 When I'm talking about the contributions of Mises and Rothbard to economic thought So just that right there to be clear that I'm focusing narrowly on the economics and even within that I'm saying there's this is not going to be an exhaustive Survey or what I'm going to do is go through highlight a few things and then give you sort of in-depth treatment on a few items that are particularly important or things that I think that I'm Competent and explaining whereas other things like especially in the philosophy and so forth that that wouldn't be my area of expertise And so you've heard that from other people this week Okay, so contributions of Mises Here if you don't know what this is That's Michelle Bachman on the beach reading Mises And that that was just you know, I didn't waste time making that image that was just a Google image search, but you Google Mises and that pops up somewhere and It's the case you guys don't get the reference Michelle Bachman is a sort of tea party aligned conservative candidate or office holder and she apparently claims that she reads Mises on the beach, which you know, maybe she does we don't know This is Joe the plumber. He was a guy that achieved again further for our foreign visitors here He achieved a brief period of notoriety When in the 2008 campaign He president or then candidate Barack Obama was going around and this this guy to campaign stop says something like yeah I'm thinking about being a small business owner and your plan to raise taxes is gonna be detrimental to my aspirations and Obama said something like well Yeah, I think it's good though if we spread the wealth around and they caught that on tape and then you know That went around everybody's shot handy and so forth are going nuts that Obama's a socialist So he so this guy Joe the plumber was pretty famous for a while and he That Christmas for I think it was the American spectator asked him for reading lists And one of the books he recommended was the theory of money and credit and he said that this is like important readings for these troubled times So that was kind of funny because I'm guessing he didn't read theory of money and credit For now for people like especially people who are watching this online or after the fact and you think that I'm You're offended by what I'm saying. I'm not saying the old blue color people are done That's not what I'm saying. I'm saying I've heard Joe the plumber at a tea party event give a talk I don't think he grapples with the regression theorem at night. That's all I'm saying All right, so we're talking about Mises now methodology First of all, I mentioned this in previous Years, I'm not given that particular lecture. So let me take the opportunity now just as a little quibble in terms of the usage Method and methodology are different words, right? They mean different things So it's it's annoying and not that many people care about this, but you will if you go into academia you will run into some referees or some journal editors or some People on your committee that are as anal as I am So I just want to point this out that some of us care about this kind of thing If you say in your paper like you're gonna run a regression You say my methodology in this paper is to take GDP and regress it against, you know Income and blah blah blah and and weather and so forth. That's that's not right. That's not your methodology That's your method. All right methodology means you're writing about method. So what I would say here is Mises methodological works is when he's talking about what method should we use in economics? So this is something that I didn't realize myself for a while Initially when Mises was writing on this and explaining how is it that we do economics properly? He wasn't Telling other economists. Hey, you guys are wrong stop trying to be like the physicists and Do it instead this way like I'm saying use a verbal logical deductive analysis. No initially Mises was just telling other economists Hey guys, I don't know if you've ever thought about like this But look at how this is what we're doing actually when we do economics and it's good This is what we do. All right And so at least initially he his point wasn't to sit in the corner and wag his finger at everybody else Initially, he was thought he was just telling all the economists. This is the way we do economics properly And then it was only later in his career that there's the rest of the profession sort of moved away from that and embraced especially like I think Paul Samuelson was the Pivotal moment with that Paul Samuelson started cranking stuff out that was very mathematical that was quite consciously modeled after mathematical physics and then other economists thought wow, that's this guy's a sharp guy And we want to be like him and so that's I think he was the model and that's what really made Mainstream economics so mathematical that nowadays we just take it for granted But when Mises was first writing this stuff his methodological regs again He didn't think he was telling other economists that they were doing something wrong He was just trying to explain to them, you know Hey, I've taken a step back and this is what we're actually doing in case you guys never thought of it like that If you want to get that if you want to see some evidence of that documented, this is a great place to get it in Hoppe's short Booklet on this issue. He's got a bunch of quotes from older like classical economists showing that this tradition is there So again, it's just not that Mises made this up out of whole cloth and the other thing is You will you will see the strongest claims for the the power of this sort of approach in Hoppe's Pamphlet here or even more than you would even see it in Mises that Let me put it this way you rarely hear someone say something like yeah You know that guy over there. He's kind of like Hans Hoppe, but more so nobody ever says that right? That when when Hoppe is going to take a position he really takes it to the extreme So what I'm saying is you want to see this thing really like the power of And it claims made on behalf of the strength of a sort of logical deductive praxeological approach versus the empirical Approach then I would definitely recommend that book just to give you some idea. I personally Never really cared that much about praxeology in terms of the a priori stuff I mean, I knew what it was and I thought okay, it wasn't I thought it was wrong But I just thought no I could teach me what the business cycle about purchasing power of money that sort of thing And I never really thought that you know why are we wasting our time telling people no humans act and what we did I didn't really care. It was really after reading Hoppe's Pamphlet here that I realized wait. This is kind of deep. This is an important thing and you know I need to figure out where I stand in this so I'm not giving a blanket endorsement of this I think all the faculty we all disagree with each other on various things But I am saying for what it's worth if you if you've never gotten all fired up about the praxeological method per se and of course you're afraid to admit that because you get Dumped