Socialism and Transition | Peter Boettke

my my topic for this morning and before you go off to your adventures is on socialism in the transition to the market economy trying to condense two different very sort of very divergent topics into one as I apologize for that one is the theoretical discussions or in the debate over the nature of socialism and its ability to operate efficiently in one on the other one is the actual practice of socialism and then the transition from socialism that has been taking place since the late 1980s early 1990s the reason why it's necessary I think to talk about trying to condense these things is because the episode of the battle over socialism to a large extent defines sort of the Austrian school the three major intellectual disputes right within Austrian economics are going to be the battle over the workability of a model of our of socialism The Critic meth illogical and policy conclusions of keynesianism all right so the excessive aggregation and all these things like that and then the meth illogical dispute over scientism which is going to be divided up into two different kind of battle grounds which is going to be formalism and then positivism alright and at the time of Mises and Hayek scurry r on the world moved in a direction that favored socialism favored Keynesianism and argued that the unity of the science has generated formalism and positivism and the Austrians are on the opposite side of each of those those battles which helps explain I think for example like I said in my first in my first lecture I went through the different historical epics and an incursion er he divided up a little slightly differently but not most identical epics except Kerzner didn't talk about he talked about an objective factor and i talked i define those epics more in terms of psychological propositions of the people that were involved so you know if you think about what the 20th century is and what the problem is ok so again I'm going to be a little bit normative here alright it's this from an Austrian point of view there's an unholy alliance of scientism and statism and that the Austrians represent the opposite side of that all right and so that's why they're in juxtaposition with other intellectual trends at the time so there's battle over socialism is important it's a lot for art for our own understand it's also important analytically because it's in sharpening our arguments against those intellectual opponents that the self identity comes about okay so I think this is an important lesson in intellectual history a lot of people intellectual history treat arguments as if they are disembodied from context but that's not true ideas evolved in a conversation it's a dialogue that takes place and if you really want to understand what say for example Hayek is arguing in the use of knowledge in society you can't just read the use of knowledge and society you have to understand who it is he's trying to respond to and what they believed because what he's trying to do is engage in an eminent criticism right there's a difference between an admin asst ism and a transcendent criticism right I and ran wrote transcendence isms collective isms terrible I'm going to stand against collectivism all right the Austrian economists Mises and Hayek in particular were engaged in an eminent criticism what are the arguments you're making let me step inside of that argument and then blow it up okay Deirdre McCloskey the methodologist she loves to compare and contrast her experience at university of chicago where she taught for many years of the difference between Milton Friedman and George Stigler she said no you know George Stigler you would go into a paper seminar and you present your paper and George Stigler would say only an idiot would write a paper like that no one should write a paper like that if I was to write a paper it certainly wouldn't be that this is the paper i would write and dear just says you could never learn anything from that you would get beat up made fun of ridicule but you couldn't learn anything milton friedman on the other hand what he would say is you know that's not a very good paper but if i was going to write your paper which proves x y and z I think it would be better if you used arguments other than arguments five six and seven so in order to make your paper better which I don't agree with you would be better off if you did this that's an eminent criticism so intellectual ideas take place within a context of a conversation so you can't really understand the use of knowledge in society unless you also understand what Oscar Longo was saying what I will learn ER was saying what Dickinson was saying these are who Hayek's responding to all right I'll come back to this theme in a minute and that's also true of Mises right who is nice is writing about when he writes the so you know economic calculation in the socialist Commonwealth who's his conversation partner who's this conversation partner when he's writing you in action right who's this conversate that's how you're going to find out what it is that and where these arguments come from you can't treat these ideas as disembodied so keep that in mind as we walk through this argument so the very first thing that I want you to understand is that there's nothing wrong with incentive-based arguments one of the most powerful books written in the last 10-15 years is Bill easterlies the elusive quest for growth and at the end of every chapter he says incentives matter next next topic you know what incentives matter one more time with feeling all right every economist worth is you know whatever the phrase is or 'this grain of salt or whatever believes that incentives matter this is the oldest critique of collectivism it goes all the way back to Aristotle's critique of Plato right incentives matter it would be a mistake for you to say you know there is no such thing as an incentive problem right even think about the way professor Kerzner put it the other day he said it's not that we're emphasizing the incentive problem that may be true but there's an additional problem he didn't say oh there's a you know an incentive problem we're going to say that that doesn't take place you know it's not the true that people respond rationally to incentives right it's an additional thing why is that that's part of a conversation and think about how it is that incentives matter became not a successful argument against socialism well socialists made a very important assumption so anyone know what it was who says it man will change we will have a socialist man now how much things just so we get this on the right page how much a stronger of an argument would you have if you granted that assumption even though it's stupid right it's a massively stupid assumption man all of a sudden is going to be transformed into a nice man he's all kind and happy now right and you know all these things thats stupid some but even if I grant you that assumption and I can still show you that your theories don't work haven't I just now delivered an even stronger punch now welcome to Ludwig von Mises because that's what Mises did he didn't deny that socialist man doesn't exist but he said for the sake of argument let's assume that socialist man's in charge but yet he's still going to confront this problem so the original argument is and it's not Mises by the way originally this is you know vilfredo pareto and enrico borrone who in the early part of the 1900s this was their response there was responses well ok let's assume that you know you have this socialist man but you know