Jeff Deist: The Broken State of Modern Economics

[Jeff Deist] Earlier this week I sat down with John O’Donnell, host of the Power Trading Radio show, to discuss not only the state of the economy, but also the state of economics the profession, itself. So, if you enjoyed last week’s show with Joe Salerno on this same topic, stay tuned for a great discussion with John O’Donnell on Power Trading Radio [John O’Donnell] Jeff, welcome to our show [Jeff] Thanks so much, John. Good to talk to you. [John] You know, I had the opportunity to sit in on — listen in on — your Mises Weekends show with Joe Salerno, and I thought you asked and broght up a very interesting topic I’d like to explore a bit today, which is “Is Economics Broken?” Why don’t you take us through the theme of that topic that you all discovered, because I think it’s very relevant in what seems to be going on in our world economy today [Jeff] Yes, it’s a huge topic. It is really one we could scarcely do justice to, but when I say “economics is broken,” I mean that the profession. You know, there was professional economists — academic economists — are no longer doing what, in my opinion anyway, the profession ought to be doing. And, as a result of that, lay people like you and me who are interested in this stuff, especially if it affects our lives our job prospects or our investments or purchasing power… We get led astray We’ve been taught for, you know several decades now, this wasn’t common a hundred years ago, but with the last many decades we’ve been taught that economics is technocratic mathematical science that really is almost a form of physical sciences that requires creating hypotheses and testing them to see if they’re true. And, as a result of that, I think the average guy or gal, John, has become somewhat afraid of economics, and “Well, gosh, I’m not really qualified to understand this it’s so complex, and global markets are so interconnected, and there’s so many variables, how can I possibly piece all this together, and I better just listen, to these really smart Ivy-League-degreed people who work at the Fed, because gee whiz: they study this stuff all day long, and I don’t. I have a regular job.” And I think that’s been a very dangerous pattern — a very dangerous assumption — for us that: we have let economics become the purview of technocratic elites, rather than a subject that’s vital to all of us and can be — and ought to be — understood like other social sciences So when I say “Economics is broken,” I mean that A) Professional economists have lost a lot of credibility, because all they’ve really got now as a schtick is predictions. We’re using mathematical models to predict the future. Well, they didn’t predict the housing crisis, they didn’t predict the Lehman Brothers collapsed, they didn’t predict the tech stock bubble of ’01, they didn’t predict the crash of ’08, and as a result the profession has — from my view as a layman — it has egg on its face. And, when we get into academia, I think the profession is equally broken, because academic economics has just become like calculus. It’s become this series of upper very high level math classes American Econ PhD programs are increasingly filled with Asian students, by the way, who are adept at mastering these higher level mathematics courses when coming to the U.S. to join programs. So, it’s really just teaching modeling and mathematics, which is almost a form of history, right? We’re looking at data. Data is something that occurred in the past by definition So, it’s a very strange time. I don’t think economists a hundred years ago would really recognize the profession today And, I think that it’s a profession that’s really not serving humanity It’s not doing anything beneficial for the majority of us, and that seems like an odd thing to say, but there it is That’s how I see things, right now. [John] You know, you know there’s an industry that has recently developed called “Big Data” where dramatically large datasets around our behavior are being accumulated by lots of online sources, and it even drives us more to this economic phenomenon of taking excerpts of big data, putting it in long, complicated formulas, and then attempting to come to some kind of solution or perspective forecast You know, I forget who it was — but it might have been Murray Rothbard, as far as I know —

but, someone announced one time —at least I recall, it went along something like this — an economist spends the first half of his career learning how to make these long formulas and forecasts, and he spends the second half of his career justifying why they didn’t come true. And, I think that’s the era that we’re in. Is it even possible today to get a PhD in economics without being totally overrun with mathematics? [Jeff] It’s very difficult, and I think anyone is interested in becoming a PhD economist ought to be able to handle the math, if for no other reason than to be able to refute the dominant modeling approach that is found in universities today. So, you know, I don’t think Austrians or free market economists should be anti-math, but, you know, economics is not mathematics. We cannot reduce human action in the economic realm to formulas, and we can’t reduce it to hypotheses to be tested. So, it’s