might be a guy like Bill Gates who's determined to overturn Austrian economics and when we have a minimum wage, what he does is he starts hiring people, unskilled people to overturn it. We don't say that that can't occur, but we say that if profits are the only focus, then that won't occur and who knows if we have a minimum wage, maybe there'll be a new discovery and things will be better. There'll be two things going on. That's why we have to have setter as paribus, other things equal. So again, it's not falsifiable. My PhD dissertation with Gary Becker at Columbia was on rent control. I did an econometric regression equation analysis and I was trying to demonstrate, prove at that time I was not yet an Austrian. I was trying to prove that rent control ruins housing, bad vacancies, the landlord doesn't have an incentive to keep up the buildings, whatever. And most of my regression equations came out with the right signs and most of them were statistically significant at the 5% level or whatever it was, 1% level. But every once in a while, I'd get the wrong sign. And embarrassingly, sometimes they were statistically significant. Now if Gary Becker were really a neoclassical that he says he is, that he thinks he is, he would have said, I got this young genius block. He's gonna overturn everything that we know about rent control. Instead what he said, he was too kind to say it but what he was thinking of was blocky moron. Go out there and do it again until you get it right. So what's testing what? Is my empirical evidence testing rent control? Here's a rent control thing, supply and demand, housing, quantity, price. And we have a price below and now we have a shortage. So I'm trying to measure a shortage and if I get it, what the Austrians would say is I'm illustrating it, not testing the theory. This stuff is praxeological, undeniable. Now I'm not saying that we Austrians are omniscient. I'm not saying we can't err, we can err. All I'm saying is that the category that we must place economics in is more like the Pythagorean theorem than anything else. Now we could be mistaken about the Pythagorean theorem. We have to be modest, who knows. But it's sort of a branch of symbolic logic or a branch of logic. It's not an empirical science, we're not logical positivists. Okay, so I think I've made the case very briefly. There's a lot of work that's been written on this. Most of it by Mises and Rothbard and Hoppe and other scholars. But I think I've demonstrated in a few minutes what praxeology is and why Austrian economics is grounded on praxeology and why they think that we're a cult in a religion because they say we're not scientific. We're not testing anything. We don't believe in falsifiability. Now there are areas in economics that are not praxeological. For example, what is the elasticity of bananas? If the price of bananas rises by 10%, how many fewer bananas will we have? Well we have no principles there. So there you have to test it. If you wanna find out what the elasticity is, you run a regression and we Austrians are not against that. Many of us don't use that stuff. We don't see any great benefits. My colleague, Jeff Herbiner, I think disagrees with me on this, or at least in the past he has, but this is my view. And there are differences among the faculty on certain things. Jeff thinks that math is just, I don't wanna put words in his mouth, but it's a snare and a delusion. And I think that mathematical economics or statistics can have some heuristic value. And certainly they have value when we have no praxeological laws. So what we're after is laws, not the hypotheses that could be overturned the next day. But there are things that are hypotheses about the elasticity or just how big a shortage. Praxeology doesn't say how big it'll be. That depends upon the elasticities of the two curves. And we have no law on that. That's an empirical issue. So we can run statistics. It's a mistake to say that Austrians astute totally mathematical economics and statistics. We don't. It's just the purpose. It's the interpretation. Now we can run regressions on rent control and on minimum wage and on free trade and things like that, but it's not testing it. Remember, which is the dog and which is the tail. What's testing what? When the empirical stuff is not testing law, it's illustrating the law. So we can use it and it's incorrect to say that we totally abandon it. Okay, the next thing that I'd like to say, what I'm trying to do is show differences between Austrian economics and the mainstream. Now the next one, Austrian business cycle theory, macro money area. They're all Keynesians. Milton Friedman was once quoted by Paul Samuelson and Paul Samuelson said that Milton Friedman said we're all Keynesians now. And Milton Friedman said he misinterpreted me. And what Friedman actually said was when it comes to the tools of analysis, sorry, when it comes to public policy recommendations, there's a great divide between us monitorists and them that are Keynesians. But when it comes to the tools of analysis, we're all Keynesians now. Now it seems to me that the tools of analysis are much more important than the public policy recommendations because the one emanates from the other. The big differences between the monitorist Keynesians and the fiscalist Keynesians, the right wing and the left wing Keynesians is they all agree that when the economy is in the doldrums, you have to step on the gas. They just disagree as to whether it's a money gas or a fiscal gas. And when the economy is hyper heated, then you have to step on the brakes and they again disagree on whether it's monetary or fiscal breaks. But they all agree that that's the way the economy is. One time Arthur Burns, who was Murray Rothbard's dissertation advisor at Columbia and who made it impossible for Murray to get his PhD for like 10 years or something, he was