An Austrian Critique of Mainstream Economics | Walter Block

okay I'm ready to to begin the topic that I've been assigned for this period when they read it off to you it is an Austrian qatif of mainstream economics so I'm going to be talking about an Austrian critique of mainstream economists I would say if we had a Venn diagram and here's Austrian economics and here is call it the mainstream or the neoclassical economists that there is a an overlap we Austrians have certain views that are unique to us they have certain views that they unique to them and then there's this overlap in between the two and I'll be mainly speaking of the this part will we disagree with them but let me first say that there are areas of agreement for example most economists whether Austrian or mainstream favor free trade most economists whether mainstream or Austrian I think that the minimum wage law will create unemployment for unskilled workers I think that rent control will take resources away from residential rental units and make it worse for tenants so there is a an overlap a great overlap there's even an overlap in terms of economics some people radical radical Austrians not me I'm a moderate that's why they call me Walter moderate block jeff herb in Iran this one is an extremist he says that there's no use in Austrian economics for statistics or econometrics and in my view if what you're interested in is an empirical issue well then why not for example the elasticity of shoes we know that there's a downward sloping demand curve for shoes and if we raise the price of shoes by 10 percent we know that the fewer shoes will be purchased but how many fewer 1% 2% 20% what what's the elasticity of the demand curve for shoes and we Austrians really have no dog in that fight we're happy to go along with the mainstream people and say well if you want to find that out the way to do it is through Econometrica source patiska economics there's nothing wrong with that so we're not against math per se period but we do have great reservations about it because a lot of math and economics it assumes a smooth curves because if you want to get I don't know a slope of a curve you can only whatever it is a price and quantity and let's say some sort of demand curve and you want to pick the slope of it you have to take the slope and you can only get a slope if the curve is continuous and if you want to differentiate or integrate a curve it has to be a continuous curve but we Austrians believe that there is no smooth curves out there that depict reality because economics discusses human action and human action is discrete so you don't get curves like that you get some sort of jagged lines in that regard and therefore we have great suspicion of it for example let me give you an example of that here is an average cost curve and average cost curve quantitate price and the mainstream think that the best place the B is at the bottom of the average cost curve and if you have a downward sloping demand curve which means you're not in perfect competition well then the demand curve has got to be tangent to the to the average cost curve at an inefficient point everyone following this ok but Murray Rothbard in his man economy in the state says look that this whole thing depends upon smooth curves and what you're doing is you're letting the mathematical tail wag the economics dog or is it should be the opposite the economics is more important the math is just the a handmaiden of the economics for economists to mathematicians fine let the math you know Matthew Bareilles for mathematicians but not for us so what Murray does is he draws the curve like this and then he says look here's an average cost curve there's quantity there's price and we can be at the bottom of the average cost curve even with a downward sloping demand curve and and the whole reason that you're not is because of the smooth curved assumption so that's sort of completely backwards so that would be just one example of math and economics where we Austrians disagree with the mainstream people those of you who are going to graduate school in economics especially in the u.s. not so much in Europe where they're more Austrian but in the US it's mainly math I had though some graduate student or student who graduated from Loyola went off to graduate school and took one look at the Micro text and it was all math and she didn't want into math for five years so she quit I wonder about that but that's a whole other story okay so that's one area where we disagree and here I would say that getting back to this diagram I'm going to be going over many many areas where the Austrians disagree with the mainstream and I'm going to take the Austrian point of view I'm an Austrian economist and I'll be taking the Austrian point against the mainstream okay I've got about 15 things like this on my list I don't know how far I'll get through but I'll just keep pushing until we come to the end of the period okay another one is this thing called the synthetic a priori what's the synthetic a priori a synthetic a priori statement is a statement that's a particularly necessarily true and yet has something to do with the real world and this is one of the sticking points for me when I first was introduced to Austrian economics I was introduced to it by Murray Rothbard just when I was finishing up my PhD at Columbia which was a logical positivists kind of a place a mainstream place if ever there was one my main mentor was Gary Becker Nobel Prize winner and I was a logical positivist and I couldn't understand how that could possibly be it seemed like magical it seemed cultish it seemed weird it seemed ridiculous that there were actual statements that have to do with the real world and yet we know them absolutely for sure and we don't have to test them we known just by the logic of them the the way the mainstream sees this is there are two kinds of things and the two shall never meet one is analytic