very difficult. Now, in European and Asian econ programs, ironically, math is far less prevalent There’s still a lot more emphasis on theory, but in the U.S. and in the West — well in some of the West and in the U.S. — math is really the dominant measure of whether you can obtain a PhD, and then once you’ve got one. whether you can publish, because publishing increasingly means doing studies, not writing an abstract paper based on theory. And, what’s so ironic here is that, you know, we’ve almost lost the ability to perform theoretical economics. That’s almost a dying subject. And, part of the reason for that is that young people today Well, first of all, John, they’re turned off towards economics, because of all this mathiness — if that’s a word And, second of all, they’re obtaining PhDs with no understanding of their place in the history of economic thought. They don’t study past economists. As I told Joe Salerno: it’s almost like we take bright young people and drop them on the island — a PhD island —and they have no idea how they arrived there. They have no idea what historians or what economists thought in the 1700s, 1800s, 20th century, and so they live in this bubble of data, but they don’t have any context. They don’t have any historical context in which to place it. And, that’s really dangerous. I think that’s how bubbles happen. I think that’s how a lot of companies and a lot of industries and a lot of stock markets get themselves into big trouble [John] Well, the Mises Institute, with your leadership, has done an incredible job of identifying bright young people, bringing them to Auburn, being it also for Mises Weekends, and learning experiences periodically through the year, on a very very affordable basis, and exposing them to the Austrian tradition with some of the Masters that we have alive today that do such a great job of teaching these principles. But, I’ve noticed recently that you’ve launched a new online learning division, and I want to compliment you and your team for making it very user-friendly. I noticed that it’s some of the same courseware I’ve taken through Mises on other platforms, but you’ve really made it frictionless and affordable for any member of the general public that wants to learn about the Austrian tradition to do so. Can you tell us a little bit about the new program? [Jeff] Well, we found that a lot of people don’t take economics at all in high school or undergraduate. And those who do, unless they’re an econ major, it’s generally some sort of micro and then some sort of macro class, and there’s a textbook written by Paul Samuelson, which is still very widely asigned, and this textbook is full of errors and misconceptions — at least from our perspective — that’s a matter of opinion, of course — and, so we said, well, you know, there’s a need for people who want to take online classes, but they don’t want to do it through a regular University where they’re going to get this sort of balderized version of macro and micro — that they needed an actual rigorous grounding in Austrian economics, and, so, you know, there’s an audience out there for this. That it’s not everybody. A lot of people, you know, prefer to spend their free time on facebook or playing sports or going to a bar or something like that, but the people who really want to learn the stuff and want to do it for free, we decided to to build out, and make more robust, our online learning platform And it’s tough, because, as you know, I mean, you’re deeply involved in this with

your trading platforms: online learning is really still in its infancy, and what worked in 2010 is completely gone today, and what works in 2020, you know, will probably make today’s platforms obsolete So, it’s really an interesting exercise in finding what the market is I mean, people clearly want to learn at home, they clearly want to learn on their own time at their own pace, they clearly don’t want the traditional brick-and-mortar model — the 15-week semester and buying books and going and physically sitting in a one-directional lecture for an hour and then going home and doing homework and taking tests — we know that the traditional model is broken, and it doesn’t serve the needs of people today, because basically the same model that has been used for a thousand years, which is ironic, but beyond that, we’re very much trying to figure out what people want and some people would like to consume just a tiny amount of economics education. They just want to have maybe a twitter feed, and occasionally read an article that broadens their understanding. And some people want a whole lot of economics education. They’d like to come to the Institute and use our library and spend 3 months here as a fellow, and then maybe go on and get a PhD in economics So, there’s people on each extreme, and there’s a lot more people in the middle. So, we’re trying to reach some more of those people in the middle, and we’re trying to gauge where the interest is. But, I will say this: a lot of young people are disillusioned or bored by the economics that they’re taught in their undergraduate settings. So, we want to be there as a non-traditional school — a 21st century school — that’s accessible to anybody. That’s not just for young