Austrian Economics Newsletter Summer 1997

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The Spanish Rootsof the Austrian SchoolAn Interview with Jesus Huerta de Soto

AEN; You made an extraordinary an-nouncemen t today at the AustrianScholars Conference. Can you share itwith AEN readers?de SOTO: First, I'd like to thank theMi es Institute fo r pon oring this greatconference. It is gratifying to see somany countrics an d disciplines repre-s en ted , and I look forw ard to reading al lthe papers that are being presented.

I I y announcement was this: begin-ning this October, we are publishingThe Collected Worhs of Ludwig VOIlMises . We have support from 300 pri-vate subscribers, as well as SOUle helpfrom free-market institutes in Span-ish-speaking countries.

The Collected Works wil l totalseven volurn s, each one of them as

th ick as Human Action. The first vol-ume, already in preparation, wil l betitled Moneta.ry Theory and EconomicCycles. It will include The Theory 0 /iVioney arul Credit and other books andwritings on the subject of money andbusiness cycle .

The project. is without precedentin the world, and it will be completedin four or five years. We are sure theCollected ~Y()1'kswill be received favor-ably in theintellectual world, not onlyin Spain bu t also in Latin America. Iti the best tribute we can pay to ou rmaster.AEN: How does it happen that thereis a ready market Ior these books?de SOTO; The publication of Spanishtranslations of Mi es' books began[esus Huerta de Suto, profes 'or of eco-nomics at the Cnmplutcnse Universityof M adrid, is Spain's lead.ing Austrianeconomist. As 1 1 1 1 uuthor, translator,publisher, and teacher, he also ranksamong the world's most active arnbassa-rlor fo" clas ical liberalism. I-Ie is thauthor of a Spuni h work on economiccalculation and the Au trian method,the introduction to the new Spanishedition of Hunui n Action, and articles inmonetary and hi tory o r thought jour-nals in four lallguilges, including TheReuieu: oj Al.Istrirlll Ecotunnu:s. H e w asinterviewed follnwing his keynote ad-dress


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THE LUDWI6 VON MISES INSTITUTE

Since the 19605, Joaquin Reig andhis brother Luis had organized aweekly Austrian seminar that met:every Thursday in their home. Thisseminar, which I attended, was re -spcnsihle for the spread of Austrianideas. Hayek even attended it severaltimes .. In these years, Reig also trans-lated Bureaucracy, Liberalism, TheAnticapitalistic Mentality, and Theoryand History.

I received a chair in political econ-omy at the Compluten e University ofMadrid in 1985. That's when the semi-nar left the Reig home and began tomeet at the University. The most im-portant Spanish universities areowned by the government. All profes-sors are civil servants, who hold theirchairs for life. But according to ourConstitution, they can teach what theywant with almost unlimited freedom.This system was used and abused byMarxists and socialists for many years.But since the early 19805, it has alsobeen used by free-market economists.

Complutense University is one ofthe oldest in Spain, founded in 1293.Today it has more than 100,000 stu-dents, and the law school where Iteach has 17,000.1 have been teachingthe same course for twelv years withincreasing success and popularityamong the students. H um an A ction . isthe required textbook, and up to nowmore than 2,000 students have passedexaminations on the book. A 1 1 told,more than 15,000 copie of Reig'sSpani h edition have been old.

- n US T -h l-n NECON 0 M I CS N E W S L m E R

Summer 1997 - Volume 17. lIIunlber 2Editor: Mark 8rand ly i Aub u rn U il iv e rs it yAssoc ia te Edi to r: Jef frey A . TuckerCont ribu ting Edi to rs : Wil li am Anderson, PeteCalcagno . Paul Cwlk, Gregory Demps te r. Scot tK jar. Kei th Reutter. T lrnc lhy Terre ll . Jol inThompson. Christopher WesUey/Al.lourn Universi ty~lanaglng Editor: Jud ith F . ThommesenThe Austr ian Economics Newslelter Is publishedqua rter ly by lhe Ludwig von Mises Ins ti tu te . Aubu rn .Ala. 368495301; (334) 844-2500. ta x (334)844-2583. internet: [email protected] .web site: www.mtses.orgCopyright 1997 Ludwig von Mlses Ins ti tu te

AEN: Does your department acceptthc Austrian School a a legitimatealternative?

translation of Raimondo Cubeddu'simportant book The Philosophy of theAustrian School.