in the pool or something at the dorm You try try reading this and at least you'll see why all this is why some people get so fired up about it Because if this is right, this is really powerful stuff Okay, let me give you two quick examples of what I'm talking about so Supplying demand something real simple and this is what I would tell my students when I was teaching just principles I would try to get them to see that Strictly speaking we don't have a theory of supply and demand It's not that we have this theory like there's market prices out there And I'm gonna have this conjecture with which to explain them the way a Physicist might say well the moon's going around the earth and let me let me make a conjecture that okay I think that there's these this thing called a law of gravity that behaves and operates on the moon between the moon and the earth the way it Does between the earth and an apple and let me come up with some predictions of that and see if it's verified or falsified That's not at all what we do when we try to Explain prices as economists using supply and demand that framework is just a well It's a framework. It's a it's a lens or a toolbox. It's a way that we look out at the world It's how we interpret prices So there's there's nothing that could ever happen that would make us say oh my gosh supply and demand are wrong No matter what happens we would just be able to handle that outcome using our supply and demand framework so that is the the germ of truth in the Criticism that other people that empiricists will give to Austria and saying oh you guys it's just a religion You know there you're insulated from ever being wrong no matter what happens you're you're always right and so you know You're not using science here. This is just religion Well, yes and no that it is true that no matter what happens you wouldn't ever Stop using or you wouldn't ever say up supply and demand has been falsified but our point is just everything we do in terms of basic economic theory in terms of How do economists view the world in terms of what we mean by saying the economic way of thinking all of that is Non-falsifiable in the sense that those people mean that term right so just something as simple as the statement incentives matter All right, that that's clearly I think just any economist you grabbed would say that yeah That is a crucial part of the economic way of thinking that's if you don't think that incentives matter You're not an economist and if you are an economist you think that so what? But you say okay that that statement that incentives matter could that ever be falsified and no it couldn't because I could say Well, what if I walk up to you and I say hey, I'll I'll give you $50 if you let me chop your toe off And then you say well no did I just prove incentives don't matter No, I just proved that offering you $50 wasn't incentive enough to let me chop your toe off right so You can just think through it like that. There's no way you could possibly test the claim do that incentives matter You just have to just decide I'm going to use that in my view of the world explaining human action I'm going to assume That incentives matter and to see can I make better explanations of things using that approach than if I deny that incentives matter Now what is true if you wanted to get empirical you might see in certain settings Incentives matter more than you would have thought or more than the average person would have thought Okay, so there's empirical studies showing things like with changes in tax laws So like like it changes to inheritance laws that people Let's say they change the tax code so that if people die in this one calendar year They're gonna get hit with a bigger tax bill for their estate Then if they can die the next calendar year Well, they've done empirical studies where that stuff has happened and there seems to be a Sharp drop-off in the rate of death in December and a spike in January the following year Right, so that's kind of shocking to people at first because you would think the other person who thinks economists are crazy And and oh you think everyone's a bunch of robots responding to incentives mechanically That's a perfect example where economists might predict empirically that oh we should see some sort of effect because the change in the tax law on the On the you know measured rate of death in December versus January the following year You do see that and then you try to figure out what's going on. Is it really did they actually die at different times? Or did they die like in December 28th and the people at the hospital just fudged the Report because they knew the the family would make hundreds of thousands more You know there's there's questions about that or is it just that the person decides to really hang on because he knows You know, I don't want to get more money the government and that's possible too, but anyway The point is you know, there's a there's a continuum there between the pure theory versus The empiricism and in practice, you know I'm sloppy myself with with mixing those two up But in terms of the strict theory to say incentives matter I'm an economist and I'm going to use that Insight to help explain human behavior. That's not falsifiable and just about anything that even empirical economists mean when if you just ask them Off off the top of their head. Hey, what does it mean to think like an economist all the stuff they give you that's not going to be testable Okay, another example methodological individualism so here What I'm what I'm talking about what are these examples of I'm saying this is flowing from Mises is claimed that the Science of economics except what we mean by pure economic theory is logically deducible from the fact that humans act So what I'm claiming is this it's not that Austrians Start out with the action axiom and then supplement it by saying oh and by the way We also believe in methodological individualism I'm saying if you really think through the implications of saying people act Then you are doing methodological individualism you have to be it's it's a necessary thing because to say what does it mean if you say I think That there's action you mean when I look out at the world. I'm not going to interpret it merely as mindless Matter in motion the way a physicist or a chemist would that you're going to say no the Partly the way I explain what I'm observing is a social scientist is to say there are other Conscious entities at work. There are subjective goals out there That certain beings are trying to achieve and that's partly how I'm making sense of what's going on as a social scientist So to say that to say that there is action Well, there has to be an actor wouldn't make sense to say that there's a conscious being out there with goals It's trying to achieve, but I don't believe in individuals right that that doesn't make any sense All right, so that's the kind of thing I mean it on one hand. It's almost trivial, but on the other hand It's it's pretty deep. All right, especially since there are so many social scientists who deny the usefulness of methodological individualism All right, let's do a different topic