people, not just for traditional students, but really for anybody. So, we’re working on it, and and we’re modernizing it, and it’s a work-in-progress. It’s a lot of fun, because, as you know, in the pre-digital age all this stuff had to be done with physical books, and you had to know somebody, or you have a professor who was good, and now with a couple of clicks we can we can post something and 40 or 50,000 people can see immediately So, it’s a great leveler [John] I think it’s very important and I think the great mission to educate all ages, as a matter of fact, a lot of — as you know —we serve an investor-trader audience here at Power Trading Radio and online trading academy, and we have a very substantial audience who come in here at all age groups who have virtually no economic grounding, whatsoever, and we do our best to integrate Austrian economic principles into our teaching in our courses, both in our classrooms and forty markets across the world and online. We attempted to do the online education work, but — believe it or not, way back in 1998 — and we were all geared to deliver online coaching, mentoring But the problem was there was no bandwidth to the home. I mean, 56k modems were hardly out, and the platforms were very expensive, and not very stable, so we kind of abandoned that for several years But, it’s now the biggest division and the most… Our online support division both before classes and after class, to carry on a continuing experience and branding right into the home of our adult learner is the most prolific experience in our education. So we like to blend the best practices of the physical classroom experience with online learning techniques, and I think it’s 2 + 2 = 6, and I certainly it’s got a great future. Now they’re coming out with software, I understand, where you can almost do foreign language translation on the fly So, can you imagine speaking into a camera in English and delivering your content, and on-the-fly your PowerPoint and voice is converted into Spanish or German or French? [Jeff] Well, it is amazing and we’ve never had more information so available to us our fingertips. The problem is not a lack of information like 30-40 years ago. The problem’s too much And it’s cultivating it and sifting through it, and figuring out what’s important and what isn’t it So, we’ve got more information, John, but seems like we have less wisdom, in many ways [John] I know you’re very close to Ron Paul and his organization with private education, as well, Jeff. I’d like to get your opinion or thoughts on two very large for-profit education entities in the education space: Corinthian College and

ITT just went out of business, simply because they apparently were abusing — or allegedly abusing — college loans sponsored by the US government. Do you have any thoughts on, you know, the state of the College finance programs that are going on out there? [Jeff] Yeah, those were sad, because I very much like the idea of trade school: schools that teach people practical, applicable skills through for those who don’t necessarily want a broad liberal arts education and a bunch of mandatory classes that they have to take in a four-year undergraduate setting. So, you know, the ITT Tech the Corinthians, I applaud them for for teaching direct skills. Now, unfortunately, they were provided with a very perverse incentive by the federal government, which is taxpayer-backed student loans that are easily obtainable, even by someone with little or no credit. And, you know, they could… in other words, no one’s loaning eighteen-year-olds $60,000 to buy a Corvette, but lots of people will loan — lots of organizations will loan — eighteen-year-olds $60,000 to go get in debt in college, because it’s backed by the federal government. So, in a sense, these colleges that… Although, look, they may be, on an individual basis, they may be scammy They may have a very hard sell. They may fudge their employment statistics, all kinds of things. I mean, I’m not here to say that they were angels, but the Mother’s Milk of the problem is federally-subsidized student loans If it wasn’t possible for students with little or no credit to so easily obtain these loans, then these schools have to drop their tuition It’s just that simple. You could say that of four-year schools, as well. So, you know, people respond to incentives, and when Uncle Sam creates incentives for people to spend a bunch of money now going to school, even when there’s an uncertain outcome at the end, you know, that’s what people are going to do it. And, these schools that either exploited or preyed on these young people as result or they offered, you know, a market service that got out of hand… I guess you could look at it either way… but it really is a shame, because I think technical education is something that America is sorely lacking, and I think this push that every kid has to go to college… It’s just resulted in diluting the value of the standards of college. That’s all it’s done. So, tough situation, and I gotta tell you — moral hazard aside— as a 40-something, I do have some sympathy for the argument that we ought to forgive student loans. I think a lot of these Millennials are really sold something that… Now, they bear some responsibility, don’t