 When I got the question if I wanted to come and talk on the topic of how to think about the economy, I was like, that's not a bad idea. I have a few things to say about that. Then I learned that you get a copy of the book when you enter the door. I really have nothing more to add. So I'll just stand here. Seriously though, there's a lot that we can talk about on how to understand the economy. And taking an economics course is probably not the right thing to do. So let me first just distinguish between the actual economy and how a lot of people view the economy. And you can see there's a thumb up and the thumb down. Just as a hint on where to stand on this issue. Okay, so one side is talking about the world as a scarce place where we don't have all the resources we need. We don't have all that are once satisfied already and so forth. We need to engage in production and exchange. And then we have the other side, the other view, which is strangely common where, if I can see this, where they envision or see the world as a world of abundance or post scarcity, you might have heard that, where there is really enough for everyone already. The problem though is that some people have taken more. I don't know why they would take more since there was already enough for them, but that's another matter. So there are problems in the world and there are exploitation and there's power and that's why the economy sees all these inequality and things like that. So in a sense, this is really the world of the view, a few of the world, where the world is a magical money tree. There's just money and stuff growing all over the place and you can just get it. Whatever you want, you can just get it automatically. Okay? Well, if it is really a world or the economy is really a magical money tree where you can get anything you want at any time, there's really no problem, right? Nothing is wrong, which means that someone made it wrong. Okay? There's someone or something that caused all these problems that we see and what we need to do is get rid of this somewhere. And that's the analysis, right? We start out in a beautiful place and then some corrupt dude and I hear it's this guy, the evil capitalist destroyed everything and I hear that I am a lackey of his. I have never met him, but I'm still a lackey of his. Okay? So this is the other side of the story, right? But if you look at the actual data, you might have seen this graph, which really runs only from 1820. But you see that the green are the people who are not poor and the red are the people who are poor. As you can see, something happened over the past couple of hundred years, something enormous. It was not due to completely free markets because they didn't exist, but it was due to an economy actually working and producing stuff and creating prosperity for all of us. Now, if you look at this and here's some lines just to show you, 1820, 10% of the world population were non-poor. I mean, we're not talking poor as in only making 750 an hour. We're talking poor as in starving, right? Now, 10% of the world population are starving. It's a huge difference, right? The question is, where the heck did this come from? How can we understand the economy and the world economy really that created this enormous prosperity for people? And this, that's the green arrow, that's the difference in 200 years, right? And it's not because parliaments voted one way or not the other. That's not what created it, right? It's something else that created it. Now, that green arrow is pretty big. The problem here though is that it's not really just that arrow even though it is big, but the graph is wrong. This has the number of persons. That's not true. It's really the percentage. What happened during this time? Well, this is the world population during this time. So, it's not like another 80% of the population was lifted out of poverty. The world population increased by a factor of eight. Eight times as many people and then only 10% of the people are poor. That's pretty enormous, right? And just to give you an idea of how can we understand this and when did we start studying this? Well, the Wealth of Nations was written and published right there in the beginning when it all started to take off. A much better book in my view, it's Human Action, was written later. So, you can see most of the population has happened, or the population increase has happened after that. So, the question of course is, how can we understand this? How can we figure out what the heck happened? Well, let's talk about the economy. What the heck is an economy to begin with? It's not that easy. So, I've asked a lot of people granted on Twitter, so you don't get the best responses. You do get a lot of communists though. Okay, so the economy, what is the economy? There's several ways of explaining the economy and these four statements are really explanations in themselves, but you can also combine them. Okay, so in one sense, it's all of us economizing. Each and every single individual trying to do as well as they can, satisfy as highly valued ones as possible, and of course, interacting and so forth with each other to do so. But we're really just trying to figure out how can we get the best life possible for myself, for my family, for my friends, and what have you. Another is engage in production. Why? Because if we produce, we're going to get more out of it because there is no magical money tree. We can't just pick the next generation iPhone from the tree outside our door. It doesn't exist there. There is no such tree. There is no nothing auto-magic about the world. And of course, there's entrepreneurship, as we know as Austrians, entrepreneurship is the driving force of the economy. It's what changes and reshapes the world and creates our tomorrow. That's how I usually want to think about entrepreneurship. It creates our tomorrow, which is a fantastic force to have on your side. Right? We can also think of the economy in terms of exchange. We're exchanging one thing for the other. Well, Marxist would say that, okay, so