 I want to spend a few minutes talking about some more specific applications to contemporary business and commerce, especially American business. You might say, well, it's one thing to think about profits in the abstract sense of gain. That makes a lot of sense. People want to achieve a gain. They want to avoid a loss. And yes, a business person and entrepreneur needs the kind of feedback from profit and loss signals to know if they're doing the right thing, as Bob described. But most of us have no trouble thinking of school children trading a peanut butter and jelly sandwich for a ham sandwich or whatever in the playground and recognizing the benefit that accrues from those kind of activities as profit. But when you talk about a big, nameless, faceless company, especially in a demonized industry like the oil industry, well, that's not kids on a playground. Those are bad guys. They're greedy. They're mean. They don't care about little kids. They're sort of anonymous people in suits who are just counting their bean counters, all they care about is money and so forth. Do the arguments that Bob laid out carry forward to a context, you know, a more realistic, practical, big business environment. I'm going to spend a few minutes talking about that before we have our coffee break and bathroom break. But before I do, I want to make one administrative announcement. And this is really some information and maybe a reminder to our students and also to the parents and to those watching at home that if you're interested in learning more about these kinds of issues, aside from the many excellent conferences that the Mises Institute sponsors in places like Houston, we also have an online learning initiative, a new program of the Institute, which is called the Mises Academy. And the Mises Academy is an online educational platform from which you, from the comfort of your own home or office, can take courses from the Mises Institute's faculty and staff on a number of topics like the things we're talking about today, courses at all levels from beginning to intermediate to advanced, focusing on economic theory, application policy, but also on history, philosophy, political theory, and a number of other topics. So if you go to the Mises.org and click on, look for Mises Academy or just do a search for Mises Academy, you can get information on how to sign up for these courses. They run periodically throughout the year, some are as short as two or three weeks, some are as long as a full academic semester, but I would strongly urge you to take a look at that if you're interested in furthering your education in the tradition of the Austrian School of Economics. So back to profits and big business, I mentioned in my introduction this morning, and Bob alluded to it as well, this idea that we have from popular culture about big business people, business people, but especially executives at large corporations. And by the way, they're typically portrayed in the media as, well, almost always middle-aged white males, right, you know, in suits, in dark suits, kind of grim and humorless, you would rarely see them talking to a family member or a child or shooting the breeze with a colleague about last night's ballgame. They don't seem like normal folks, like people you would want to hang around with, right? They seem like bad guys. When we think about people like that, is it right to model them, to think about them in the way that we've been discussing this morning? One issue, for example, is that these kind of demonized big business people, particularly in corporations, you know, they often operate in organizations that are very big, you know, lots and lots of people work for a corporation, and the person at the top, the chief executive officer, the chairman of the board and so forth, they're not necessarily the day-to-day decision makers looking at how many customers bought a particular item and making the kinds of decisions that Bob described about whether to expand operations, whether to produce something different. So some critics of big business have said, yeah, these arguments that you free market people make, you Austrians, you pro-capitalist types, yeah, you have your little arguments about how the market works and that's fine. If the market were, you know, if markets are small, if businesses are small, if heroic entrepreneurs are making these decisions, well, that's okay, but what about nameless, faceless bureaucrats in big companies? Surely the argument doesn't apply to them as well. Well, as we'll see, the argument does apply to executives in large organizations with some caveats, depending on the extent to which those organizations are privileged or protected by government. Some of you remember the Occupy Wall Street movement from a couple years ago. I think that movement is pretty much disbanded now, but there were a lot of, you know, Occupy, Occupy the, you know, Walmart, Occupy Starbucks, Occupy Factories, Occupy Wall Street, Occupy this and that. No one seemed to want to occupy, you know, Congress or the White House, which might have been a more productive use of time. But, you know, that's, you know, that was, you know, to the extent that that was a spontaneous groundswell of popular support for a particular idea, which it wasn't entirely. You know, that might be seen as, you know, sort of a populist revolt against these big, you know, these nameless, faceless people in suits. The so-called progressive era in the early 20th century is typically portrayed as something very much like that. And you students who have taken American history courses, unless you happen to have a very good instructor, you were probably taught that the progressive movement was another kind of populist reaction by the people against the robber barons, right against the big industrialists of the 19th century who put the children in factories and dragged the women off the farms and put them to work and so forth, polluted the air, cleared all the trees and made huge amounts of money for themselves while impoverishing the rest of us. That's kind of the