Hello, I'm **Saifedean Ammous**, and this is the first lecture of my online course **Principles of Economics**, available on my online learning platform **saifedean.com**, and based on my new textbook *Principles of Economics*, which is available on saifedean.com as well as major booksellers worldwide.

In today's lecture, I will provide my rationale for making this course and writing this book, why you should consider taking it, and discuss chapter one of my *Principles of Economics* book, which explains the difference between the economic methods used in this course and the ones you may have encountered in university and popular media.

Did you find studying university economics to be tedious, confusing, and uninformative? You're not alone. Most intelligent people struggle to make sense of their economics university courses. I know this because I taught economics at a university for ten years. I saw how so many smart students would come into the class with questions and leave the class with even more questions, incredibly confused at why the material does not make sense. Some of these students would excel in fields like engineering and physics and mathematics, and yet struggle to understand the seemingly simple concepts of economics. I believe the problem is not in these students. I believe the problem is in the economics that is taught at university. It's not that you're not smart. It's that the economics is not useful. And in fact, smart people struggle to understand it more because they struggle to make sense of it because it does not make sense. And the reason is that university textbooks today are steeped in Keynesian high time preference and ignorance. It is impossible to teach anything useful with these textbooks as a base. These textbooks teach you irrelevant models and thought exercises with little relevance to the real world and predictable conclusions.

**Austrian economics**, on the other hand, is a much more useful approach, which provides students with value. When I used to teach economics at university, I'd always try to include some Austrian economics in my regular mainstream economics courses, and students would always find that to be the most useful, most interesting part of the course. It would be great if we'd have a course dedicated purely to the Austrian method of approaching economics because I believe that is far more useful for students and far more informative. But the problem with that is that the Austrian tradition does not have an easily accessible comprehensive textbook. **Murray Rothbard** wrote *Man, Economy, and State*. **Mises** wrote *Human Action*. But these are not easily readable books. The modern reader will struggle to make sense of them. And to be frank, they are books that I have trouble recommending to people today because the vast majority of these books is spent engaging in academic debates that are of little relevance to the individual who just wants to learn about economics and not get bogged down in decades-old debates about arcane little minutia and details of economics. The problem with these books, as informative and as monumental as they are—the problem with them is that they are geared towards academics and economists rather than the layperson and the average university student.

What I've always wanted when I was at a university was a simple explanation of economics from the Austrian perspective, aimed at the learner, not at the academic. In order to teach principles of Austrian economics at university, I'd have to get together all kinds of different resources, articles and chapters from books and curate them into a syllabus, which was not ideal because you're reading different parts of different books which have different methods and different approaches and you never quite get the same experience as you would if you just had one coherent textbook written by the same author that you could go through throughout the entire course. And so from that came my idea for writing this book.

I spent quite a bit of time planning on doing this. I first had the idea for writing this book around 2009–2010 when I first started teaching at a university at the Lebanese American University. I designed a course in 2011 that was a prototype of the ideas that I would like to include in an economics textbook. And over time I continued to think of this but never quite got round to it except after I published my book *The Bitcoin Standard*, when I developed the readership and I found a lot of people to appreciate the way that I explained economic concepts. I thought this was probably the right time for me to make my own book independently of academia so that I could self-publish it and write what I want to write and not write for the approval of academics.

So this is the book that I've always wanted to teach and this is also the book I would have liked to learn at age eighteen. I wish somebody had given me this book when I was eighteen years old. I think it would have saved me a lot of hassle in life. Would have taught me a lot of very useful things. I aimed to write a clear, concise and readable treatment of the main economic ideas in the Austrian tradition culminating in an understanding of the civilizational importance of the extended monetary market order. These might sound like big words at the beginning, but I hope by the end of this course and the end of the book, you will understand the true meaning of these words and the significance of them and why I wanted to write a book about them.

This book forms an introduction to the principles of economics and the economic way of thinking. It's a powerful tool of mental planning useful for everyone to understand. It uses the plain written word to explain what many economists throughout history have found to be the most powerful methods of understanding economic phenomena.

The online course is the equivalent of two university courses. So if this was a university, you would teach this course over two semesters and I believe it's got enough material to cover two semesters, possibly even three semesters if you wanted to really dig into the material and read the extended readings and the extended bibliography of the book which is in the syllabus and also the bibliography of the book that you can download from the book's web page saifedean.com/pe.

The book is divided into five parts. The first part of the book, **"Fundamentals,"** explains the basic building blocks of economic analysis from the Austrian tradition and the most important foundational concepts of economics. The second part of the book is called **"Economy"** and it discusses the actions that individuals carry out as they economize. The third part of the book, **"The Market Order,"** explains economizing within the context of a market order, within the context of an interpersonal system for exchange and trade, wherein people don't necessarily have to know each other in order to exchange with one another. And then the fourth part of the book and course discusses **monetary economics**, the economics of money, which is an enormously important topic, of course, well worth its own section. And then finally, building on all of these ideas, we arrive at the fifth section of the book which discusses the concept of **civilization** and how economics helps us understand what civilization is and what the success of civilization requires from an economic perspective.