people like to exchange. Why does that matter? Because value is objective. So every exchange, we're indifferent anyway. Of course, we know that the reason we exchange is that we expect to be better off. In every exchange, value is created for the simple fact that I get something that I want more than I give up, and the same is true for the other party. So both people expect to be better off. That's why we exchange. Imagine a world population of some 8 billion people exchanging and no one trying to hinder them in doing that. There's a lot of value produced already there. Let's look at these four different types of descriptions of the economy and see what we can learn from this. So there we go. All of us economizing. Well, we know that human action is purposeful behavior. Mises teaches us this, right? All Austrians teach us this. So what is that we're actually doing when we're acting, when we're economizing? Well, we're choosing between ends to begin with. There are plenty of different things we could do. Plenty of different things that we value that we can do. You could do something other than be here today. You're not, which suggests to me that you figured this was a better use of your time than doing something else. You might be thinking of differently right now, but that's a different matter. Okay, so we're trying to figure out how to best pursue our ends and what ends to pursue. We also need to figure out how to attain those ends. How can we get the value out of the end that we're pursuing? There are different ways of doing this. It's not that easy. It's not that obvious. Okay, we also have to choose do we want to attain all of our ends right now or some of them tomorrow or maybe 10 years from now. So those of you who have kids, you probably plan a little longer into the future than next week. You might have a college savings fund or something like that, right? Across generations even. You're thinking of satisfying your wants and attaining your ends. Okay, so what we do then every day and all the time is to rank these ends and the means and try to get as much value as possible out of it. That's the economy. That's all of us. We're interacting of course doing this and we're learning. We're figuring out better and better ways of doing things and figuring out other things that we could do in other ways of doing them. Production. What is production? Well, the first statement might seem a little weird. Production takes time and then even weirder, namely that production precedes consumption. If you ask a Keynesian, this is mind boggling. They don't get it. And I've asked plenty of Keynesians, what do you mean production precedes consumption? And I would say something like, well, you can't eat a slice of bread before you actually bake it. And they go, what do you mean? Which is very odd to me, but that's actually true. So what they think is if you just give people money from the magical monetary, then customers having money means that they will just draw production out of producers. So you need money first and then you just get production automatically. Very strange. Well, in our lives, since we have ends that we want to pursue later on, we also engage in the savings. We don't consume everything right now. So we save. What does saving mean? Saving means that we invest in capital. This is still value that we have on hand that we invest in order to produce something in the future, maybe engage in longer production processes so that we can produce more outputs for the same inputs. Means we have to wait a little bit, but still might be worth it. We have this trade off over time. Of course, if we produce for others, well, that means that we can specialize. We can produce doing something that we're really good at, whether or not we like or want what we produce. But we're really good at it. And we can develop those skills and we can trade with others. And therefore we can gain a whole lot, because maybe I can produce something that you want a lot. I don't care for it much, but I'm good at it. Maybe I like doing it. Who knows. And then I can get a whole lot of purchasing power in return. Of course, there's entrepreneurship, which is my favorite topic. As an entrepreneurship professor, I sort of want you to not understand entrepreneurship a whole lot, so you can take my courses. But I'll tell you anyway. Entrepreneurship is speculation. It's really starting production right now in order to offer something later that people might want. You don't know if they want it. It's impossible to know. But you have a gut feeling, or maybe you have done a lot of research. You just know, or you think you know, you hope that you know that you're producing something that people are willing to pay for later on. What is later on? Well, it could be a week from a year from now, or it could be 10 years from now. So a regular new type of automobile takes five to 10 years from starting to design to actually having it in a dealership. Obviously, that is speculation, because who knows what people will want in terms of personal transportation in 2033? Well, I certainly don't, which is why I'm a professor. Okay, so entrepreneurship is also decentralized trial and error. You have all of these people who see all these opportunities and they pursue them when they think that they might be worth pursuing. When there is something that they think is going to be very valuable to other people so that they can produce it. Okay. Now, how do they just make this distinction? How do they decide this? Well, they start with thinking, huh, this I think will be very valuable to people. How valuable? Well, I think they will be willing to pay this much for it, so I can get this revenue in a year from now. And then based off of that decision, you decide, hmm, how much can I buy inputs for? How much can I pay my employees without suffering a loss? So you start with the value and then you select the costs. And by doing that, competing with others, you determine the prices of the factors of production, of all these inputs, you determine