money so here Mises made amazing contributions if I don't know if I had to pick that might be his most important in terms of not necessarily Importance for the human race, but importance in terms of the development of pure economic theory I mean this if he just did this he would have a place in the annals of the history of economic thought So what I'm focusing on here is the stuff that he did in the theory of money What's called in the English translation the theory of money and credit? So one thing he did is he and I didn't catch this until I just reread it recently to do the study guide If you guys don't know It's not physically available yet, but the PDF of my study guide to theory of money and credit just got posted like last week so in rereading it I was blown away by Mises creating this taxonomy. So he has all the different types of things that could be considered money or Related to money and he had to figure out a system to classify it all and he goes through and Comes up with these terms where the translations are things like money in the narrower sense money substitutes fiduciary media and so forth Again, just to confess to you when I first got into that stuff. I said, you know what? That's not worth my time I'm not gonna learn all these different distinctions. I'm just gonna learn. What's the business cycle theory, okay? But that but so going through this again I was bracing myself to be bombarded with all these arbitrary terms that Mises was throwing at me and the point is yeah There were a few terms, but they weren't arbitrary He not only does he give you the the terms and their definitions what he explains to you as he's doing why He chose it that way. All right, so there's there's a method behind it and Specifically it has to do with the fact that that's you need to have this terminology in order to understand his theory of the business cycle so the point is for example fiduciary media What that and I realized some of you are newcomers here and so this these terms might be scary what fiduciary media means it's Money substitutes that are issued that aren't backed by the actual money commodity. So in our times now fiduciary media would mean that when Commercial banks have more in checkbook deposits than they actually have cash in the vault or reserves with the Fed right? So it's fractional reserve banking But the point is why did he come up with these terms is because he wanted to he needed to have two things going on He wanted to be able to incorporate the sense in which if you write a check and go buy something to store That's that's money in a very legitimate sense Just like if you give him a hundred dollar bill if you write him a check for a hundred dollars that's drawn on your checking account You know in a certain sense those are both $100 that you have and that helps to explain why prices are what they are whether you buy something with a hundred dollar bill or write a check for a hundred dollars You're pushing up the price of that thing. Okay, those are almost equivalent as long as people think that that check is Instantly convertible into a hundred dollar bill But on the other hand you you can't just say okay So that's all money, and I'm not going to make any distinctions He wants to know there's money in the narrower sense and then there's these things called money substitutes and it matters if those things like the checkbook balance is fully backed by Cash because if it's not that leads to the business cycle All right, so that's why he makes all these distinctions because he wants to be able to explain the relationship between the stock of money and prices But he also knows a few chapters later in the book. He's gonna talk about what we call the Massessy and theory of the business cycle. So that's why he needs to have all these distinctions. All right, so my point is just Reading it with fresh eyes and then knowing where he ends up with it It's just it's sort of impressive that you know he was a young guy doing that and it's kind of you know It was a bold thing for him to do to just say you know I'm just gonna start make it up terminology because the framework that everyone else has developed up till now isn't useful To solve these two twin problems Okay, here's a big one I'm gonna spend a few minutes on this and I'll try to so that so just so you know to pace yourself This is gonna be the topic that I'll spend the most time in this lecture on Because it's a little bit subtle, but it's what it's pretty important And then when we get to Rothbard the stuff will be more fun So if you if you only have a limited amount of energy just really keep your so you know See if you see someone not enough nudge him or something stay away for this one And then we get to Rothbard that will be more lightning and fun Okay, margin utility theory to mind. Let me first explain to you why this was an issue. All right, so Manger, of course pioneer and subjective margin utility theory that comes out in 71 early 1870s Manger and then two other guys while Ross and Jevons Came out with this subjective margin utility approach to explaining prices All right, and you guys have heard all that if you've been going to the lectures all week You know that story what I'm telling you now is which what may not have been made clear They couldn't even the Austrians like Bumbaverk and Miser and so forth They could not take that in a in fully In a fully satisfactory manner Explain the the price of money using this framework All right, so they could explain why is it that in orange and equilibrium trades for two apples They could explain that using subjective value theory as simple But they couldn't really explain why is it that One unit of money Exchanges for two apples. All right, and so that you might say what's the with the issue? Well, the problem was of course anyone could see the straightforward application of that you just say oh well the reason That we look out in the marketplace and we see that the exchange rate is that one unit of money trades for two apples Is that people have subjective the value scales and it must just be the case that if you look at their rankings You know this guy's ranking He has a bunch of units of money and it must be that that particular unit falls here And so he gains by trading that away for two apples and this guy over here has a bunch of apples and not not as much money And if you look at his rankings then you know, he gains from giving up two apples and getting one unit of money All right, so of course you can say that that's fine But the point is they said something's fishy there because when it comes to oranges and apples is Economists it's fine to just say well people are hungry and they get satisfaction from eating fruit and People people are different and so that's why you have these differences in their valuations on the margin And that's where the explanation stops You don't need to probe further and say why is it ultimately that people want to acquire apples or oranges We can just take that as a fact But with money the problem is Why do you want to hold money? Especially if it's fiat money that's really a Problem and the only reason is all because