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Austrian Economics Triumphs

Jeff Deist on the Powerful Deductive Social Science of Rothbard, Mises, Hayek and Böhm-Bawerk

It took less than a month for the Biden administration to start dropping bombs on the Middle East. Once again, the strikes are in Syria, in response to an alleged attack on US troops in Iraq. Now, both a Republican and Democratic President have ignored the will of the Iraqi people, who voted last year to expel all foreign troops from their country. So much for spreading democracy abroad…

What recourse does the private Iraqi or U.S. citizen have against a state power bent on intervening in distant lands? The radical libertarian must be content to drop ideas — not bombs. Our peaceful pact, the non-aggression principle, prevents us from using coercion, even when the State egregiously violates the Constitution and international law.

And so we are left with ideas. Fortunately, in the long run, ideas and memes may be more powerful than bombs and fighter planes.

Jeff Deist — President of the Mises Institute — joined me to close out this week’s celebration of #RothbardWeek, which began on the late great libertarian scholar’s birthday on Monday.

We discussed the things that make for wealth and peace, and those things that thwart them.

Transcript

A Tale of Two Sciences: Austrian vs. Mainstream Economics

Bob Zadek: I have a confession to make. I am a closet economist, if you will. If I hadn’t chosen the career path that I have, I probably would have enjoyed studying economics. But I was doomed in my first year at a somewhat mediocre university, way back in the day. I took economics because I was in the business school and it was a required course. The textbook was the standard at the time — Paul Samuelson’s book — and it was big and fat and heavy and full of graphs. Man, was it boring. I was turned off immediately, and that was it for me and economics.

It wasn’t until much later in life. When I found my political home in libertarianism that economics became more than the dreary, data-filled mind-numbing textbook written by Paul Samuelson. I discovered Austrian economics, and I said to myself, “Why wasn’t I taught this?”

This is more a story about Austrian economics, than it is about the career choices that I have made. Others with whom I talk about current affairs have very little understanding of this entire important school of thought called Austrian economics. When one thinks of Austrian economics, you are driven to the leading Austrian economists, those who founded the discipline. One of the founders and icons of this school of economics is Ludwig von Mises. Today in Auburn, Alabama, there is the Ludwig von Mises Institute.

I decided to invite the president of the Mises Institute, Jeff Deist to analyze what is causing us so much difficulty, and how an Austrian economist would approach the problem. Most importantly, we will analyze how they would solve it, and how that solution compares with the solution being imposed upon us by our governments: state, local and federal.

I’m delighted to welcome to the show this morning, Jeff Deist — president of the Mises Institute.

Jeff Deist: Well, thanks for having me.

You bring up that Samuelson textbook and a lot of Americans of a certain age — people over 40 or 50, may have experienced that same text in their undergraduate econ. It went through about 12 editions. By the way, it made Samuelson an enormously wealthy man.He was the gentleman who suggested that by the late 1980s or so, the Soviet Union would be a more productive economy than the United States. So hopefully, we’ve got a new generation of young people coming up who are not reading Samuelson because he was dead wrong on that call.

Bob Zadek: It was the late 1980s, in a speech that he gave, but he said it with a straight face. He might have believed he was right, which is astonishing for a person with his alleged credentials.

But we don’t want to waste our time talking about Paul Samuelson. We want to talk about Austrian economics — i.e., Mises, Murray Rothbard (a name we will come to in a moment) — and how their approach to world and national affairs is different than the approach taken by those who govern us today.

Let’s go back a step to a few minor but important building blocks. Tell us in non-technical terms, what is Austrian economics?

Jeff Deist: Austrian is a term of convenience, because the leading lights of the Austrian movement happened to come out of Vienna in the late 1800s and early 1900s.

I would just say, it is ordinary economics. It’s economics as we knew it, and understood it properly as a social science. When Keynes came along, from the 1930s, following Marx, our perspective on what economics was started to change radically.