once asked, well, suppose we have both, suppose we have unemployment and inflation. What then? And Burns said, well, then we'll have to resign and everyone laughed because you couldn't have that. But we have had stagflation and they haven't been resigning unfortunately. It would be nice if they did. Another difference between us and them, the other guys is we believe that capital is not homogeneous, capital is heterogeneous. For them, there's just this letter K and that's all capital. For the Austrians, we have the structure of production. Can I be heard when I'm over here? Ah, great. For them, whether you have the Keynesian Cross or the ISLM or the aggregate demand, aggregate supply, it's just too much or too little. For us Austrians, it's not a matter of too much or too little. It's a matter of allocation. And we have a misallocation theory of the business cycle. Namely, there's too much this and not enough of that and it's all got to do with capital. And Roger Garrison deserves credit for turning the, what do you call it, the Austrian triangle on its side and putting time over here and money over here. Whereas it used to be with Hayek and Rothbard, that time was on the vertical axis and nobody's used to having time on the vertical axis. So he made it more amenable, more accessible for the mainstream and I certainly applaud him for that. And the idea here is that if this is the triangle and this is consumption and this is various levels of production, this is far away in time. Here is the present, time zero. If this is the actual triangle or a structure production that represents the savings and investment decisions of the people, then what happens when the government artificially lowers the interest rate, the interest rate is that angle. What it does is it makes a triangle longer and thinner, shorter and fatter however you wanna call it, but it goes from triangle one to triangle two and all of this stuff here is really unjustified in the sense of the time preference of the people. And the way the mainstream sees it, the boom is a good period and the bust or the depression is bad. The Austrians flip it around and they say that this is the bad stuff, this is misallocating resources and the depression is getting us back to triangle one where we should have been in the first place. Now Bill Barnett and I have a long 80, 90 page article saying why the triangle is not a good way to depict this. And I sent this to Roger and what he said was triangles yesterday, triangles today, triangles tomorrow, triangles forever. Sort of like the Alabama governor segregation yesterday, today, tomorrow. This article came out a few years ago and I'm waiting for the Hayekian Garrisonians to criticize this because we did rip up the triangle. Bill Barnett and I have a slight difference. I still think it's a good heuristic device. I use it, I think about abuse, that's the way I was taught it and whenever I think of a problem, I think of it in terms of the triangle. He and I think that we should supplant the triangle with interest elasticity, which is a different concept. But he thinks the triangle is just garbage and we should ignore it and I think it's a good heuristic device. So we disagree on that. So don't let minor disagreements stop you from co-authoring stuff. But if anyone is interested in these articles, email me and I'll send it to you or give you the site. And my way of thinking is, I don't know if we have the truth but the way we'll get that one millionth of an inch closer to the truth is we have a thesis, they have a thesis, we criticize theirs, they criticize ours and maybe out of this mess somebody else will come up with something that neither of us see and we can progress. So I'm a big believer in John Stuart Mill on liberty, seeing both sides and trying to debate. Okay, the next thing is the non-neutrality of money. These guys believe that if you double the money supply you'll double prices, period. Whereas the Austrians have this view that it's not quite so simple. It depends upon how the money is injected. Is it a helicopter? Do we each add a zero to our currency? Things like that. The Austrian view is that money is not neutral. That it has real effects. It's not just a veil. Although it is a veil too, but it's not just a veil. Another one is the spontaneous order. That's an Austrian thing that just the individual actions of people lead to, as Hayek would say, something that is not in their intention. For example, language. People are going ug and bug and whatever and somehow you get language out of that or money. My colleague Philip Bagus did an excellent presentation on money. Although Bill Barnett and I and Bagus and Howden, his co-author, are having a big fight over, borrow short and lend long. We all agree that fraction reserve banking is problematic but we go further, Bill and I, about borrowing short and lending long and they disagree and we've had four or five articles on this. Okay, the next one is entrepreneurship. Is hardly any room for entrepreneurship in mainstream economics. It's land, labor and capital. They don't really have a fix on entrepreneurship whereas Israel Kersner, I think it's no exaggeration to say that his entire career is devoted to elaborating and expanding on the Missessian inside about entrepreneurship. So that would be another difference between the two schools. Another one is ordinal and cardinal. Ordinal utility is ordering. I like the tie better than the pen and I like the pen better than the paperclip. I can order rank and we Austrians have no problem with that and we think that that's a legitimate way of dealing with utility. Cardinal utility is counting. This has got 20 utils, this has got 10 utils, this has got five utils and therefore this is four times more valuable than this and two times more valuable than that. That's nonsense, that's silly. That just shows they