I'm good it has purchasing power I'm going to be able to trade it away for goods in the future So the economists at the time thought subjective margin utility theory doesn't work with money because you're just arguing in a big circle What you're trying to do is explain Why money has purchasing power and you're giving an explanation that assumes money has purchasing power So really what you're saying is oh the reason somebody would give up Valuable goods and services for money is because he knows other people will give up valuable goods and services for money So it looks like you're just arguing in a big circle. So that that was the issue and so Mises solve that problem. So let me show you how I did it Okay Obviously, I'm taking liberties with this. I'm trying to make it more palatable for you guys It wasn't that Mises was doing it in terms of days of the week But I'm think I'm gonna give you something that's consistent with his explanation that maybe is a little bit easier for you to grasp Okay, so there's this guy on Friday All right, and he What we're trying to explain we want to understand why is why does money have purchasing power on Friday? So what does it mean for money to have purchasing power? It means he's gonna sell something. Let's say it's a cool car with glowing doors and He sells that in exchange for Money and I actually I'm purposely using fiat money because that makes the problem more difficult Right that clearly the only thing you use fiat money for is in its role as a medium of exchange So let's actually do it with fiat money. So that's so that's the issue. What why did he do that? That's what we're trying to explain Why is it that he would give away a really cool car that can do all sorts of things in exchange for This thing that is intrinsically useless, you know, I mean could use it for to burn You know and make some warmth, but clearly that's about it Okay, or if you use it as a bookmark or something but in terms of the direct utility of that thing it's pretty low So that's what we're trying to explain. Why is it that this stuff has purchasing power? Why is it that somebody who's off-screen here was able to acquire a car on Friday? With a bunch of these green pieces of paper. That's that's the problem. So we're trying to explain Money's purchasing power on Friday. Why is it that money can get you a cool car on Friday? So now The answer goes like this. Well, because this guy looks ahead and he realizes that on Saturday if he has that money He'll be able to trade it away For stuff that he wants burger or something like that. Okay, so that's why on Friday He did that he gave up his car to get the money on Friday because looking ahead He anticipated that that money would allow him to enter the marketplace and acquire goods and services On Saturday. All right. So now you say, okay. Well, how did he? But now the issue is okay, but you're just sort of making stuff How does he know what the purchasing power is like why wouldn't he say, you know, why doesn't he sell the car? How does he know to sell the car for? $100,000 or why doesn't he sell it for ten cents or why doesn't he insist on getting two billion dollars for it? What is how does he know what the purchasing power of money is and they say oh because he looks ahead and Gages what he thinks the purchasing power is going to be in the near future And so then you say okay, but how does he know that why doesn't he think it's going to be you know I have a burger going for two pennies or a burger going for two billion dollars tomorrow and the answer the Mises gives is because He has a memory of prices in the recent past. He knows that on Thursday a Certain amount of money would exchange for a certain ratio with other goods and services. Okay, so Alrighty, let's stop and Mises has already broken out of the circularity problem This before the way other economists were thinking of it They thought Somebody who tried to use a subjective margin utility approach would say the reason money on Friday has purchasing power is That money on Friday has purchasing power and they would say she just argued in a circle So already we're out of that circularity claim because now that's not we're saying we're saying the reason money has purchasing power on Friday Is because the people accepting money Anticipate it's gonna have purchasing power on Saturday and how do they know that where they what's the basis for their expectations? They remember what the purchasing power of money was on Thursday. Okay, so we've broken out of the we're not arguing in a circle But now it looks like you say, okay, but what about You know, how did he know about the purchasing power on Thursday? And of course, I'm not gonna you know, he remembered it How would you how do you explain what it was on this day? It'd be the same thing that people here accepting money We're looking ahead to Friday because they remembered it on Wednesday and so on you just keep going back So then and this is now you got I'm sure most of you familiar with this is what the regression theorem was because you say Okay, you've alluded the circularity problem Mises, but now it's just a problem of an infinite regress Okay, it's true You're not saying the purchasing power of money on Friday is explained by the purchasing power of money on Friday fair enough But really Mises now all you're telling us is the purchasing power on Friday is explained by our memory of the purchasing power on Thursday So come on that's not an explanation because you're just gonna keep doing that forever and Mises says no I'm not gonna keep doing it forever With the case of fiat money we go back So that of course is not money It's way back to when that would exchange for the precious metals like commodity money in Then How do we explain that well then you push it back even further and say how do you explain the purchasing power of the commodity money? You see if you go back to the origin of money when it first emerged out of barter or direct exchange When people were using gold for its own intrinsic value Right so people used to use value gold for its role as jewelry or you know for other industrial applications and so forth So you can keep pushing it back until the point at which the commodity money Was valued just as a commodity and then Manger has showed us How you explain the purchasing power or the relative prices of Commodities when there isn't a medium of exchange. Okay, so that is what Mises did He explained it right now today using that little, you know time introducing the time element and then he just kept tracing it back To the point at which the commodity money emerged from direct exchange Okay, so that is that whole thing is what we generally call it is the regression theorem, but my point is Mises was the first one to really show that no we don't need two different Sets of explanations because economists up till then tended to do What we would now think of as micro price theory in real terms and explain relative prices using subjective marginal utility analysis But then when they wanted to explain the absolute money prices They would revert to real holistic macro concepts, right? So they would