myth of the progressive era attack on big business. Well, the true story is far different from that. And we have a number of books and even some online courses that cover this in more detail. In reality, what happened was the progressive movement was mostly an effort organized by some big businesses who were losing out to smaller, more nimble competitors to protect themselves against those smaller competitors. So even in the 19th century and in the early 20th century, the dynamic pulsing competitive market process was at work and was chipping away at some of the profits of the large established businesses who sought to protect themselves against their more nimble competitors. And so they went to the state and they basically cut back room deals where a whole host of new regulations would be imposed on business, regulations that applied primarily to the newer, smaller, more competitive businesses and typically exempted the large established incumbents who were very cozy with Congress and the president. So the typical, the sort of mythology of the progressive era as it's portrayed in mainstream textbooks is a perfect example of how history has been written by the winners in a way to make enterprise per se look like something that it isn't. The progressive era is really a story about big government working hand in hand with particular corrupt business people to harm you and me, consumers, and to harm other business people, those who are not in bed with the governing authorities. But that's virtually the opposite of what you get in a mainstream history text. That's just an example of how the way business has been portrayed in history has been really twisted in our academic culture as well as our popular culture. Now, one could err on the other, one could err on the other to the other extreme. So Ein Rand famously described big business as America's most persecuted minority. And Rand made the completely valid point that in the sort of identity politics of the late 20th century with different groups being portrayed as victims and so on, the one group that is never portrayed sympathetically is business people or entrepreneurs or capitalists. That is true, although Rand went a little bit too far in describing big business specifically as a persecuted minority for the reason that big business in America is a mixture of things. Right? There are honest entrepreneurs who are very successful in the marketplace and become large and they grow because they've earned profits by providing goods and services that consumers want. But there are a lot of other big businesses in America that have become big through special protection, through working hand in hand with the state. And we always have to be careful to distinguish among those two types. Now, you can't do it a priori on theoretical grounds. We have to look on a case by case basis. We have to look at individual business people large, medium and small and say, what do they do? How are they acquiring profits? Is it through voluntary exchange in the market? Or are they using the state? Are they using regulation? Are they using the government to compel people to buy from them rather than from some other firm? Okay, so big business as a kind of social class is not necessarily without fault, right? Some individual businessmen and women are heroes, but others are villains in the sense of working hand in hand with the government to get big. So what I'm proposing is, as I mentioned before, a balanced view where we understand what profits and losses do, what they are, what is the nature of profit in a free society, while recognizing that in a mixed economy like ours, profit signals can be distorted. The whole thing can be messed up, right? Some profits, actual profits can be higher than they would be in a free market. Other firms might earn profits that are lower than they would be in a free market. And we need to be, you know, we need to put our historian hats on and look very carefully at individual cases before we make a sweeping sort of, you know, an overall characterization before we offer one the way that Rand did. So in the next few minutes, let me just recap a few issues about, you know, what business is, what a business firm is, what an entrepreneur is, and then remind you what the government is and what the government does, and then think about the interplay between them, right? So Bob already talked about the basics of exchange and the idea of profit and loss as an indicator of the success of our exchange, right? Now that happens to all of us. We all act this way on an individual basis every day, right? Though we don't often measure our profits in dollars, just as in Bob's example with the kids, you know, exchanging, trading their lunches or the example of you students being here this morning and taking time out of your busy schedules when you could have been doing something else instead, right? We anticipate that you will, you will, you know, experience a profit. You will gain a profit from attending this morning's session. In other words, what you got from listening to us is more valuable than what you gave up from not doing something else. You won't have a number to attach to that profit. It will be psychological, right? It's a mental concept, but you can understand you feel in your bones whether you got a gain or a loss, and we certainly hope it'll be a gain, right? Now, in a more complicated setting where we are not simply exchanging things that we already have, but rather producing things, right? Entrepreneurs have to assemble resources, land and labor and capital goods, components and so forth, and combine them to produce the final goods and services that we that we all consume and enjoy, right? I mean something like an iPhone, right? Doesn't just, you don't just pluck an iPhone off a tree the way you do an apple and bring it to market, right? There's a whole lot of planning and engineering and experimentation and R&D and so forth that goes into figuring out how to assemble plastic and silicon and metal and glass and so forth into an iPhone. It takes a lot of