have a sense of humor or maybe not. Look, we have measurements, we're not against measurements. There's height, there's weight, there's speed, there's velocity, there's all sorts of mass and all sorts of measurements but there are no utils. There are no measurements of utils. You can't say I'm twice as happy now as I was 10 minutes ago or I'm half as happy. I mean, that's just silly. You can say happier or less happy, fine, that's ordinal. But cardinal utility is a snare and a delusion and yet every time these people put marginal utility on something, I mean, once you have marginal utility, you're into cardinal utility and they've got diagrams like this all over the place. So this here is twice as high as that, right? This has got 20 utils. I mean, what are the units here? It's utils and here is 10 utils. I mean, that's silly and then they have this diminishing marginal utility of something or other. Cardinal utility, it's highly problematic. It's unscientific. It's a cultish religious kind of a thing. Since poetic justice, we might as well, if they're gonna call us Nambi Pambis, we can call them back Nambi Pambis. The next one I've got on my list is transitivity. What's transitivity? Well, if 10 is bigger than 10, then nine and nine is bigger than eight. Here we go, 10 is bigger than eight. No problem, mathematical transitivity. I have no problem with that. But what they wanna say that if you prefer apples to bananas and if you prefer bananas to carrots, then you also prefer apples to carrots. That's a problem because when you preferred apples to bananas, it was a time T1, right? And when you preferred bananas to carrots, it's a time T2, yes? And now when you're asked between apples and carrots, it's a time T3 and you might have changed your mind. So what's this transitivity business? It's not necessarily true. Now, you can get this even if things are false. For example, I could have said that eight is bigger than nine and nine is bigger than 10. And therefore eight is bigger than 10. All false statements, yet it follows logically. But so you have to be careful about the difference between validity and truth. Here it's valid, but it's not true. But still it's valid even though it's not true, okay? So we, Austrians, don't take transitivity as a key. Part of the reason that they love it is because they love indifference curves and I'll get, well, I'll get two indifference curves right now. They love indifference curves. They're fetishists about indifference curves. Here is apples and here is bananas and here is, what do you have? Say 10 and eight. And now what you look for is some other combination, another dot beside the X1, another dot with which you'll be indifferent. For example, X2, you prefer X1, X2 because you got more of both and now we're assuming that these goods are beneficial. And so X2 can't be on the same indifference curve as X1 and X3 can't be on the same indifference curve as X1 because it's got more of both and you prefer more of both than less. We'll assume that for the moment. So there must be some point say X4 such that you really don't care whether you're on X1. We have 10 and eight or X4, we'll say you have 20 and six. Is it clear from the diagram? Okay, I mean, they just love indifference curves and then they get, so you get some sort of curve like that and this is 20 utils and this one would be 40 utils, namely the, we're into cardinal and this might be five utils. They love indifference curves. They're forever going on about them and they shape them in funny shapes and pornographic shapes, I think sometimes. Just kidding here. They're not into pornographic indifference curves, although I suppose they could, you know. But the problem that Austrians have with indifference curves is you can't demonstrate indifference. I like that water bottle that this guy in the white shirt's got in the front table and I'm willing to offer you five bucks for it. Well, that doesn't establish indifference. It establishes that I like the water more than five bucks and he likes the five bucks more than the water, otherwise he's not gonna make the trade. How can you demonstrate indifference? You can't. Now, yet indifference is a perfectly good English word. We all know what it means. You know, we have all those cans of Coke and bottles of water in the refrigerator outside and when you reach in to get a bottle of Coke, you don't really, or a can of Coke, you don't really care which one it is. So in ordinary language, we could say you're indifferent between me, you just pick one. It's sort of like in physics. If you hold out two 10-pound bars, what do you call it, dumbbells, I can do it for about a minute and I start drooping and the sweat starts coming down me. I mean, even a very strong guy, Arnold Schwarzenegger or Mike Tyson, would have trouble holding two 20-pound barbells, just steady and yet they wouldn't be doing any work in the sense of physics because in physics work is mass times distance or something like that and there's no distance here because you're holding steady and yet you're dripping sweat after about 30 seconds. So technically, in technological, technical physics language, there's no work and yet this is a very tough exercise. Another one would be holding the L position on a parallel bar, you're standing still, but it's hard. I mean, your stomach is gonna cramp up your quads and all that. So it's similar in economics. We don't eschew the word indifference, we all know what it means, right? But as a technical matter, just like in technical physics, work has to be something with distance and if you're holding barbells, holding the L position on a parallel bar, you're not doing any work, but in ordinary language, you're really doing a lot of work. So in economics, you're doing, we know what indifference is, but it's not a technical word, but when it comes to technical language, then we