or two otology or a priori two plus two is four the Pythagorean theorem all bachelors are unmarried men things like that which are necessarily true but they don't impact the world they're more how we use language that's sort of a thing and on the other hand there are empirical statements that do impact the world and do describe the world and do explain the world and help us understand the world for example it's sunny outside or it's nice and cool in here but it's very hot outside or there about 50 people in the room these are empirical statements which are not necessarily true you have to test them to go out and look and see if they're right and they have to be falsifiable we have to know what it would mean for them not to be true and never the twain shall meet so that there are analytic statements that are necessarily true that don't impact the world and then there are empirical statements a posteriori statements that do impact the world that do describe the world that help us understand and explain the world but we have to test them and where do you get a statement that has both well we Austrians not me originally but Marvy rothbard hans Hoppe other austrians have come up with a series of them for example if I trade you this pen from my watch it must mean that I value the pen more than the watch at least in anticipation right now and it must mean that you value depend more than the watch more than the pen necessarily true why else would you do the trade now you might think that if you make the train I'll give you an A in the course who knows or you might think if you make the trade I'll be your best friend I don't know why you're doing it all I know is there's something about this watch you like more than pen because you're giving up the pen to get the watch and there's something about this pen that I like more than the watch are the ones I wouldn't give it up this is necessarily true I got into a big debate with what was his name from George Mason the guy that wrote about the irrationality of democracy Bryan Caplan got into a big debate on this and he wouldn't even concede this that this is necessarily true he kept coming up well maybe people are lying or something like that it's hard to deal with these people I used to be one so I can sort of understand but they are they're fixed it can't be and now I'm going to read off a whole bunch of other statements that are synthetic a priori and I say that this distinguishes Austrians from the mainstream because they don't cotton to this they think it's cultish it's religious and they dismiss us as religious cultists okay so one is the gain from trade the opposite ranking of two goods there's a tendency for profits to be zero a tendency whenever you say there's a tendency you can't falsify it you can't falsify it because I say there's a tendency for profits to fall to zero and right now profits aren't zero so I'm a positive some a negative some are zero well that doesn't refute the fact that there's a tendency and yet we know there's a tendency and there's also a tendency for profits in all industries to be the same the same zero but at least the same because if they're high here and low here the resources will flow out of here and into here pushing down the profits here and pushing up the profits there until you get some sort of equilibration there's a tendency for markets to equilibrate we never reach equilibrium or the evenly rotate but there's a tendency for it others are more of marginal utility whenever the supply of good increases by one unit provided each unit is regarded of equal serviceability by a person the value attached to the unit must decrease diminishing marginal utility another one is the recording in law of Association comparative advantage whenever minimum wage laws are enforced that acquire wages to be higher than existing market wages involuntary unemployment will result whenever the quantity of money is increased while the demand for money is held is unchanged the purchasing power of money will fall so Austrian economics is littered with synthetic a priori statements statements that are necessarily true and yet impact on the real world the Austrian business cycle theory is a synthetic a priori same it's a much bigger statement it takes a lot of premises to get it out and I'll talk a little bit about it but that's another one so these are a priori unfalsifiable and people like Krugman will say well if it's unfalsifiable it's it's magic so this is a crucial distinction between the two okay another one is this thing about testability let me tell you a little story about my dissertation with Gary Becker and my dissertation was roughly of the sort that well all Econometrica kwai shins are the sort aid equals y equals a plus B 1 X plus B 2 X 2 plus B 3 X 3 plus an error term and what I was trying to do is here was my rent control variable and what I said is that the more rent control the lousy of the housing would be holding constant what else do I have to hold constant well well I have to hold constant anything else that might impact the quality of housing such as weather you know if it's very bad weather you'll have lousy or housing than otherwise and here was say good good housing and what I expected was that this thing would be a negative namely did negative relationship between more rent control and less housing quality holding everything else constant that was my dissertation roughly there was a lot more but that was one of the points and most of the time I got the right sign and most of the time thank God it was statistically significant at the five or even the one or two percent level sometimes a ten percent level but every once in a while I get the wrong sign don't ask I got the wrong sign and every once in a while the wrong sign was statistically significant so how did Gary Becker react to this well if he were a neoclassical what he should have said was well you know maybe rent control doesn't work the