know using margin utility analysis up one apple trades for two oranges in equilibrium But then when they wanted to say well, what are their prices? Is it $1 and $2 or $1 and 50 cents or is it $10 and $5? They need to say well, what's the stockpile of dollars and what's the velocity of circulation and so you know I mean so they would switch to these macro Concepts to explain absolute money prices and Mises was showing here. You don't need to do that You can just use subjective marginal analysis on money. It's just a little trickier Okay, what else did he do we talked about? trade cycle theory What's amazing is this stuff? I've been talking about the last 10 minutes. This was all in just one book You know, I mean this is this is Mises saying hey guys. I think I'm an economist. What do you think? You know, I mean just amazing Okay, what he did here and again if you go through and read it I know it's intimidating, but I would encourage those of you, especially if you're Getting PhDs in this stuff Try reading through the theory of money and credit because you're gonna be blown away It's not merely that Mises is a good theorist and has a sharp mind But he has read everything like he just you know refers to banking literature and stuff in the footnotes and This part in particular the trade cycle theory He was he didn't on the one hand It would be almost more impressive if he just dreamt it all up off the top of his head But no when you appreciate that he just read a bunch of stuff and absorbed things from various schools So it's not simply that he read Manger and then Bumbava and then just You know tweaked it. He read everything and then decided what did he like in various thinkers? Writings and then what didn't he like even in his own mentors writings and he came up with what he thought the most Satisfactory explanation was so here the trade cycle theory actually draws on all these things that the classical wages fund doctrine so the notion that You know when you think about why is the boom unsustainable? Well that kind of goes back to the classical economists in their view that what the capitalists do is they save up The actual consumption goods so the way some of the classical economists thought about it is the capitalist has tuna fish and meat and milk and so forth and shelter and then the workers come up with nothing and the capitalist says Don't okay here. I'll give you some food. I'll give you this I'll give you shelter and you work on this project for me And then five years from now it'll be ready and then I'll reap all the returns and meanwhile I'm giving you sustenance and that's what's keeping you alive So that's it's so that fund of savings is what out of the fund out of which wages were paid because the Output from the work wasn't going to accrue until later. So that was the classical conception of How the capitalists interact with the workers and why the capitalists get a certain amount of interest income out of the Annual produce so if you think about it that is in the Austrian theory of the trade cycle because that's the notion of the unsustainable boom That there is not enough real savings to carry us through that people are going to start griping because their real consumption is going to have to Fall at some point Also, of course drawing on bomba work in capital theory This what's called either the English or the British currency school of banking theory these people had of a theory of booms related to the expansion and contraction of bank credit and The interest theory of Wixell who had this idea of the natural versus The the market or contractual rate of interest So it was Wixell who came up with the notion that if we push the interest rate below the natural level that could screw things up All right So Mises drew on all that stuff to give what we all now learn this week as as the Austrian theory of the trade cycle Okay, as if that wasn't enough. Oh, by the way, he came up with a socialist calculation argument, you know, just he was a busy guy, so I may just point out that this was and again You guys have presumably heard this unless you were skipping lectures this week So you know what the argument is. Let me just put in the context. So this historically is Stronger than the incentive argument. So before Mises came along and really drove home this point of Course there were people who were socialist writing and advocating socialism before Mises came along and there were conservative Economist and social pundits and so forth that were Opposed to it but the traditional argument the traditional objection to socialism was to say well if We just take what everybody makes and put it into a giant pool and then give it out based on, you know egalitarianism or based on some other Criteria like if you have more people in your family, then you get more food or whatever that's going to really break down the incentives and and So that's why it won't work that the productivity of labor is going to go way down because the workers not going to work as hard for Society is he's going to work for his own family and that's probably you know, that may be true But the socialists would just come back and say well, you're right people right now act like that But that's because they've been raised in this cutthroat capitalist world They've been trained to think and they have to behave that way because otherwise they would starve the way this crazy system works But if people were born into a socialist utopia Where the productivity of labor was unimaginably high because we didn't have all the you know Exploitation from the capitalists then they wouldn't think like that their natural instinct to just Do think create things for its own sake and just to give gifts to humanity would manifest itself, right? So the new socialist man So whether you know, you might think that's crazy or might think it's fine But the point is that was that's where the debate was and they kind of an impact so Mises by saying You know rhetorically he stipulated all that he said yeah Let's suppose the worker is just as happy to take orders from the central planner and we'll do whatever he's commanded to do and let's also assume that the That the planners are nice guys, right? So we're not even bringing in the issue of corruption and you know The dangerous concentration of power which obviously is a real concern And he said to stipulate those two things still they would lack the ability to rationally allocate resources So that's why it was such a powerful argument Just historically, I mean, you know, it was important because I mean Hayek says and I think it's in one of the introductions to the book socialism that It's he the Hayek himself and he says something like and all the other good men of the day were Socialists and what he means by that is that people who were concerned and wanted to help humanity They honestly thought that the way to do it was socialism and then when they read Mises, you know He just blew up just blew up their worldview and they had to grapple with that So it's it's kind of refreshing to see that at least among some intellectuals They can be swayed by other people's books that it's not just a pure