This week, Jordan Peterson released an interview titled, “Is Property Theft?”, with Austrian economist Robert Murphy. The conversation was fast and exciting, with a lot of references to books, articles, and other ideas from Austrian economics thrown in.
Since this is likely to be the first introduction to Austrian economics for many people, I am taking it upon myself to release a “study guide” of sorts for this interview. Here I will give citations, references, and other explanations for that may have gone by too quickly for the audience.
As a table of contents, I will use the time stamps from the original video as they appear on YouTube. Almost all of the links will take you to a free book, article, or lecture. That’s one of the great things about Austrian economics: there are a lot free learning resources.
A word of warning: the first few sections are much longer than others, as they provide a lot of necessary background information. Feel free to skim the information as needed on a first pass, and come back to it later for more details.
[2:30] Jordan Peterson Introduces Robert Murphy.
Robert Murphy has an active blog that goes back more than a decade, and covers many different topics. He’s also active on Twitter. He also goes by Bob Murphy, and has an active podcast covering current events and general economics, as well as an older podcast (and affiliated annual cruise) dedicated to discussing the economics of New York Times columnist (and Nobel Laureate) Paul Krugman.
[2:30] Learning about the Austrian school of economics.
Peterson references “Mises”: this is Ludwig von Mises (1881-1973), an economist born in the Austrian empire. He has written many books and articles, all of which are freely available online, which I’ve collected here. Mises is the most important figure in the so-called Austrian School of economics, as it was his books, personality, connections, and activism that inspired several generations of economists both during his time and in the decades after his death. So it may be useful to provide a brief biography, in bullet form:
- Mises first became interested in economics after reading Principles of Economics by Carl Menger (this is the book credited as founding the Austrian School). As a student and then a young economist, his foremost mentor was another giant of Eugen von Böhm-Bawerk (pronounced in English as Oygen von Bome-bah-verk), a student of Menger’s who then became the Minister of Finance to the Austro-Hungarian empire.
- Mises’s first claim to fame as an economist was his book called The Theory of Money and Credit (originally published in 1912; Murphy created a free study guide), which put forward two important ideas: first, the “regression theorem” which interests a lot of bitcoin theorists, and second, what came to be known as the Austrian Business Cycle Theory. More on each of these later in this study guide. After publishing this book, he was called to serve as an officer in the First World War.
- While living in Vienna, he worked as the chief economist of the Viennese Chamber of Commerce, a very prestigious position at the time. He was also very plugged into the “coffee house culture” of the time, where the top intellectuals of Europe would regularly meet in coffeeshops (and elsewhere) to discuss academic and political topics. Mises had earned a following for himself as well, made up of economists who would go on to teach at elite schools around the world. Perhaps the most famous participant at these seminars was Friedrich Hayek (which we will have more to say about later), who went to win the Nobel Prize in economics the year after Mises died.
- In 1921, he published an essay called “Economic Calculation in the Socialist Commonwealth“, which put forward the idea that it is impossible to calculate profits and losses in a society with communal ownership of property. (I’ve summarized this argument using one-syllable words here.) He expanded on this essay with a full-length book called Socialism: An Economic and Sociological Analysis, which gives a comprehensive account of all the features of socialism—not just the strictly economic impacts, but the social/cultural effects as well, including the effects on the family, on international affairs, and the relations between the sexes.
- As he was Jewish, he fled his home in Vienna just before the Nazis embarked on the Anschluss—which proved to be wise, as the Nazis searched his home and stole his papers, perhaps looking to see if he secretly had worked out a solution to the economic calculation problem. After the war, the Soviets got a hold of his papers, and they were only re-discovered in the 1990s by Richard Ebeling.
- Mises first fled to Switzerland, then New York City. By the time he arrived in the US he was in his 60s, and began teaching at New York University, while continuing to write books and giving public speeches. In the US, he published several major works: Human Action (his magnum opus, a treatise containing a coherent unified explanation of every branch of economics, from methodology, to production theory, to the economics of war, and more; Murphy has a detailed study guide), Theory and History (on the differences between theoretical research and historical research); The Ultimate Foundation of Economic Science (on why the method of the social sciences is unique and distinct from that of the natural sciences); and Bureaucracy (on the purpose, nature, and dangers of bureaucratic management as opposed to profit-based management—I’ve summarized this book in one-syllable words here).