way we think it does you know I mean rent control is there's the supply there's the demand there's quantity there's price that you put a maximum price on housing demand is greater than supply there's a shortage the usual rent control story that you get in economics 101 Becker didn't say that he was too polite to say but this really what he meant to say he meant to say block you go out and do it again till you get it right so what was testing what was my Econometrica testing the supply and the man and rent control of which we all know and the Austrians and the neo-classicists agree on that no is the other way around the the theory was testing my econometrics a very similar thing happened with rent control sorry with the minimum wage now we all know that the minimum wage is a very similar sort of thing only now we have wage and and here we have the quantity of labor and if you put a minimum wage above equilibrium you're going to have a surplus namely unemployment so Gordon Krueger come out with this cockamamie thing and there was some New Jersey and Pennsylvania one of them raised the minimum wage and then card and Krueger try to see if there was a difference in the unemployment rate for unskilled workers between the two because this increase in the minimum wage and this is what Krugman relies on this is what Hillary Clinton and Bill Clinton relies on Bernie Sanders everybody loves card Krugman on the left so again if Gary Becker and Newmark and other of these mainstream people were really logical positivists if they were really neoclassical economists see my thesis is if you scratch a good economist he's going to find an Austrian whether they admit that their Austrians are not so so what they should have said is well maybe economic law works differently in New Jersey I mean it's pronounced New Jersey so who knows what what's going on in New Jersey maybe the minimum wage story only works 95 percent at a time or 98 percent of the time they would have been moderate here but no they had fire in their eyes what they did is first of all a replicate ability they called up the same people that Gordon Kruger called up to get the information and they couldn't replicate it so that's one problem but they came out with real fire in their eyes the idea was that this is wrong and we're gonna get that card in Kruger people but they shouldn't have done that only Austrians should do that so I now am awarding these people honorary Austrian degrees they're not going to accept it but I'm gonna award them whether they like it or not I'm gonna you know pin the tail on the donkey I'm gonna pin Austrian isn't on a lot of these mainstream people that are good economists even though they don't think they're Austrians by the way the reason we call it Austrian economics has got nothing to do with the economics of Austria it's because the people who started it came from Austria Mises bomba vert mangar Hayek we're all in Austria it's the same with Chicago economics it's got nothing to do with the economics of the city Chicago it's rather that Friedman and Becca and Stigler just happened to be at the University of Chicago and had a unique look at economics okay so we've now had two or three of the 15 or so elements and let me go on to another one what else have I got let's talk about entrepreneurship for Austrians entrepreneurship is very important Israel kurzon I wrote a book competition and entrepreneurship Peter Klein one of our fellow teachers here is a expert in entrepreneurship and specializes in it and emphasizes the importance of entrepreneurship was if you look at any mainstream textbook what you're going to find is land labor and capital and if you're lucky in the index the the word entrepreneurship will be there and it'll be one page and if you're not lucky they just ignore it I might be exaggerating a little bit but not much whereas for if there was an Austrian textbook and there are a few David Gordon wrote one and there were a few others entrepreneurship is I don't say the only thing there are other land labor and capital are also important but the you know entrepreneurship is very very important the entrepreneur is the the one who sees an opportunity and sets up a business you know and there is a debate between Murray Rothbard and Israel Kerzner on this Israel 'krsna has this thing called a pure entrepreneur who has no capital whatsoever or is Murray insist that it's a capitalist entrepreneur and I'm on Murray Rothbard side of this particular debate is real person that says well you you have this idea of entrepreneurship but if you want to do something if you want to impact the world you have to buy or sell or invest or do something you just can't have pure entrepreneurship divorced from anything else and if you borrow money from someone else well you have collateral with which to borrow it in the first place and you had some labor to go to the bank and ask for money so I don't think that there's any free-floating pure entrepreneurship but but entrepreneurship is very important whereas for the mainstream it's not at all important another is of the difference between ordinal and Cardinal utility ordinal Cardon ordinal utility is ordering I like apples better than bananas and bananas better than carrots that is legitimate and fine and that is a fine distinction and we Austrians believe in ordinal economics we support it it's a rational thing it helps shed light on economic issues fine what is Cardinal utility Cardinal is counting util so an apple is ten you Dalls carrot a banana is 20 you Dalls and and a carrot apple is ten banana is twenty and a carrot is thirty therefore the carrot is three times as much utility as the apple and the banana is twice as much as the apple and the carrot is so one hundred and fifty percent more joy mminton this is nonsense this is nonsense on a stick I'm getting the word not a pogo stick nonsense on something right what am I missing here nonsense on something and