ideological thing Let me just make one clarification here a lot of times I hear people say stuff like You know, there was a socialist calculation debate in the 20s in the 30s and At the time people weren't sure who was right, but then when the Soviet Union fell everyone realized Mises had been right I mean that I understand the spirit in which people say that but technically Mises wasn't making an empirical prediction about How long could a socialist regime? Maintain order. He was saying no from day one the socialist planners don't know how to calculate They can't rationally allocate resources And so that that's what the argument is now you can take that and say because of that fact Given what we know about People and their ability their willingness to support various regimes and so on you know Could a socialist order stick around for 200 years? Well, maybe not but the my point is that Mises was not strictly seeking making a prediction about a Regimes ability to maintain power. He was saying could the planners rationally allocate resources Okay, why is this important? It's not simply a matter for Socialism per se that in general by him talking about the limits of socialism. I think that Forced Mises to appreciate what happens in a market economy. So it was only when he thought about why wouldn't a socialist Arrangement work that that then led him and also Hayek to do some of the most important work on the nature of a private property economy And the importance of calculation. So at the last Rothbard graduate seminar, we went through Human action and it was just it's a really struck me again how much calculation is at the heart of Mises view of Basically human civilization, right? So he really makes him strong claims on behalf of how Important calculation is and again you need to when we say what we mean by calculation He means the ability to reduce things to the common denominator of money That a business person needs to be able to look at outputs and inputs and Compare them. Okay contributions of Murray Rothbard. It's time. We got here Okay, yeah, we're good on time Okay one thing People might say oh, yeah Rothbard He was a good writer and he Explained stuff for the layperson, but he didn't really contribute that much and I always want to say even if that were true Well, so what I mean Man economy in state is much easier to read than human action is and so when people come up and ask me Which one should I read first? It's like, what are you kidding read man economy statement? That's not even an issue that you you're you might I'd be afraid it worries me when people say Yeah, I'm getting interested in this Austrian economics. I'm gonna try to read human action I get worried that you they might get three chapters into it and give up and then just walk away and say it's too Hard and so that's why I always think people should read Rothbard first So again if he did nothing besides just explaining that then that would be an amazing contribution because they he would evangelize Bring them to bring the message from the gospel of Mises if you want to get silly with it So a lot more people that way and I think we sometimes just take it for granted Oh, yeah, Murray Rothbard was a good writer, but you don't you don't realize how good he is unless you try to read other Economists and you know academics and just Okay analysis of monopolies and cards, so I just have two more points and I'll turn over to your questions So here I'm I was focusing more on Mises just because I really wanted to drive home that point about money and its purchasing power So here I'm not doing justice to Rothbard and maybe in the Q&A You know if with Walter or somebody thinks I'm I've left out something big. He wants to plug it So let me just focus on a few things that I personally loved in terms of Rothbard's analysis and things that were clearly his contributions okay, so he disputed this whole notion of Monopoly the way that the conventional textbooks used it and even the way Mises used it all right, so that's for one thing that just shows it's not true this claim that old Rothbard was just a you know a follower of Mises and never thought Mises anything wrong. No in man economy and state Rothbard He does it very gently and politely, but he Criticizes a lot of stuff that Mises did So what one thing in particular he's saying this idea that there's such a thing as the competitive price that we could contrast with the market price in the absence of a Government privilege and he has a lot of cute Examples to drive home the point and again it almost it's so light and fun that when you're reading it You almost think all this can't be a deep analysis because it's not giving me a headache But it is really you know, it's they're brilliant points just things like like take out a heavyweight price fighter And you with the conventional analysis you might say well gee if this guy who does it who is the heavyweight champ right now? Who? Kitchco Okay Is that a person or an animal? All right, so All right, I kind of fell out once Mike Tyson bit that guys ear. I got out of it Okay so the point is In a sense that person is withholding with restricting production You know that person has a monopoly on how many heavyweight defenses there are per year And the person could be fighting more or take like your favorite band, you know, if they if they had a concert Every three days, you know, they would be providing more service for their fans So why don't they do that and part of the reason is I mean first of all they'd be exhausted But also you'd say and you could also say well They wouldn't have time to write new stuff if they were always touring but you but another clear reason is their manager Whoever their accountant could say if you held a concert every three days You couldn't you would earn less total money You'd have to lower tickets prices enough to be able to keep doing that that you'd actually probably make less total money per Year than if you do it the way you're doing right now. So there what are they doing? Oh my gosh They're restricting production in order to raise prices. Oh my gosh. That's what the monopolist does And so why doesn't some other band come in and do that? Well, because you know that band is what it is and you could have people doing covers or whatever but in terms of being You too, there's only one you too, right? So someone else can't be that so the point is That analysis holds there but yet when it comes to things like heavyweight fighters or professional musicians It doesn't seem as big a deal. So Rothbard's point is why is it a big deal if the person making computers does that or cars does that? He also has a neat little argument where he goes through the conventional Analysis of why cartels are supposed to be so bad And he says well, how is that different from what we think of just a standard corporate merger or even? Just the the formation of a corporation in the first place But there you've got a bunch of people pooling their assets to form one entity that's gonna then make joint decisions about production and so forth So how is that different from what a cartel is where you got a bunch of