say indifference is impossible to demonstrate because any human action is an attempt to change a less preferred situation for a more preferred situation. So you can't have indifference and all of their indifference curves have to go by the board, which is another element of our cultiveness and our religiosity supposedly. Okay, the next one is antitrust. Before I do antitrust, let me just do cost curves because cost curves will figure into antitrust. Okay, so what's going on with cost curves? In the first chapter or the first second chapter of every textbook you'll ever see, what they'll do is give you the correct view of, namely the Austrian view, the correct view of cost. Cost is the next best opportunity for gone. The fact that you're here, sitting here, listening to me babble on about Austrian economics, what is the cost to you? What is the real cost? The real cost to you is what you could have been doing otherwise had you not been here. I don't know what that cost is. You probably don't know what that cost is. You didn't even think about it because you were thinking about it in different curves or praxeology. You weren't thinking of what the alternative or opportunity costs of being here were for you or not only this lecture but the whole week. This lecture you could have slept later. You could have been riding a bicycle. You couldn't go in for a hike. You could have been swimming. You could have been reading. Who knows what you could have been doing? Whatever it is that you could have been doing, the next best thing, that's the cost. That's the alternative or opportunity cost. And nobody knows what anyone else's costs are and we don't even know our own costs because we very rarely think about that. Okay, so that's chapter one or chapter two of virtually every mainstream microeconomics text. Intro, intermediate, advanced, that's cost. And that's Austrian. But then in chapter six or wherever they get into cost curves, they start drawing things like this. This is the average cost curve. Now look, this is pornographic because they say that the best point is to be there. Now come on, you know what that looks like. Now where the hell do we get this average cost curve from? I mean average cost means that if you produce this much, quantity 10, the price will be five or something like that. This is objective costs. Now somehow they switch from opportunity costs or alternative costs which are subjective and nobody knows but it's a theoretical thing of a very important theoretical construct. And all of a sudden we got this crap. Where did we get that from? And then they have the audacity to say that if we have perfect competition, the demand curve faced by the firm will be there and will be at the bottom point of the average cost curve. Whereas if God forbid we have imperfect competition, we'll have a demand curve that slopes down and now we won't be at the average cost, at the bottom point of the average cost curve and this is bad, therefore we have to have perfect competition which means an infinite number and they call us unrealistic, an infinite number of firms and everybody's producing a homogeneous product and there's no competition and there's no profit and then they just go on and on with all sorts of wonderful things about perfect competition and they say, aha, in the real world there's no perfect competition and whenever there's no perfect competition the antitrust people can get you. I mean, that's just crazy. I have to tell you my antitrust joke. It's a series of two jokes and I once told this joke in front of a whole bunch of lawyers and economists who make a lot of money in antitrust. A colleague of mine, former roommate of mine, Ben Klein who's a pretty famous neoclassical economist. He was in money macro and he was switching to antitrust and IO and I asked him why I said there's no money in money which means you can't make much money in studying money but there's plenty of money in antitrust, the defense, the plaintiffs, plenty of money in there. So he switched to this and I was giving a lecture to people like that who love antitrust and it was a two-part joke and the first part was there were three prisoners in the Soviet Union and as prisoners do, you people know you're a bunch of jailbirds, you swap stories as to why you're in jail. So the first guy says in the Soviet Union well I got to work late and they accused me of cheating the state out of my labor services. The other guy says I got to work early and they accused me of brown nosing and the third guy said I got to work every day exactly on time and they accused me of owning a Western wristwatch and I got a big laugh out of the audience and then the second part there were three guys in jail in the US due to antitrust violations and the first guy said well I was in jail because I charge higher prices than everyone else and they accused me of profiteering and the second guy said well I got in jail because I charge lower prices and they accused me of predatory price cutting and the third guy said well I got to jail because I colluded and I charge the same price as everyone else. Of course it's hard to see how he could charge the same price as everyone else given that this guy is charging high and that guy is charging low but you have to work with me, I mean it's just a joke but the point is none of them laughed because they all realized that this showed that antitrust is dead from the neck up because I mean look the law of murder is a legitimate law because if you murder you go to jail if you don't murder you don't law of rape is a legitimate law if you don't rape you don't go to jail if you do you do but in antitrust no matter what you do you charge a higher or lower or the same price you're guilty. So and yet the so-called free enterprise Chicago school? Now let me draw you my antitrust thing can I do this? No I better get a fresh sheet