I'm not sure why but I'm steroids maybe okay now you might think well this is just sort of Airy fairy crap and you know who cares about the I mean what is what's the importance of it well the importance of it is and I trust let me give you a little antitrust stuff which the mainstream loves and Austrians reject entirely whereas the chicago school is supposedly a free enterprise school and they have a sort of a moderate position let me let me get into that so first I'm going to draw the usual complicated curve here's the average cost curve there's the marginal cost curve hitting the average cost curve at the bottom point you always have to be at the bottom point quantity price here is a demand curve here is a marginal revenue curve we know that the perfectly competitive industry will be right there and we know that where marginal cost it's marginal revenue is where the quantity of the monopolist will be and he'll move his way up to the demand curve and that'll be where the monopolist will be and here is the price of the monopolist how many people have seen this before good okay I'm glad that we're we're in sync and now what do we have we have prophets and and here's the indictment of on the part of the mainstream of monopolies and a-one is that the price of the monopolist is higher than the price of the competitor and don't ask me why a high price is bad but high prices are bad don't ask and we know that the quantity of the competitor the quantity of the competitor is greater than the quantity of monopolist and quantity is good so the more quantity and the lower the price the better and notice that monopoly is bad on both these counts and perfect competition is good on both these counts the third one is what's the third one profits profits are evil we all stipulate that you know who could who could disagree profits are evil and and the the profits of the perfectly competitive is zero and the profits of the monopolist is this little box here the shaded box right the call at the box the shaded box that's profit and and profit are profits or evil so you know that's the third indictment and then the fourth indictment but the real biggie the one that really sticks in their craw the evil thing is this triangle here and this is the dead weight loss and and this really bugs the crap out of them I mean you know you it's sort of like you know across against the who who are the guys you wave across that and they run away the vampires well you sort of wave deadweight loss at it and a mainstream economists and that you know that they get scared I mean it's horrible for them and this deadweight loss is a total exercise in interpersonal comparisons utility so this stuff about ordinal you see it's not only ordinal and cardinal but before I'll get back to this in a second but every time you have a diminishing marginal utility curve and there is quantity and there is some price sorry this is margin utility whenever you draw a curve with an axis you're counting you Dalls right so this curve from the Austrian point of view is illegitimate because it's quantitative and we've said to my satisfaction at least and I'm sure most of you agree that ordinal is a reasonable way of looking utility but you Dalls this says that if you have this many units X units then the noodles are X and then if you have Y units then the marginal utility goes to people of marginal utility Y this is an exercise in Cardinal utility but this diagram here is even worse than Cardinal utility it's not only Cardinal utility it's interpersonal it's even worse somehow it's bad enough to say that I like carrots 3 times as much as I like apples but it's even crazier to say well I like carrots twice as much as you like carrots I mean how do you compare I mean it's just crazy so what this is saying is that we the people get utility under the demand curve so let me be more colorful here so the utility that we get is under the red where is what are the cost the cost is the area under the marginal cost curve in blue and the difference is the deadweight loss and what the monopolist is doing is cheating us out of stuff cheating us out of the difference between QM and QC because if he was a nice guy if he didn't wanted to create a market failure which is a whole other thing that the the mainstream loves market failure and monopoly public goods of externalities unequal income I mean in order to get into the American Economic Review you either have to have just math well you have to come up with a new market failure they just love market failures whereas for Austrians no such thing as a market failure there are imperfect people entrepreneurs making mistakes but that's not what they mean by to tell you what they mean by market failure is something that the government could step in and and tell the the monopolist you know produce @qc or we'll break you up or we'll nationalize you those are the three solutions to the to the problem so this is an exercise in interpersonal comparison aim Li they're saying that the buyers value it at the red area the sellers it only costs us at the blue area and and yet it's not produced let me give you a real world example here we have a joke a who is the best tennis player nowadays give or take and Djokovic enters fifteen tournaments a year he really should enter 25 he's cheating us out of 10 tournaments a year that dirty rat and what we should do is use the antitrust against him and make him play more I mean look if he plays an extra ten tournaments his shoulder is gonna hurt or his knees are gonna hurt or whatever and he only picks 15 but thanks to neoclassical economics we can order him to play more and know that economic welfare will be enhanced because we value the extra ten tournaments more than he disavows it that's sort of a reductio ad absurdum isn't it it's it's just barking mad and yet that's the implication okay now how does the Chicago School fitting on this they're the free-enterprise school they adopt