initially? distinct units Joining their financial resources in order to make joint decisions about output and pricing and so forth that what's what's the difference? alright, he's got a good critique of consumer sovereignty and again, this is an Area where this is something Mises believed in and touted and Rothbard opposes it so just to give you a quick summary of it Mises one of his One of the reasons he touts the market economy is he said it fulfills consumer sovereignty in fact much better than The the democratic process does that when you terms of bringing power if you will to the common man That's the market economy for you and his point is he's got some famous passages where he says The conventional man, especially the socialist reformer looks at a market economy and thinks that the Capitalists or the entrepreneurs are the ones that are in charge that they're making all the decisions They decide how many cars to produce they decide what models to make and so on and he said but really they're not They're actually the ones just steering the ship the actual captain the one who's like sitting in the big command chair is the consumer So it's the consumers who are giving the orders and yes to the superficial view It looks like the capitalists are the ones Controlling things and controlling the means of production, but they're only granted that Temporarily because the consumers have decided. Okay, you're doing a pretty good job fulfilling our wishes So you get to you know get your hands dirty and you deal with the day-to-day details here But if we decide later on that you're not doing what we want will revoke your Ability to that will put somebody else in your place. Okay, so Mises goes through it and uses that metaphor to Describe what happens in a market economy? So Rothbard doesn't like that. He says for one thing It's this term sovereignty. It's just misleading. So it's not true that the consumer is Sovereign overproducers that the consumer can't literally order you to go into a certain line of production He said rather than that. I think people should just have individual self-sovereignty. It is a producer You own your body so you own your labor services you if you have natural resources you own you control how they're used You have capital goods you can control what lines of production they're incorporated into But nobody can force you to do that and the same thing with the consumer You can buy products or not and then you just all come together and then reach voluntary mutually beneficial arrangements So Rothbard thinks it's it's misleading to To call that consumer sovereignty Okay Monopolistic competition. Okay, so I actually lied to have two more slides. So these these are two different arguments From an economy and state that I always just thought were great. So let me just walk you through them so here and For those of you who have not seen this kind of if you haven't taken economics at the undergraduate level at least This might be a little bit above your head. I'll try to not leave you behind here So this is the conventional diagram showing the evils of monopolistic competition and the benefits of pure Perfect competition So the standard textbook exposition says under pure competition The all the producers Perceive a perfectly elastic demand curve. So they think you know for a given price They think they could sell as many units as they want and If you run through the diagrammatic exposition that means that in equilibrium in a perfectly competitive market You're gonna set output at the point the minimum on this this AC curve here. That's average cost Whereas under monopolistic competition when the firms have market power when they think they have some influence over Price what that means is the firms face a downward sloping demand curve They realize that oh wait a minute if we want to sell more we have to lower the price That's what it means to say they face a downward sloping demand curve Whereas here they think no we could sell as many units as we want at the market price because we're such a small component We can't affect the price whereas under monopolistic competition You're a big part of the market and so you know to be more realistic You realize if we doubled our output we couldn't keep selling the same unit price So who cares what's the big deal? Well in a standard mainstream textbook. They're gonna say all the big deal is She run that if you do the calculus or whatever you see the The equilibria and profit maximizing point for the monopolistic competitor as opposed to the firm and perfect competition is Where there's this tangency here and that's gonna happen. So look at output gets restricted and prices go up And the other thing is this is at a higher point on this Average cost curve than this point was so they're gonna say see what happens If you initially started with a perfectly competitive market and then a bunch of the firms Grew like kept merging so now you just had like six big firms that all heads market power What's gonna happen? They're gonna all restrict output prices are gonna rise and production is gonna occur at At higher average unit costs and then they the textbooks try to give some Real-world examples like well, okay, this is just geometry. What do you mean though? And they're saying well if it's something like, you know wheat farmers where that's a perfectly competitive market Everyone sells wheat the same price. There's no differentiation and they're there's they're not advertising, right? It's not that farmer Joe says by my wheat. It's better tasting than Farmer Smith's where something like the sneaker industry There is differentiation. There are people, you know Nike and Reebok and so forth. They have different brands and There is some differentiation and there they do advertise So the point is they're gonna say yep see they're wasting all that money on advertising just trying to capture things from so the Average price to make sneakers is higher because of monopolistic competition. It would be more efficient if we could just Just you know have a uniform type of sneaker sold by everybody All right, so there's a million things wrong with that that Economist before Rothward have pointed out, but one thing that he points out is there's something fishy about this Geometric argument and he said it crucially realized he said what's going on here? Well, how are they getting the result that it just pops out that it has to be the case that with the downward sloping demand curve You have you know output goes down prices go up and you end up Intersecting you know the point of tangency with this thing Occurs higher than the minimum point. He said that's crucially dependent on the fact that this is a smooth curve And that's just something that they make for convenience You know the the mainstream textbook writers don't think that anything hinges on that being a smooth curve They just think well, we're just doing that to draw a nice curve. You know just what what else would we do? What what differences are making he shows? Well, what if it's like that? What if you had a kinked average cost curve? then You could have a downward sloping Demand curve that Hits