- In New York, his reputation from Vienna preceded him. He again was able to attract a following, most notably the most important “American Austrian” Murray Rothbard. Mises had a famously intransigent personality, clashing often not only with intellectual foes, but also those ostensibly on the “same team” as him, including Milton Friedman. Friedman recalls a story of a heated debate at a conference of free market economists, where Mises left the discussion in disgust after saying to his interlocutors: “You’re all a bunch of socialists!”
- Mises died at the age of 92. His life motto was the Latin expression from book IV of Virgil’s Aenid, “tu ne cede malis, sed contra audentior ito”—”do not give in to evils, but proceed more boldly against them.” Towards the end of his life, he met a young publisher named Lew Rockwell. After his death, Rockwell and Rothbard worked with Mises’s wife Margit to set up a think tank in his honor. The Ludwig von Mises Institute was founded in 1981, based in Auburn, Alabama. The Mises Institute has digital copies of nearly all of Mises’s works, and offers them for free download. (The Institute has many live events as well, including a week-long student conference called Mises University.) Many of Mises’s personal papers are physically held at Grove City College.
- Although he officially lost his nobility title “von” after the Great War, for whatever reason he continued publishing under his old name. He would sign letters to friends as “Lu Mises”, and the correct citation for him is “Mises, Ludwig von”.
- Mises had a younger brother, Richard von Mises, who was a highly successful applied mathematician and probability theorist at Harvard (his work is still cited by engineers to this day). Mises had his own unique probability theory which he spelled out in chapter VI of Human Action.
For the most comprehensive biography of this person, see Jorg Guido Hulsmann’s Mises: The Last Knight of Liberalism.
Peterson references Murphy’s book “Choice: Cooperation, Enterprise, and Human Action”, available for purchase here. Murphy’s book is a simplification and distillation of the ideas found in Human Action, for a modern audience.
Murphy says Peterson’s comments on how people respond to social cues and other feedback are very “Hayekian”. This is a reference to Friedrich Hayek, another Austrian School economist. Hayek is most famous for his formulation of “the knowledge problem”, based on his article The Use of Knowledge in Society, his argument (based on Mises’s essay on economic calculation) being that knowledge is dispersed in society, and cannot be grasped by one mind alone; this is why free-market exchange is important, since (according to Hayek) they in effect aggregate all this information and distill it into a single number: the market price. Without private ownership of the means of production, there is no free-market exchange, and no prices; thus, central planners cannot have the information they need to allocate resources efficiently.
A brief biography of Hayek (1899-1992), as he is perhaps the most well-known Austrian economist today.
- Hayek was originally a socialist at the University of Vienna, before reading Mises’s Socialism which converted him to a free-market position. While never officially a student of Mises, Hayek was a frequent participant in Mises’s private seminars.
- In fact, it was on Mises’s recommendation and fundraising that Hayek got his first job at the newly-created “Austrian Institute for Business Cycle Research”. Hayek went on to teach at the London School of Economics, where he built on Mises’s theories on the business cycle to later publish The Pure Theory of Capital, which would establish him as one the top economists in the world.
- While in England, he developed a friendly rivalry with John Maynard Keynes on the merits of central planning during a depression, which has been immortalized in a series of popular educational rap videos.
- Towards the end of WWII, he published a book called The Road to Serfdom, an international bestseller warning about how the infringements on liberty instituted during the war may slowly grow over time, until the the free-market system is replaced by a quasi-feudal one.
- After the war, he moved to the United States and became more interested on the evolution and design of political institutions, publishing The Constitution of Liberty; Law, Legislation, and Liberty; and much more.