what then you're going to have a problem that the task is simply too complex as Pareto puts in his manual a political economy the market solves a stream of equations right which the government official would have to do by design all right and as he points out right if I have an economy of 700 people right and you know 100 goods the number of systems simultaneous system of equations that would need to be solved would be beyond the ability of any computation so the market solves it daily but you can't do it with your you know with your computational tools it's too complex well then how did socialist respond to that well let's assume a computer right and we'll make a super computer or we're going to have as trots put it the mind of the place right we're going to assume that people so what are we assuming we're assuming individuals who are right selfless and have tremendous cognitive capabilities okay and the Austrians are then going to sit there and say we'll wait a minute hold on time out you still would have a problem all right and that's where you end up with the impossibility of rational calculation it's not that it's about husbanding resources it's not that there's too many decisions to make it's that without the institutional basis of private property you will not have the knowledge necessary to engage in the calculations about the use of alternative resource use okay you won't know whether or not to build railroad tracks out of platinum or out of steel all right let me let me make sure you understand its problem technologically platinum is a far superior resource than steel it's smoother it would last longer the trains would run you know better but what's the problem with it how do you know that though right how do you know that you know that because of scarcity is indicated through prices well how do you know these prices because people do what they engage in exchange what are they exchange property that's ultimately what we're doing right changing property so unless you have property so what's Mises argument without private-property in the means of production there'll be no market for the means of production without a market for the means of production there will be no money prices without money prices reflecting the relative scarcities you don't know what to do by the way note the phrase there you don't know what to do you don't know how to calculate there seems to be a knowledge problem that's embedded with the calculation problem but we'll come back to that alright impossibility of rational economic calculation or socialism here's an easy way to understand this you need the three P's to generate the three eyes okay this is for your test making that up property prices and profit loss provide us with incentives information and innovation you don't get the 3 p's you don't get the three eyes alright or and as pj o'rourke puts it you you know eat suit you know eat stones for soup alright so I really well I ever read PG O'Rourke's book eat the rich if you haven't go get it but it's a hilarious book and starts out with the example it's not the perfect example but he says I don't get this in Russia they got people that can play simultaneously three games of chess right and there are eaten stones for soup and then the United States we got like Bobo's in Paradise out there in Hollywood and yet we're like experiencing all these wonderful things how is that possible it's not possible because the inherent characteristics of the people it's because of the system within which they operate right that's and that's why he's you know tries to explain this so why do these arguments evolve the way that they did this is what I just tried to go right so the incentive argument you just assume better people the informational complexity argument you assume better computers in each case the less a fair argument is on the defensive but that defensive then turns into the imminent criticism where if you assume even in a world of better people even in a world of supercomputers change and the contextual nature of our knowledge right so if any of you how many here you know you guys are all at this seminar so presumably you've read a fair amount of Austrian economics right when you read Austrian economics what's one of the things you first you know hear from Mises right there is no such thing as fixed data right the data is constantly changing economics is about change right that's you know it's always going on Hayek says the economic problem of society is a consequence of change it's a big theme in their idea is that the idea that it's all about change and accommodating factors to change that's what efficiency is in the Austrian if we can even use that term the Austrian notion of efficiency is adaptive efficiency not allocated allocation Allah fishin see all right so it's adaptive to change this is the epistemic critique or the knowledge critique and it is yet to be just effectively by socialists yet people believe that they challenge it by challenging this or this but they never really deal with high x implicit economics or Mises is the full implications of Mises is argument about monetary calculation which I should point out as you've seen here like in Steve's lecture which I thought was very good on this right the monetary calculation point isn't limited to socialism it's also what's underneath interventionism and the problem of the business cycle right but it's also on the flip side why it is that markets work incurs nurs right it's precisely because you can engage in monetary calculation that the willingness to bet on ideas and bring those bets to life under capitalism doesn't lead to just wishful conjecture all acts of entrepreneurship or wishful conjectures right all acts of entrepreneurship are wishful conjecture but in in the economic life wishing it so doesn't make it so you're disciplined by the market how is it that you get disciplined by the market through monetary calculation the weeding out of bad investments the weeding in right of good investments that's all from the profit and loss calculation it's like some of the questions were asked in the discussion group about you know the bailouts or whatever right there is there's a wonderful little book by de lightly and Richard Mackenzie it's called the bright side of the dismal science and what it emphasizes is the law side it's a profit and loss system you need the lost side of the system for the system to work okay so one of the factoids that I used to have on my head when I was doing transition studies all the time is that in New York City alone in 1995 there was more bankruptcies than all of Moscow from 1991 to 1995 which system has a vibrant market economy see right new york city people enter businesses and fail all the time this is a very important message for us to communicate precisely at this point in time unemployment the you know WH Hut one of the great lines about his book idle resources the Keynesian czar you know there's all these idle resources and Hut says sometimes idle resources should be idle there's no as that are 0 like Tyler Cowen just put a blog post up the other day about zero marginal product labor what should happen to zero marginal product labor it needs to become not zero marginal product labor which means it knots to make adjustments if it remains zero marginal product well you know what it's going to stay unemployed and rightfully so right markets work through spying innovation through profit and catalyzing decisions through loss okay the market itself has the greatest regulation mechanism known to mankind it's called profit