 Okay, let's go ahead and get started. Good afternoon, everyone. Today's, or this afternoon's topic is the Austrian theory of the business cycle, which it turns out that it's a quite timely topic because there's a lot of confusion among the powers that be about what exactly a recession is. And I'm sure this has nothing to do with who's in office or who's in power right now. It's purely an academic exercise. And so hopefully Miss Yellen is tuning in on the online viewing and she'll learn something from this lecture. Coincidentally, somebody yesterday, a good friend, said that I looked like Matt Walsh. And so perhaps another title for today's lecture is, What is a recession? We'll clear it up. I usually put the recommended reading at the end and I always run out of time and since it's so important, I decided to bump it up to the beginning. So here's just a few, you can take a picture of this or find the slides online to see these. But these are just a few things that I would recommend that you read, sort of in order of beginner to advance. But Meltdown by Tom Woods was really my first introduction to Austrian business cycle theory. It's great. In this lecture, I'm going to be talking about the theory. I'm not going to be talking about historical episodes except perhaps in passing. And so if you want a good example of how the theory is applied to historical examples of business cycles, then you could look at Meltdown or America's Great Depression by Rothbard. I maintain that the first couple chapters of America's Great Depression by Rothbard is still the best exposition of Austrian business cycle theory. So definitely check that out. There's also the causes of the economic crisis, which is a collection of essays and talks by Ludwig von Mises both before and after the big crisis that happened in the late 20s and 30s. And so he didn't run into Paul Krugman's problem of having to backtrack and being incorrect about what he said. Mises has writings before and writings after, and we can see that it tells a coherent story. There's also a great article by Joseph Solerno in the Quarterly Journal of Austrian Economics. It's called a reformulation of Austrian business cycle theory in light of the financial crisis. And here he's responding to some misconceptions that he found in the literature and actually some Austrian adjacent scholars that were considering the Austrian theory as a sectoral shift or like a hydraulic sort of mechanistic theory. And so in this article, Solerno sort of, he restates what the theory says and provides a good definition of overconsumption and malinvestment and explains how the theory does fit what we see in the data in response to those critics. There's also a time and money, which is available in the bookstore. It's a great pedagogical exposition in which he's got graphs that line up, and in the past I've had those in my talk, but I've tried to change things up a little bit. So I don't have them here, but you can find Roger Garrison's previous lectures and also that book to see the great graphs that he has, wonderful power plants as well with the nice sound effects. And then finally at the bottom I have Ludwig von Mises, his theory of money and credit in which he originally expounded the Austrian theory of the business cycle. And it's worth noting here that in this book he is actually connecting some ideas that already existed about the problems that exist with fractional reserve banking and how panics can arise. And in this book Mises shows how it's not just localized to the banking sector. It's not just something that's a trouble for finance and banks, but it's when interest rates are falsified, when they're pushed artificially low, it's something that applies to production in general. And so this is where we have the first telling of the Austrian business cycle story. So another interesting thing that we should point out here is that we're branching away from the unhampered market economy, the theory of unhampered markets and into hampered markets. So we've seen in the lectures so far this week that individuals on their own and individuals interacting in the market economy are able to economize. They're able to dedicate resources towards their highest value of use. We've seen lots of examples from Crusoe. So Crusoe is able to see the stuff that he has on his island by himself and he's able to, with his own ideas and his own preferences, he's able to allocate those resources towards productive uses so that he can attain the different wants and needs that he has. And it's not really an intellectual problem. It is difficult for Crusoe to go about that because he's operating in isolation as opposed to a division of labor. But intellectually it's not difficult because it's his own preferences. It's his own ideas. It's his own know-how that's being used to arrange his environment in such a way to produce the things that he wants and needs. It's a little bit more difficult when we talk about a division of labor because then we have, intellectually, there's an extra complication. And the complication is because it comes from the fact that we can't engage in interpersonal utility comparisons. So your subjective value is your subjective value and mine is my own. So since these are all personal, there's no way for us to measure value in an objective way. We had this question, okay, so because of that or since we had that, how do we allocate resources? Who gets to consume what? Who decides to produce what? And we've seen over the past day and a half, we've seen how we accomplished that in an unhippered market economy, namely through the use of market prices and profit and loss calculations. That calculation allows us to, through voluntary exchanges on the market, we know that goods are being used towards their highest value use. So that's how we branch from the individual acting in isolation to society. While there is