coordination to assemble those resources to buy them in markets for metal and plastic and silicon and so forth, to hire workers to combine all these things until you get an iPhone and then to figure out how to sell it to people, whether to market it directly to the consumer or whether to partner with the company that provides a complementary service like wireless access and maybe sell it through a cell phone provider or whatever. These are very complicated things, complicated decisions in a modern industrial advanced economy. How does it happen? Well, it doesn't happen by itself. It happens through the conscious, purpose, deliberative actions of individuals, right? So entrepreneurs are those individuals who specialize in acquiring these productive resources, combining them to produce goods and services, and then offering those goods and services to us, to the consumers to buy or not to buy as we see fit, okay? Now, how should that kind of production be organized? I mean, think about producing an iPhone. I mean, in theory, there are lots of different ways that we could get an item like an iPhone and put it in our hands, right? So you could imagine one very large entity, let's call it oh, I don't know, Apple, let's say, right? A large incorporated business with shareholders and a CEO and managers and workers, right? That goes out into the market and buys all these inputs and assembles them and sells them to the consumer and so forth. But you could also imagine a different model, right? And we can think of other computer companies, electronics manufacturers that use this kind of a model where the company that the consumer associates with the product really is just the one selling the product. But other companies with names you've never heard of, typically because they're located in Asia, are actually doing all the assembly and are actually building the thing, right? So a company could outsource production to one or more companies that are kind of behind the scenes that are also their own businesses with their managers and their workers and so forth. They actually build the thing, they put our sticker on it and then we buy it from them and we sell it to our customers. Or, right? Imagine a whole network of small independent artisans, right? A glass maker who specializes in, you know, cutting a sheet of touch sensitive glass that's just this size, right? And a plastic maker who knows how to build little plastic boxes about this size and some engineer who knows how to produce little chips does it in his basement, right? And then they all just sort of negotiate through the internet or they show up on Sunday morning to trade and they, you know, put their little inputs together jointly and the result is a phone, right? This is what they, so-called cottage production, right? So you could imagine lots and lots of independent producers, independent contractors, each of whom specializes in a little tiny piece of what ends up being an iPhone, but no, there's no one entity that supervises and coordinates the whole process. Think of the Wikipedia production model. Suppose that iPhones were produced the way a Wikipedia article is produced in a highly decentralized, disaggregated fashion, right? These are all ways of combining inputs into outputs that can then be offered to consumers. Now, which of those methods is the right method, which is the optimal method? Well, I mean, you can't say that ahead of time, right? It depends on the circumstances. It's up to market participants to give different models a shot and see how it works, right? If you look at the history of most industries in the US or elsewhere, you find that lots of different production models have been used, right? Think about automobile productions before Henry Ford came up with the fantastic innovation of the assembly line, right? There were literally thousands of independent automobile producers in the United States scattered all over the country, not just in Detroit, and most of them produced cars one car at a time by hand, right? So one artisan or a small team of artisans would they would produce one automobile, and then the next day they'd produce another automobile or maybe the next week or whatever. Ford had this idea of bringing lots of people together in one big plant and having specialization where each individual specializes in just one little piece, you know, attaching part A to part B, and passing it down the line to someone else who attaches part that to part C and so forth, right? So nobody knew in the early days of the automobile industry, what was the right kind of production model? Again, for you high school students, I'm sure whenever you have an assignment for school that you have to and you have to research it, you always immediately go to the Encyclopedia Britannica online or in its huge, you know, 50 volume giant books in the library. No, of course, you don't do that. You look at you go to Wikipedia, right? I mean, your teachers aren't supposed to know that, I guess, but you know, scholars, you go to Wikipedia first, too, right? Now, does Wikipedia have errors? Well, of course it does. Does the Encyclopedia Britannica have errors? You're darn tootin' it does, right? I mean, so these are two different ways to produce an Encyclopedia and it's not obvious which one is the best in some kind of, you know, global sense. People can try different production methods and there's competition among them and we can sort of decide what we like. In other words, in other words, there's nothing uniquely, you know, virtuous or moral or uniquely, you know, evil or harmful about organizing production within one large entity like a corporation, right? A corporation with lots of workers and lots of managers is just another way of producing goods and services, right? As, you know, a community of many, many small firms that work independently or collectively. That's another way of producing goods and services. And from an ethical point of view and indeed from an economic point of view, you know, what was sort of neutral with regard to which one is best, right? In a free