and loss if allowed to operate if you you know believe in a stupid idea in the market a stupid to find objectively here is you know not related to the demands of the consumers you will pay the penalty and you will suffer the losses and you will lose the money unless someone bails you out and then you can go on being stupid for a long time all right all right so think about kirchner's pearl necklace example versus a pearls form than a circle right so he mentioned this very briefly but think about what he's saying he's saying that look you look at you know what's the task of picking up a pearl necklace and keeping it still in a circle all right if the string is attached to it when you pick it up it's a difficult task it's a complex task you'd have to great but then he said but that's not really what the problem of God economic calculation or socialism is is it because what it is it appears as if it's a necklace but there's no string to attach all the little beads so when you actually go to pick up the beads they're fallin all over the place it's impossible for you to pick them all up as one because they're not stuck together why aren't they stuck together under socialism because there's no private property rights right private property rights provide the connection between all those beads which means that you could write lift them up even though it would be a difficult task that's like in the market economy peering into the the future an uncertain future about where the demand is but yet you know you do it through these guides and signals but if there's no connection you can't do it at all I would go even further and point out that in high x knowledge problem argument it's not that the knowledge of the underlying taste technology and preferences is out there see remember incursion their story there's at this there's a linkage between the underlying variables of taste technology and preferences and the induced variables of prices and profit and loss and the point of the market is that the induced variables are chasing after the underlying variables and in equilibrium they would be perfectly aligned so any move outside of equilibrium there's a profit opportunity for the entrepreneur who recognizes how to move it closer to alignment that's your betras opportunity okay in Hayek's world if you eliminate the profit opportunities that are there the prices that are there that knowledge doesn't exist it's not that you can't get it it doesn't come into being it's Kerzner Spurl nikla the pearl necklace that are just pearls formed in a circle you can't pick it up socialism a difficult it's impossible okay now you have to understand what that means in terms of the Technic end the conversation partner socialism did not mean Sweden and socialism did not mean Princeton okay socialism ant the abolition of commodity production and that through the means of abolishing commodity production you'll get a burst of productivity which will eliminate scarcity in this world so you'll have a world of tremendous material abundance no private property and abolition of you know commodity production and Mises argument is okay comrades how are the chickens going to get into you know the comrades mouth alright they can't because those does they they don't have access to those things and then you know height well high x later development is to a large extent trying to explore what happens when P we'll try to do it even though it's an impossible task to do so think about the Road to Serfdom as countries mother Teresa right not nasty bastard mother Teresa trying to pick up the pearls and they're in a circle and she creates a mess right so now mother Teresa the kind-hearted soul it's all over the place it's a hot mess that's the road to surf them okay are so let me so in the midst of this debate there are also develops as Professor kerzner pointed out the public choice analysis of one way to think about you know the nature of government planning is to not only analyze the economic issues but then to ask the political issues about what goes on in government when they engage in planning all right and so it doesn't it's not shouldn't be surprising that in after the Road to Serfdom in the 1950s is when you start getting the theory of Public Choice developing all right and the theory of public choice is first and foremost a criticism of the idea that market participants and political participants that the assumption of benevolence is at all acceptable all right so that was the recount of reaction so the Austrians reacted one way public choice scholars reacted another way which was they basically if you think about the assumptions of omniscience and benevolence Public Choice assumes omniscience but challenges benevolence the Austrians assume benevolence but challenge omniscience okay but the the public choice argument is not blind to the the argument about coordination so this is a book by Gordon Tulloch which was written in draft form in the 1950s but not published until nineteen sixty-five and Gordon Tulloch in that book marches through similar to what I did before the various different arguments about an incentive argument what's the incentives for bureaucracy that maximize their budget they do all those things like that but then teluk also asks how is it that bureaucracies communicate information so someone I believe it was you who had the graph of the health care system I just hold it up real quick all right so this is this is a this is going to be here it hand this to me so I can show it right this is produced by the way by one of my students he's actually a Hillsdale you got it to Hillsdale graduate though that you went to Hillsdale it's the second greatest college in the world the first one is grove city where I went to school but but Pete Lisa's out here so we can't get in a death match over this but anyway this is the new health care system it's produced by the Joint Economic Committee one of my students who's actually my ta is working at the Joint Economic Committee this summer and this is what he did for you would you do on summer vacation that's what he did and and so taluk is asking the question in the politics of bureaucracy one what are the incentives that these bureaus each of these bureaus would actually have which would be to maximize their budget but then he asked another question oh man right he has the other question which is how do they communicate with one another right how does information flow between the different nodes all right and he argues that there's going to be a coordination problem okay that takes place okay and as you can see here it's a you know but that is kind of a complexity task rather than the informational tasks that I was star the inside the knowledge task I was talking about before but public choice should not be disregarded in this debate and you got to understand why often why it evolved at the time that evolved and it's important as an intellectual historian of economics understand adam smith and john baptiste assay and how many red vitac basquiat who was the great popularizer of economics in 19th century he understood public choice what is the greatest satire in the history of economics is the can is there is the candlestick maker makers petitioning the government for protection from the Sun that's pure rent-seeking basquiat understood that so why is it that by 1950 economics was practicing in the Samuel Sounion revolution as if Basquiat never existed and Buchanan in teluk and these guys had their resurrect those kind of older arguments they also were in Adam Smith this is adam smith this