- He was extremely influential in academia and politics: he is one of the most cited economists ever, he won the Nobel Prize in economics in 1974, and the Presidential Medal of Freedom in 1991. When Margaret Thatcher first came to lead the Conservative Party, she is said to have slammed down a copy of The Road to Serfdom in a meeting, declaring “This is what we believe.”
[6:00] The basics of Austrian economics by Ludwig von Mises is distilled in Murphy’s book ‘Choice’. Robert outlines the basic building blocks of this economic system.
Peterson and Murphy give a very brief account of what the “Austrian School” is and what distinguishes it from others schools, so here is a more detailed bullet-form list going over these basics:
- First, some background. People have been theorizing about economics for thousands of years. But it’s only relatively recently that the science has been taken seriously. Adam Smith is often said to be the father of classical economics, with the publication of his book The Wealth of Nations in 1776 (here is an introduction to Smith written by Mises). One of the many questions Smith sought to answer was, where do prices come from? His answer was that prices reflect value, and value is an objective notion based on how much labor it takes to produce something. This became known as the labor theory of value (LTV), and it influenced economists for the next century, including Marx. The use of the LTV to explain prices, in addition to an overall objective view of value, became known as “classical economics.”
- The “Austrian School” or “Austrian economics” is shorthand for the “Austrian School of economics”, a “school of thought” within economics originally founded by a Viennese economist named Carl Menger. In 1871, Menger wrote a book known in English as “Principles of Economics“. This book used a particular method of theorizing: a logical, step-by-step verbal account of economic principles. It did not use or invoke any mathematical or statistical relationships.
- Moreover, it introduced the concept that value is subjective—meaning that each individual had their own unique value on the same object, which determined how much of a good they wanted and when. This more generally explains why exchange is possible in the first place. If everyone valued everything exactly the same, then why would anyone trade with another?
- Finally, Menger flipped the traditional way that classical economists explained the difference between the prices of consumer goods and the materials that went into their production. The objective value theorists believed that the prices of inputs and outputs are determined more or less independent of each other, based on how much labor goes into each. But Menger had a different idea: specifically, that there is sequence to production: first, entrepreneurs anticipate revenues they can likely generate by selling something; then, using that as a guide, they value the tools and labor they will require to produce that good at an accordingly less. Because if they valued their inputs higher than (or even identically to) the value of their output, it wouldn’t make sense to produce anything at all.
- The term “Austrian economics” was originally meant as a term of derision. It came up in a debate Menger had with scholars of the German Historical School, who believed that there were no such thing as universal economic laws. Menger argued the contrary position, in what became known as the Methodenstreit (“debate about method”). The Germans were not impressed by Menger and his method, and denounced him as mere Austrian, as opposed to a mighty German.
- Those influenced by Menger were, initially, mostly based in Vienna. They carried on his tradition of verbal argumentation, and refined his method over the years. While the historicism of the Germans eventually fell out of favour, economics based on mathematical and statistical/aggregate reasoning took its place. Mises has contributed the most into Austrian methodology. His position regarding the use of math in economic theory can perhaps most starkly be summed up with this quotation from Human Action, chapter XVI, section 5:
- “The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena.”
- To summarize, the Misesian/Austrian position on the proper method of economics is this: economics starts with one axiom (so-called the “action axiom”): humans “act”, simply meaning we have the power to choose. Without this axiom, it is impossible to distinguish between the behaviour of humans and the behaviour of rocks. Understanding this axiom is what enables us to interpret the actions of human beings.
- This axiom alone has some basic but important logical implications about time, preference rankings, and uncertainty. The action axiom does not imply that humans are always choosing, or that they are somehow immune to the laws of nature. Rather, it simply posits that humans can choose, and its analysis is only valid in the scenarios where people are in fact choosing.
- But to make the analysis more interesting, certain empirical assumptions are later added to better reflect the real world. The analysis is always a chain of causation that, at its root, is based on the fact that human behaviour encompasses more than just unthinking reactions to external stimuli. Some modern Austrians refer to this as the “causal-realist approach.” This is in contrast with the “mainstream”/”neoclassical” mathematical approach, which uses deterministic equations based on highly “stylized” (that is, fantastical) assumptions about how people behave.