To get into more detail: **Part One: The Fundamentals** begins by explaining **human action**. So that's the topic of chapter 1, which is today's lecture. What is human action? Why are the Austrians fixated on understanding economics through the lens of human action? And the second lecture is on the concept of **value**, which is an enormously important foundational concept in Austrian economics. Because perhaps the most important difference between Austrian economists and other schools of economics is that from the Austrian perspective value is **subjective**, whereas from other perspectives value is considered something **objective**. And we're going to see why this is so important and why it leads to all the differences that we see between those two different approaches to economics.

And then in the third chapter, the final chapter of the first part, I discuss the concept of **time** and the pivotal importance the concept of time has in economics. Why I believe it is very useful to think of all of economics, all of the concept of economizing, as being all about the economizing of time. We can think about all the actions that humans carry out in order to economize as being aimed at (a) increasing the quantity of time that we have on earth and (b) increasing the quality of that time or the value—the subjective valuation—that we place on that time.

With these fundamentals established, we move on to discuss economizing in the second part of the book. And so in the second part of the book, we discuss what people do in order to economize. And I thought that I would divide these chapters in this sequence. Now, if you look at this book, they are individual chapters that could be read individually, that could be thought of as an independent essay on an economic concept. You could read it as a standalone essay, but the book is also structured as a monograph, as a narrative laying out these concepts in a logical sequence. So I begin with the most simple basic concept of economic action, which is **labor**. The idea of humans working: what is labor? How do humans work? What is the economic significance of labor and how do humans use it in order to economize? In other words, increase the quantity and value of time that they have on earth.

With that established, we move on to the second economic process, which is **property**. Now, labor is pretty basic. You can argue animals are capable of carrying out labor because they hunt and that is a form of labor. But property is a little bit more advanced. It's something that sets us as humans apart from animals: that we are able to develop the concept of property and to accept it and to live in societies that accept other people's claims for property and do not aggress against them. And this I believe is a very, very pivotal and foundational concept in our ability to economize because without the ability to hold property, everything else—all of the rest of our economizing—becomes practically useless.

In the sixth chapter we discuss the concept of **capital**, and capital is a form of property that is distinguished by the fact that it is used for the production of other goods. It's not a consumer good that you consume for its own sake. It's a producer good which you use to produce more consumer goods.

With that out of the way, we then move on to the concept of **technology**. And this is not usually something that is discussed in depth so much in economics textbooks. But I think it is very useful to think of technology itself as an act of economizing because this is what we as human beings do. We develop new methods of producing things and we keep improving them. And I think it's worth looking at the economics of technological progress individually to understand how economizing happens in human society and in markets.

And then finally in chapter 8, the final chapter of part two, I discuss the concepts of **energy and power**. And this is not something that is usually included in most economics textbooks. It's not included as an explicitly economic topic, but I believe it is of enormous importance. I believe it's impossible to understand the economics of the modern world without reference to the economics of energy and in particular the economics of power. And I use the Austrian method and the Austrian focus on the ideas of marginal analysis—which we discuss in part one of the book and the course—to apply that to the markets for energy and power, and I arrive at some conclusions that are probably counterintuitive for most readers and students in this course, but I hope you find them quite valuable.

With that second part of the book, we've looked at how human beings economize individually. All of these things are things that can be done individually. If you were on a desert island on your own, you can have labor, you can have property, you can accumulate capital, you can improve the technology, and you can harness energy and power in order to meet your economic needs. But then when other people get into the system, we have what we call a **market order**. What happens when people interact with one another?

So in the third part of the book, we discuss the economics of interpersonal exchange. The economic actions that happen when other people are introduced into economic decision-making. And so in chapter nine, we discuss **trade** and the economics of trade, why people engage in trade, why trade is so important, and how pivotal it is for our ability to economize as human beings that we are able to trade with one another.

Then after having studied trade, we can then explain the emergence of **money** and why money is such an important economic concept and why money is really like a superpower for us as a civilization, as humanity, because it allows us to channel our productivity in a much more productive way by allowing us to specialize and trade with people that we don't know within circles of trade that can grow to include millions and billions of people, allowing for great increases in specialization and productivity.

With that in mind, then the next chapter discusses the concept of **markets**. Chapter 11: we discuss what markets are and how markets emerge as this system for people to exchange with one another, why this is massively productive, how people make decisions in a market system, and what the significance of this is. So all of the economizing actions that we studied in part two and the concept of trade and money combined together give us the market system.

And then finally in part three we discuss the concept of **capitalism**. What is a capitalist economy? What is meant by the term capitalist economy and why a capitalist economy is so much more productive than other alternative forms of organizing human society and organizing human labor and economic activity.