of paper. The way they do it they have here's the average cost curve here's the marginal cost curve here's some sort of demand curve and here's a marginal revenue curve the average revenue or demand here's quantity there's price. This is the ideal place this I'll call C for competition there's where the perfectly competitive firm will be but the monopolist dirty rat will be where marginal cost hits marginal revenue and here's the price of the monopolist and here's the quantity of the monopolist here's the is this clear enough to see? Well those of you that are used to this will know that I'm doing it and those of you who've never seen this before I don't know what to say here's the price of the competition and what they say the problem is that here is M for monopolist and the indictment of the monopolist is higher price lower quantity profits are earned because there's a difference between the demand curve and the average cost curve so this is profits but the real thing that they hate is this thing called dead weight loss this triangle here called at K so it's K MC is the dead weight loss and they just hate that with a purple passion and what they say is that they should be producing at QC but they're only producing at QM they're withholding they're engaging in restrictive practices of some sort and I've got all sorts of laws about this but this is just interpersonal comparison of utility this is just cardinal utility what they're saying is that we value the product this area here let me get another pen we've we the consumers value this product that area is that clear maybe I'll go like that that area and this isn't really clear let me try again it got too busy okay so here's marginal cost average cost demand marginal revenue and this triangle here is the dead weight loss triangle and what they're saying is we should be producing QC we're only producing QM and therefore there's a misallocation of resources now think of it in terms of Tiger Woods Tiger Woods engages in I don't know eight tournaments a year and what they're saying is he really should engage in 12 tournaments a year because we value the extra four tournaments more than he values the this utility of the extra four you tournaments now come on I had a full head of hair before I saw this and look at me now I mean this is this is nonsense this is nonsense on stilts this is crazy this is cultish religious I don't mean a diminished religion a cultish I mean this is horrible stuff and yet the entire edifice of no I shouldn't say I was gonna say the entire edifice of antitrust is based on this but it's not what it's really based on is what Murray Rothbard said it's just the the Morgan people were getting the Rockefeller Trusts and the Rockefeller people were getting the Morgan Trusts and then later on economists came up with this nonsense in order to justify it so you can see one reason that the mainstream doesn't like Austrians because they'd be no antitrust if Austrian insights were implemented although I shouldn't say that because Austrians we do believe in the difference between normative and positive and I think someone was saying Tom Woods the other night that cheating rascal was saying that you could have a Nazi or a socialist Austrian who just understood economics but hated humanity and wanted to screw us up and he'd be a good Austrian economist but he'd be an immoral person so I shouldn't make the normative positive fallacy here but if you implement this sort of if you don't implement this sort of a thing a lot of economists wouldn't have jobs if you got rid of the Fed a lot of economists wouldn't have jobs now I don't say that it's an implication of Austrian economics but work with me here on the normative positive I mean what Austrian economics says is that the Fed has dust in such effects and those effects aren't very good and what we're saying here is that this can't be justified in technical economics and if that was implemented, the normative part many economists would lose their jobs and that's one reason that they don't much like us because the implications of a lot of Austrian economics is for fewer economics professorships okay, what do I have now? We did alternative costs, we did antitrust utility and welfare economics now we're in a personal comparison of utility you can't say that we value the extra four tournaments that Tiger Woods would get into more than the costs to him it's just interpersonal comparisons of utility it's even worse than the ordinal and cardinal I mean the ordinal says I rank this higher than that, fine the cardinal says I rank this twice as much as that not so good the interpersonal comparison of utility says that you rank this pen 3.2 times higher than I rank it I mean, where in bloody blue blazes do they get that stuff from? They just make it up they just make it up and then because it looks good on a diagram it's somehow scientific okay, the next thing is socialism now, I don't have to tell you about what the Austrians think about socialism Mises wrote a, taught a book, socialism you'll hear about socialism many times in this week how did the mainstream see socialism? Well, Paul Samuelson who you can't get more mainstream had this diagram, here's time and here is some sort of indication of economic wealth and what he's got is the US is up here and this is the way we're going and here is the Soviet Union and they're below us but they're creeping up and they're growing at a faster rate and pretty soon they're gonna surpass us, right? what's his name, Skousen did good work on this this is their view of socialism that it's efficient I spend my summers in Canada and Vancouver and the latest thing is that the Canadian socialism is better than US capitalism as if what we've got here is capitalism I mean, this is really weird stuff as Mises showed that if you are engaged in socialism you are planning in the