should be and this is from the wealth of nations it becomes an extremely important passage in high xed understanding this actually is in the context of the passage about the invisible hand but read what he says here what his species of domestic industry which his capital can employ and which the produce is likely to be of greatest value now the key passes every individual it is evident can in his local situation right local knowledge judge much better than any statesman or lawgiver can do for him the statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention difficult task right but assume an authority which could be safely trusted not only to no single person but to no council or Senate whatever and which would know where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it okay that passage contains all of the insights that we're learning in this battle between socialism Keynesianism and then also the scientism battle right in here all right in Adam Smith in 1776 here's a more sort of interesting way to think about this for an economist point of view and it's about robustness of the system so systems have to be robust against deviations from ideal you build in rope bondage River Dundon see all kinds of things like that so when when David you in his essay on the Independence of the Parliament wrote in designing a government we should begin with the presumption that all men are knaves and therefore build the government in which knaves can't behave knavish Lee all right Smith's argument is that net knavish a side of us comes in the form of two types right au beurre istic knavery right that's arrogance or what hyatt calls the fatal conceit and what's the other kind of knavery opportunism right and that's more along the lines at a public choice critique so our Navis nature can come out in the form of our you bristol ambitions or in form of our opportunistic ambitions right so what's good government supposed to do constrain those ambitions so think about the founding fathers when they sat down to write the constitution right what does Madison argue what's his argument he says if men were angels there'd be no need for government if government was to be run by angels there be no need for constraints but precisely because men must rule over other men we have the first in power and then constrain that's the paradox of government alright that's the paradox of a constitutionally limited government how do you get that to work well so what I want to sort of get you to think about here is on this axis we have some notion of economic goodness peace prosperity autonomy right and on this axis we have behavioral assumptions know what's going on here if God was in charge right if God was in charge meaning a being who is omniscient benevolent and all-powerful alright so we can't like sneak something in here like you know they don't have all the power whatever if God was in charge there would be no difference in systems okay that's where you would have you would max whatever you know given the realities of the world that you live in you would all have economic goodness at the same level okay but the question is from that point of view well how does the system deal with deviations in the argument that Mises and Hayek are putting forth is that that liberalism the system of private property rights is going to be very robust against deviations from omniscience and benevolence so that even when we're down in here where people are as they are sometimes you know not very good sometimes not very smart you're still going to get a high level of economic goodness but under socialism when you have slight deviations right this I could draw this the way I wanted to do i normally draw this I'm not very good with computers okay so this is my problem so normally when I draw this what I do is this this collapse is very fast okay and this you know is very robust a robust estimator so for those of you who are like into the understand what I'm talking about David Levy who so you tell you a little story about scholarship they believe he was a professor of mine but he's actually one of the most difficult people to understand you know what he's saying so when I was teaching up at NYU I wrote a paper on nieces that got published in the in the the hand the sort of big book that was published on methodology I was invited to write the piece on visas and I chose to write it from the point of view of Willard Klein's stuff and I talked about you know Klein and nieces and the nature of the arguments and analytic philosophy and how there might be parallels and whatnot and Tyler Cowen read when it came out he writes to me and he says hey he goes that's a great article but it's just like what Lee be used to argue so I'm like really leave you used to argue i don't remember that in a lecture so i contacted david because he's very sensitive as a lot of scholars are to these kind of questions I apologize to David I really apologize i'm sure i must have heard it in a lecture and it just was in the back of my head and I never did anything he goes he laughed and his characteristic way and he says you know that because I don't worry about it it's it's you know I got the idea for Mario and he goes as long as you cite Mario you're okay Mario was in the office right next to me and I was like no I didn't save him either and so I felt very bad it's the same thing with the robustness stuff I've been talking about this robust and stuff since my dissertation and I thought I was only one ever talking about these things if you read my my dissertation it's called the political economy of Soviet socialism and I start talking about this whole thing about robustness even back then and then leave eee started working on robustus but leave does it from econometrics and when he talks about is robust estimators and so yeah an estimator that looks like this which is an ideal estimator all right and then you have robust estimators which are like that okay and what levy argues is that robust statistics like for example what kind of statistical one out the current crisis i was just watching a YouTube video this morning on quants has anyone seen this YouTube video on the Clontz anyone you should watch it and you know but what they did was they use basically what they used was very refined models which were not robust against deviations from their assumptions so they were doing ideal predictors as will walk set in the in the video if housing prices had never fallen we all would be still making a boatload of money right but what we didn't have is a downside risk or what to leave now seem to leave refers to as taking into account the fat tails right so a Black Swan event or something um so what levy argues is that what you should have is robust statistics okay but nobody's saying there in order to use robot robustus you trade off right from the deal what I'm doing here which is what I go up in my own way was that in the socialist calculation debate this wasn't what they were talking about Mises and Hayek were insane that under an ideal system right that socialism for example would outperform capitalism the starting point was that socialism and capitalism under the ideal conditions of general competitive equilibrium produce identical results and then what happens is what are the the claims against deviations from those assumptions and so I have socialism collapsing and liberalism painting over a longer period of time and I think that's the way to understand what Mises and Hayek er are arguing so again let me just make sure to clear about this because there's some confusion