So with the market order explained, we then are able to look in detail at **monetary economics**. We've looked at money in part three in the chapter on money. But then in part four, we study the economics of money in more detail. And to begin that from the Austrian perspective, I believe the best way to approach the topic of money is to begin with the topic of **time preference**, which I believe is an enormously important concept discussed in chapter 13 of the book. And time preference refers to the degree to which humans discount the future. From the Austrian perspective, time preference is always positive. People always discount the future compared to the present. Because the present is certain and the present is here. It is being experienced and felt very vividly. Whereas the future is uncertain. And so naturally, humans provide more of a valuation subjectively on the present than the future. But the degree to which we discount the future is what we refer to as time preference.

And so once we understand time preference, we can understand money, we can understand **credit**, and we can understand **banking** from the Austrian perspective. And so chapter 14 and lecture 14 move on to discuss the concepts of credit and banking from the Austrian perspective, drawing heavily on the work of Mises.

And then in chapter 15, we discuss the concept of **monetary expansion**, the increase in the money supply, which might seem like a little inconsequential detail, but I believe by the time you read the chapter, you're going to see that it might not be. It is arguably much, much more important than most people think, and it is an enormously pivotal causative factor in the failure of many economic systems. I think understanding the fact that money expansion is harmful for economic activity is enormously important and it is what allows us to explain and understand the **Austrian business cycle theory**. The theory of why economies go through what is known as the business cycle with booms and busts, booms and recessions. Why do we get this? I believe in order to understand that we must—the best approach to understanding that is the Austrian theory and the best way of understanding the Austrian theory is to understand it formulated in terms of money and in terms of time preference, and we'll see why in detail when we get to part four.

Now with all of that established, having explained what economizing is, having explained what capitalism is, having explained what monetary economics is, we then move on to the final part of the book which discusses **human civilization**. And this is a topic that might not intuitively appear to be relevant to a course in economics. It might seem like it should be something in political science or sociology, but I believe it is inextricably linked to economics and I believe that economics is essential towards understanding the concept of civilization and how human beings can live together in a civilized order.

So to explain that, we begin with the **economics of violence**. What is violence? How are the economics of violence better understood using the approach of Austrian economics—of marginal analysis, of subjective valuation—and with this analysis we can understand what is the **economics of defense**, which is the topic of the next chapter. And having explained the economics of violence and economics of defense, we get into the discussion of why defense is just another market good and why the market can and does in fact provide defense for the mass majority of people and what it means to live in a society with defense being monopolized by one entity that is free from competition, which is the case in societies where you have a state—practically all over the world today.

So with that in mind, we then conclude by explaining what **civilization** is and why civilization relies entirely on capitalism, on the acceptance of private property, and on the freedom of people to economize with one another and to trade with one another and to act economically in a way that is beneficial to them and as they see fit.

So this is in general a brief overview of the topics of this course. We now begin with chapter one of *Principles of Economics*, and chapter one is entitled **"Human Action"**, which is also the title of Mises's probably most important book. And human action is a really important concept in economics because it is how Austrian economists approach economics.

Mises's book, *Human Action*, offered an explicit redefinition of the field of economics as the study of human action and choice under scarcity. Mises essentially sees that the role of an economist is to analyze how humans act rather than to analyze material objects and their properties or aggregate and abstract units. You might be thinking, okay, why should this matter? This seems like irrelevant quibbling at this point, but I think it's going to be an extremely powerful tool for us to use in order to understand economics.

Mises explains that throughout human history, most intellectuals have analyzed humanity as a whole or analyzed collectivist concepts like nations, race, or church, and they sought to find laws to explain the behavior of such entities and their consequences as if history had ironclad laws to be discovered akin to the natural sciences. But Austrians focus on **individual human choice and action**.

So what do we mean by action? First of all, why is this important? Well, first of all, we need to figure out what action is. And according to Mises, action is **purposeful behavior**. It doesn't just refer to anything that you do as an individual. It refers in particular to things that you do purposefully. So it is in contrast to things that you do impulsively or things that you do without thinking through, things that you do reactively. So somebody scares you and you jump because you're scared, you've been frightened, you've been surprised. That's not human action. That is a reaction to a stimulus.

So Mises's definition is: "Action is will put into operation and transformed into an agency. It is aiming at ends and goals. It is the ego's meaningful response to stimuli and to the conditions of its environment. It is a person's conscious adjustment to the state of the universe that determines his life."

Murray Rothbard says: "Action is purposeful behavior toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied."

So humans act purposefully because we are endowed with reason and are able to direct it to the meeting of our ends. And that's what distinguishes us from animals. And that's why, according to this definition of action, **humans act, but animals do not**. Animals yield to their instinct. Human reason allows us to supersede our instinct and to act out of our reason.