- The distinction between the mainstream mathematical approach is this: their fundamental assumptions are metaphorical to ensure “tractability” (or convenience). They assume people act “as if“ they could perform instantaneous complicated calculus, and have preferences and values that are convenient to model and represent mathematically or in aggregate.
- Mises called the general science of human action praxeology, and the more specific application of praxeology with the added assumptions of the existence of money catallactics.
- When Mises and Hayek moved to the United States, Austrian School was in decline. The mathematical and statistical/aggregate approaches were taking over the academic journals, and winning influence with politicians. (They became known largely as the “neoclassicals”, with several other schools within them.) But Mises and Hayek did not give up: they continued writing and speaking to try to foster a new generation of followers. Given where they were living, it should be no surprise that most of these new Austrians were Americans.
- The most notable of these early American Austrians was Murray Rothbard (1926-1995), who in publishing the treatise Man, Economy, and State in 1962 (think of it as a follow-up to Human Action; Murphy also has a study guide for this), along with being a major protagonist in building new think tanks (including the Mises Institute and the Cato Institute) as well as educational outreach efforts with public seminars, student conferences, and a variety of publications, was instrumental in the revival of the Austrian School. Also notable from this era was Israel Kirzner (1930-Present), one of only a handful of people to earn a PhD under Mises, whose research on entrepreneurship continues to be influential today.
In short, the Austrian School refers broadly to a method of doing economics: a verbal, logical method that is based on realistic assumptions about the world and how people make decisions. While most Austrian School economists are based in the United States, there are adherents all over the world. Even though there are fundamental differences between how the Austrians and “mainstream” non-Austrian economists do economics, there does exist broad agreement on the basic issues. But there are many important differences that necessarily arise due to the different methods of interpretation and analysis.
- Here is an excellent lecture by Jonathan Newman on the differences between Austrian and mainstream “macroeconomics” (Austrians actually reject the distinction between “micro” and “macro” economics, as the presenter makes clear)
- Both Austrians and the mainstream disagree with the fundamental arguments of so-called Modern Monetary Theory. Here is a debate between Robert Murphy and a proponent of MMT.
[11:30] Theories of Value, Marginal Utility, Utility, Labor.
Peterson asks, “Why on the margin?”
Menger’s book was part of something that later came to be called the “Marginal Revolution”, an intellectual shift between the classical objective theory of value approach, and this new method developed independently in 1871 by Menger in Austria, William Stanley Jevons in Britain, and Leon Walras in Switzerland.
- What all three argued was that when two people decide to trade, they are not trading things of equal value; rather, each person in a trade believes they’re getting something more valuable in return than what they’re giving up. What’s more is that each trade is between specific units of goods: you are trading a specific quantity of money for a specific number of (say) water bottles in return.
- Where does the word “marginal” come from? It comes from fact that before you trade, you have some stockpile of the good in question. And you have some plans for what you expect to do with your stockpile. The larger your stockpile, the more things you can do. You value the different things you can do differently: some are higher value to you, and some are lower value.
- When you make an exchange, and so you give up some portion of your stockpile in an exchange, there are some things now that you cannot do. The question is, did you give up your highest-valued use of what you could do with your stockpile, or your lowest-valued use? The answer must be that you gave up your lowest-valued use, because if all the units in your stockpile are pretty much the same (a crucial assumption), they are equally serviceable to both low-value and high-value uses. And so why would you do something low-value if you have the means and motivation to do something high value?
- A synonym for use is “utility”, and a synonym for lowest-valued is “marginal”. Thus, exchanges are made based on marginal utility. (As an aside, the expression “marginal utility” was coined by the Austrian economist Friedrich Weiser [1851-1926], an especially important influence on Hayek.)