sometimes within the Austrian literature about various different positions one of the reasons for this is kind of a simple explanation which I don't I just want to say even though I don't believe it's true but sometimes people will say things like well Hayek didn't emphasize private property he actually doesn't use the word private property all that much he chooses instead to use the word several property or separated property but it's the same thing right it means you know you all matte black shirt right or I could say you know that black shirt is yours I don't say that black shirt is your private property I just say well that black shirt is yours and that blue shirt is yours we have several property here that's still private property right so but let me just so let me get that so Hayek does never never denies private property private property is at the core of his argument will come back to this in a second but so private property as i said before property prices and profit and loss gives you what incentives information and innovation innovation through the ability to engage in calculation okay and so what what you got to see here is that like an arrow property is the basis for giving us prices prices are the knowledge necessary to engage in the calculations okay so this is the sort of Austrian triangle of economic understanding property provides the basis you can't get anywhere without property because without property you can't get prices without prices you can't calculate all right so you have to see these things as interrelated so here's the brilliance of Hayek okay the main point about which there can be little doubt is that Smith's chief concern was not so much with what men might occasionally achieve when he was at his best but that he should have as little opportunity to do harm when he is at his worst it would scarcely be too much to claim that the main merit of the individualism to which he and his contemporaries advocate is that is a system under which bad men can do least harm it is a social system which does not depend for its functioning on our finding good men for running it or on men becoming better than they are now but which makes use of men in all their given variety and complexity sometimes good sometimes bad sometimes intelligent and more often stupid so what is high x8 was the great discovery of the classical liberal economist Smith in you right it was that under a system of private property and free competition we will marshal the ordinary motivations of man to generate publicly desirable outcomes that's high x interpretation of the invisible hand and it's at the core of what it means to do economics all right and the way you understand how the invisible hand the mechanism of the invisible hand all right is you're going to take a behavioral assumption put it inside of an institutional filter and then generate its equilibrium properties so now can anyone tell me where they've read that before in a contemporary philosophy book by the way come on Peter this is a softball for you buddy this is Robert Nozick's discussion of what invisible hand explanations are that it formed the core of Anarchy state in Utopia he has 14 examples right and what other one of those examples one of the number one of them is the economic calculation or social is Commonwealth all right what's another one the Austrian theory of the business cycle all right this is Robert Nozick in writing and Anarchy state utopia singling out what is the intellectual agenda for understanding invisible hand explanations all right and he relies on the understanding of Mises and Hayek in this regard ok now I'm going to get to the fail application of these ideas in a second but I want you to consider again just very briefly the fate of FA Hayek this is a I was the FA Hayek lecture at the lse this is my my lecture is this is all on this fake because Hayek you know taught at the lse and I got to give a lecture as one of the thrills of my life at the old theater which is where Hayek gave his lectures in 1931 on prices and production and I got to give my lecture at the same place I gave it in front of 400 people or whatever it was fascinated really want to think and what I chose to do was try to explain the fate of Hayek during the period that he was at the London School of Economics till he left to go to university of chicago and it's a very interesting fate because again as I said to you the other night in 1931 when Hayek first came and gave those lectures he was a rock star right he was like people were like oh my god this guy is a genius everyone became a high I can't people were swarming you know so you know it's like just a mat you know like he was he was he was cool right he was it and then by the end of the decade everyone's like a high x miok and not only that it was his students who did that so just to give you some thing here at a learner road is dissertation with who fa hayek and what was his dissertation call the economics of control and what's that book about the victory of soap market socialism and Keynesianism Hayek was his dissertation advisor so to put it in modern parlance and you'll have to edit this out Hayek in my opinion is sitting there with one WTF what right you know what happened how do these guys get screwed up and that explains why Hayek moves into weird things like philosophy of science and political and legal philosophy it's precisely because he's searching for an answer of how it is that these bright and brilliant students that he's working with can get it so wrong when he's so right and he's like what happened right so on one hand he goes on a march of analytical economics that's leads to the pure theory of capital and other things like that right but on the other hand what else is he doing he starts in an abuse of Reason project in the middle of being a technical economist who does that right here he is this he was at that time one of the leading economists you could arguably argue one of the two leading economists in the world and that's not making stuff up John Hicks when he writes his essay on on the twentieth century he says the critical debate of the 20th century is Hayek vs Keynes when when shackle writes his book about the 20th century it's called the years of high theory Hayek versus canes ok it's not like Hayek was a no-name he was a big factor he was an it factor in economics ok and all of a sudden he has no one believing him anymore he's like well why would they do that and the reason why they would do that is because they must be misled by a bad philosophy to think that some arguments because what this philosophy determined it determines not only what are good questions to ask but what are acceptable answers to provide right you can't do science without philosophy that's my concession to you here you can't do for you know science without doing philosophy because philosophy defines what are the good questions and what are acceptable answers and so Hayek thought he had the and then his students are flipping them all around on it means like I mean that doesn't make sense and the other thing is is if you look at him in 1933 he writes an essay called the trend of economics and his basic argument in that essay is that if you are an economist you're all a safe heiress why would you pls a fairest if you're an economist remember this right you would know Adam Smith that's what it means to be an economist and if you were if you were an economist you would know that the local politician he doesn't have any judgment over the local individual and those who think he does they're like engaged in