that extra complication with the interpersonal utility comparisons, we've seen how there's a solution to that, just voluntary exchange, private property, prices in profit and loss. But the question is, what happens when something outside the market acts upon market actors? What happens when somebody forces somebody to do something else? So instead of having voluntary exchange, we have violent interactions or we have something like a state prohibiting people from doing the things that they would do if they were unhippered or if they didn't have that sort of influence. And so that's where the Austrian business cycle theory fits. And that's worth stressing because there are a lot of people who might say that business cycles just happen on the market on their own. Like capitalism is just prone to these inconsistencies and so we have business cycles that just occur because of the instability of investment spending or animal spirits or all sorts of things that are built into the economy. But the Austrian theory says that, no, there is no reason why we would expect that in an unhippered market economy. It only comes from outside the market. The only influences from outside the market would cause there to be the intertemporal discoordination that we see in the business cycle. So one example I have going back to Crusoe is Crusoe has a stock of consumer goods that he's collected over time. He's saved up some of his resources. He hasn't consumed everything. And that allows him to engage in a prolonged period of production. If he has extra coconuts and berries and fish or whatever it is, if he has more of those things that he can spend the day making a capital good, he can spend the week perhaps depending on the size of his subsistence fund, depending on the amount of coconuts and berries that he has, he could dedicate some time to different lines of production that have payoffs in the future. He can make specific capital goods today as opposed to just going out and collecting coconuts and berries like he does in normal times. So this stock of saved resources allows him to engage in longer production projects. However, suppose in his collection one day he finds some mushrooms that are growing and he consumes some of these mushrooms. And these are not the good mushrooms but the bad mushrooms and they cause him to hallucinate. And the precise nature of these hallucinations is that it causes him to see his stockpile of saved resources and instead of it being its actual size, it's 100 times bigger or 1,000 times bigger, just like this gigantic pile of coconuts and berries. Crusoe is a millionaire in his own respect. So what we can ask then is, how would Crusoe change his actions with this misguided, this incorrect view of his savings? And the answer is he would engage in totally different, much longer lines of production than he otherwise would have. Instead of going out and building a raft perhaps, he might look at his massive pile of saved resources and start building a mansion instead. Or instead of a fishing pole, he might start building this massive boat that he could either take back to the division of labor or use for fishing. But the point is his view, his own perception of the stockpile of saved resources determines the sorts of production projects that he would undertake. And so this is the same sort of thing that happens in the business cycle in a division of labor. There's something that happens to the supply of money and also to incomes in the interest rate that make it appear as if we, everybody, the entire economy, has more resources set aside for production or would allow us to pursue longer lines of production than currently exists. So there's a falsification of that perception and that comes from outside of the market, either through central banking or through fractional reserve banking. When there's an increase in the supply of money that comes from somewhere besides going into the ground and mining some gold. Okay, so Mises has a more straightforward analogy that doesn't involve any hallucinogenic drugs. So this is a great analogy. It's a wonderful one. So let me just read through it. Mises says, the whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It's obvious that our master builder's fault was not in overinvestment but an inappropriate employment of the means at his disposal. So there's this master builder who has an incorrect view of the resources that he has to complete the structure and as a result he starts building the wrong kind of house. He lays a foundation that's for a house that would be much bigger than what would be appropriate for the amount of resources that he actually has. So Mises makes this connection. It's a good analogy because it works both as an analogy for what entrepreneurs and what the economy experiences in a boom-bust cycle but also in a literal sense we actually see in some boom-bust cycles whole neighborhoods are built that are based on this plan that's much bigger than it can actually be completed. We saw this in the 07 and 08 recession where it's like we look back in the past and it's like, oh, wow, we plan to build this house but we can't finish it. It's not profitable for us to do so. So that's why I think it's a great little story. Okay, so let's define a business cycle by first ruling out what business cycles are not. In America's Great Depression by Rothbard, he's very clear about this that business cycles do not refer to regular everyday industry or firm specific fluctuations. So there are business fluctuations that happen all of the time due to changes in the market data, including consumer preferences, including our ideas about technology that we can use to produce different things and the sheer amount of consumption and time preferences and the resources that we have at our disposal. These sorts of things are changing all of the time and we've already seen that it's the task of