Up until less than 100 years ago, we understood that economics is a social science. When I hear you mention your undergraduate experience, I think it’s such a shame that so many young people come up not understanding that economics is vital. It’s part of everyday life, it’s part of understanding the human condition — human action, the human psyche. It’s not just about finances, or how economies grow wealthy. It’s not just about material things. It’s about something much broader than that.

“[Economics is] part of everyday life, it’s part of understanding the human condition — human action, the human psyche. It’s not just about finances, or how economies grow wealthy. It’s about something much broader than that.”

It’s really about everything we do in the context of the world around us, and scarcity and trade offs.

More importantly, if we think about economics as a social science, as opposed to a physical science, like chemistry, or physics, then it is certainly my firm belief that social science has a different method. It has a different approach to helping us understand the world. And so in the physical sciences, we have what is loosely termed the scientific method, where you observe some things in life –let’s say if you’re a botanist, and you say, “Qell, this seems to happen occasionally. So I’ll develop a hypothesis. And then I’ll go out and test that hypothesis over and over again, and see if I might be onto something.”

Even with this, the theory of relativity or gravity could be disproven. I don’t think we’re lucky. In the physical sciences, the science is never settled in that sense. But in social sciences, we’re talking about human beings and what they do. That’s what economics is — it’s the stuff of life, it’s about human beings, and the choices and trade offs we make.

It’s very strongly interrelated to psychology and sociology and anthropology and all kinds of other fields. We can’t just neatly divvy it up. When we look at human beings, we say human beings are not the same as an apple in physics. They’re not atoms or molecules. Human beings are volitional creatures, they have minds. They have emotions. They have desires. They have rational and sometimes irrational beliefs and attitudes and opinions. So we can’t study them the same way we study the physical world; we have to use a different method. We have to start with certain principles — certain axioms about human action, certain things we know are true, simply axiomatically, and that from that we can work backwards deductively, and figure out what’s going on.

This is not the way that the physical sciences work, but starting with Keynes in the 1930s and developing really strongly throughout the 20th century, we started to treat economics like physics and math, we started to say, “Well, we need to have all kinds of formulas. And we need to have a lot of empirical testing, we need to build out these huge models in spreadsheets. And we need to simply look back at economic data, what people have done in the past,” which is really just another word for history.

“We need to look back at economic data, and use that to model out and predict the future and we’ve seen time and time again.”

Samuelson predicted dead wrong on the Soviet Union. Alan Greenspan and others predicted dead wrong with the housing crisis of 2008. These mathematical models, which are unfortunately the mainstay of many economists today, haven’t served us well.

Austrian economics is about getting back to basics and understanding human action deductively. What do I mean by deductively? What do I mean by axiomatically?

Here’s just an example: We say that human beings act, because if they just stood there on a plot of Earth, they would soon starve to death or overheat or freeze or die of thirst, whatever it might be. Humans go out and act — that’s pretty obvious to people.

But from that we can derive things like “humans prefer things sooner, rather than later.” Okay, that seems pretty commonsensical. But do we have to go prove that? In other words, would you rather have your dream home in Coronado at age 40 or would you rather have it at age 90?

Most people would say 40, because we understand that the human condition and human lifespans are finite. We prefer things now to tomorrow. That’s why people will go out and get a loan, and borrow money and pay interest to have that fancy new car today, and make $800 payments every month, instead of putting out a check for $45,000t To buy it outright.

Economics like other sciences is, it’s not prescriptive, it’s not normative or ethical per se. It just observes things, and hopefully, helps us understand the world better. But, but it’s very important, I think, to understand economics as a social science is about humans — these social animals. It is not the same as physics or chemistry or math, but it has developed what we call “math envy,” where economists mostly study at the PhD level, a very high level math, a very high level statistics. They tried to use this and go out and understand economics through math. And it hasn’t worked out.

Bob Zadek: I recently saw a movie, which I think explains what you just said, perfectly: The Big Short, fabulous movie. The protagonist in The Big Short who made billions didn’t rely upon graphs or charts. He went out into the field, interviewed the homeowners, looked at these tracts of empty houses where people own three and four of them and they were buying it with zero-down mortgages, and he made all the money.