wages for people and so forth. Of course, entrepreneurs are also those who figure out their divisionaries. They think of new ways of satisfying people and new things that people might like, new ways of or even new values that the consumers don't even know they have yet. They think of those things too and they bet on producing it. So exchange. What is exchange for? Well, we exchange every day, like we exchange our labor to get a wage. So exchange for purchasing power. That's the most common activity in the market for most people, right? You have a job, but you have the job not because you like going there. You have a job not because you enjoy working necessarily, but because you get an income. And that income means you have purchasing power to buy stuff that others have produced. Now this also means, of course, that entrepreneurs who fail are not a burden on society really because entrepreneurs who fail, they still hire people. They still pay their bills until they figure out that they can't sell what they thought they were going to sell. That still means they create jobs. So don't fall into that trap that a lot of people tend to fall into saying that, well, if we could only plan the economy better, as we didn't have all these failures, we would have more jobs. No, we wouldn't, because people still make money in businesses that fail later. They might not have a job as long, but that's a different matter, right? Okay, so businesses, they create new stuff and they make use of all the resources out there. They try to maximize the outcome based on the cost of inputs. Now, if you take all of these four things together, these four different descriptions of the economy, what do you get? You get the gang sign of economists, supply and demand graph, or what do you get? No, you don't. What you get, all of this really hints at that what we're talking about is a process. Nowhere at no point in time do they say that, well, this is the goal of the process. No. This is the outcome that we need to get to. No, because it's an open-ended process. We create future values through production. We don't discover the value that was already there, or try to recreate it. We create new value, create more value. Entrepreneurs engage in a decentralized decision-making on what value might be, what means it's referred to as a division of intellectual labor. And of course, if it is a process and it doesn't actually have a goal, doesn't have an outcome, you can't really plan it either. If it has an outcome, if it is a process that we know that this is what we need to produce, and we're all on the same page, then of course we can't plan it. We can maximize it and so forth. But that's a factor, not a process. So everything we know about the economy really is that it is necessary. It's a process. A lot of people acting, interacting, discovering stuff, producing things, figuring stuff out to what end, to all their individual values, to all their individual well-beings, not to some common end, except for just satisfaction perhaps. But that means different for different people. So let's look at the distinction. The factory is very easy. If we think of the economy as a factory, we already have a production process. We already have the defined inputs. We already know the outputs that we're going to produce. We can just put a manager there. It's easy to manage to tweak a little bit and make sure that we cut the fat and have less waste in the process. Easy. The problem though is that it is a process and the process is hard to understand. A snapshot of it, like that, it doesn't help. It doesn't give us a process. Even if we have a snapshot before and a snapshot after something happened, we still don't have the process. Is it a straight line from before to after, or is it a winding road? Well that matters, right? It said those are different explanations, a different understanding of what is going on. Typically if we study the economy using data, we look at before and after, and then we just assume that we know what happened because we just take the shortest route. Shortest route is not usually not what happens. And a lot of smart people make the mistake. They jump to conclusions. They think that they know what's going to happen because it's so obvious. Well the problem is that if you go through it step by step, it's different. You're going to end up in a very different place than if you jump to conclusions. So we need what Mises referred to as step by step analysis or step by step thinking. Okay. Now what is the step by step method? Well there's a quote by Mises there, but it really is reasoning through what would happen step by step as you might imagine. It's not it's not just saying oh before and after looking at the aggregate structure, the aggregate statistic, but looking at wait a minute, what does this mean for individuals? How do individuals react to this change? So I mentioned on previous slide that John Stuart Mill and David Hume made this mistake. They jumped to conclusions. So let's look at the mistakes they made and this is Mises talks about this in terms of the neutrality of money. Rothbard is very clear in many condominium states talking about this as well, but let's look at how they screwed up. So imagine that tonight the MMT ferry will double everybody's cash balances. So whatever you have in your checking account tomorrow morning when you wake up it's a double. Whatever you have in your wallet tomorrow morning it's double. Whatever you have in your mattress it's a double. All the Bitcoin and gold no. Just the dollars. Okay just the dollars. What will happen? Will all prices double? What do you say? That's a lot of answers to a simple question. Okay my answer is hell no. Because the problem here is that it's easy to jump to conclusions. Prices are this. One day while we double everybody's money well the prices are going to be double as well. That's what Hume and Mill, the mistakes that they made, that's not what happens. Because if you think about it prices are not auto magic, prices come out of people's