all this crap and what they say is look and I trust costs money true who could deny it you have to have courts you have to have lawyers this and that and the other and sometimes the deadweight loss is bigger than the costs of pursuing it in which case we should pursue it get it and in other cases the cost of pursuing pursuing here are bigger than deadweight loss and we shouldn't you see what what free enterprises they are they're saying just because you have deadweight loss doesn't mean you should have an antitrust suit now I have to tell you my my and I trust joke and I told this to a bunch of people who were lawyers and and economists all specializing any antitrust I have a friend Ben Klein he was a professor at the UCLA and they used to specialize in money and then one day told me there's no money and money you can't make much money studying money where is the money and I trust cases Mises said to his wife I'll be studying money but I'll never have much of it that was a quote from Mises to Margo Margaret his wife well there's not really that much money in money this a little bit and people have done Studies on just who supports the Fed yes the economists have been paid stuff they're down their throat with a lot of money from the Fed in terms of going to 5-star hotels here and there and being able to bring their wives or significant others so there's a little bit of money and money but the real money is in antitrust so here's the antitrust joke it's a two-part joke and the first part is there were three Soviet prisoners and as prisoners do you people know you've been in prison you've you talked to your buddy why you in jail why you in jail and the first guy said I was in jail because I came to work late and they accused me of cheating the state out of my labor services ok fine the second guy said I came to work early every day and they accused me of brown nosing you know what brown nosing ok the third guy said I came to work exactly on time every day and they accused me of owning a Western wristwatch so they put me in jail and I got a big laugh out of the the economists and and lawyers and other people who batten off antitrust cases whether on the plaintiff or the defendant side and then I told the other joke I said there were three prisoners in jail in the u.s. because of antitrust violations and as prisoners threw they were comparing notes and the first guy said I charge higher prices than everyone else and they accused me of profit profiteering and gouging second guy said I charge lower prices than everyone else and they accused me of collusion cutthroat competition and predatory pricing the third guy said I charged the same prices as everyone else it's hard to see how he did given these other two guys but what the heck it's just a joke you know you've got to give me a little leeway and they accused me of collusion and cartilage the point is no matter what you do they can accuse you of any trust violation look the law of murder and the law of rape are legitimate laws you murder you go to jail you don't murder you don't go to jail you rape you go to jail you don't rape you you don't go to jail but with antitrust no matter what you do they can get you poor guilt bill gates he was happier in the boonies in Washington State mining his own business creating nerd them and whatever he was doing and he wasn't paying off the boys in Washington by the way I think 7 out of the 10 richest counties in the country are all around Washington it's just a coincidence so it's inexplicable why that should be the money goes there and comes back - a little bit from Washington and Bill Gates wasn't paying off either you're supposed to pay off both like Donald Trump you would pay off the Democrats pay off the Republicans that's what a good businessman did so they launched a trusted against them why not they're gonna get him on something higher lower the same prices whatever they'll get him Murray Rothbard went through economic history and he said there were certain presidents that were Morgan presidents and they would go after the Rockefeller con companies and then when a rockefeller president got in he'd go after the Morgan companies it's just a crock it's dead from the neck up it's incoherent no matter what you do they can get you and yet the mainstream love it getting back to an intermediate microtext you got two or three or four chapters above this monopoly and then this - dollar index this ol accompli duopoly this hopple even Apple II and and that they just love this stuff you know the more concentrated you are the worse you know you start out the where how did McDonald start out it was just one store two stores and then it spread out because they served the public and made a good product and a low price and they out competed whatever was in the market and now there they can be subject to monopolization so that's a sharp distinction between Austrians and mainstream Tom DiLorenzo has done a lot of good work on that I'm not sure if he's speaking about this subject this time but if you read him he's he's good on that one okay what else do we have let's try transitivity and rationality and indifference another thing that the mainstream love are indifference curves there are always indifference curves you know here is an indifference curve there's a good one there's good two is indifference curve one and indifference curve two and and here's a budget line and here we have another budget line and we get a what do you call it the different different good the way you get a Giffen good and you know the income effect or the substitution effect and all that stuff the austrians reject this entirely not entirely it's sort of sort of like chess for economics namely irrelevant but fun if you're weird you like this stuff nothing wrong with it per se is a mathematical exercise but the problem is with indifference there is no way to establish indifference I bought this watch for twenty bucks I demonstrated