Acting is **rational** in the sense of being the product of reason, not in the sense of being correct. Most people think of the term rational as in the correct decision. So if you make a rational decision, you're making the correct decision. That's not the definition that Mises and the Austrians use. It's irrelevant whether your decision is correct or incorrect according to this definition. It's irrelevant if the decision is incorrect according to your viewpoint or the viewpoint of somebody else. What makes a decision rational is the fact that you deliberate. Is the fact that you use your reason in order to arrive at that decision and then make that action that follows from it.

So once we understand human action, we understand economics as human action, it allows us to perform economic analysis in a way that I find—and many people find—more fruitful than the alternatives. And we're going to see how now.

So economics studies human action. And we can define economic terminology in relation to human needs and how humans treat these objects that they use. If we use the lens of human action, we can then study everything in economics through the lens of how humans act with it.

And so economic theory in the Austrian sense, as **Hans-Hermann Hoppe** explains it, consists of three things:
1. An understanding of the meaning of action
2. A situation described in terms of action categories
3. A logical deduction of consequences

So you understand that humans act. You look at a situation that is described in terms of action categories—so we think of things in terms of action, in terms of human activity—and then we deduce the consequences of human action. That's what an economist does.

This is effectively how we do economic analysis in the Austrian tradition. We deduce the logical consequences of actions that humans carry out. And the goal of economic analysis is **understanding**. Understanding is a very, very important word in the Austrian tradition of economics. And there's really no alternative to understanding. And there's no alternative to really being able to understand what is going on. And there's no easy way to quantify and to explain understanding in a way that fits in with quantitative approaches to economics because understanding—you either get it or you don't get it—and Austrian economics is all about establishing an understanding of economic phenomena and economic issues.

So from the Austrian approach we use logical deduction, we use thought experiments, and we use the common sense familiarity with reality—that you understand how the world actually works. You employ these tools to understand the implications of economic processes.

**Quantitative analysis**, on the other hand, is a different approach to economics which relies on numbers. However, from the Austrian perspective, it's not that numbers are useless. It's not that the quantitative approach is pointless. It's that the quantitative approach is meaningless and mute without logical deduction and conclusions to motivate it and understand its results. In other words, you're unable to get any meaningful economic insight by looking at data unless you have a guiding framework that is logical, unless you have a way of approaching the world. Data on its own cannot tell you anything unless you have a pre-existing mental model of how this data relates to itself—the different parts of the data that relate to one another and how the world actually functions.

So in the rest of this chapter, we're going to discuss the limitations of quantitative analysis in economics and why it is arguably inferior as a mechanism for studying economics. I would identify four main reasons why quantitative analysis on its own is not very useful in the context of economics:

1. The fact that in economics there are **no constants**
2. That there is **no replicable experimentation**
3. That quantitative analysis **conflates factors that can be measured with causal factors**
4. That it **conflates accounting identities for causality**

After a century of aping physics, economics has failed to produce one quantitative law or formula that can be independently tested and replicated.

So begin with the first one. **Economics has no constants**. Without a constant, there can be no measurement and therefore there can be no quantitative relationships established. Since value is subjective, value cannot be measured.

Appendix one in the book compares the quantitative approaches in natural sciences to economics. In the natural sciences, we have formulas such as the **ideal gas law**, which is PV = nRT. P is pressure in bars, V is volume in liters, n is the number of moles, T is the temperature in Kelvin, and R is the gas constant. If you're unfamiliar with chemistry, this might seem confusing, but bear with me. You don't have to learn chemistry in order to understand what's going on here. We're going to just look at it from a broader picture.

The important thing to understand here is that this relationship is possible because all the units are measured using constants that are agreed upon by everybody who uses this formula. These constants are defined by the seven base units of the **International System of Units**. And these seven units are: the second, the meter, the kilogram, the ampere, the kelvin, the mole, and the candela. These seven units—there is broad agreement across the world about what constitutes a second, what constitutes a meter, and what constitutes a kilogram. And that agreement is essential because the fact that we have a clear idea of what a meter is means that it is possible for people to measure different things and that the measurement will always come out to the same number regardless of who does it and where they do it.

This is why we are able to build all of these sophisticated scientific formulas about understanding how the world works scientifically, because we're basing it all on these constants. These are reliable physical units for measurement and they make it possible to engage in systematic, reproducible, and quantifiable scientific experimentation. These constants and measurements make it possible to conduct systematic experimentation with gases at different volumes, temperatures, and degrees of pressure. And because of that we are able to arrive at a formula like the ideal gas law which I just mentioned, PV = nRT.