actions and interactions. So what is going to happen tomorrow when everybody wakes up with more money in their bank accounts and in their pockets? Are they going to buy exactly the same things as before? No because you're going to have some people who might not have had enough for a beautiful steak but they go to the grocery store to pick up hot dogs or something and they say wait a minute I have a lot of money in my pocket. I can afford steak. So will they buy steak? The next guy too and the third guy. Of course with the carnivore movement everybody's going for steak. But that means that no one is really buying the hot dogs right? Everybody's buying the steak. So the grocer what is he going to do? Well he's going to place an order for more steak to begin with. He's going to probably put the hot dogs on sale because no one is buying the damn hot dogs right? And then maybe if it's smart or the other grocer opens later he just glances at the other guy and says hmm I'll just raise the price of steak because then I can make more money. Well look at that. More money. Well the price of steak went up, price of hot dogs went down. How did that happen? What about over time? Well people have changed their behavior already right? They've changed their preferences. They behave differently. So our price is going to end up being exactly double what they were. Yeah sure if no behavior is changed and no ones are changed no preferences are changed. But we already changed those. So going through this step by step how would people actually react to this thing? It means that we get a very different outcome. Prices will not double. The price structure will be different and actually the price structure will be screwed up because now someone created more money. Now that's a problem right? Now if the economy is actually a process as we believe in here I think most of us. Is there any Keynes down here? No? Well what are the implications for economics? Well first of all we can't take the snapshots to generate theory. We can't explain what is going on in the economy by just looking before and after. We need to look at the actual path and go through the logic. It also means that we need theory first. We need theory to understand what the heck the data actually mean. We can't just look at the statistics and say oh yeah yeah let's just draw a line between these two and then that's the slope and then that's what happened. Now we need theory the understanding to tell us what actually was going on and why this other point is higher or lower or whatever it might be. Okay empirical data in fact can only help us get a greater understanding deeper understanding of the example the specific example or specific event in history but they can't really tell us anything about the theory because the theory is human behavior it's nothing else which means also that we can't really predict we can walk through step by step but do we know how many people with double the cash tomorrow will buy steak? No there's no way of knowing so we can't really say we can't really predict exactly what's going to happen. We can predict that people will change their behavior yes and in a certain situation we can predict that more people will probably do this rather than that and whatever else but nothing else. So in here of course Austrian economics is very different from many other economics which is pretty much empirical nowadays. Okay so what does this mean then for understanding the economy because I'm guessing most of you are not ivory tower economists like myself so you have other interests fine well what can we say about the economy well we know that it's an unplanned order it doesn't matter if it was in the Soviet Union or if it was in some hypothetical free market country it's still an unplanned order you can try to plan it but that just means you're going to be further away from where people would actually want to be right it's a decentralized process because you have all this decision making whether or not you centrally plan what people can buy they're still going to make their decisions themselves what you can do is sort of some matrix kind of thing and make people into batteries and feed them what that's a perfectly planned economy but let's not go there and I mean that let's not go there okay so the driving force of change is production trying to find value is production trying to figure out where people might be better off it's entrepreneurship without entrepreneurship the economy stalls the economy stops and the economy dies we also know that the economy cannot be maximized there is no such thing you can't maximize the process you can remove barriers and obstacles from the process but you can't maximize the outcome that doesn't even mean anything it's like maximizing the flow of a river what does that even mean what you can do if something is disrupting the river and this say it's a big rock or something like that you remove the rock but if the river wants to go somewhere the river will go there it's that easy so we know a whole lot about the economy we just need to explain it to people and I tried in what you might refer to as Paris Little Red Book if you get that joke no okay because unfortunately economic understanding is a very scarce good and I've I've realized this both online and in so-called meat space that people really don't get it and they would rather trust authority not mine but other people's authority on how it works and plan the whole thing and I think with a little bit of economic literacy just understanding that there's more of an organism than a system or a factory more of a process than a factory people will realize that well any regulation has a lot of problems comes at a huge cost unintended consequences and it's going to disrupt the river it keeps throwing rocks in the river it's going to take another path and it's probably going to destroy some things while it's going there so I think just a little bit of economic literacy means that we're going to take a big step forward and be able to change the world thanks