or revealed that I valued the watch at more than 20 bucks otherwise I wouldn't have bought it for twenty bucks in the ex-ante sentence ex-post I might not value it at more than twenty might not keep good time but at the time I bought it I valued it more than twenty bucks more than the guy who sold it to me valued it at less than 20 bucks otherwise he wouldn't have taken 20 bucks for the watch how can you establish indifference you can now hear I had another big long debate with Bryan Caplan on indifference because he wrote a thing why I'm not an Austrian economist and and one of the things was in he loves indifference and veto Holtzman and I and about five others all attacked him in I think it was the ikan Eastern economic journal they wouldn't publish any of our critiques they only published his attack on Austrian ISM well that's the mainstream you know they they don't like to have debates as they lose this reminds me another story I'll get back to this in a second what happened was some jerks published an article saying why is Austrian economics wrong and the proof was there were fewer Austrians than there are mainstreamers can you imagine that I mean this was a serious article was published in a journal Sherwin Rosen a Chicago economist I think it was him published an article saying that the proof that Austrian ISM is wrong is that there are fewer Austrians than mainstream I mean can you imagine when the first guy said that the earth revolved around the Sun and not the other way around and people said well you're wrong because more people believe the other way around this is science you know democracy you take a a nose countess the who believes white and that's the truth so my co-authors and I said look this is crazy you know be and we gave all sorts of cases where the minority turned out to be right but if you want an objective test of which is right we've got an objective test and we think that that's also wrong but with trying a reductio ad absurdum and what we said is that the last guy in the debate is the winner and we got all sorts of debates between Austrians and mainstreamers and we've got like 175 debates and I think we had the last article in about 110 of them so I said on that basis austrian is is right now obviously that's just a silly right because you know some people die in the middle of a debate and you they can't reply so you can't say well just because he died or he doesn't think it's worthwhile because you can't look I my articles are attacked by a lot of people and I can't reply to all of them there was so many so some of them get the last word on me so we're not seriously saying that he against the last a word and the debate is the winner but we're saying it's just as good as counting noses to see who is the rightful winner you know who is correct in economics okay getting back to indifference there's no way to establish indifference because every time you do anything you establish preference there's only preference look you people are all here you could have been one of the other debates one of the other presentations you could have been out bicycling or swimming or sleeping or eating or god knows what you could have been doing but you're here so you establish that you preferred this now you might change your mind after you hear this nonsense emanating from the front of the room but at the time you chose you I get that stuff from David Gordon he tells me I have to do that there's only preference look here are two bottles of water and a lot of people pick you know which one do you want and most people would say well I'm indifferent I don't really care which bottle they're both perfectly good bottles of water you see the problem is that the the word indifference is a perfectly good word in the English language and it applies to things like this and Brian Kaplan says this shows indifference and I say no it doesn't because what you're going to do is you're going to pick this one why did I pick this one no it's closer well maybe I picked this one it's further away and I need the exercise I don't know but the point is you all have bottles of water you all have things that are sort of the homogeneous and you pick one of them right you've got a few bottles of water why don't you pick those when there could have been other as well who knows you just sort of close your eyes and pick a bottle of water but you pick that one that shows you preferred it for some reason rather now look we have a technical language in economics and we also have an ordinary language ordinarily I don't have no objection to the word indifference it's a fine word but as a matter of technical economics it's all wrong let me give you an analogy from physics and physics work equals mass times distance namely you have to move an object through a certain distance and that's what work is now suppose I suppose these are 20-pound barbells and I hold them like this what's going to happen I'm gonna start sagging soon because it's hard to keep weights up at this angle and the sweat is going to start dripping down my face and in ordinary language we would say I'm working that's good exercise you know instead of lifting weights this way you try this too it really burns these muscles and and and it's very very hard at even 5 pounds try holding 5 pounds for one minute and you're gonna be you're gonna be sweating and and breathing heavily so you're working but in physics are you working now because assuming it's rigid there's no movement of anything there's no work so in physics they have an ordinary language and a technical language well in economics we can do that too you've heard of penis envy there's physics envy physics Envy is what economists have that want to make economics like physics like testable hypotheses and stuff like that whereas we Austrians there are certain hypotheses that are testable name of the elasticity of shoes as I mentioned but there are others namely a synthetic a priori a