the entrepreneurs in a great lecture by Dr. Klein that it's the task of entrepreneurs to bear the uncertainty associated with these changes. So we're not sure what the future will hold. Entrepreneurs are tasked with this responsibility. So they're the ones who are putting resources on the line to try to make things that consumers want in the future. The changes that happen in the market like this are, we already have a theory, we already have this, we understand the mechanics of this. This is not a business cycle because what we see on top of these sorts of changes is we see that there are general booms and general busts. And I just have a few graphs there. It's not quite as important for you to know like what these graphs are of but just see the shapes of the lines. There's a stock market index in the top left. The unemployment rate is in the top right. Gross output is in the bottom left and then the case shield or home price index is in the bottom right. But you'll notice the key feature of all these is that there's these big ups and downs and these are things that apply to the economy as a whole. This is not a specific business fluctuation. This is not a change in consumer demand that an entrepreneur is trying to anticipate and then they change their production accordingly. This is something that's happening to the entire economy it seems. It might be that some industries are affected more than others but nevertheless it's something that applies to in general. So it's a general boom and then a general bust. So that's what we mean by a business cycle and that's what our business cycle theory should explain. Another thing that we notice in business cycles is that we notice that consumer prices don't fluctuate as much as factor prices so that's another thing that we need to take into account. Rothbard notes that capital goods industries fluctuate more widely than do the consumer goods industries and we see a consumer price index on the left and the producer price index on the right and you see that just using some eyeball metrics as opposed to econometrics, yeah, that's right. So to do a little bit of stock taking our theory needs to account for these things. We have to account for the shape and the stages of the cycle. We have a boom followed by a bust and it's general. It's for the whole economy. We have to take into account the cluster of entrepreneurial errors to at least explain what might be causing those errors to arise or to happen. And we also need to account for the more dramatic fluctuations in capital goods industries compared to consumer goods industries. And since this is something that happens to the economy as a whole we immediately have a couple suspects and that would be in money and in credit for a couple reasons. One is that money and credit pervade the entire economy. So in a money-using economy one half of all transactions has money on it. So if there's something that's affecting the entire economy it would make sense to look at money since it's everywhere. And we might also be interested in looking at credit since it has such a big role in entrepreneurial decision making. The supply of credit allowing entrepreneurs to borrow and then undertake production projects for long periods of time. So those will be our suspect areas. Okay, so now that we have the groundwork and the definition here's the outline for the rest of the lecture here. So first we'll recap the structure of production. We had a great lecture by Professor Rittenauer on that but we'll just recap it since it's such an important part of this story and we'll also recap time preference and interest. Once again another great lecture by Professor Herbner. And we'll see how that the unhybrid market economy is integrated and coordinated along both of these dimensions or in both of these areas. So we had the production is structured in a certain way in stages and then there's the time preference that we all have and the resulting social rate of time preference or the interest rate that emerges that allows us to allocate resources across time and so we'll see how those work together. And when we see how those work together we'll see what is required for us to have sustainable economic growth. What understanding that production happens for certain reasons what does it take for us to produce more? What does it take for us to have more consumer wants and needs satisfied? So we'll come up with a theory of sustainable growth and then we'll ask the question what could cause this to be messed up? What could cause this to be unsustainable as opposed to sustainable? Since we see that there's this boom that's inevitably followed by a bust what happens in those sorts of booms that's not sustainable? And we'll see that the answer the key to the story comes from overconsumption and malinvestment. So first to recap the structure of production instead of flourless chocolate cake I have bread that probably has flour in it and it's being used to make a sandwich and so this is following Rothbard he uses this example and usually when I'm teaching this in class we'll have some back and forth but for the sake of time I'll do all of the work for you. So if we ask what does it take to produce a ham sandwich and we set it up in this way where we just put the consumer good in the middle and then we start putting the factors of production that are required to make the ham sandwich around it we might have something that looks like this so we need ham, we need bread, lettuce, some condiments a plate, a table and chair to eat the ham sandwich I think this is at a deli and we also need some space some physical space that we would occupy to put the ham sandwich together and then consume it at the table once again if this is a deli and we also need some labor we need somebody to put all of these ingredients together at the deli and as we all know from the previous lecture this is not