As they overturned the “classical” view of economics, the new era of subjective values and marginal analysis came to be known as neoclassical economics. It’s crucial to note that Menger, Jevons, and Walras had important differences between them. Most importantly, Jevons and Walras came to their conclusions using mathematical reasoning. This required different assumptions from Menger (who used no mathematics at all), because they posited that there exists “total utility” that exchanges can add and subtract from. This influence continues to mainstream economists today. Here is a short paper on how Austrians and the mainstream interpret “marginal utility” differently.
Murphy talks about the “water-diamond paradox”. Many non-economists still make this same error when talking about value. Here is Jay-Z inventing the “water-music paradox”.
[17:00] Why should average people care about how economics works?
Mises devotes the last three chapters of Human Action (which make up only 30 pages) to discussing “the place of economics in society.” This gist of his argument is this: economics is an important science to understand, because it affects social policy—which has ramifications for peace, prosperity, and war. Politicians have it in their self-interest to mislead the public and operate on false beliefs about economics, and it is the duty of the economists to present their ideas in new ways—in order to prevent the spontaneous (or systematic) rise of fallacies.
It’s perhaps best to quote the last two sentences from Human Action:
“The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.”Mises, Human Action (chapter XXXIV, section 3)
[19:30] Will raising the U.S. minimum wage hurt or help young people?
Peterson cites John Maynard Keynes (pronounced Kains), rival of Hayek, and for whom “Keynesian economics” is named after. Here are two brief interviews (one and two) with Hayek and his opinions of Keynes.
Murphy calls Austrian economics “value-free”. This means that Austrian economics per se does not judge what a businessman or politician should do in a specific situation. Rather, Austrian economics merely describes what it believes people are actually doing. Sometimes Austrians will throw around the German word “Wertfrei” to mean this same thing. Here is Rothbard on the concept.
[27:00] The practical price paid for increasing the minimum wage / interfering with the free market setting pricing in general.
See also the drama over the empirical analyses of the effect of raising the minimum wage in Seattle to $15 an hour in 2014: when politicians realized that a study they had commissioned to study the effects of the minimum wage would have negative results, they secretly commissioned another study in order to find positive results. (Austrians would point to this episode as an example where statistical economics can be less helpful than theoretical economics.)
[35:30] Mises’ ideas in the Austrian view of economic structures.
Here is the Bureau of Labor Statistics on who tends to be a minimum wage worker in the US.
Murphy talks about “catallactic functions.” Catallactics is what Mises called the study of the market economy, one sophisticated enough to have money prices. Contrast with praxeology, which is the general science of all human action, and thymology, which is the branch of praxeology dealing with historical events by understanding the motivations of people (sometimes called Verstehen).
[46:00] Relating different parts of the economy from the perspective of Austrian economics and Marxist communism/socialism.
Peterson says that “thought is a labour multiplier.” Here is Mises on the role of ideas in determining action and society. More pertinently, here is also Mises on the role of the creative genius. An excerpt:
“Neither society nor single individuals can substantially further the genius and his work. The highest intensity of the “demand” and the most peremptory order of the government are ineffectual. The genius does not deliver to order. Men cannot improve the natural and social conditions which bring about the creator and his creation. It is impossible to rear geniuses by eugenics, to train them by schooling, or to organize their activities. But, of course, one can organize society in such a way that no room is left for pioneers and their path-breaking.”
[54:00] Does specialization maximize productivity? Is free trade beneficial to all?
See Mises on the role of specialization and the division on labor, in chapter VIII of Human Action.
Austrian economist Per Bylund on “the division of labor being the very core of economic growth.”
Here is Robert Murphy on who benefits from free trade.
Murphy says “even if one person (or country) was better at producing everything, it would still be beneficial to specialize and trade.” This is most commonly referred to as “comparative advantage.” Mises referred to it as the “Law of Association.”
Peterson brings up slavery. Here is Mises on “The Work of Animals and Slaves“: “If one treats men like cattle, one cannot squeeze out of them more than cattle-like performances.”
Rothbard on Marx and alienation.
Peterson refers to “the most important chart in the world.” He is referring to charts that represent the global explosion of wealth per capita. Here is more data on the rapidly improving state of the world. These differences were apparent going as far back as Adam Smith, which is why he wrote the Wealth of Nations. Mises gives a short answer to this question here.