All of those who are sitting with graphs and charts were left holding the bag. Austrian economics focuses on observable behavior, predictable behavior, irrefutable behavior, for the most part, as opposed to all of these economic, more formulaic driven economist who said, “It shouldn’t have happened according to our graphs.”

The Big Short could have been entitled, Austrian Economics Triumphs.

Jeff Deist: The Big Short takes us to our second big difference between what Austrian economics focuses on and what a lot of professors today focus on. That is, how to think about money, and how money comes into society and how central banks work. We think about greed, mal-investment, and the errors that people in the housing markets and commercial banks have made in lending. We thought about the errors that Wall Street had made in cutting up all these trances and derivatives wrapped around mortgages, which were assumed to be subprime, you know, non performing mortgages. What The Big Short didn’t really delve into is what’s underlying it all — why did this mania happen? I would argue that it happened in large part because of central banks.

What Would Mises Say? An Austrian Perspective on Stimulus

Bob Zadek: In your earlier life, you were active in Ron Paul’s presidential campaign. That was an important theme of his campaign. To some degree, Rand Paul, his son in the Senate, will raise that same issue of the very existence of central banks as being hardly part of the solution, but most assuredly part of the problems we have today.

Many economists have written about the supply of money and the management of interest rates, as opposed to letting interest rates find their equilibrium in the marketplace. For some reason, those who run monetary affairs are scared to death of letting interest rates find their true level the way stocks do, but that’s for another show.

In all that’s going on in public affairs today in Washington, we have an active debate on the minimum wage, on the $1.9 trillion with a T stimulus. Let’s talk about injecting steroids into somebody with cancer.

If you had first year students, is there one example you would pick as a poster child for how an Austrian economist would have taken a different approach to either the Trump administration or what we know about the Biden administration?

Jeff Deist: I might look back at the big stimulus bill passed last March or April, when Coronavirus was just unrolling. It was called the CARES Act — $2.7 trillion of spending. That was purely on the fiscal side, meaning Congress and the Treasury spending that money in the economy, as opposed to the monetary policy side.

I would simply say to students that we had this Coronavirus issue come along from governments — not only in the US, but around the world — they mandated business and school shutdowns and told people to stay home and do this. Now, obviously, that puts a huge brake on economic action. People are out at work, they aren’t dining out, they aren’t flying, they’re not doing all kinds of things. We would say that that is deflationary in nature.

Government wants to help people by giving them money. As a logistical matter, they botched getting those checks out last year. It wants to help businesses by giving them loans for payroll and this sort of thing.

So they’re going to spend $2.7 trillion, but they’re not going to tax that from us. That would seem circuitous and counterproductive, right? So we take it from us out of the economy and give it right back. I think a lot of people would understand that. They say, “Well, where are they going to get it?”

Well, they’re not going to get it, they’re going to just produce it at the Treasury level. For simplicity’s sake, I would say that we’re going to print the money. That’s not exactly what happens — it’s mostly digital.

Here’s the problem, Bob: Wherever this new money enters the economy, whether peopleor businesses or fat cat special interest, get the checks — none of that produces none of that creates any new goods or services, per se.

We’re left with this the same amount of goods and services in society that we had the day before Congress spent this money. But now we’ve got all this new money. Are we richer? Wealthier? Are we better off as a society? Well, of course, we’re not. Nothing new was produced. Some people are going to get more or less of that money, and they’re going to benefit in sort of a political sense. Of course, the majority of the recipients of those funds are the special interests — that’s just politics.

Money, per se, doesn’t make a society or an economy richer. What makes it richer is more goods and services and what produces more goods and services is getting more productive and having better technology and being innovative and having a profit that allows us to save up some money and invest in better machinery, better equipment, more innovation.

If you look at a company like Tesla with Elon Musk, a lot of investors have saved up money and put money into Tesla. This goes on for quite a while. Tesla’s only had a profit for a few quarters of its existence, even though it’s been around for quite a while now. Sometimes this involves a long time and a lot of risk. But something might come out of Tesla — that’s different than simply producing money and giving it to everybody.