Among the books are titles byRothbard, Kirzner,Mises, Hayek, BrunoLeoni, WiJJ1elm Ropke,and a 50th anniversaryedition of Hasliu's Eco-nomics in One Lesson,which. has an introduc-tion by Ll w llyn H.Rockwell, Jr. Futureprojects include Hans-Hermann Hoppe' TheEconomics and Ethicsof Private Property andBruce Benson's T he E n-terprise of Lmv.Mostimportant, we are pub-lishing a translation ofRothbard's Austrian Perspective on

the History of Economic Thought. Itwill appear with my introduction inone large volume in 1998.AEN: Did you ever meet Rothbard?de SO'1 'O: Before I completed myPhD in Spain, Ireceived a grant tocome to the United Stat s to study.Hayek wrote a letter of recommenda-tion for me to Stanford University,which admitted me to its MB A pro-gram. To my delight, Rothbard wasthere on fellowship with the Institutefor Humane Studies, and we spentmany wonderful days together, dis-cussing among other thing, hismanuscript for The Ethics oj Liberty.Iwill always treasure the early draft he

de SOTO: At one time, no. But thish a changed in th e last .- _I_ ---.twelve years. We nowhave a PhD seminar onAustrian economic,we participate in out-side programs on lawand economics, andevery year we guide for-eign students whocome to Spain in re-search topics. We re-cently had a two-dayconference on Misessponsored by the city ofMadrid and the minis-

One of theworst thingsthe communistsdid was kill allthe anarchists.

My grandfatherused tosay, "those

anarchlsts arefine people,"

gave III .He knew everything about Spain,

all the details of the geography and thehistory, and especially the ideologicalfactions in the Spanish Civil War. Hewas opposed to Franco, of course buteven more opposed to the RepublicanCommunist Party. Iagreed entirely.One of the worst things the commu-nists did was kill all the anarchi ts ..Mygrandfather used to say, "tho e anar-chi ts are Iine people." In a way, theywere more )'mpathetic to market andprivate btl iness than were the ocial-ist and conservatives, who really hatedthe classical liberals.

ter of education, Esper-anza Aguirre. It attract d 300 profes-sors and students and received gener-ous media coverage.

In the U.S., you have debatesamong Austrians, with different peo-ple emphasizing different aspects ofMises, Hayek, and Hoth bard. For ex-ample, I've been following the debateon economic calculation under social-ism very closely. I have not r ached afinal conclusion. But Ido lend tobeli v that Mises's and Hayek's argu-ments are two sides of the same coin.

For om part, we are trying toforge a synthesis between th e rational-ism and utilitarianism of Mises, theAristotelian natural law position ofRothbard, and the evolutionary ap-proach of Hayek. In my bankingcourses, I emphasize the 100 percentre erve ratio, consistent with an oldtradition of Spanish law on fungibledemand deposits, which is still inforce.AEN: Judging from the many booksyou've brought here, publishing hasbeen crucial to the spread of the Aus-trian School in Spain.de SOTO: Apart from the collectedworks of Mises and Hayek, Iedit aseparate series called the New Collec-tion of Li.berty. p to March of thisyear, 20 volumes have been publish-cd, the last of which was a Spanish

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mask wha t i essentially a tax-fundedbailout of an already failed system.AEN: Can a similar transition strategybe used to dismantle medical ocialism?de SOTO: Spain's system is more sta-tist than the U.S.'s. AI. .- -- -- -'- -- -- -- -- ,most the whole of themedical s ctor is gov-ernment controlled.I'm advocating a planthat would encomagethe further develop-ment of a private sys-tem by use of tax cuts.Anyone who spendshis own money onmedical services candeduct that from histax liability. This pre-vents people [rom pay-ing health care twice.AEN: And these ideasare getting a hearing?