our stopping point because we just have we can ask this same question again so if we're asking where does the ham sandwich come from we would also need to ask where does the ham come from where does the lettuce come from, the bread and all these other ingredients we need some land and labor since those are originary factors of production so those are provided to us just by God we just have physical space available to us and the ability for us to use human effort in production so there's not an explanation behind that they're originary but when we do that we see that there's another ring around the rosy here so the butcher comes from the ham comes from the butcher the butcher needs some land and labor and other capital goods as well the bakery has land, labor oven and flour the flour comes from farming I skipped a few steps there as you'll see and this just becomes a completely complicated mess it's a very complex structure of production and eventually if we were like if we wanted to be thorough with this it would end up looking something like this it's extremely complex they've come up with two ways to simplify this so that we can actually work with it because it's pretty impossible to work with this in a way like you would move a demand curve on a supply and demand graph so the way that we've organized it is by putting these different these nodes, the things that are happening in production we put them in time so we put the stuff that happens first on the left and then the stuff that happens last on the right or in some authors they do higher to lower, so top to bottom but the idea is this we just shuffle everything around so we have the original starting factors of production on the left and then we end with the consumer good on the right this is still a little bit difficult to work with but I would call your attention that this is very similar to Rothbard's figure 32 in Mannequin State if you turn your head to the side a little bit you'll see that this is just land and labor capital goods through a structure production that ends with a consumer good at the end still a little bit intractable so instead of having these nodes in a web form we stack up the spending on all of the things that happen in those stages so at the earliest stage of production there's an amount of spending on all of those factors then there's another stage of production we can tally up the spending on all those things so we've organized that giant complex structure of production just for a ham sandwich and we've organized it by time on the horizontal dimension and then by spending on the vertical dimension and what we have is a nice tractable structure of production as a result now you might have heard the evenly rotating economy mentioned in a couple of the lectures the evenly rotating economy it's a thought experiment, it's an imaginary construct that we use to say what would happen if there's no more uncertainty what happens if the market day repeats itself over and over or whatever the market period is if it repeats itself over and over again such that there's no more uncertainty about what happens in the future and one thing that we know is that all profits would go to zero there'd be no more profits since entrepreneurs, the source of profits is correctly guessing over and above what other people correctly guessing consumer demands for different goods and so if you make everybody a perfect guesser by eliminating uncertainty there's no more profit, however an important conclusion from Mises and Rothbard is that there is still a spread between stages and that's due to time preference so since capitalist and entrepreneurs are being asked to part with present consumption by purchasing these factors of production earlier in the stages and they only get the revenue until later it means that they have to reckon their own time preferences as a result and we've also seen from Professor Herperner's talk that there's some uniformity that happens that because of arbitrage opportunities the rate of interest that occurs in one line of production is the same that would apply to a different line of production and also between the credit markets and also in production as well so there's this uniformity that happens so the only remaining spread between the stages of production is just interest and in fact this is the more important as Rothbard notes the more important time market it's the market for factors of production it's bigger and more widespread as compared to a loanable funds market or a credit market where we also see interest emerge so the fact that we have trades of present money for future money occurs because we have varying rates of time preference and once again time preference it's based on the fact that we have this disutility in waiting I like to explain it in this way so Mises said that all action is aimed at removing felt uneasiness so all action universally this is not something that we just notice as an imperial regularity for action to be action it means that there has to be this dissatisfaction with the current state of affairs and so when we elongate the amount of time between starting in action and actually getting the pay off getting the consumer good or the satisfaction the desired state of affairs it means that we're increasing the amount of time that we're experiencing that that uneasiness that Mises talked about or extending that amount of time that we had that dissatisfaction with the present state of affairs and so that's why it's a praxeological thing and not just a psychological or empirical thing so even though we all have time preference there is a variety of rates which means that we can trade and I've got an example between David and Jeff here where they have they have a double inequality of value for different amounts of money in different time periods as opposed to like apples and oranges they're trading money but in different