- Perhaps the second most important graphic may be the collection of charts at wtfhappenedin1971.com. Jonathan Newman has a recent article discussing what happened in 1971, as well as the events leading up to it and those that followed.
[1:08:30] Discussing the idea that private property is theft, What rights do we as individuals need to own. Defining what it means to own something.
- A more charitable interpretation is that Proudhon meant specifically private property is “theft” because all property should be “public”. In addition to the economic calculation problems that this would engender, it would also not address the very reason property rights arose in the first place: to determine who gets to use something and when. Rothbard addressed this issue in his essay “Human Rights” are Property Rights.
Mises makes many passive remarks about Proudhon in his works, but mostly in dismissive tones. In his economics works, Mises takes the justification for property rights mostly for granted. This is because justifying property is outside the narrow scope of economics, and instead is properly within the field of ethics. Mises instead simply analyzes what the effects would be of different arrangements of property rights.
Murphy talks about “anarcho-socialists” and “anarcho-communists.” Rothbard put forward what would come to be called “anarcho-capitalism”, and gives a comprehensive defense of it in For a New Liberty.
Peterson talks about the lack of private property in oceans. Austrian economist Walter Block argued for the privatization of oceans in his book, Water Capitalism: The Case for Privatizing Oceans, Rivers, Lakes, and Aquifers (coauthored with Peter Lothian Nelson).
Murphy refers to Mises stipulating that even if the central planners truly want the best for their subjects, and their subjects faithfully carry out the orders of the central planners, there would still be problems knowing where to put factories, etc. This is the argument Mises initially laid out in Economic Calculation in the Socialist Commonwealth (which I’ve summarized in one-syllable words here), and later expanded in his book Socialism.
Peterson talks about “distributing the computational problem to the maximum number of economic actors.” This was the thesis behind Hayek’s The Use of Knowledge in Society.
Peterson also says “there are places where we have real trouble with that, where we can’t price something accurately.” This is question Mises tries to answer in his books Bureaucracy (summarized in one-syllable words here) and Interventionism: An Economic Analysis.
[1:25:30] The distributed supercomputer of the free market that allows complex communication through price.
Peterson talks about money as a “measure of value.” This is dangerously close to a common fallacy. Robert Murphy has an article on why money is not a “measuring rod” of value, an argument initially put forward in chapter II Mises’s Theory of Money and Credit. The basic gist is that money is exchanged for other goods and services because of an inequality: the person giving the money values it less than the person receiving it in an exchange.
Peterson tells a personal story about pricing difficulties he faced with his “Self-Authoring” suite of products. Pricing strategies are not in the realm of economics proper, since (as Peterson himself alluded) they can involve complex analysis of psychology, which moves them into the field of thymology. An interesting reference point may be professional advertiser Rory Sutherland, who tried to initiate an “Austrian School of Marketing“, where he combined psychological insights with the subjectivism of Austrian economics. See also Mises on advertising in Human Action, in the section “Business Propaganda.”
[1:33:30] Is the power to make investments and society shaping decisions spread over a net of rich people or in the hands of the state?
Peterson says some people “specialize in the ownership of money.” This is very perceptive. While many in the mainstream would argue (using marginal analysis) that “a dollar is worth less to a billionaire than a homeless man”, the Austrians would argue that this is an “interpersonal utility comparison” and is invalid. It very well could be that the billionaire would get more utility than the poor man. Think of it this way: who would benefit more from a gift of $1 million, you or Warren Buffett? Remember that Buffett has access to investment and charitable vehicles that make his money much more productive than yours. Murphy was involved in a debate on this very question in 2015.
Peterson asks, “if we didn’t have radical inequalities in income distribution, would we ever be able to introduce new expensive products into the market?”
Mises responded to this point in his book Liberalism, in the Classical Tradition: “This is the course of economic history. The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone.”
[1:38:30] Claims of systemic racism from an economic perspective or the consequences of irrational prejudice in a free market economy.