is politically po sible right now?de SOTO: For .tarters, we ar at-tempting to redu e the requir d lump-sum payment for firing by half, and,when valid cause can be established,

by more than half. Themandatory lump sumhould never be be-yond one year's salary.Of course that's far toohigh. I've suggestedthat all these detailshould be strictly amatter of contract. Ifan employee wants alarge pension Dr lumpsum in case of beingfired, he acceptsmaller wages now, or

vice versa. It should beup to those parties tomake the exchange, notthe government.

I entirely disagreewith Becker.Because it'sgovernmentmoney involved,there is no wayto calculateecenornlcallywhethereducation is a

good investmentor not.de SOTO: Last year we had elections,and the socialist candidate lost out infavor of 4.4~yearold Jose Marfa Aznar, Heissurrounded bya new wave ofpoliticiansand adviser who have been readingauthors lik Iises, Hayek, and Roth-bard. They are classical I iherals, I havebeen advising Aznar's Popular party for12 years, always defending the mosthard-core libertarian position. ThoughAznar's libertarian people are still a mi-nority in the parliament, tremendousprogress is being made. Capital gainstaxes have been reduced from 56 percentto 20 percent. Corporate taxes and in-come taxe are down as well.

The next big challeng will be in thelabor sector. When the socialist govern-ment took charge 14 years ago, none ofGeneral Franco's socialistic labor legis-lation was touched. The law requiresthat any business that lets an employeego must pay a very high lump sum tothe employe totaling wages for 1,260days. As a result, busine s does notwant to hire. Itcan't afford to specu-late that way. In addition, unemploy-ment hen fits are 90 percent ofsalaries, so there is little incentive toseek new employment.AEN: What's a reasonable change that

This idea, like much of what we freemarketeers want, will be a long timecoming. But we look for progress wherewe can make it. The center of gravitycontinues to shift in our direction, sothat is an encouraging sign.

.For example, military service is go-ing to be made voluntary, Up to now ithas been compulsory and it lasted oneyear. Young men would waste time, usedrugs, chauffeur the generals, or what-ever. More than 200,000 young peoplewere losing one year of productive time.So by regaining this time, the overallwealth of the country will increase.AEN: Do you think these kids shouldbe in school .inst ad?de SOTO: ot necessarily becausethat could be an intellectual malinvest-ment, which often happens when edu-cation is subsidized by the state. The"human capital" theory of GaryBecker would eern to imply that themore you learn in school the morevaluable you are to ociety, The ohvi-OllS conclusion i that gov rnrn nthould pay for everyone's schooling tomake society richer,

I entirely disagree with Becker.Because it's government money in-volved, there is no way to calculate

economically whether education is agood inve tment or not. Most prob-ably it i not. People spend years study-ing things that have no use for them.Neoclassical theory tends to t.reat capitalin general this way: there is no good orba d capital investment; it's all ju st cap i-tal, And in some ways, t.he rnalinve t-ment of intellectual capital is e enwor c than the waste brought aboutth rough other resource illisallocation.AEN: Do you see a contradiction be-tween yom theoreticalideals and mod-est reform proposals?de SOTO: The biggest danger of lib-ertarian strategy is to fall into day-to-day political pragmatism. It is easy toforget the final objectives becau e ofth supposed political impossibility ofachieving them in the short run. OU}'programs and goals become blurred andom intellectuals are co-opted by thegovernment.

The way to prevent this from hap-pening is to adopt a dual strategy. O none hand, we must be open and hon-est about our goals and constantlyeducat the public about w hy our finalobjective is best for society. On theother, we should upport any hort-term policies which get us closer toour goals. That way, when our short-term goals are accomplished, there isno retreat. We can march on with fullconfidence that people understand thatmore needs to be done.AEN: How did you come in contactwi th th Austrian School?de SOTO:When I wa 16 years olel Itook a very strong likiJlg to economicsgenerally. I would comb the bookstorefor every economics text I could find. Ithought 1 had read them all until r wentto a book fair one day and saw one Ididn't know about. It was H um an . A c-tion. I like books the thicker tile better,so I immediately hought a copy. I waamazed at its power from the outset.