time periods present in future so we have an interest rate and as we mentioned before this this interest rate is the same one that would apply in production and we would see it as the slope of that triangle shape the Hayekian triangle in the evenly rotating economy okay so to put all of that together so we have the structure of production time preference and interest we have inter temporal coordination so we have consumers that have certain time preferences and entrepreneurs plans are limited by this they're limited by the set of resources that have been not consumed so there's some resources that are consumed in any given time period and some that are set aside for investment in production so that's a limiting factor for entrepreneurs they can only pursue the lines of production that are enabled by the resources at their disposal and while so I'm saying it in this way but all of that happens through credit markets and through the structure of production and the rates of return that happen between stages but it's the same sort of thing that would apply to Crusoe when he's deciding what lines of production am I going to pursue am I going to pursue really long ones do I have a large stockpile of coconuts and berries that would enable me to make more capital goods and pursue X, Y and Z or do I have a smaller set of safe resources that would only allow me to produce A, B and C right so it's the same sort of thing happening socially in this regard it's just all happening through once again market prices profit and loss okay so the only projects that are deemed profitable are the ones in which the discounted anticipated discounted revenues from the sale of output exceed the cost of production so there's this limiting factor entrepreneurs can only start lines of production that meet that threshold and the threshold is determined at least in part by time preferences because we have to discount those revenues in the future to make a comparison to the cost of production today so entrepreneurs do not undertake projects that would take too long and I know that's not a very precise term there so if we define too long as there's insufficient resources to complete them or perhaps there are more urgently desired projects so an example here might be like suppose Crusoe makes a mistake in which he decides to start producing a a toaster instead of a fishing net and so the creation of the toaster to make toaster that requires a lot of other efforts and the payoff there would be much further down the road as opposed to if he could make a net that would allow him to catch fish tomorrow perhaps so he could make a mistake that's not just based on the set of available resources but it's also just a mistake based on what is what is more urgent what do I desire when and as we've seen the rate of interest is uniform across lines of production and across or between consumption and production okay so we see this inter temporal coordination but now we need to ask the question how do we get sustainable growth how does our economy grow in a way that doesn't have this inevitable bust and the answer is with saving so we actually have to bolster our savings first we have to set aside resources away from consumption and toward production so that we can produce more so saving involves freeing up resources for production in credit markets we see this by saved funds are made available to entrepreneurs and they these entrepreneurs with the lower interest rate and the availability of availability of funds itself they are able to purchase additional factors of production and pursue new longer different lines of production so and that those new longer lines of production would be in line with consumers time preferences because you remember we started off the scenario with consumers decided to save more so we have more goods and savings and entrepreneurs are responding according to there is a coordination there and the initial investment if it's in excess of what's required to just maintain and replace the existing capital stock this would pay off in the future with an expanded set of resources so if we create new capital goods if we bolster production if we consume us today and add to our productive capabilities it means that in the future we have more stuff more goods and services capital goods and more consumer goods because we've increased production today but the important point is that this comes at a cost right you have to forego some consumption you have to not consume some stuff so that those resources can be used in production that's the important point and there's there's no way around it right it's there's not a way for us to just increase production and increase consumption right with a given set of resources right we're just stuck with that so so that's that's our explanation of sustainable economic growth the way we get sustainable economic growth is by saving first okay so next question is what if instead of saving money but instead of saving more what if that increased supply of vulnerable funds comes from the printing presses where we just have brand new money is entering the scene and it's coming in through credit markets it's not coming from people deciding to to consume less and then those resources can be used in production but what if it comes from something outside the market perhaps central bank increasing the money supply frantically and so here instead of instead of calling this scenario an increase in savings since it's falsified we'll call this an artificial credit expansion so in this in this case newly created money enters the economy through credit markets and it represents an increased supply of vulnerable funds but one important point is we're going to say that time preferences don't change so the consumer time preferences and what would have happened on the market is is just the same so this is just a new drop of money that's coming in