dark you have without prices, I mean, if you define socialism as government ownership of the means of production, you can't plan you can't know whether you should build a bridge out of tungsten or tin or copper or whatever you don't have prices you don't have alternative or opportunity costs of things you don't know whether to build robots out of wood, plastic, metal you're just sort of planning blindly Hayek contributed that without prices, market prices and if the government owns all the means of production you can't have market prices you can't have a market because they own it all well then the information flows are cut off the Austrian view of socialism is not good you might ask, well how then did socialism last so long? I mean, they started in 1917 and they didn't go Kerblui until 1991 I think that's a couple of decades and the obvious answer is they didn't really have pure socialism because they had access to Western prices they could look at the consumer reports or the mercantile exchange of Chicago or whatever and the Sears robot catalog would give them a lot of prices but if the whole world had socialism this wouldn't apply Murray Rothbard goes so far as to say if you had one big firm in man economy and estate it would be the same thing namely if one big firm owned everything well then by definition there could be no trades and that's why firms can't get so big because the bigger they get the hotter it is to plan so these are the Austrian insights and it's very different than the mainstream the mainstream is socialism is just another system and they can solve the equations just as well as capitalism and in some sense they're even better because you don't have to have evil profit and you don't have to have competition and we can now rationalize everything this sounds sort of silly now but in the 20s when Mises was writing he was a lonely outpost everyone was saying he's crazy they even had a statue of Mises in the central planning bureau because he made them think more clearly about what they were doing I think the Mises Institute should have a statue of Monica Lewinsky because thanks to her Bill Clinton didn't do what he would have otherwise done he was too busy with her so you know I'm a big fan of Monica okay I did capital heterogeneity with the structure production I did indifference curves I did alternative costs mathematical economics now let me pull out something that I had before you see this diagram over here remember I said I gave you this stuff when the demand curve is flat and you get to the bottom point of the average cost curve and when it's not you're not there what Murray said is this is solely and totally an implication of smooth curves and the reason you have smooth curves is because you have calculus which means infinitesimally steps infinitesimally small steps but what Murray said was that in reality you don't have infinitesimally small steps which you need for the calculus and they love the calculus because now they can do mathematical economics integration differentiation all sorts of great stuff which has got nothing to do with economics and a lot of people graduate from non-Austrian programs with a PhD and they sort of know math econ but they don't know economics that they've never heard of Henry Haslitz economics in one lesson they don't know this stuff all they know is you know the the fifth differential of something or the Lagrange multiplier so what Murray did is he did it I think in two ways I forget how he did it one way was here's the average cost curve namely it's discrete and now you can have a downward sloping demand curve it won't be tangent to the average cost curve but it will touch at the bottom point another way he did it he said okay let's have an average cost curve like that isn't that brilliant I mean if it's got a little thing poking out of it then you can have a not a tangency again a tangency means you have to have a smooth curve but you can have it touching at the bottom point so the downward sloping demand curve shouldn't be a barrier to efficiency Bill Barnett and I wrote another article we said you could do it another way even with smooth curves but now see he's got a flat demand curve Murray did what we did is we worked it the other way we said okay look you can have a smooth average cost curve and just have a sort of a wiggly demand curve that is tangent there if it wiggles but it's smooth it's not as clear as it could be but I hope you get the point namely that this a conclusion that you're inefficient because you're over here follows from math econ and why should math be the dog and we the tail this is our discipline we shouldn't let them imperialize themselves over us I mean human action is discreet it's not continuous we can't buy one millionth of a pen right or one trillionth or you know go to the limit human action is discreet you can buy one pen or maybe a half pen or something like that but you can't buy a millionth or a zillionth so the paradox is that on the one hand we Austrians are very very suspicious of mathematical economics and on the other hand praxeologically we are a branch of math because math is logic so you have that paradox of the relationship okay the next thing I want to do with you people is this business of market failure they love market failure one time I had nothing to nothing to do over the summer and I wanted to write some articles so I got maybe a dozen back copies of the American economic review and I started reading and a lot of it was just mathematical statistical gibberish and I could have understood when I was a graduate student but I've sort of not been in that habit and this was 30 years later but maybe one third of the articles came up with new market failures I mean that's the way you earn your spurs in in the one of my favorites ones was yes man under capitalism everyone will be a yes man because you