One of my father's hi nels found mereading Mises one day, and invited meto join the Reig seminar I mentionedearlier. They were surprised that I knewthe book as well or better than the othermembers. Next I read Man, Economy

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As the churchdeclined, 50

did the wisdomof its besteconomic

theorists, wnllethe power of thestate and theinfluence of itsapologists grew.

ReJormation actually set back thecause of free-market economics.Thchurch had long been a vital .quili-brating power to the state. As thechurch declined, so did the wi dam ofits best economic theorists, while thepower of the tate and the influence ofits apologists grew.AEN: V(1hy d id it take an Austrian torediscover Spanish economics?de SOTO: Th books of the scholasticswere typically publishedin Brussels and in Ita]y,and they were sent toSpain and to Vienna. Sothey made inroads thisway. There i also a scho-Ia tic tradition ofthought in Austriawhich is, after all, 90percent Catholic.

Even so, a SpanishCatholic writer d id solvethe "paradox of value"27 years before CarlMenger. His name wasJaime Balmes. He washom in Catalonia in 1810 and died illJ8 1b8 . During his short life, he becamethe most important Thomistic] hi-losopher in Spain, In 1844, he pub-lished an article called "The True Ideaof Value; or Thoughts on the Origin,ature, and Variety of Prices. 'Balmes asks why is a precious

torrex v orth more than bread? And hanswers, that the value of a thing i inits utility so that "there is a necessaryrelation between the increase or de-crease in value, and the shortage orabundance of a thing."AEN: In what way can Austrians usthe writings of the Salarnancans to-day?de SOTO: A r w years ago, a group oJscholars took it upon themselves totranslate all the main works of theSalamancans into Spanish. They aremaking these writings widely avail-able, and many scholars are now awarethat these great thinkers were ::111iber-tarians. And this has begun to changethe status of lh Austrian School inpain. It has helped root itin history

and thereby has given it a more sub-stantial intellectual foundation.

Jot too lTlanyyears ago, Tw a justone guy in a university teaching unfa-miliar literature. j ow Iam seen asrepresenting a school that foretold thefailure of socialism, and as a spokes-man for th e greatest thinkers fromSpain's pasL. And this is happening atthe sam time that Spain is strugglingto free its own markets from the wel-

fare morass ..AEN: T o assist that ef-fort, you've produced aplan to reform Spain'system of social se u-

rity,de SOTO: This problemof guaranteed old-agepensions is significant in,illwestern countries. Inevery case, the liabilitiesare enormous but demo-graphics hav madethem essentially unpay-able except through in -tolerably high taxes.

Before we can know what to do aboutthese systems, we have to unci rstandtheir in h rent contradictions,

First, these systems purport to beabout caving money, but in fact theydi.scourage savings. The taxes theyrequire tak the place of what wouldotherwi b private saving. And theyencourag people to heli ve they willbe taken care of il l the future andth refore th y don't need to save. Em-pirically, then, the rise of social secu-rity has paradoxically coincided withhuge declines in savings. T h is fall insavings then drives up interest ratesand reduces overall investment inways we cannot account for.Second, no matter what the lawsays about how employees and employ-ers share the burden of contributingto the ystem from an economic pointof view, the worker pays the whole tax.Mises first developed this insight inSocialism, where he said social insur-ance contributions always corns at theexpense of wages.

Third, th system is based on gen-eral and indi criminate in titutional

aggression against the citizenry andthereby attacks freedom itself. This inturn inhibits the creative developmentof entrepreneurial discov ry, new fi-nancial modes of savings, and the effi-cient lise of property. The re ultingmisdirection of labor and capital iincalculably huge.