mettlesome preferences which is we don't allow his economics so in 1933 he's talking about the trend of economics the only way in which you could get an argument against economics this is if you denied the teaching of economics so how could it be that the best trained economists were now arguing for the opposite of this that's this that's the intellectual puzzle that confronts high it and it must be that in Hayek's member i said that an ongoing conversation so think about this conversation in the english english language debate Mises puts forth the challenge longa and learner try to respond Hayek provides the rejoinder and he doesn't win in the eyes of his students they're still doing market socialism and what they're using is neoclassical economics Abba Lerner said the following thing Marxism is the economics of capitalism all right socialism right neoclassical economics excuse me Marxism is economics of capitalism neoclassical economics is economics of socialism that was an argument by learner to understand by the way just very you know put this in your little note file to look up after you get out of here but read Milton Friedman's review essay of a learner's economics of control because built Friedman anticipates the public choice criticisms of socialism in that review essay he says that learner engages in policy as if it's in a vacuum therefore eliminating all the administrative costs associated was doing socialism and that's what he does add economics but it Hayek tries to take a different tack which is learners economics is bad so why is it that learner because learner and if you read the use of knowledge in society he says when we are at a period of time we're a great theorists such as Joseph Schumpeter could be misled and the reason why schumpeter was misled Hayek puts the argument on is because schumpeter was doing a equilibrium based theory of market socialism in which in equilibrium the value of the consumer goods is perfectly imputed back to the value of the producer goods needed to produce them which would be true in general competitive equilibrium and high x whole point and nieces his point is that you can't get that valuation without the market process and in the system of simultaneous equations of all us okay there is no process it's a mathematical so you get as Hayek says you get once you have consumer values you can impute back the producer values without any intervening process because it's simultaneous determination in the model and Hayek's argument is you can't make that ipso facto claim so right there and then you have all the beginnings of the germs of the idea of the development of a mature theory of the market process how is it that you're going to impute the values back well you need an intervening market for capital goods right you need property prices and profit and loss there is no such thing as simultaneous determination of the prices in an economy prices emerge out of the competitive market process so when he writes his competitive solution paper it's like you have to discover the cost curves a fresh every day the market has to adjust to that it's not that you can sit there and assume the costs are given all right and as you know and this is leads to all this sir particular emphasis in the high icky androgenic genda they don't get it all these people don't get it and so as a result Hayek start saying well why wouldn't you get it am i and keep in mind that he tries several bites of the Apple to make sure that he's not miss stating his position it's not like he just says it once and says okay and he refuses to accept the proposition that other people are evil or stupid right or they agree with him so he's constantly 'king in the mirror and thinking to himself what the hell what's going wrong right and so as a result what he does is he says it must be that they got the wrong philosophy of science so I'm going to engage in abuse of Reason project right and this culminates in the counter-revolution of science essays in the 40s and then in even in his political philosophy work you can see the outgrowth of the abuse of Reason project as being the constitution of liberty in which he said he adopts the you mian dictum i'm going to use reason to whittle down the claims of reason and you can even get to the end of his life when his last book is called the fatal conceit it's an abuse of Reason right that's the ueber istic bias right I'm going to have you Bruce all right so he also says man these guys aren't in attention to institutions they think that remember like in the in the dovetail that if you're in general competitive equilibrium there's no institutional differences between socialism and capitalism but all the really interesting action is in the institutional differences so we need to worry about property law right we need to understand the role of contract we need to understand the role of politics in terms of rent-seeking or privileges this is why for example of any of you read Hayek he makes a distinction between law legislation he even goes as far as to try to go to what's the science of study the origins of words etymology right he goes in and he says look privileges it's rude is in ledges right which means what that you know special to one as opposed to the law which is about generality all right so he's against legislation but for right the law right and so he's going to go into the political illegal next so the big move from Hayek in the 50s through the 60s is to move away from technical economics to find the root cause of why the debate screwed up in philosophy of Sciences in this in a large a large sense Mises is left to pick up the task of developing the economic response and he starts to develop his theory of the market process the market is not a place or a thing right it's a process and more and more emphasis from human action on word is about this idea of the market as a process by the way you can read it in his original 1920s paper too he says socialism has no problems of statics it only is a problem of dynamics that's the same thing as saying in statics the two systems are ideal dynamics how do you deal with it socialism has no waiting to deal with dynamics Mises has some wonderful lines even though he didn't you know it wasn't a native English speaker but yeah it's like absolutely wonderful passages things like the boil doreen throng of economic possibilities he's trying to emphasize to you how difficult it is for monetary calculation to work even under capitalism precisely because of I can show you how difficult it is for people to peer through the future that the future is unknowable but not unimaginable and somehow the system of property prices and profit loss guide us through this then if you take those mornings away how difficult do you think difficult to the point of impossible right because you're not even going to have that data you're not going to be able to work with it so the implications of the debate soakers nurs development of the entrepreneurial theory of the market process coming on the heels of Mises and then finally I would argue that the implications of the debate for social philosophy and policy and this is more towards the Philosopher's here but this is why I mentioned before alright because you know what is the core claim against classical liberalism from the left right originally it was not that classic gin generate prosperity read the Communist Manifesto marks admits that the bourgeoisie brought on to the world greater wealth and we ever could have imagined all right it's not that they autonomy individuals have more rights