want to get ahead and the way to get ahead is to butter up your boss and this is market failure so anyway the main market failures are monopoly which I've discussed externalities public goods asymmetric information and about 75,000 other ones if you want to get tenure in a mainstream school come up with a new market failure and oh yes you're a great guy you've had the Jones market failure it'll be named after you okay so let me do a little bit on externalities now there are what's an externality an externality is something you and I are engaged in trade for the pen and the tie and somehow this hurts or helps somebody else if it hurts them it's a negative externality or an external diseconomy if it helps them it's a positive externality or external economy okay so let's take external economies first here you have supply and demand and at equilibrium this will be the actual quantity but this is education Milton Friedman is horrible on this stuff he's horrible on a lot of stuff one day I'll give a lecture on the problems of Milton Friedman it'll take three hours but this is a good one okay so education and what he's saying is that the demand for education and not just him but every mainstream person will give you this as an example of an external economy market failure why is this a market failure some people are buying education other people are selling it we're giving it away for free as in the case of the Mises Institute this week thanks to donors what's the problem the problem that these critics of the market have with this is that you will only get education for your own personal selfish interests get a better job learn stuff meet the right mate and one of the functions of universities sorting function you know if you go to Harvard you get a certain type of people you go to Catholic school you'll meet a Catholic person to get married to so it'll be for your own benefit however there will be spillover benefits on to other people because if you're more educated you're less likely to be a criminal if you're more educated you're more likely to vote intelligently if you're more educated you're more likely to be a better citizen so therefore you're only taking into account with this demand curve the private benefits but there are other public benefits to these other people that spillover to them and you don't care about them because you're only interested in number one you're only interested in the benefits to you you're not going to go an extra year of school because now you'll be a better citizen come on the reason you go an extra years to get a better degree or a better job or whatever so when we you know if you have this demand curve here and this demand curve here demand one and demand two and you add them up you get a bigger demand curve well similarly with this I always tell my students the label axes and if they don't I give them bad marks so I have to label them even though it's sort of stupid but what the heck you got a label axes you must label axes so if you take the private demand curve or the private demand and you take this public demand then you get a total demand and here I'll just put the total demand over here so this is this demand curve and now the optimal amount of quantity is not qa which is quantity actual but rather quantity optimal got it? namely here you're only getting a units of education here you're getting o units of education we're always bigger than a so what the government has got to do since it's the fountain head of all things that are good it's got to subsidize education how should it do it? give scholarships Pell grants doesn't matter how they do it they just got to get that demand curve shifted out there and now we will take into account all the benefits not only the private benefits but the social benefits or the public benefits and now we'll get a thing called total benefits okay and that's their analysis and the market will get you at qa whereas we should be at q0 or qo right and that's a market failure well Murray Rothbard has this wonderful thing he says you know the idea that three string players should be able to force a viola player to join their quartet isn't worthy of sober comment I mean what Murray is saying is this is not worthy of sober comment but I'll give it some sober comment first of all it might be the case that education is a bad it's not a public good it's a bad because most of what education consists of is courses in in black studies feminist studies queer studies sociology Marxism English literature Marxism political science more Marxism or feminism or and you know it's interesting whenever they have a plebiscite on rent control rent control is usually popularized in places like the People's Republic of Ann Arbor or the People's Republic of Cambridge or the People's Republic of San Francisco we have a lot of university students who've been learning that rent control is needed because the landlord is greedy so maybe the very opposite is true maybe we want to tax education maybe it's an external diseconomy I mean you can make a case now more recently I've had to change this around a little bit because Ron Paul goes through where is Ron Paul's followers mainly at universities so I'm not sure about this it's difficult to say before Ron Paul I was clear that education was a waste except for not economics but Austrian economics it's mostly a waste and I'm not talking about chemistry or physics or engineering or music which are apolitical but any of the fields that are political or telling kids the wrong things I mean academia is very very anti-libertarian anti-Austrian even in economics which is the most free enterprise of all the disciplines most of the economists have been surveys this guy Klein at Mason Daniel Klein I think it is not our Peter Klein Daniel Klein who did good work on showing the bias of academia and he did magnificent work on showing