Fourth, the system cannot work asboth insurance and welfare, becausethese ar incompatible concepts. Pri-vate insurance is based on the principlethat benefits are linked with contribu-t ions. Welfare is based on need. Withever-declining returns, the "insurance"el m nt of the system is aborting the"welfare" element, and vice versa.

And w hy do we have these sys-terns? Supposedly because some peo-ple would not be able to provide forthemselves. But this is like saying thatbecause a small number of peoplecan't get food, everyone in the wholepopulation should be forced to eat ingovernment canteens.AEN: Is your reform plan based onthe Chilean experience?de SOTO:We have to remember thatthe li ab ili ti es i n Chile's system were verysmall as compared wi th Spain's and theU,S .'5 . T h ey had been largely inllatedaway and what remained were paid out ofbudget surpluses. So the Chile analogyonly tak s u so far. Om problems aremuch more difficult to solve.

In the transition period, the presentworking payers pay for present benefici-aries as well as save for their own retire-ment. The key is that the new savingsshould be entirely private and be con-trolled completely by the individual. Itcannot b a forced program.

We must allow those who want togo outside t.he system to do so, payingno taxes into itand taking no benefitsout of it. That must be the long-termgoal, and I expect most people wouldtake this option. In my plan, our tran-sition period allows for a 50 percenttax cut today in exchange for forgoingall claim on future benefits. Also, taxesmust never be raised to pay lorthe tran i-tion. lt' too tempting for politicians to1I e th language of privatization to

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. J ! 5 . ~: '\A ,,)i ; :: " ,A n : n i : v . .e r & T l / ' J"'~&1~j.n. {y - . . . . .. " : J . . . .. .~1 5 TH ANN fV EfiS fI JT i' C ONF ERE. C E

September 26-27, 1997J\LJ':lntu, Gl!Ill'gia

C.LI (or Inforruntion: 3a4-8H-2500t . . . . mall: l,.'mi..scs@nlojl .nnhuru.eduweb site: htfp:llww'w.mises.org

in his 1556 book" Commentar.y cfEx-changes ( I own a first edit ionl}, writingthat "money is worth more where andwhen it is lacking than where andwhen it is in abundance."

Navarro opposed fractional re-serves and made a clear distinctionbetween loan banking and depositbanking. The banker, he said, shouldhe the "warden, depositor, and guar-antor" of monies in his possession. Hesaid there can be no valid contractbetween the depositor and the bankerthat allows for fractional reserves. Ifsuch a contract were made, all partieswould be guilty of fraud.

More sympathetic to fractional re-serve Inoney was Luis de Molina, who,...as the first to argue that bank depos-its should be considered part of themoney supply, But he confused loansand deposits, and didn't understandhow fractional reserves are inherentlydestabilizing. So Navarro am! de laCalle were a kind of Currency School,and very distrustful of banking andanything less than 100 percent re-serves, while de 101ina and Juan deLugo, like the Banking School, weremore tolerant of fractional reserves.AEN: Beyond history of thought, doyou plan to enter the debate amongAustrians about reserve ratios?de SOTO: I've written a long paperdefending the 100 percent reserve po-sition against George Selgin's theoryof monetary equilibrium. His theory isthat when the demand for fiduciarymedia increases or decreases, banksshould b free to respond b y expandi ngor contracting credit. These actions

" '"

don't create investment distortions King of Spain, sent his brother Ferdi-because banks are responding to prior nand I to he the King of "Austria,"changes in demand. With this theory, which etyrnologically means "EasternSelg.in seems to be reviving the old Part of the Empire," which comprised"needs of trade" doctrine of the Bank- most of Continental Europe. The onlying School. And like Keynesians, free exception Vias France, then an isolatedban leers seem fixated ~~~~~_J_~~--"--~~~ island surrounded by

Spanish forces,The economic, po-

litical, and cultural rela-tions between Austriaand Spain continuedfor several centuries.Carl Me nger redis-covered and took u~this continental Catho-lic tradition of Spanishscholastic thought thatwas by then almost for-

Juan de Maria.nacondemned anygovernment

debasement [I fcelns as sheerrobbery, and

suggested thatany individualcitizen mayassassinate aruler whoimposes taxeswithout the

people's consent.

on short-term unilateralmutations in the de-mand for money.