So anybody anywhere in the world can get any gas and put it in a container and study that it conforms to the ideal gas law. You can measure the pressure and there's standardized equipment that gives you very accurate measurement of pressure. You can measure the volume in liters. And you can measure the temperature in Kelvin. And you can measure the number of moles in the gas that you have in your chamber. And then you add the gas constant. And you plug those numbers into the formula. And you will find without exception that this formula holds anywhere, anytime, everywhere. And that is enormously important. If one person was to come up with an exception to this formula, then the entire ideal gas law is thrown away. You can't just dismiss one exception because any tiny little exception falsifies that law.

So when chemists or physicists call this an ideal gas law, it is a law. It is something that can't be broken by anybody. And all it takes is one person to demonstrate that it doesn't work. And then it's no longer a law. It just becomes an ex-law, an ex-theory, a previous theory. And that's why people from all over the world can use machines and tools that travel halfway around the world and produce things that are constructed across the world and not face measurement problems. So you can have a fridge that is designed in Germany, built in China, and sold in Argentina and the measurements on it are expressed in meters and centimeters. And every single person who is involved in the production, in the design, in the purchase uses these measurements and they can all work together seamlessly because they're all using these constants.

So in the natural sciences, we have these constants and because of that we're able to measure things and because we can measure things, we can experiment and we can establish these relationships and we can come up with clear mathematical and quantitative relationships.

But there are **no equivalent constants in economics**. Economic value can only be measured **ordinally**—in a way that compares the value of one good to another—and not **cardinally**—by assigning a mathematical value to each good. Value is something that is experienced psychologically. It is not physically defined. And that's why we understand it ordinally and not cardinally. We're going to discuss this in more detail in the next chapter. But ordinal means you can say that you like this thing, you value this thing more than the other thing. But you cannot express the valuation in numerical terms. You cannot say that you value having another child as being equivalent to having 2.3 new cars. There is no easy way to express these. There's no correct way of expressing valuation cardinally because valuation is something that is subjectively felt and it cannot be compared between different things with precise mathematical precision because it cannot be measured. How do you measure the valuation that you place on different things? Because there are no units to do that.

Because of us not having units that are constant with which we can measure economic factors, we end up with a world in which we cannot make economic statements quantitatively similar to the natural sciences. And this is the fatal flaw of modern mainstream economics, which is that they just ignore this and they assume that they can create measurements in economics even though they have no unit with which to measure. That's why they proceed to then come up with theories that are arguably counterproductive rather than being helpful. And that's why economics can be so confusing at university.

So the second problem with quantitative economics is that **in economics we cannot perform replicable experimentation**. In natural sciences you study physical objects and you perform experiments on them and establish those relationships. You look at gases, you put them in containers, you measure the pressure and the volume and the temperature, and then you're able to then devise the formula. And you can come up with the constants that make the formula work. And you can ask people from all over the world to verify this and to try to test it and to try and falsify it. And with repeated experimentation and testing, we're able to arrive at something that we can call a law.

No such thing in economics. We can study the action of humans but we cannot study it with experimentation in the real world and we cannot put humans in a lab and assume that that translates to the real world because the real world is far more complex than a lab.

Thirdly, a big problem with quantitative economics—and it's related to the first two—is that well, maybe we can't measure this thing. So we're just going to build the relationships based on the things that can be measured. Instead of measuring the causal factors and trying to understand the driving forces of economic phenomena—which is individual action and subjective valuation—we instead resort to trying to focus and measuring on things that can be measured. So rather than measuring the actual causal factors, we just go for the things that we're able to measure like aggregate numbers of GDP or spending or consumption or something of the sort which you can measure and therefore you can build relationships upon it. So people focus on the things that they can measure rather than focusing on the things that they need to analyze.

And this is similar to: imagine if you drop your keys in the dark and the place where you drop the keys is dark. But because it's dark, you don't want to look there. And so instead, you go and you look under the light where it's not dark. The key is not there, but at least it's light. So you can look there. Whereas when it's dark, you can't look. This is what economists do. They don't have an ability to measure and test and build quantitative relationships around nebulous concepts like valuation and individual subjective preferences. And so therefore they build their concepts around the aggregates that they can measure. So they focus on that.

And finally the fourth one is to **mistake accounting identity for causality**. So in macroeconomics this is one of the cardinal sins of macroeconomics. But macroeconomics just simply assumes that relationships based on accounting identities must imply causality. In other words, from the macroeconomist's perspective, the total level of spending is equal to the level of output, which is an accounting tautology. But therefore, it is assumed that raising spending will result in raising output, which is only true if you assume that the accounting identity has to imply causality.

So the result of this is that after a century of aping physics, economics has failed to produce one quantitative law or formula that can be independently tested and replicated. We don't have laws in economics in the same way that we have them in physics or chemistry because laws cannot be made quantitatively. We've never been able to build something like that.