get me wrong. But, you know, I do have some sympathy for that argument. It’s a very tough situation to have all these young people starting out heavily in debt. It’s a terrible way to start out life [John] But, it seems to me, the government — I’m sure there were abuses — but on the other hand, it seems to me the government, as measured by the Department of Education, has really targeted the for-profit space They haven’t seemed to take in to task the potential abuses that very well — of the same allegations — maybe taking place in the traditional state university You know, at the University of Alabama or Auburn or University of Georgia. I mean, why is it that they have seemed to have taken on such a target on the back of the for-profit space? [Jeff] Well, first of all, they hate for-profit education. They view it as something like healthcare that ought to be provided by the state, or it’s not legitimate They want to promote their four-year universities, you know, for one And, there’s lots of kids who have gone through those and come out with little or no job prospects. At least a lot of the for-profit schools or shorter two-year degrees — the culinary schools and art schools, heating and HVAC schools, that sort of thing — at least they’re shorter in duration and you get a degree fast and it costs less. Auburn University, which sits across the street from my office — about forty thousand dollars a year for in-state tuition. So, that’s that’s quite a lot of money, potentially $160,000 to obtain an undergraduate bachelor’s degree. If I was going to school under those kind of circumstances Boy, I would hope, as a young person, I would have enough foresight to think long and hard against it, about it, but iI think you’re right I think that there’s a bias against for-profit schools. I think that’s why the government… they’re viewed as somehow predatory by their very nature,

that anyone who makes money teaching kids how to do something is somehow immoral. That’s absurd You know, for-profit education sounds to me like how education ought to operate [John] Well, our organization is a for-profit education entity — it’s unaccredited — but, at the end of the day, there are adult learners come here. We have our own self-financing program through third-party finance companies. But the student has a substantial down payment to make for the tuition. We have a broad menu of courseware that they can choose from, but they’re not here to get a job. Most of them are here to learn a very specific skill: to use our core strategy to time the market, take responsibility for their own pension plan, be self-directed to the market, and use our support, which is unending lifetime support So, when somebody becomes a member of our family we’re committing to serve them for the rest of their life in giving them a community to find entries and exits that will help them, you know, beat the market versus the traditional buy-and-hold SNP model and are take it away from Wall Street. We give them a lot of motivation and they aspire to take responsibility for their own financial affairs, but we don’t take a nickel for the government money. As a matter of fact, we’re net render of taxes to the government We don’t have any government support, whatsoever, for our students. Nor do they want it. Nor do they necessarily need it. There are private sources of credit out there for creditworthy individuals, especially if they have a significant down payment toward the, you know, full contract value [Jeff] Absolutely, and your students are also probably not always 18 years old. And that’s the twist here. Of course a hundred years, it would be considered absurd that an eighteen-year-old wasn’t responsible for understanding the debt situation that he or she was getting himself into But, today, an 18-year-old’s not the same thing as a hundred years ago. So, that kind of adds a twist when these young people are told throughout their childhood: education is the key to a brighter future. Go to college Go to college. Go to college. And, then, when they turn 18, well, they say “I don’t have the money for college. My parents don’t have the money, but here’s Uncle Sam offering these loans, and all I have to do is sign.” You can see how that’s extremely enticing. [John] Yes. it is Jeff, I understand you’re getting ready to launch your new funding campaign for Mises Institute, but you, through your leadership, have provided a terrific scorecard on beating the big DC thinktanks. You run a very efficient operation out there. Why don’t you tell our listeners a little bit about the Mises Institute I’m a member of it. I love it. I can’t think of a day… what my day would be like if i didn’t have as a primary source of income for what’s going on in the world economically. But, how have you been so efficient in beating out some of these very well capitalized thinktanks in DC on a relatively Spartan budget there in Auburn? [Jeff] Well, I think the Internet is the answer The digital revolution has been, as I mentioned earlier, the great leveler. We operate on a few million dollars a year We have about 23 or 24 staffers at any given time. There’s a lot of organizations in Washington DC that have hundreds of employees and bring in 50 or 75 or a hundred