But they don't dealwith the prospect thatthe changes in moneydemand are not alwaysexogenous to the freebanking system,. butcan be determined en-dogenously as well.Banks themselves maymanipulate the supplyof money heeauseit'sintheir interest to do so,so long as thcy canavoid mns .. And thisnew supply can createits own demand and pro-voke economic cycles.History bears this out. Free bankingtheory doesn't take account of thisbecause it is exclusively a macroe-conomic theory.AEN: As with ba nking, was the Saia-mancan political position generallypro-free market'?de SOTO: They tended to defend lib-ertarian positions across the board,For example, Francisco de Victoria iswidely seen as the founder of interna-tional Jaw. He revived the idea thatnatural law is morally superior to themight of the slate. Then Juan de Mari-ana condemned any government de-basement of coins as sheer robbery, andsuggested that any individual citizenmay assassinate a ruler who imposestaxes without the people's consent.The only place Mariana erred was inhis condemnation of buJ1fighting, hutsince I am the grandson of a famousbull fighter, I'm not impartial.AEN: Is the Spanish-Austrian Link any-thing beyond an accident of history?de SOTO: Let's remember that in the16th century,. Emperor Charles V, the

gotten.AEN:WeU, what hap-pened to this traditionthat it had to be redis-covered?de 501'0: Adam Smithand his followers cameto dominate economic

thought,. ending the development 0 1 'the subjectivist school, which not onlysupported the free market consis-tently, but also understood it theoreti-cally. The tradition 'was kept alive inFrance in the writings of CantiJ10n,'l'urgot, and Say, and some knowledgemade it to England via the writingsof Protestant natural law theoristsiarnuel Pufendorf and Hugo Grotius.

But in Spain, we experienced theyears of decadence in th e 18th an d19th centuries, with the last of theHapsburgs and the beginnings of theBourbons from 'France. The statism orPhilip IV led him to attempt to organ-ize a vas t e In p ire and control it fro II IMadrid, ani nherently unviable pro-ject.

The scholastics were against thisstatism, of course, but they were dis-regarded and their tradition "vas lost.There was also the problem that theywrote in Lati 11, so there was a languagebarrier. In addition, there is the British-promoted Black Legend.which tendedto discredit anything Catholic and Span-ish for two centuries. Ironically, the

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The last time I saw Rothbard wa th 1950- Hayek had TTl t til greatat the Mont Pelerin Soci ty III cling Italian h Jar Bruno Leoni, author ofin Ri o de Janeiro in 1993. We organ- Freedom and the Law, who con inc dized a lecture tour for h im in Spain Hayek that the intellectual origins ofand Portugal, which w a to lake place classical liberalism should boughtin the second half of 1995. It was to in Mediterranean Europ , not Scot-culminate at the Ilniver ity of Sala- land. Thi led Hayek to hang hismanoa, the birthplace of the Austrian r s ar h program dating back to hishool, Sadly, Rothbard was not able first Icgal studies at the London

to visit Spain nor his r--------'----------, School of Economics.beloved Salaman .a , Later, one of Hay k'sHowever, I am sure he Hayek says pupils, Marjorie Grice-would be very happy that Rothbard Hutchinson (now Bar-about the size of thi and Marjorie oness Ma rjo rie vongathering here today, Grice-Hutchinson Schlipp nba h) trans-and would be even hap- lated the main texts ofdemonstratepier about the growing the scholastics.tie between Austrian "that economicon both sides of the At-

There is a quotationin Bruno Leoni bookfrom Cic 1'0, in whi hCato says Roman law isthe most perfect law ofall because it hasn't be ncreated by anyone mind.It has not b en con-structed, It i . a result of

a process to which .many minds havecontributed their wisdom. The lawyersdon't make the law; they discov r itand can improve it only lowly.