You can think of a quantitative law in economics would say something along the lines of: if the price of a good goes up by 10%, then the quantity demanded and the quantity sold is going to decline by 3% or something like that. That would be a quantitative relationship. Can we establish such relationships in economics for any one particular good? No. We've never been able to establish something like this. And the reason is that we don't have the tools needed to establish these kinds of relationships. As I said, there are no constants. There's no ability to experiment. And the things that drive this—the things that drive the quantity of a particular good sold or bought—are not the abstract aggregates' relations to one another. What drives this is **human action**.

The best example that I like to use to demonstrate the complete failure of quantitative economics to mimic physical sciences is the **mythical trade-off between unemployment and inflation**. So if you had the misfortune of studying macroeconomics at university level, you will know that it is an article of faith among macroeconomists and various pseudoscientists that there is a negative trade-off, a negative relationship and a trade-off between unemployment and inflation at any society at any point in time. You can increase unemployment, but that would result in increased inflation. Or you can raise inflation, but that would result in a decline in unemployment. So there's always a trade-off between the two. You can't have high unemployment and high inflation. You will either have low unemployment and high inflation or low inflation and high unemployment. You can't have low inflation and low unemployment and you can't have high inflation and high unemployment.

This is the idea of how economics functions and this is the most important conclusion that the Keynesians arrive at: that there's a trade-off between unemployment and inflation. And this is something that is just taken as an article of faith and you still open a macroeconomics textbook today and you see them arguing this and treating it as if it is a physical law of the universe that if you just printed a bunch of money then unemployment is going to go down. Inflation will go up but unemployment will go down. And if you stop printing money then inflation would go down but unemployment would go up.

But reality stubbornly refuses to abide by this fiction. Reality continues to refuse to cooperate. So we've got now about 50 or 60 years of data on unemployment and inflation in the US. And if you plot them, you see they look like a blob. It should, according to Keynesian theory, look like what is called a downward sloping curve. There needs to be high unemployment and low inflation or low inflation and low unemployment. But instead, what we see is a blob. There's no particular relationship. You can have high unemployment and high inflation or you can have the opposite and there's no clear relationship between the two. So even just the general descriptive idea that there is a trade-off doesn't hold.

If this were to be a scientific law, it would need to offer quantitative measures of the trade-offs that are involved. But of course we don't have such a thing because no studies or experiments can be possible on things like this. Keynesians are not sitting in laboratories where they're experimenting with societies and establishing the relationship and seeing how much more inflation you can get if you raise unemployment or vice versa. We don't have constants to measure the subjective valuations that people place on their economic decision-making that would allow us to understand these epiphenomena of unemployment and inflation. So therefore we focus on what we can measure. We can measure unemployment. We can measure inflation. We can't measure the subjective valuation. So we're just going to make our theories based on unemployment and inflation as they are. And when reality fails to conform, we simply redefine the terminology to try to keep the theory alive. This is what pseudoscientists do.

And so, up until the 1970s, it was kind of tenable to continue believing in this fiction. There seemed to be some kind of tradeoff, at least in the short run. But then in the 1970s in the US and in most of the world you witnessed an explosion of inflation and unemployment at the same time—which this theory says should not be possible—and yet there it was. It did happen.

So what would you do now if this was a science? If this was a true quantitative science, all it would take is one example to falsify this theory. All it would take is one person being able to show us how the ideal gas law no longer applies and the ideal gas law is toast. But this is a pseudoscience. And so when we get a falsifying example, when we see something that clearly demonstrates that this theory is incorrect—because here we are, we have high inflation and high unemployment—well, what happens? The Keynesians just simply revise their theory and say, "Oh, well, something happened and now we have a supply shock." Because of the supply shock, unemployment and inflation both go up. Well, then that means that there is no trade-off between unemployment and inflation because other factors can come in and destroy that relationship. So then there is no relationship there.

No, they still want to believe in the relationship and they still believe it 50 years onwards. Here we are. They still talk about it. If you have the misfortune of following mainstream news and media, you will see them talking about: we need to raise unemployment in order to bring down inflation. They still believe this nonsense even though it's been falsified by reality many, many, many times over.

So this is I think a good way of understanding the differences between the natural sciences and the social sciences—or between economics and physics as representatives of the two. And to illustrate the value of the Austrian method, I'm going to now try and do a contrast between the two approaches toward an economic question.

So how would the approach of mainstream quantitative economics differ from the Austrian approach on a topic such as the **minimum wage**?

Let's take the minimum wage as an example. For a mainstream quantitative economist, they will approach a question like the minimum wage with a quantitative model. So the model will say something along the lines of: 20% of all workers support 35% of all the population and they earn less than $10 per hour. If we passed a law saying, "Let's give them a $10 minimum wage," that would lead to a rise in wages equal to $10 billion per year. So all of these 20% of workers who are earning less than $10 would each increase their wages by a few dollars an hour, maybe. And therefore, if you were to calculate that over the entire economy, that would be say $10 billion extra of wages, which is going to result in $8 billion in increase in spending. So people are now going to be spending another $8 billion more. So if you put this into the model, the quantitative model that the Keynesian mainstream economist has, you're going to see it's going to create 40,000 new jobs. It's going to cause a 12% increase in industrial output or $16 billion increase in GDP.