market, we would expect to see lots of different kinds of businesses, large, medium and small, corporations with shareholders, but also soul proprietorships where one individual owns the entire company, partnerships where a group of people invest and jointly own the company, maybe cooperatives as we have in some industries today like agriculture and some parts of financial services. I mean, those are all potentially legitimate ways of organizing a business, and we would expect in a free market for, you know, a thousand flowers to bloom. And we would see competition among these different kinds of organizational forms. Now, if you look at the landscape of a modern economy like the US today, you do see a variety of different kinds of organizational forms producing stuff, right? But you do see one particular form that is extremely important, namely the big corporation, right? I mean, you've heard of the so-called 80-20 rule. I mean, something like that roughly applies, in this case too, about 20 percent of the companies, actually, actually even fewer than that, in the US produce, you know, 80 percent of the stuff. So there are some large companies that produce a lot of stuff. Now, there are two possible explanations for that, right? One is that for purely economic reasons, economies of scale, efficiencies in production more generally, it makes sense to have a small number of large companies producing on a very large scale. But it could also be the case that large companies or companies with a particular structure, like the corporation as an ownership structure or companies with a lot of middle managers, with a thick sort of hierarchy, it could be that that particular type of organization is, you know, dominates the landscape because the government likes that kind of organization, or because the government has intervened in some particular way that leads to more of those types of firms. Now, I don't need to tell most of you here that the, you know, kind of naive textbook version of government, in which government simply exists to protect people, to do for people what they cannot do for themselves. Those of you who are economics students, right, to correct so-called market failure, market failures, that view of government is completely naive and is not at all relevant to the kind of discussion that we're having today. In fact, government often acts, as I suggested before with the progressive era, in the interest of particular individuals, often business people, to get what they want. For example, in a modern interventionist state such as the one we have today, a lot of what businesses do is satisfying the requirements of the government, the accounting rules for tax purposes, recording everything about the payroll, insurance, and so forth. In regulated industries, financial services, or healthcare, or education, government regulators have a, you know, huge, a huge array of specific detailed requirements that all businesses operating in that industry have to meet. Firms need public relations staffs to make sure that politicians will appreciate and like what they do, lobbyists, and so forth. Right? So the mere fact that we live in a regulatory state means that businesses have to devote a fair share of their resources to making sure they meet the regulations and maybe trying to influence the regulations. You know, it could be something as blatant as bribing a government official, or it could be something more subtle, right, making sure that regulators get what they want and that they like what they see and so forth. Right? Now, these, in an interventionist kind of economy, it is often easier, though not always easier, for large companies to meet these kind of requirements than for small companies. Right? Large companies can afford to have a staff of lawyers who work for the company. Right? They can afford to hire press agents. They can afford to lobby. They can afford to try to influence politicians because, you know, they have large amounts of capital. They're producing on a large scale. Adding a legal team and a PR team might be a small percentage of the overall budget. Whereas for a mom and pop store, right, a single entrepreneur, they simply can't afford to have a dedicated legal staff. They cannot afford to lobby and influence regulators the way a larger enterprise does. Mises wrote about this in his 1944 book, Bureaucracy. He has a great discussion of how interventionism, the mixed economy, affects the structure of business. And he says that in an interventionist society, entrepreneurs must be skilled in the way Mises put it, in bribery and diplomacy. Okay? So the mixed economy selects not necessarily for those business people who have the greatest business skills, but for those who tend to excel in bribery and diplomacy and the more subtle forms of bribery and diplomacy. Large firms often get direct payments from the state, in particular industries, right, think of aerospace. The aerospace industry in the U.S. and in Europe, right, is almost entirely dependent on government contracts, on military contracts. And many of the innovations, for example, in civilian aerospace are spin-offs of Defense Department projects, right? If you cut off all government contracts, right, if we were to completely dismantle the U.S. military interventions overseas, right, the reason that is very, there's not a reasons why that hasn't happened and why it doesn't appear to be likely to happen anytime soon, but you can bet that the lobbyists from Lockheed and Boeing and so forth are going to make darn sure that doesn't happen. Okay? That's how they make money. That's part of their essential part of their business model. There are indirect subsidies for larger enterprises too. Some people have suggested that maybe, you know, subsidized transportation infrastructure favors large firms over small firms because you can produce everything at a big factory and then ship it out on state subsidized roads and rail lines, right? The government, of course, owns all the interstate highways and doesn't charge for use on a per-unit basis the way