how the Fed has bought up every macro money economists practically and stuff money down their throat and then they all support the Fed it's amazing how that works the bottom line is you can't prove any of this it's not praxeological you can't demonstrate any of this stuff you can talk airy-fairy you can write the curves all you want but you can't prove any of this so I think that would be the fallacy of it apart from whether schools are on net balance a positive or negative for education okay let me do the external diseconomy now so here is again supply and demand oh by the way Bill Barnett and I I have a lot of co-authorships with him also have a critique of supply and demand on Austrian grounds the idea here is action is binary you either buy or you sell or you set aside whereas demand curve even the demand curves of manger with the you know the gold five ounce of gold four horses three ounces of gold two horses that stuff it's not really Austrian I think it's a good heuristic device just as I think that the structure of production is a good heuristic device but strictly speaking there are problems with praxeology and demand curves and supply curves Mises never use them there are problems with the structure of production again Mises never used any of that stuff one of our articles was entitled Mises never did this was he wrong and we said no he wasn't all fans of Mises in Austrian economics okay so here is the external diseconomy external diseconomy or negative externality and the usual example here is smoke or dust particles I'm building a podium like this and I have to pay in the supply curve that's the cost curve the backing of the supply curve is cost and the backing of the demand curve is utility for the mainstream so I'm building this podium five minutes okay and I have to pay labor I have to pay a rent I have to pay for the wood the inputs I have to pay insurance I have to pay this I have to pay that the one thing I don't have to pay for that's not in the supply curve is the fact that when I create them smoke comes out of my chimney and gets into your lungs and into your laundry and stuff like that so when we take that into account the supply curve is higher it's either shifts up or shifts left so here is the quantity actual here is the quantity optimal and now what the government should do is move us from QA to QO how do they do it? well that's subject to a lot of fights one is tax tax it another one is the cosian analysis and I'm not going to get into the cosian analysis now because one of my future lectures will be the bash cos but the bottom line here is we've got to shift everyone to the left we've got to produce less of these or fewer of these because of these externalities now Murray Rothbard wrote this brilliant brilliant essay maybe 60-70 pages of it the first half is just law and property rights and the second half is applying it to cases like this and what Murray says if I can summarize it and put it in my own words is that this is not an externality this is an invasion you put smoke in other people's lungs and put smoke into other people's laundry before we had the electronic dryers you're invading them and this I forget the guy's name he was at the Hoover Institution Murray I forget his name what he said is look if I take a bag of garbage eggshells orange peels coffee grounds paper junk bacon lines and I dump it on your front lawn we all know what everyone will say that you know you're violating property rights you're trespassing your crap onto my lawn but somehow if I burn it up into fine little particles then it's an externality this is the same thing it doesn't matter if you send it over in little clumps or in gigantic horrible garbage it's still a trespass so the way the Austrians look at this is not that it's an externality not that it's a market failure but that the government has taken it apart itself to be the arbiter of property rights and they've allowed this to happen in the early days in the 1930s and I get this again from Murray the little old lady would come into the court and say that their factory polluted my laundry I hung out my laundry it was wet and clean I'd come back an hour later it's dry but now it's dirty or some farmer would come in the court and say that their railroad I had haystacks 300 feet away and the sparks from the railroad came and set my haystacks on fire and I want an injunction and I want damages and pretty much in the 1830s, 40s, 50s not always but the courts would do this which had very good effects namely they had to get smoke prevention devices on the railroads and on the factories they had to put stuff in their chimneys sort of meshes to catch the pollution before it went away was this perfect? No but there was environmental forensics to try to figure out better ways to prevent smoke and sparks and stuff like that but then in the progressive period so-called progressive period the 1880s, 90s when the US wanted to be number one and Great Britain was number one the next time they came in and asked for injunction and damages the court said you're stinking lousy selfish private property rights we're not going to do that we're not going to protect you because there's something more important than private property rights and what's that? It's the public good and you have to have a drum roll when everyone says public good and what does the public good consist of? The public good consists of the US being number one and how are we going to be number one? By letting little old ladies mess with factories or by letting farmers mess with railroads? No and they gave them a SOP they said okay we'll have minimum height regulations for smokestacks so now instead of a 20-foot smokestack that polluted a little bit of an area they had a 300-foot smokestack that polluted everything and this was a market failure well I'm out of time thanks for your attention