Murphy mentions “polylogism.” This is what Mises referred to as the idea where different peoples (be it different races, classes, nations, etc.) in chapter III of Human Action. Mises pointed out that these ideas have been propounded by Marxists, racists, nationalists, for many years, yet none of these people actually put forward a coherent argument of why this is the case.
So Mises took it upon himself to try to build a case for each, and showed that in the end, it is all nonsense anyway: “If the Marxians and the racists were right, it would be impossible to explain why those in power are anxious to suppress dissenting theories and to persecute their supporters. The very fact that there are intolerant governments and political parties intent upon outlawing and exterminating dissenters, is a proof of the excellence of reason.”
Regarding sexual discrimination and the pay gap, see Walter Block’s lecture on the topic.
Peterson says “people aren’t incentivized when they’re tyrannized.” Recall what Mises said on “The Work of Animals and Slaves“: “But as soon as he begins to expect from his slaves services other than such as can also be rendered by draft and pack animals, he is forced to loosen their chains. He must try to substitute the incentive of self-interest for the incentive of mere fear; he must try to bind the slave to himself by human feelings.”
Murphy refers to Standard Oil succeeding by offering lowering prices, while Peterson says he remembers how Microsoft took over the market. “Gates bundled software together, and sold it for one-tenth the price.”
On Standard Oil’s market success, see this article by Lawrence Reed. Listeners should be careful not to confuse this with “predatory pricing”—the illegal practice of selling goods at a loss in order to attract business and drive out competition, only to raise prices later when all the competitors have exited the market. To see why this worry is problematic both theoretically and in practice, see this article of Dow Chemical’s entry into the European market.
[1:46:30] Equating value to price. Tracking liabilities and assets.
Murphy quotes the German poet and author Goethe, who writes in chapter X of his novel Wilhem’s Meister Apprenticeship, “What advantages does he derive from the system of book-keeping by double entry? It is among the finest inventions of the human mind; every prudent master of a house should introduce it into his economy.”
Here is Mises on monetary calculation in chapter XIII, section 1 of Human Action. Here is an Austrian defense of accounting from attacks by a popular historian. Here is a non-Austrian defense against the allegation that double-entry bookkeeping is somehow racist.
[1:50:00] Introducing The Business cycle.
The single best introduction to the Austrian business cycle theory (or ABCT; also called the Austrian theory of the business cycle, or the Austrian theory of the trade cycle) is this video presentation by Austrian economist Roger Garrison, based on the greatest slideshow ever constructed. I am not exaggerating. If you have any interest in this stuff, this is definitely worth your time.
Murphy mentions that Mises was a “rationalist” and Hayek was more “evolutionary”. Here is Mises defending rationalism. Hayek’s “evolutionary” view of social structures is based on the idea of “spontaneous order”: that which is the product of human action but not design. Here is a video of Hayek discussing his views. He went into these issues more comprehensively in the first two volumes of Law, Legislation, and Liberty. Austrian economist Joseph Salerno compares and contrasts these two views in an essay here.
Peterson asks a seemingly innocuous question: “why do we have an interest rate, and what is it exactly?” This has been the subject of intense debate for millennia, going back to justifications on bans of “usury”. Of course, the simple answer is that interest is the extra money you pay to someone when you borrow money from them. But it gets more complicated very quickly: can interest be paid when borrowing things that aren’t money? Is borrowing a necessary component of paying interest? And so on.
- Robert Murphy is actually an excellent person to ask this question. His dissertation was on this very topic, he has written extensively on the issue for both academic and non-academic audiences, and he recently had a podcast episode on this topic with fellow Austrian economist Jeffrey Herbener.
Peterson brings up Scrooge McDuck. Austrian economist Kristoffer Mousten Hansen defends the miserliness of Scrooge McDuck here. See also the chapter on “The Miser” in Walter Block’s book Defending the Undefendable.
[2:03:00] Confronting the possibly morally problematic idea of inherited wealth.
[2:15:00] Finally finding our way to business cycle theory.