predictive statements that are not testable so to get back to indifference curves the reason we reject indifference curves is because indifference is not a proper economic element and then they use for all sorts of nefarious purposes they come up with given goods which means that upward sloping demand curve but the the whole problem with that is that when you have a demand curve everything else is supposed to be constant so along the demand curve there's quantity this price there's demand curve income is supposed to be constant if it's if it's a true demand curve namely ceteris paribus everything else is constant including income and if income changes the price of this change is like in the potato case with the Ireland where potatoes was such a big part of their diet and the price of potatoes moved up and down and that in heavily impacted income what were you supposed to do a shift in demand curve you're not supposed to move along at the man curve so the given good is nonsense but given good is beloved of the mainstream economist and the Giffen good is comes out of this sort of thing where the income effect is bigger than the substitution effect that sort of thing so you see a lot of terms you might think well you know beutel's big deal but you Dalls have important implications for antitrust and you might think well indifference is really unimportant but it has implications for the demand curve and the demand curve is very important because one of the big fights in the in the minimum wage fight is our demand curves downward sloping or not and these cretins you know by that you know in every other way they'll admit that if the price of peas rises we'll have fewer Peas the price of shoes Falls we'll have more shoes when they want to get rid of what is it the abortions those abortion clinics the states in the south what they do is they raise the criteria up through the roof you know you have to have hospital attachments and all sorts of things in order to get rid of them well that's what the minimum wage law is look if the minimum wage law was so good as Tom Woods said the other night the first night here why have foreign aid just tell Bangladesh stories you've been wage why have it at 15 why be so niggardly 15 is cheapskate 'hey why not make it 50 your 500 will all be rich we can all make 500 an hour I mean the poverty you know with the stroke of Hillary President Hillary's pen we can all be fabulously rich but she's only doing it for 15 what's the matter with her she's against the poor right if I'm elected I'll raise it to 5,000 an hour I'm kidding I'm kidding okay what else do we have here externalities that's another big Eevee the mainstream loves externalities and what's going on with externalities what we have here education is the usual example that they use and this is the quantity of Education and this is the price of education and there's the demand curve and there's the supply curve and this is the actual amount quantity actual that's the amount that will be bought in equilibrium and that's reasonable that here's remember I drew the what was it the Venn diagram the that that would be part of where we agree this so far so good but then what Milton Friedman and the other people who are other free enterprises who hate the market what they say is this demand curve is only private private benefits and they're a spillover benefits own neighborhood effect benefits or positive externalities or external economy benefits namely if you're educated you're less likely to be a criminal you're more likely to vote more intelligently you're more likely to be a good neighbor this young lady is shaking a head I'll get to that part in a second but I agree with you it's all nonsense but I'm trying to present the the case the way it's presented in the textbooks and what they say is when you you know with demand curves you add up the man curves this the man curve a and that's the man curve B then this would be the sum of the demand curves right the addemup so what they're saying is this is private but then there are also public benefits and let's say the public benefits are here so that when you get the sum that the Matt the sum of the demand curve you add this one in that one and and you get that one everyone with me namely if we took the total demand namely all the benefits of education not only the internal ones that you know I'll get a better job I'll get a better spouse I'll in personal you know I'll learn stuff and it'll edify me whatever but also the spillover benefits by me being educated I'll help you guys and you guys aren't paying me and yet I'm benefiting you you dirty rats you ought to you know have some respect so anyway so anyway we now have a total demand curve and this is the quantity call it ideal namely that's how much education we should have if we took into account the external effects and what are we going to do well Freedman is going to have is a voucher system or will subsidize educational somehow we got to push us in that direction and this is a market failure because the market only takes into account selfish personal individual benefits we don't take into account the the fact that we're helping other people there's no charity kidding here I'm trying to refute the thing obviously we do take into account other people or to put it in neoclassical terms other people's utility enters our utility function we are made better off when other people are made better off especially if we like them family members kids parents whatever friends okay so that's the argument what's the reputation why is this wrong well you know just be right now I'm smiling at you see teeth smiling and by the way I take a shower once a month whether I need it or not you people owe me hey give me some money because I just smiled at you right well give me some money because I took a shower a month ago I mean what kind of an argument is that just because I benefit you I can charge you and and that's