If you have these quantitative relationships—which are built based on fantasy essentially, the work of an economist called **John Maynard Keynes**—if you just take his word as gospel then you can build all these relationships and you can say: well, minimum wage going up means people have more money, means workers have more money in their pockets. More money in workers' pockets means more spending. More spending according to these fantastic models means more jobs get created, more industrial output, more GDP. So everything gets better if we just raise the minimum wage.

If you are formulating quantitative models, you can come up with any model and there really is no way of measuring or verifying the accuracy or veracity of this model. Ultimately, it's all down to appeal to authority. Keynes came up with this and Keynes is lauded as the hero of economics and so everybody has to go along with it. And that's kind of how they put it in the textbook: that this is just Keynes introduced this new model of understanding the economy. Okay, why is it true? Why is it correct? Why should anybody listen? Why should anybody pay any attention? It's down to his authority, which is not the case in science. Doesn't matter how popular or smart or how well marketed any particular physicist could be, their theories fall apart by experimentation.

By contrast, an Austrian economist would analyze things through the lens of **human action**. And so when you look at this issue of minimum wage, you don't look at aggregates and try and formulate relationships between those aggregates. Instead you look at how the human beings involved—those are the causative agents, those are the ones that shape the reality—how do humans act in response to this wage law, this minimum wage law? You think about the process of job creation. What happens when a person takes a job? Well, two people act in order for there to be a job. If you hire me, that's two people who have to act. I need to take the job and do the job and perform it. You need to give me the job and offer me the job and pay me. So two people need to come together to an agreement to make such a thing as a job happen.

If you analyze it through the lens of humans acting, you're going to see how the analysis is going to be different. Well, what is the motivation for the worker to work? As a worker, I'll take the job if what you'll pay me for that job is worth to me more than the alternative. And the alternative is that I sit at home, I don't have anything to do, I don't have money. Or the alternative is that I go and do another job. And so I look at the subjective valuation that I place on my time. I look at the subjective valuation that I place on my time being spent at your job doing the job for you versus another job, and I look at the monetary value that I get from your job and the monetary value that I get from the other job, and I decide to go with the one that gives me the most economic value. So I will take the job if you pay me more than how much I value my idle time or more than the alternative.

Now for the employer, for the person who's going to offer the job, they will only employ the worker if the return from the employment will exceed the wage. In other words, you only hire me if what I provide you in this job is going to be more valuable than what you pay me, because why would you hire me otherwise? So if you run a lemonade stand, I'm going to squeeze lemons for you. If adding me to your lemonade stand increases your sales and your margins, increases your revenue by $20 per hour because you have an extra worker now, then you're going to be willing to pay me up to $20. Anything more than $20, then you wouldn't hire me. If I increase your revenue by $5, then you hire me as long as I will get paid anything less than $5, because beyond $5, then I'm a burden on your business and you cannot hire me. And of course, not all business owners are intelligent, but the ones who survive are and they have to understand this.

So this is economic reality because it imposes itself whether people understand it or not. In other words, you can choose to hire people that don't offer you as much return as you pay them, but then your business is going to go out of business. And so we can generalize and say that employers will hire people only if those people offer them a higher return than the wage that is being paid. Because if they don't, then their business goes out of business. If a business is going to survive, it needs to continue to operate in a way that is profitable. And that means paying less than the revenue contributed to each factor of production. So that means that the employer will only hire me if what I contribute to the business is higher than the wage that I ask for.

So let's assume that I'm able to offer $5 of extra income to the business for every hour that I work. And so therefore, I'm getting paid $4 an hour and that's what I'm able to secure. Now, a law comes along and says, "No, you need to pay every worker $10." What does the business owner do? Does he magically decide, "Well, the law said so, so I'm going to have to pay this guy $10"? Well, now he's losing $5 for every hour that I could work. So there's a very obvious way for him to increase his profitability, which is to just not hire me at all. He'll make less lemonade. He'll sell to fewer people, and he'll earn less revenue, but he'll pay a lot less in the wages. And so therefore, it's a profitable move for him to not hire me.

So effectively what the minimum wage law does is that it makes it illegal for anybody to hire anyone whose productivity is lower than that of the minimum wage. So the minimum wage law makes it illegal for employers to hire anyone whose marginal productivity is less than $10 per hour as explained in this example. And that is what you arrive at if you analyze this economic phenomenon through the lens of human action.

The minimum wage law effectively **criminalizes employment for the youngest, the poorest, and the least experienced**. People with low productivity generally tend to be young or poor or less experienced. They don't have the ability to offer a lot of productivity because they don't have skills. They're still young. They're still learning and they haven't been able to invest in education and learning those skills. So it's very difficult for them to get a job when there's a minimum wage law because it's very difficult for them to get on the ladder of having the productivity that is higher than the minimum wage.