that point is is tangent to it if you know tangency doesn't really work here But you get the point at the lowest at the lowest point now just to so you know Rothbard, he didn't really dot all the eyes and cross all the t's here, right? They're the and it's not worth getting into because some of you don't even know what the standard exposition is but There are some holes here, but Walter blood would you do it with Bill? Walter block and Bill Barnett have a paper where they they flush it out So Rothbard was on to something here He just he didn't quite get it right but the point is he had the brilliant insight of realizing no that is just an artifact of The assumption of a smooth cost curve and once you get rid of that the whole argument falls the geometric argument falls apart in A you know in addition to the the verbal arguments we can make up against the approach All right, so talk to Walter if you want to see yeah, like they actually give numerical examples like with You know showing with with the calculus and everything so it's for sure that that that works Whereas here it's not as obvious because Rothbard didn't fill in all the steps of the argument Okay, one more thing I'll turn over your questions. This is I think my all-time favorite Critique of Keynesianism. So this is I got met all this stuff comes from man economy and state So there's one section where Rothbard is he's gonna blow up this idea of the investment multiplier that Keynesians come up with So he so right now He's recapitulating the Keynesian argument So he says goes something like this the Keynesian start out with this identity that total income is equal to consumption plus investment Okay, yeah, that's true and Then you assume that there's a constant marginal propensity to consume so let's say that Consumption is always point eight of income Now that's that's not that's not a definition that doesn't that's not as true as this thing is true But the Keynesians think that's pretty reasonable to assume that people you know you give them more income They consume a fraction of it, but not all of it Okay, and then what happens and then they say well look at this so We're taking this equation and we're rewriting it here So you got income but then is that a consumption? We're plugging in point eight times income and then you're bringing this investment down Then you're just gonna do algebra so you subtract that so now on this side You know this turns into point two times income equals investment and then look oh my gosh You divide through by the point to you get the total income and the economy is equal to five times investment spending And that's where the Keynesians come up with the investment multiplier And so look at that if if we're in a slump and we have idle resources the government just needs to Spend up a hundred billion dollars of making roads and bridges and stuff like that and that will add five hundred billion To GDP once all is said and done because of the magic of the multiplier And it wouldn't the Keynesians say you think that's wrong. Well look at we were doing it with math You know so you guys are you you Austrians who take up geometry or sorry algebra sometime. Okay, so Rothbard Points out the specific flaw with that, but then he doesn't deduct you add absurd to show Okay, let me just make sure you see just how stupid this is So he says okay Let's do a different Hautology the social income is equal to the income of the guy reading my book man economy and state plus the income of everybody else That's true, right And then he says I'm gonna observe the income of everybody else is about you know almost all of social income But not quite that's true And then watch what I can do with that Social income is the income of the reader plus this Rearranged social income is 100,000 times the income of the guy reading my book right now and that is exactly as Valid as the Keynesian demonstration. So Rothbard concludes don't you know the government shouldn't stop with this Piddly little five times multiplier investment. They should send checks to the guy reading my book right now Right because if we gave him $5,000 there'd be a hundred thousand multiple in terms of raising GDP All right, so the point is you think through okay, this can't possibly be right What's going on and you realize this was the crucial Stop that that number doesn't need to be the same what would happen is if you Took money from everyone through taxes and then gave it to or by deficit spending and then gave it to the reader That number would change a little bit. It's not that that would stay exactly the same So that meaning this would have to stay the same so if the income of the reader goes up That's got to go up by a hundred thousand times. That's not what would happen Okay, so something is you can see the fallacy an example like that And then you really you go back and say oh is there something different with the Keynesian argument investment spending and you've been Rothbard had Are shown that none there really wasn't that it's Literally an analogous argument Okay, we got about five minutes left. Let me turn over to your questions What did Walter leave Walter? Do you want to say anything about Rothbard or like what's your what's your favorite contribution he made? Well, what were Rothbard's greatest contributions to geopolitical warfare? All right, does anyone else have anything scholarly to say, okay? Okay, so the case you guys couldn't hear it the question is did Rothbard contribute anything to business cycle theory per se Well at the very least you know that was a contribution in terms of economic history and how do you apply to that period I Don't think he changed the theory per se at least in that book But what he did might have done that hadn't been done was to just like that is a task But how do you like do you count? Bank deposit you count this in terms of how do we measure what the money supply is that sort of thing? So off the top of my head and maybe someone wants to afterward add something to it I don't think he supplemented the theory per se in that particular book or to my knowledge elsewhere Maybe one more question. Yeah, right there. Okay, so the question is on imputation theory So there Peter Klein is the expert. I think if memory serves that Rothbard cleaned it up a little bit So the people it was sort of like what Walter did and Walter and Bill Barnett did with this thing That like I said Rothbard, you know gets the credit for he coming up with the brilliant idea But technically he didn't execute it perfectly and then they just kind of cleaned it up the argument I think that's what my analogy Rothbard did with the imputation stuff Earlier thinkers had the basic idea like this is the way you explain prices when there's joint Outputting that kind of stuff, but they didn't quite dot all the eyes and cross all the T's and he he did it You know So if you're gonna read it somewhere read it there because he did it properly and made sure it all was internally consistent But I don't think he came up with any novel Insight and how do you explain? Factor pricing in these various scenarios. Okay. Why don't we end there? Thanks guys