through credit markets but people's time preferences haven't changed so what are the effects of this well this would decrease the interest rate so it's increasing the supply of vulnerable funds so the interest rate comes down the market price and the vulnerable funds market and it's not because of a change in time preference and at the lower interest rate and also just because incomes can increase now that there's an expanded money supply so we have inflation there's new money so incomes increase and the interest rate falls and so this enables or encourages consumers to save less and to consume more so we actually have the opposite occurring in real terms we don't have an increase in savings we have a decrease in savings as a result of this money pouring forth on the credit market so consumption and borrowing increase and firms take the new funds entrepreneurs take the new funds and invest in new longer lines of production from the entrepreneurs perspective this looks like hey now the projects that I thought would not be profitable they now appear profitable it's the same as the the mushrooms and cruisers case from their perspective they see the interest rate is lower we can borrow now at a rate that would allow us to deem this project that was it was off limits now it is within our feasible set of like profitable lines of production so like now we can pursue this line of production that we couldn't do before as a result of this factor prices increase so entrepreneurs demands for factors of production increase in the early stages of production so now they create new capital goods and they increase their demand for labor in the early stages of production which means that factor prices increase wages increase employment increases consumption increases and investment spending increases not only do we have this boost in business in the early stages of production but we also have a boom in the later stages at the retail end because of the increased consumption so both at the retail end but also in the earliest stages there's this boom that happens and as a result it looks like the economy is doing great it looks like we just have profits are abounding incomes are up wages are up employment is up stock prices are up it's just a wonderful time as we know this can't last over because we're now in the unsustainable portion of the lecture okay so we have this boom that's general it's not in just one sector it's not just in one industry but it's for the entire economy so the key here what prevents the this boom from going on forever is we do have a real resource constraint we only have a certain number of resources the projects that were started cannot be completed at some point Crusoe in his hallucinations he would realize or the master builder in Mises's case they would realize I don't have the resources that are required to finish the projects that I had started it just can't happen and this would this would appear in a few different ways one way is that the prices of capital goods might increase as we see the increasing scarcity of capital goods we might see the interest rate shoot up or that might happen first in which the projects that were we expected to be able to do based on easy credit now it's not possible for us to do that because interest rates are increasing but the point is that we have over consumption and malinvestment so over consumption is the the fact that the new profits and incomes and higher net worth calculations and the lower interest rate all of those combined encourage increased consumption more consumption than what would have happened absent the artificial credit so resources move from early so real resources not just spending but real resources move from the early to the late stages due to that increased consumption and this is something that Salerno highlights in his article in the QJ that I mentioned at the beginning and we also have malinvestment and malinvestment is the fact that resources are misallocated so it's not it's not like oh we move resources from these lines to these lines but let's just finish it out it's a misallocation because it wasn't based on available resources it wasn't based on consumers time preferences these projects have to just have to physically have to be abandoned both financially and physically it's like it's not going to pan out so the inflation and the artificially low interest rates encourage that misallocation and it's especially difficult in capital goods industries as we mentioned at the beginning one of the things that our theory has to explain is the greater fluctuation in capital goods industries and the reason why is because specific capital goods are created during the boom specific meaning they're especially suited for one particular line of production as opposed to labor which is relatively non-specific it's easier for us to find new profitable employment for labor as opposed to the capital goods that were created in the boom so in some the credit expansion does not represent an increase in real resources available for consumption or investment and I think we've covered all of these points here that the projects just have to be abandoned because the resources aren't aren't there so what happens in the bust what happens in the recession we see firms liquidating the mal-invested capital wages decrease as these projects are abandoned workers are laid off but due to the like I said the relative non-specificity of labor this is a little bit easier than the capital goods which see a severe drop in their value credit markets dry up so there's more uncertainty there's all the secondary deflation that's based on the as Solerino calls it in his article an entrepreneurial malaise that occurs because there's all this extra uncertainty due to capital values dropping and the recession and all the unemployment so we might see this reluctance for lending to pick back up as a result