under liberal systems than they ever had previously okay all right it's not that we didn't get peace all right compared to the past peace was dominating though no to capitalist economies ever fought in war against one another right free trade what is Basquiat say if goods and soldiers don't cross border soldiers certainly will all right so you know that was a standard idea so what was the big missing thing in the late 19th century justice claims about distributive justice all right and so then the argument has to be okay well how are we going to engage in these claims right and distributive justice can we treat to fair division as if the economy is like a candy bar that I'm dividing between my two kids Matthew and Stephen they go out on halloween they get the big snicker bar that's what they want alright so if I left it to Matthew who was older than Steven right he and I'd say Matthew you know why don't you split that candy bar with your brother he would like if Steven like this much and like take the rest right so what I might say instead is hey Matt you cut Steven you choose and at that point Matthew will have like even though he's five years old and the little ones three years old right he'll have a measuring rod out there to do it exactly right because he knows even a three-year-old ain't going to take a sliver like this alright so that's questions a fair division people r a books about that but that's not how an economy operates so no zyk devotes the whole second chapter of Anarchy state and you tell a second part of the book in Anarchy state in Utopia to addressing these issues about justice and Israel Kerzner has a whole on capitalism distributive justice it's called neo capital of discovery capitalism and distributive justice ok so there's huge implications for the debate David Schmitz right now is developing he's probably the best classical liberal philosopher in the world right now it's in my opinion it's a toss-up between Schmitz and Lauren lemansky and Lauren is the most entertaining to be around but that's that's a whole other story but I would say those two guys are sort of at the top of the list of serious philosophers from a classical liberal point of view and not that there's a whole bunch of other people who are really good they're just they would just be the ones I and Schmidt's is developing a whole bunch of theories right now in justice issues he has a books called the elements of Justice in which he tries to engage in all these debates and one of the things that Schmitz is really pushing forward is the idea of you know not abstract philosophy but concrete is the way I would put it right that that like the philosophy of everyday life right it's like the people it's it's not abstractions from humanity and then figuring out right rules it's like the rules that people would live by in the real world that could get them by and so I think Schmidt's is is making some really important contributions in this John wall's just the one last thing on this in the theory of justice has another history of argument history of argument going on in the footnotes in that book again beyond this go and look this up get the book out and go and look and what you will find even though he rejects utilitarianism and all these other things like that in the sub context of the footnotes his argument works to get the second to get the difference principle right because he believes that it won't have any impact on productivity and where does he get that argument because he sides with longa and learner in the socialist calculation debate if he does inside with long at lerner the system collapses therefore it's not workable so you get the first principle justice but not the second principle okay that's my hypothesis to you to go and test okay so this is my teacher Don the boy unfortunately passed away coming on to almost a decade now from pancreatic cancer at the age of 50 he had a lot of things left in him to write and it's a real tragedy but it's a shame that he got ill and whatnot but in 1985 you published two books both of which i will highly recommend to you one is a technical book on the socials calculation debate another book is a book called National Economic Planning what is left which is a policy oriented book potato published it and hopefully I think Kate was going to have it online very soon because it's very relevant to the world that we're in today but Don's basic point he was a student of Israel kerzner but Don's basic point was that if in the in the calculation debate the two parties missed each other in the conversation because the Austrians were developing a theoretical perspective on the dynamic market so they had a notion of competition as rivalry whereas their opponents had competition as an end state so again that's language that you should also recognize that knows accuses in the debate over justice right the issue between process-oriented ethics all right and end state ethics right okay so this is what lavoie is sort of developing for the sub context of this is that there's also an implication of this debate is that socialism in practice is not what people think it is because if it's true that socialism is technically impossible right what was going on in those socialist countries right socialism the complete abolition of private property in the means of production and the abolition of commodity production right and complete and comprehensive central planning that wasn't what was going on something else was going on and you have to open yourself up to that so one of the things that happened was the best work on soviet ology happened f stalin died but before they have the what's called there's a what's called the 1956 there's called the full generation so Stalin dies they open up the country scholars go over for about a period of five years and then they shut it down but during that period of time there's a whole generation of works which actually try to do ethnography of Soviet actual life and the development of the idea of the myth of the central plan there's one of the great books by economist named Joseph Berliner who taught at University of Wisconsin and he says blatt is higher than Stalin which was a quote that was used by state officials state you know planning officials blatt which means corruption bribery is higher than Stalin so what you have to understand is the Soviet system was not a centrally planned system it's it's something different the macroeconomics is then we're going to sort of you know emphasis on economic growth statistics so what happens is that in the economic growth statistics we get Keynesian analysis of made-up Keynesian data right which is we're going to infer what it is that their growth rates are so we're going to try to redo their growth rates now one of the things that's important about GDP accounting is to read simon kuznets who was the founder of this a methodology his criticisms of that methodology not the Soviet but in even in the United States so one of the things that Kuznetsov is GDP you don't want to have double County right so what GDP did was it relied on the idea that we were in a competitive equilibrium because price has to equal the marginal cost everyone knows that about price is a characteristic of price and an equilibrium is that that condition as the whole right so now think philosophically for a minute what actually that means right it means that the full opportunity costs of your decision is taken into account full opportunity costs of your decision is taken into account right now when I add those things up I have a coherent whole one