the logic of this that I'm entitled to tax you so that I'll have more education because I'm benefiting you that's crazy I mean if we apply this I'm a big fan of reductio ad absurdum and a reductio ad absurdum is if if every time you benefit someone else you can charge them well every time a woman whereas a miniskirt should be able to charge everyone because all the guys their eyes are bugging out and and we should pay for her miniskirt and you know this is nonsense on wheels or nonsense on stilts that's the word I was looking for not not on steroids on stilts this is nonsense okay so that's one refutation another refutation is where weighted Bernie Sanders get all of his buddies for the minimum wage I'll tell you where the People's Republic of Ann Arbor People's Republic of Cambridge Mass the People's Republic of San Francisco and what's true in all these places lots of universities and what do they learn at universities most of them don't take economics they take sociology or feminist studies or queer studies or god-knows-what studies of black studies and what they teach him is Marxism so really what we have is a case of external diseconomies what we ought to do is tax education because we've got too much of it we should move this direction too much education so there are problems here when am I supposed to go from 11:00 to 11:45 or oh so I'm finished well I can keep going I've got 20 stuff but okay let's dude let's do negative externalities external diseconomies the usual case there is pollution so here we have supply and demand again quantity and price I'll just go another two minutes because otherwise those greedy people will beat us the lunch we don't want those greedy people that beat us we greedy people want to beat them okay so here's supplying the man and I'm producing these wristwatches and in order to produce wristwatches I have what's behind the supply curve does costs okay fine and these are only private costs and what are the private costs we'll have to pay my workers I have to pay the raw materials I have to pay insurance I have to pay to buy or rent a factory I have to buy also machines to make the watches those are my private class what are the extra external costs I pollute you when I produce these watches out comes out of my smokestacks comes pollution it gets into your laundry and your lungs and we don't take that into account so this is the actual quantity quantity actual but if we included the all the cost we would have higher cost and therefore the optimal quantity optimal would be less and now we've got to move us in that direction okay and now we have a debate between Pegu who wants to have taxes and co soo has cockamamie scheme and i don't have time to go into and we have a government you know just government would just tell people you know that hockey stick thing you know we're we're polluting too much and they would just say you can only pollute two-thirds of what you're now polluting murray rothbard in the best article ever written on environmentalism it's called something air pollution it was 1982 in the Cato journal the first half it is just libertarian law on property and trespass and the second party applies this to to the pollution case and I'll summarize the second part of it and what Murray says is that in the 1830s and 1840s what you had was a spate of environmental cases with some little old lady hung out her wash on the line and it started out wet but clean came back two hours later dry but dirty well you had a railroad setting off sparks to the haystack of the farmer and burning the haystacks abuse of the sparks go three hundred feet and the plaintiff the environmental plaintiff would go to court and the court would pretty much uphold not always based on the evidence this is not a pathetic this was an empirical examination did this guy trespass suit onto your property or onto your lungs or onto your haystacks sort of fire or whatever and this led to several good things people would use anthracite coal instead of sulfur coal even though an anthracite cost more because it didn't pollute and if it polluted you'd get some plaintiff who would demand damages and an injunction injunction is a letter from the court saying you know you polluter cut it out or we'll put you in jail and damages so the economy was moved in a in environmental direction a green direction if you will and there was even environmental forensics trying to figure out where this dust particle come from from this Factory in that factory there wasn't much in the 1840s and 50s but it was something now we moved to the 1890s 1900 1910 and now we have the progressive period who was number one then Great Britain us wanted to become number one become number one you need battleships airplanes tanks guns bullets whatever so the next time some environmental plaintiff came into court the court said yeah yeah they're violating your property rights you're stinking lousy selfish private property rights there's something more important than your property rights and that's drum roll the public good and what is the public good consists of of letting manufacturers run wild because if you want to have be number one you can't take the sign of a little old lady against the factory or railroad a stupid farmer and that's why we had pollution problems and that's why we needed the Clean Air Act but Murray Murray's point was that if you could sue the environmentalists the polluter you wouldn't have this externality so this is not a market failure this is a government failure a government failure to uphold the law like they did in the 1830s and I didn't in the nineteen 1910s thanks for your attention

Channel: misesmedia

Views: 8,188

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Keywords: Austrian, Austrian School, Economics, Mises, Critique, Austrian Economics, Mises University, Walter Block, Mainstream Economics

Id: ua_tJbdmNmo

Length: 54min 25sec (3265 seconds)

Published: Tue Aug 02 2016