and we also see prices readjusting to reflect consumer demands it's important to point out that the bust is a correction phase it's like a recovery it's like we're fixing the mistakes so the mistake was we allocated resources to very long lines of production and we have to move those resources into new lines of production that actually will pan out and that's what happens in the recession it's a healthy period even though it's painful it's just one of those things it hurts you to see wages decrease these sorts of things are painful to see your retirement account because the stock market is tanking but the point is that from a bird's eye view this is healthy this is what the economy needs to do as a result of all of the mistakes of the past the reason I point that out is because a lot of the government response to recessions and the bust that happens is to worsen or to hamper this recovery phase so they'll try to prop up wages they'll try to increase government spending supply once again to try to maintain total expenditures for example but from the Austrian view we'll see that this actually hurts the recovery process and you're actually just paving the way for another bust in the future so I have just a little bit of time I thought it would contrast it to some popular views so there's the Keynesian view and it's totally different like almost like it's almost like a complete opposite I just told you in the Keynesian view busts come out of nowhere usually from this hard to describe instability in investment spending so like there are these capitalists that they're operating on whims they have these animal spirits that are either optimistic or pessimistic so all of a sudden people just get pessimistic and they pull their funds out of the market and so we have investment spending tanks and since investment spending as you'll see is a component of total expenditure there total income it means that total expenditures falls and according to the Keynesian view while wages there would be a decreased demand for labor but wages don't come down for whatever reason we just have sticky wages and so markets don't clear in labor markets we have persistent unemployment and so we had this doubling down effect where a spiraling downward effect one decrease in investment spending turns into another decrease in spending because of the uncertainty and the extra waning animal spirits as a result and there's nothing within the market economy that can fix it in the Keynesian view so the only hope here I told you this is totally the opposite the only hope is government the only thing that can step in and increase the total expenditures is government spending and modern Keynesians would say to increase the money supply that would also stimulate additional expenditure but this is the only thing that we can do to get us back to that full employment level of expenditure and what's interesting is that the Keynesians and the monetists are viewed as opposing schools of thought sometimes but you'll notice that when we contrast to the monetary view it's exactly the same the story is almost the same instead of there being this sudden decrease in investment spending we have this sudden decrease in the money supply or in the growth rate of the money supply depending on who you ask and this causes total expenditures to fall sticky wages prevent labor markets from clearing and we have a crash and the only hope in this view is we need the central bank or some sort of monetary authority to increase the money supply so that we can get back to the full employment level of expenditures instead of the Y is equal to C plus G they're using this equation of exchange to help them tell that story it's interesting because both Milton Friedman and Rothbard would blame the Federal Reserve for causing the Great Depression or at least that boom bust cycle they both pinned the blame on the central bank in that case but for totally opposite reasons if you ask Rothbard it was based on the growth and credit through the mid to late 20s that caused the great depression or the crash that led to the recession and then the depression and if you ask Milton Friedman he would say the Federal Reserve is at fault because they did not increase the money supply so they didn't increase the money supply when they should have they should have seen that all these banks were falling and they should have maintained the money supply by being a lender of last resort and just increasing them so notice they're both blaming the Fed but for totally opposite reasons in fact if you compare monetarism and Keynesianism there's a lot of similarities there so in conclusion here if you look at the highly aggregated data if you're not looking at the stages of production and the inter temporal coordination that happens with time preference interest in production then you will misdiagnose the problem if you're looking at total expenditures or just changes in the money supply for example you'll misdiagnose the problem and you will also give bad solutions another thing that we've noticed in the process is that we had to first come up with a theory of sustainable economic growth so how does our economy grow in a sustainable way this is it goes back to Hayek's maxim it goes like this before we can meaningfully ask what might go wrong we should first understand how things could ever go right and so we see how economies can grow if we have an increase in savings and we have the unsustainable growth that's triggered by false savings or fake credit emerging in credit markets and so in conclusion sustainable growth is based on a real reallocation of resources away from consumption and towards production so we had to have real savings and unsustainable booms are caused by artificial increases in credit and the recessions of the time in which we fixed the mistakes that we made during that unsustainable boom in the past thank you