It’s concerning that we’ve reached a point where we’ve just lost sight of common sense. We think that economics is just something that can be commanded by government, that government can just will, prosperity or that central banks can will prosperity into existence through a big stimulus bill.

“We think that economics is just something that can be commanded by government, that government can just will, prosperity or that central banks can will prosperity into existence through a big stimulus bill.”

Most people know intuitively that just isn’t true.

Growth Mindset vs. Redistribution Mindset

Bob Zadek

Most of the economic policy on the left — their approaches to redistribute wealth, to take it from a and give it to be that and that — doesn’t discuss the creation of the wealth. It starts with the assumption that unlimited wealth is already here and our task is just to figure out who gets the goodies — not who creates the goodies.It is assumed to having been already created, as if by magic.

The CARES Act, and the stimulus package just moves existing wealth around so that there is no anger.

I’ll ask you to expand upon the creation of wealth — not just making people richer, but creating new drugs, new devices, air conditioning, iPhones, electric powered cars. Creating items of value that make everybody better off. That’s I think what you mean by creating wealth, not the narrow definition of having 401(k)’s be larger, even though that’s a byproduct.

Jeff Deist

There’s an absolute mythology surrounding the wealthy in the West today. The idea they are sitting on piles of money and sort of hoarding it in unproductive ways, is just simply factually false.

More importantly, we have to understand that materialism is not simply having a fancy cars — materialism is something we take for granted. When you walk out your front door in the West, all the energy that’s around you — the physical buildings, the abode where you live, the hot and cold running water, the variety of food available, the air conditioning, the heat, the vehicles, the roads — this doesn’t just materialize by itself.

It takes the spontaneous effort of, you know, a lot of people acting cooperatively to produce all this. It could go away. There are places in the world where you can go today to see the poverty that happens when you don’t have dynamic or innovative capitalism in place.

We have to focus first and foremost on productivity and how this material wealth arises. I would argue that it arises through capital accumulation and savings and investment. From my perspective, the egalitarian left — which is focused endlessly on inequality and redistribution — really misses the point. We ought to be focused on making the wealthiest society possible so that even the people at the bottom — the poorest 10%, are far better off. To the extent that’s that’s certainly the case in America today, the bottom 10% of Americans are far better off than a lot of people in the world.

Bob Zadek

And they are better off because they have more material wealth. The quality of their life is incidentally better.

Don Boudreaux, a wonderful economist at the Mercatus Institute, has written often and with great authority and passion, explaining that the lowest 10 or 20% of Americans today enjoy better quality of life than Cornelius Vanderbilt. or Andrew Carnegie. Carnegie or Vanderbilt never had anything like the material comfort that the lowest 20% of our society has today. That’s the byproduct of a active free market.

The left spends all of their energy on wealth distribution is if like manna from heaven, it just drops down as a gift of God — hardly.

That is what one learns when one studies Austrian economics. One learns that you cannot predict economic activity, except acknowledging that human beings act in their self interest as they try to improve their lot. They are to some degree, a bit generous. Each one of us responds individually. It is that human response that one uses to predict economic activity

Those who treat economics not as a social science but as a “science science” forget that correlation is not causation. They see a couple of variables that seem to act in concert, and they assume those variables can predict the future. That’s the fallacy they make — they ignore that we’re all human beings. Is that reasonably accurate or is that too simplistic?

Jeff Deist: I think that’s reasonably accurate. I think most economists today don’t really understand much about economic history. There are a lot of brilliant young people who go through Ph.D. Economics programs, or maybe they go to business schools at places like Wharton, and they come out with a lot of superb number crunching skills. But they don’t come out with a sense of history. They don’t really understand what came before. They don’t understand some of the hyperinflationary events of the past. They don’t understand much of the workings of collectivist societies from history. They don’t understand much of money creation or monetary policy. A lot of people who are under a certain age have really never seen a bear market.

We have brilliant young people who lack historical knowledge. One of the big failings of the profession of economics is this unwillingness to teach the past, because who has time for that when you’re trying to learn graduate level stats all day? More importantly, I think it’s a failure of imagination. We have gotten into a state in America where we simply have gotten so fat and happy, we’ve forgotten what made this country wealthy to begin with.