a private entrepreneur probably would. Now, does that mean that big business is, you know, in the U.S. today is exclusively the beneficiary of or the recipient of government largesse? No, not at all, right? Of course, it depends on the big business, number one, but number two, small businesses in the mixed economy get a lot of government support too, right? There are a lot of interventions in the mixed economy that hurt big businesses and help smaller ones, right? We talked about regulation, but some kinds of regulation tend to hit the high-profile focus on the profile cases, like antitrust law, right? Very small, you know, mom-and-pop stores, two small mom-and-pop stores have a conversation about coordinating their activities. That's unlikely to end up in antitrust court, but if, you know, if Apple and Google were to have that kind of a conversation, you can be sure that that would be a prime target of the antitrust authorities. The government officials who want to make their name, right, they want to go after big fish, they want high-profile popular cases, they are likely to leave the mom-and-pops alone and go for the big guys, right? There are more subtle forms of intervention, what some scholars have called rent extraction, which is a polite way of saying extortion, right? That occurs when government officials let it be known that particular industries are acting in a way that these government officials don't think is right, and low and behold, following such announcements, representatives of these industries tend to increase their lobbying effort in Washington, they start to take more congressmen on junkets, you know, to see their, to visit their plant in the Caribbean or whatever, they tend to host more dinners for a lot, for regulators and for politicians, and they tend to increase their campaign contributions to government officials running for office, there's a great book by a legal scholar on this topic, I think the title of the book is Money for Nothing, right? Money for Nothing is how government officials can often benefit privately from letting it be known that we're a little concerned about the telecom industry, next thing you know, money starts flowing from the telecom industry to the government, okay? You can think about other issues too, I mean trade barriers that make it harder for firms to import and export large amounts of components and to sell in large quantities overseas, rules that require firms to disclose particular kinds of information to regulators, some of you have heard of the Sarbanes-Oxley Act, which increased the amount of information that companies have to report to government officials, smaller companies and companies that are not organized as publicly traded corporations do not have to meet those requirements, so larger companies, publicly listed corporations are subject to a set of reporting requirements to which smaller companies, from which smaller companies are exempt, so there are these and other regulations tend to hurt big businesses and help small businesses and maybe keep at least some large businesses smaller than they otherwise would be, right? So what's the bottom line? The bottom line is that there is nothing and there is nothing objectionable about bigness per se. If a company becomes large and if a company chooses to organize itself as a corporation, because it has been successful in producing goods and services and getting them to consumers at prices that consumers wish to pay and producing things that consumers wish to obtain, then that size and the growth of that business is a sign that the market is working. It's a sign that the owners of that business, the managers of that business, the entrepreneurs responsible, ultimately responsible for that business, are doing it right and we should applaud the accumulation of profit and the growth of a firm when it happens on those terms. However, if a firm becomes large or a firm lasts for a long time because it has special privilege or special protection from the state, then that's something, you know, we cannot say that that outcome is good for consumers. We cannot say that that outcome represents a wise use of resources in achieving the objectives that we as individuals wish to achieve. Okay, so I think we should exercise some skepticism, right, when we see a company that is large we should ask ourselves how did it get large for the right reasons or for the wrong reasons, right? This is true not only of large companies but small and medium-sized companies too and we should be very careful when we're discussing these issues with our friends and our colleagues, when we're speaking to the public at large and we're talking to our teachers, our family members and so forth that we don't come across as defending business per se where business in the mixed economy means both free enterprise and government coercion, right, that we explain the value of free enterprise, of free markets, of capitalism, right, as a system of voluntary exchange while warning against the dangers of a bureaucratic state that intervenes in business, right, the reason that big business is sometimes a problem in America is not because of business or because of bigness, right, it's because of the state, it's because of government intervention. There's an old saying you may have heard when governments control buying and selling, excuse me, when politicians control buying and selling the first thing to be bought and sold will be politicians, okay, so the reason that we have this sort of problematic nexus between government and business, business is inherently virtuous, right, but is easily corrupted by the government. A government is inherently, well let's just say not virtuous, okay, and so if we want to understand problems that we have in government business relations, why particular businesses that don't seem to do a good job survive, where we should be looking at government to find out what government is doing to prevent the good outcomes that we want. We'll resume at 1115 with the second lecture from Dr. Murphy, Why Capitalism Needs Losses 2.