piece of truck to be struck to review so far like this right and I'm able to add it up I'm able to aggregate and then I get something meaningful but if the price is not that reflecting the full equilibrium value when I add it up i'm adding apples and oranges so cuz nets argued that what we have to do even in a capitalist economy is understand how it is that you would try to jigger things right so that when you're adding up less than full equilibrium prices right you would somehow be able to get some meaningful aggregate out of it that's why GDB accounting becomes a very difficult thing okay well what about a world where there is no market prices it's all administered prices they have no third it it's not even like a market economy that's groping right it's ministered prices that are being added up so how the hell are the Soviet officials going to then refigure them so that you have any meaningful notion of gross domestic product let alone the CIA trying to refigure its figures okay here's another way to get very technical about aggregate economics ok this is technical that's a formal proof I just gave you one weighs 300 pounds the other one weighs 300 pounds ok sad sack McGee right happy healthy okay they both weigh 300 pounds the aggregate figures not telling you anything okay because what matters is the structural composition all right the Soviet Union was sad sack McGee okay and we were looking at we say oh look at the great growth look at the great growth that took place I'm not making this up in a JP II article in the 1960s an economist's wrote the following thing meet Mises used to say this if ever you say you'd say the students don't worry every statement that you might make some famous economist had said something stupid more stupid than that all right in the jpe a very sophisticated statistical analysis on soviet collectivization concluded the following the collectivization while having great losses to the human and livestock population nevertheless led to a tremendous increase in per capita GDP hmm let's think about that for a second the policy method to increase per capita GDP is cut the denominator that's pretty amazing isn't it okay right okay how does maybe he's too subtle okay so we really have to look at the costs of collectivization not in terms of aggregation that doesn't give us structural composition and we have to look at the cost of of collectivization not in terms of cutting per capita GDP to raise you know executing cutting denominator to raise gdp per capita GDP but actually what were the consequences in the Soviet Union what were the adoptions what was going on we need to get access to the system but we weren't out okay so one of the things that happens and this is one of the great Murray Rothbard in man economy and state again footnote take on going after you you are here and go pick up man economy and state and look up the analysis of both public ownership and socialism in Rothbart's man economy and state and one of the great claims that Robert makes in that book right is that we overestimate the amount of socialism in Russia and we underestimate the amount of socialism in the United States so I you know that's written in 1962 written in the 50s but the key issue here is that the Soviet type system was one of the bill pretty rights what do I mean by this property rights can be divided up into two types of bundles control rights and cash flow rates and what you had in the Soviet Union was control rights but not explicit cash flow rights so again what do we know about union or also economies was that they were shortage economies okay that meant that their prices are below the market-clearing level so the quantity demanded right is going to exceed the quantity supplied shortage economy all right now what does this mean well this this isn't where the market stops right how many here have ever you know been at a concert where the tickets sold out and then you went to a scalper okay we got one honest person to may be here if it forget a concert go to a sporting event all right how many of you waited online to get to a concert so what was the real price of the ticket that you just bought right the monetary value plus how long you waited in line to get the ticket right we got to go up to the demand curve okay and then we come on over this is the real price of the good this is the official price okay so what does that represent these are non monetary costs to the buyer without simultaneously be monetary benefits to the seller so everyone with me there are non monetary cost to the buyer that are not simultaneously monetary benefits to the seller in a normal market right the exchanges are right at a bonnet a monetary cost to the seller is a monetary benefit to this to the buyer to the excuse me to the monetary cost to the city to the buyer is a monetary benefit to the seller that's how they were you know work the exchange so now remember when I said they have control rights but not cash flow rates what we economist call a rent right they want to get access to the rent so use an example away from the Soviet Union New York City under n control rent control means what the price is below the market that's why there's a shortage on apartments so what do you have to pay Kerzner actually gave you an example of this yesterday right what do you have to do you usually have to buy a key fee you have the rent controlled apartment but then you have to buy the key to get into the apartment and the key is what the rent tries to capture that that thing a not right so if you have control rights but not cash flow right you're still going to try to transform these non monetary costs in the monetary benefits or sell this by the way is the experience that all posts the Soviet type people experienced in markets in the Soviet Union this is their black market experience this is what they think markets are like okay so what goes on in the transition from socialism right we have a collapse there's a myth of the central plan so we have ownership rights and rents we have to engage enough from here to now you can't just start with an imaginary start state you have to begin with the recognition that someone owns these rents and this flow of those rents and they have to be somehow we've defeated and so in a lot of my work and we're nice i'm just now going to spill you know spin through this real quick because when i ask some questions or whatever but a lot of this work is about rent seeking in the transitional gains trap establishing a credible commitment by the government so that they won't interfere in the market economy in the future and what you have to do with signaling and commitment ideas so to put this in a more blunt sort of way this is the basic program so communism collapses and the first thing we have to recognize is that transition problems are not economic problems but their political and legal problems economic problems are not they're not even on problems because the economics will solve it if you establish a credible commitment that you're not going to interfere with discretionary policies agents within the economy are going to transact and realize the gains from trade so to the extent that you cannot that they are economic issues there are really simple economic issues simply get out away let individuals realize gains from trade let me put this in a very concrete example for you guys here first class mail fax machines email first class mail US Postal Service right governed by a postal monopoly deployer right us employer postal monopoly

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