“We have gotten into a state in America where we simply have gotten so fat and happy, we’ve forgotten what made this country wealthy to begin with.”

The 20th century, despite a lot of depredations by government and despite what I would consider the disastrous New Deal and Great Society entitlement programs, and despite what I would consider some disastrous foreign policy, this country got really wealthy. If we think that that is just baked into the cake, and and will continue no matter what we do, that is very dangerous thinking.

A Lesson on Innovation from the COVID-19 Era

Bob Zadek

I think that economists and professors will find something in last year’s economic activity that proves so many of their points. We had the onset of COVID. We were in a pickle and didn’t quite know what to do. We didn’t know how to get out of it and were experimenting with masks, social distancing, etc., but we didn’t have a game plan. Tthe Trump administration went to the only part of the society that makes sense, the private sector. He said, “here is an order for $100 billion worth of stuff. Make a vaccine.” It is an underreported story, but once the order was placed by the Trump administration, it seeded the activity for the private sector, unfettered by government. We wanted a vaccine, we wanted to cure people. That’s our requirement. Here’s the money do it.

People will be talking about how it should have taken four years but it took nine months. When all else fails and you’re up against it, what do you do? You turn to the free market, because that will bail us out. That happened in spades. Not nearly enough has been written about how the free market got us out of that pickle.

Jeff Deist

Medical innovation is something that is absolutely remarkable. People who are elderly today remember we didn’t have the MRI, we didn’t have all the CAT scans, we didn’t have all the incredible types of surgical procedures people have today. People had big scars. Now we have all kinds of diagnostic tools. There’s been an absolute revolution in medicine. This is something we tend to think is just baked in, that it’s in the air around us.

We tend to not be thankful for all these things that happened to us. If you’re in a car accident today and you end up in the ER in a hospital, the tools available to that doctor are radically different than those available during your grandfather’s time. The important question we have to ask ourselves every day is, “What caused this? How can we encourage and incentivize this? How can we avoid falling into a state where we are going backwards in medicine.”

I would argue that in a lot of systems with single payer health care with national health services, the innovation is just not there.

Bob Zadek

Innovation is exactly the right word. No one ever even uses the word innovation in the public sector. They don’t sell innovation — they sell the opposite, because they do all command and control from the top down.

The Things Which Make For Peace

Now Jeff, the founding principles of Austrian economics and the free market in general, and the principles your institute promotes and which you promote in your writings, is a strong stance on foreign policy. One might ask, what does foreign policy have to do with Austrian economics? I would guess not much, but it is part of a more important principle of freedom and natural rights. Tell us about your clear position on foreign policy. What’s the founding principle of that governs the Mises Institute’s approach to foreign policy?

Jeff Deist

We’re against interventionism in foreign affairs as much as we are against interventionism in the domestic economy, for many of the same reasons. There are unintended consequences and blowback frequently. If you go back to the founding era of this country, there wasn’t this huge distinction at the congressional level between foreign and domestic policy. There wasn’t a huge idea that presidents are in charge of Foreign Affairs, and maybe the State Department and diplomats. That’s a 20th-century mentality.

This bright line distinction between foreign and economic policy is misguided. First and foremost, let’s remember that every dollar we spend affects things. Every dollar that’s taken in taxes and applied to foreign policy, of course, is $1, that is not spent in in our domestic economy are in some more productive use. We can’t make these nice distinctions. More importantly, I think the idea that governments can remake other countries that we can decide better than them who ought to be their political leader, and in some cases we can invade them and impose on them is very dangerous thinking.

We all understand the natural right of self defense as individuals, and I think it’s possible to extrapolate that to groups or nations or countries and say, if some foreign power was actively threatening us or attacking us, we have the moral right to respond or to prevent it.