So what ends up happening as a result of minimum wage laws is that a lot of people become unemployed. Everybody who's less productive than the minimum wage law becomes unemployed. Is this preferable to the world in which those people earn less? I'd argue obviously not. When these people earned four or five or six or seven or eight or nine dollars rather than $10, yeah, their wage was lower, but at least they were working. And $4 is better than $0. But more importantly, $4 is a small wage, but it is also very useful for the worker because it is allowing the worker to gain experience and gain skills and become more productive. The longer you work at any job, the better you become at it. And so therefore, with time, your productivity goes up. Not only are you putting people out of work, you're also taking away their ability to increase their productivity and gain experience that allows them to get the higher wage.

So this is why minimum wage laws not only create unemployment, they also create a permanent unemployed class, a permanent unemployable class of people that never acquire the skills because they cannot get the job, and they cannot get the job because they can't acquire the skills because their productivity is lower than the minimum wage.

Another potential implication is that businesses would raise prices. So if you can't fire all of your workers without going out of business, your only option is you stay open, but you raise your prices in order to justify being able to pay more. And that results in prices increasing, which is counterproductive because now you're paying the workers more but now the workers have to pay a higher price on the goods that they buy. And so what is the point of getting paid more if your prices go up?

And of course another option you see is that businesses increase automation. You see this happening in the US now where the more they pass minimum wage laws the more economical it becomes for companies to install machines to do the job of workers.

So this is how you would explain a minimum wage law from the lens of human action. You don't have quantitative methods of making falsifiable predictions about what the impact will be. It's not possible for an Austrian economist to say: if you pass the minimum wage law and raise the minimum wage to $10, you're going to put this many people out of work and you're going to cause this many people to reduce their jobs and prices are going to go up by that much. It's not possible to make quantitative predictions, but it is possible to predict the **patterns of human action** that will emerge. Workers will be fired if they have a lower productivity. Businesses will raise prices. Businesses will increase automation.

And in fact, empirically, if we look at the record of what happens to things like wage and price controls, historically, we see that they match much better with the analysis of human action rather than the quantitative analysis of mainstream modern economists. And so for that, I highly recommend looking at the book *Forty Centuries of Wage and Price Controls*. It's a very, very fascinating book about 4,000 years of governments trying to make wages and prices go up or down based on whatever criteria they happen to find fashionable at a certain point in time. And the experience meshes perfectly with the Austrian explanation, which is that when you pass a law, you don't magically change the economic reality. Instead, you just force people to adjust in certain ways. And since we have good ideas about how people act in economic manner, we can predict these. And so this book does a brilliant job of explaining those things. And we discuss it in more detail throughout the rest of this course.

To conclude, **collectivists**—or people who like to look at economic phenomena from a quantitative central planning perspective—look at the world of economic transactions as an inhuman process that they can alter to suit their needs. They mandate that the observable epiphenomena associated with markets fall within acceptable ranges. They assume humans will just adjust their actions to ensure these laws are upheld. In other words, from the central planning collectivist quantitative economics perspective: we want the wage to be this much and we want unemployment to be that much and we want inflation to be this much and we want industrial output to be this much. And therefore we can establish these relationships that look like they are scientific relationships and then we can play with these levers. So we understand that unemployment and inflation are related and they're inversely related. So maybe we lower inflation a little bit and then that would lower unemployment. And they think that they can just play with this like you can control a machine because everything is done with precision just because we have math.

But the reality is we don't have math. We don't have levers to control the actual driving force of economic phenomena. And the driving force of economic phenomena is **human action**. So in reality, we don't just shape the world by manipulating these constants and expecting humans to just follow along. In reality, humans will adjust their actions to optimize for their own well-being, not to satisfy bureaucrats. And so if you want to understand how the world's going to react to any particular thing, how the economic phenomena and how economic laws will play out, you need to analyze how human beings act.

So the merchant would rather not sell at all than sell at a loss. You'll either see a free market price or you will see no market price at all. In the latter economy, real prices are found in underground markets. That's why price controls just never work. And that's why wage controls never work. And that's why free markets always find a way of reestablishing themselves. It's a matter of: will that happen slowly or quickly? That's the only question there.

So almost all modern economics textbooks approach economics from the pseudoscientific quantitative approach. And that for me is why these things can be so confusing because you're using these formulas that have the certainty of a physics formula. But when you go to physics lab and you try and test these formulas, it works. Yet when you look at an economy and you try and see how these formulas match onto the reality that you experience or the data that you look at or the news that you hear, you see that there is a complete disconnect and that's what confuses students. And that is why this book and this course are going to be different.

So I hope you join us for the rest of this course and I hope you find it very useful and interesting. Thank you very much.

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