million dollars a year in donations. Now, a lot of those donations are from corporations or larger donors, family foundations, etc., whereas our donations are virtually all individual. So, we just use the internet. We put as much on our website as we can. We try to… we spend quite a bit of time with our outside vendor trying to fiddle with our website and make it a little more user-friendly And, we just generally try to make things available for free, because we find that that actually… like, for instance, when we sell a book in our bookstore we also try to make an HTML or PDF version available for free, and we find that actually increase the sales. It doesn’t decrease them. So, we try to be a free resource and use our status, use our website traffic, and our social media traffic to convince people to give us donations. To convince them that what we’re doing is worthwhile, and that is something they ought to support. So, while, you know, we have lots and lots of people give us ten or twenty or fifty or hundred dollars a year, and that’s how we get by. And, look, don’t cry me a river. We have a great time. We love what we do. We’re excited about our mission, and when the day comes that we’re not, then we’ll will close up shop and go home. And, I look forward to that day. I look forward to the day that

Austrian economics is so accepted on Wall Street and in academia that we’re not needed anymore. But, until that day comes, we’ll be here in some form or another, and hopefully that form is increasingly digital, because that’s the cheapest way to reach the most people quickest. [John] Well, from your mouth to God’s ear. I recall, matter of fact, last night, and was reading an excerpt from one of your PDFs. I think it was Mises talking about freedom in crisis, or something like that I believe was the title, but, any rate, he was talking about how Keynes really… before Keynes came about in 1936 with his book, the Austrian approach was very well accepted and was then considered mainstream, and of course, that Britain had been running the equivalent of Keynesian policies before Keynes even wrote his book, and then what what Keynes did was really give a license or a pass to the economists to fund deficit spending and create… attempt to create demand, and he really gave the economists a pass and the politicians love this, because they now had several PhDs endorse their deficit spending, demand creation, money manipulation, cheap liberal credit programs, to the point that… and even discredited Say’s Law I mean. He never disproved Say’s Law. He just announced it that he discredited it, and all of a sudden, mainstream economics moves to the forefront, Austrian economic-type principles kind of moves to the back of the bus, and it hasn’t lost any momentum since. It just keeps getting bigger and bigger and bigger, and, you know, what a disservice this man did. He never disproved any of the Austrian principles that that Mises and Hayek and so many others so… and Menger so well articulated, but the fact that the mainstream politicians, mainstream economists and the politicians, in essence sold out, and it’s that simple But they never disproved the principles of Austrian economics Wouldn’t you say that’s accurate? [Jeff] No, it is. And I would say modern economics operate not so much on a well identified set of principles, but instead on a very murky set of principles that that almost guide economists subconsciously. In other words, a lot of what Keynes said or believe… he actually changed later life. But, a lot of what he said he believed isn’t so much followed today explicitly It’s followed implicitly. We have this sort of general sense — and we can call it “neoliberalism” — this general sense it is the role of government and the role of central banks to create demand. That that’s the number one job of growing and sustaining an economy to create demand. Well, we all have infinite demand. We’re human beings. We all have unlimited wants and desires. The question is not what we demand. It’s what we can produce. That’s the hallmark of a civilized society, of the society that’s healthy, and growing and creating for the next generation is how productive it is Does a society consume more than it creates? Or, does it create more than it consumes? Because the whole history of human development is capital accumulation. Now, that might sound… that might sound trite, but it’s true. That healthy societies accumulate capital, and unhealthy societies consume more capital than the accumulate. And, unfortunately, modern economics pushes endless consumption — endless stimulus of demand — as the way to create a healthy economy It just isn’t true, and we’re seeing it. We have mountains of debt since 2008 We have mountains of QE, and you don’t have anything to show for it. We don’t have any real substantive increases in GDP. We don’t have new markets. We don’t have real sustained growth in US companies What we mostly have is accounting gimmicks and stock buybacks and that sort of thing. So, it’s getting very very hard to fool reality, and we have so much more debt around the world than we did in 2008. And, it’s really pretty scary, if you worry about that sort of thing, because the next crisis could be far more painful than ’08