That’s a separate question. When it comes to foreign policy in the more utopian sense that we need to go turn Afghanistan into something it’s never been in its many thousands of years of history. Or that we need to take three separate ethnic groups in Iraq that Saddam Hussein had barely cobbled together at peace, and blow that up and and start over with our own coalition government, using taxpayer dollars as well as the lives and limbs and psychological well-being of our young people who are in the armed forces. That strikes me not only as crazy and wrong, but also economically disastrous. We’re not thinking in terms of what causes wealth and what makes society productive.

Bob Zadek: The temptation might have been to discuss and to identify your approach as being isolationist. But you used the word “intervention,” and that choice of words by you is very important. I want to just point it out for emphasis to our audience. The difference is that Jeff is proposing the opposite of isolation. He promotes active economic engagement between American companies and American individuals and foreign trading partners. Isolation means we don’t talk to them, we don’t trade with them, we don’t have any contact with them. We build a theoretical wall up to the skies around our country. We trade with everybody who will trade with us.

That’s the opposite of isolationism. To be opposed to intervention means we don’t intervene in somebody else’s affairs. They come to us as they are. If we can engage in a mutually beneficial exchange, we will trade with them. I may have read it in something that Mises published, but if not, I’ll just mention it anyway. The Austrian economics analysis of Foreign Affairs is that countries do not harm their customers or their suppliers all that much. If you are trading with somebody and buying their stuff, they are less likely to harm you. That’s true in the marketplace and it’s true in foreign affairs. Actually, interestingly enough, it ties in directly the Austrian economic, free market, mutually beneficial exchange approach to world affairs. It ties it in with foreign policy.

Jeff Deist: I don’t think it’s a stretch at all. The notion that Americans are going to be isolated is just absurd. We have free trade with the whole world. You can go anywhere on earth. People know what Coca Cola is. People know what Levi’s jeans are. People know what an Apple iPhone is. We are not isolated in any way. What isolates us is belligerent foreign policy. That’s what makes people in Canada critical of the United States, where the emphasis should be on on trade.

There’s no better form of foreign policy than trade because people want Coca Cola all over the world and we sell it to them. That’s a bridge towards peace and harmony because people people don’t go to war with their customers and people don’t go to war with their suppliers. That’s not always true. But that’s a general rule.That really ought to be our our number one source of diplomacy is just the American marketplace.

“[P]eople people don’t go to war with their customers”

The Nature of Wealth

Bob Zadek: Another concept that you mentioned was that trade and free markets increase wealth. Progressives might cringe a bitat that. They take the word wealth and they expand their imagination. It becomes a McMansion, a bigger house, an ostentatious car, big cigars. It this negative vision of the word “wealth.”

Wealth means having drugs to make you better if you’re ill. Wealth means living in a way that you’re comfortable, you’re not too cold, you’re not too hot. You have food that is healthy, and inexpensive, and good for you. You have the goods and services that you need at a price generally you can afford and they always get better. When we talk about increasing wealth, the concept itself is not anything like ostentation or self indulgence, it is simply that wealth means making the world a better place.

Now, Jeff, the Mises Institute, there’s so much good work, tell our friends out there, how they can follow your institute? And what are some of the wonderful products that are available to those people with a mouse click to the Mises Institute?

Jeff Deist: Mises.org. We have a lifetime’s worth of reading there and as free books, free ebooks, free downloads. If you go to just go to our website and type in “Economics in One Lesson,” you can sign up to get for free a box of books by Henry Hazlitt — this great primer of economics. “Economics in One Lesson,” is perhaps the single best introductory book ever written. Very short, very easy, very discrete little chapters. If you don’t know a lot about economics, but would like to at least begin to develop your knowledge and you’re looking for something that’s not going to overwhelm or bore them, I would suggest that.

Follow us on Twitter, and on Facebook and consume as much or as little as you want. If you just want to occasionally click an article, that’s fine.

Bob Zadek: Jeff, thank you so much for sharing your knowledge and your insights — helping us understand a little better what’s going on in the world and continue the good work and VCs.

Jeff Deist: Well, thank you. This was a blast.

Bob Zadek: Thanks a lot, Jeff. Have a good day and have a good day to my friends out there. Enjoy the rest of the weekend.

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http://bobzadek.com • host of The Bob Zadek Show on 860AM – The Answer.

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