At the end of the previous section, Peterson briefly mentions “that the system is error prone”. Murray Rothbard argues that a business cycle theory must explain a sudden “cluster of errors”, in his essay here called “Economic Depressions: Their Cause and Cure.” That link has essays by Mises, Hayek, and Garrison as well.
On the volatility of the US economy after the introduction of the Federal Reserve, see here.
Murphy mentions Alan Greenspan’s interview with Jon Stewart. Alan Greenspan was the chairman of the Federal Reserve from 1987 to 2006. Here is the video of the interview, and an article from the Wall Street Journal at the time. Before becoming Fed chairman, Greenspan was widely regarded as a free market radical. See his 1967 article on why the US should return to a gold standard.
Once again, I’m going to push for you to watch this video presentation on the Austrian business cycle theory. Here is the gist of the argument:
- There is a market for loans, where the interest rate is effectively the prevailing price.
- The central bank, for whatever reason, intervenes in this market by creating new money out of thin air in the form of loans (see here for how this process works in detail)
- This new “money” (Mises called it “fiduciary media“) works to lower the interest rate, which has two simultaneous opposite effects:
- It incentivizes savers to save less, and consume more in the present. Mises called this “overconsumption”
- It incentivizes borrows/investors to borrow more and invest more, to create more products in the future. Mises called this “malinvestment”
- The simultaneous increase in both consumer spending and investment appears (to the untrained eye) as a general economic “boom.” More workers are hired to provide more goods and services in general, and wages in interest-rate sensitive sectors (like the skyscraper-building sector) go up faster.
- In fact, the new money doesn’t raise all prices equally. Because it enters the market at a specific point in time and place (namely, the banking sector), the industries most closely related to the banks get the benefit of the new money first. Industries least connected from the banking sector get it last.
- The problem with malinvestment is that it doesn’t align with the saving pattern of consumers. When the goods are finally produced in the future, consumers will not have enough cash on hand to buy them at prevailing prices. Producers will have to cut prices in order to sell their wares.
- Since all prices are interconnected, the prices for everything suddenly begin to fall. As revenues are lower than expected, production must slowdown: layoffs occur, factories are closed, shops go out of business. This is the “bust” of the cycle.
- Political pressure mounts for the government to “do something.” One of the most obvious things they can do is give more loans again to the (politically connected) failing businesses. This explains the recurring nature of the cycle.
The Austrian “remedy” for economic recessions is to let the market sort itself out. It may be painful, but it will pass over much faster than with protracted government policies.
- As an example of this, Austrians like to point to the “depression” of 1920, where a crash steeper than the 1929 crash occurred, but the US government did not intervene. Unlike the 1929 crash however, which stretched out to the Great Depression, the “depression” of 1920 was over within a few months. Historian Tom Woods has written and spoken much on this topic.
[2:23:00] Looking at privatized versions of commodities formerly believed to only be possible through some form of central planning or government. Bitcoin, eBay, Uber
Murphy co-authored an introduction to bitcoin in 2014 called Understanding Bitcoin, which covers both the economic aspects of it as well as the technical side.
Peterson asks about taking the monetary institutions out of the hands of the centralizing institutions. Rothbard gives a compelling account of the dangers of centralizing the monetary institutions, in What Has Government Done to Our Money? Hayek also has had an influential piece proposing a solution, The Denationalization of Money. A shorter piece also by Hayek is Choice in Currency.
Austrian School economists have also done great work on the cultural effects of centralized monetary production. See this book by Jorg Guido Hulsmann
Menger has a short book on the Origins of Money, where he argues against the notion that the state created money.
Murphy refers to “Satoshi”, of course meaning Satoshi Nakamoto—the inventor of bitcoin.
Murphy mentions the some people think government should provide courts and security. Murphy himself as a short monograph where he argues that the government does not need to provide security. See Chaos Theory. Austrian economist Tate Fegley has written more on private policing in recent years.
[2:30:00] Wrapping Up
Austrian economist Jonathan Newman has an essay on Jordan Peterson and Human Action.