L ani convinced Hay k of hi the-i . You can ee this by omparingHay k' more Scottish-on ntcd Cons ti-tution. of Liberty with his 1editerra-nean-oriented series, L aw, L e gi slc ai on ;and Liberty. In this series, Hayek Ire 1)'quotes th cholastics on economics.

liberalism wasnot designed bythe Calvinists

but by theSpanish Jesults."

lantic.AEN: It still seem somewhat revisionist tod ribe Spain a thebirthplace of the Au -irian School.de SOTO: Yes, but it is accurate. T oIocus solely on Vienna is far too nar-row.We tend to think, like all mod-ern , that only the n w bas va.lue. Totudy the old is mere archaeology. Butin economics and philo ophy, it' theother way around. Mo t gr at id ahave already been thought by om-one else in the pa t, in luding thmost fundamental Austrian ideas.

One of the main contribution ofRothbard was to how that th pre-his-tory of the Austrian School ould blooked for in the work of th panish.chola tics during th "iglo de OruEspcaiol," the Spanish Gold n Cen-tu ry, which ran from th I' ign of Car-los V in the 16th century through the17lh century. Rothbard first devel-oped this theory in his 1974 pap'rdelivered at the South Royalton Con-ference published two y ar later inThe Foundations of Modern AustrianEconomics.AEN: Yet even this in ighl IIa . a pr -hi tory.de SOTO: Of cour e. Jo ph Schum-peter argued this point in his 1954.History of Economic Analysis. Also in

. And ] have a letter from Hayekdated January 7, 1979, in which Hayeka k us to r ad Rothbard article. Heay that Rothbard and Marjorie Grice-Hutchinson 'demonstrate that the ba-sic principles of the theory of thecompetitive market were worked outby the Spanish scholastics of the 16thcentury and that economic liberalismwa not d igned by the Calvini ts butby th Spani h Jesuits. 'AEN: Who were these Spani h ances-tors of th Austrian School?de SOTO: Most of them taught moraland th ology at tbe University of Sala-manca a medieval city located 150mile to the northwe t of Madrid,

close to th e border with Portugal.They w er mainly Dominicans 01' .lesu-it , and their view on economicsclo ly purall L that stressed b y CarlM nger mol' than 300 years later.

One of my favorites is Diego deCovarruhia yLeyva who set forth theubj ctiv th ory of value. He wrotthat 'the value of' an article doe' notdep nd on it e sential nature, but onth ul je tive ti mation of men, evenif that estimation is foolish." He wasborn in ]5] 2, and served as bishop ofSegovia and mini tel' of King Philip 11.Today in the museum of the Spani hpainter El Greco in Toledo, there is astunning portrait of him. Carl M ngel'quote Covarrubias's 1560 treatise onmonetary dept' ciation.

Another important Salaman an isLui Saravia de la Calle, the firstthinl r to d monstrate that prices de-termine .osts, not the oth l' wayaround. He wrote that "those whomeasure the just price by the labor,costs, and risk incurred by the personwho deals jn the merchandise aregreatly in error. The just price is foundnot by counting the cost but by corn-mon . timation." He was also a fierceriti o r lra tional-reserve banking, ar-guing that fe - hould be paid to banI -er for k eping zold under custody.AEN: ow w 'an get to your arti Iein The Review of Austrian Economics(Vol. 9 no. 2) on this subject.de SOTO: The banki.ng theories of thalamancan i not something thatHothbard on ide r ed at great Ienrrth inhi hi tory of thought. But there jquite a lot of mat rial here. In fact, intheir interna I debates, they prefiguredthe 19th-centl.lry British banking de-hates. The Salamancans were led tostudy banking by observing the cor-rupt relationship between bankingan 1 government, which dependedmo-t fundam ntally on legal protec-tion of fractional r serves.

The alumancans were oppo ed toall forms of inflation. For xarnplothere was 1arlin zpilcueta la arm.He was hom in 1493, lived for 94years and i pecially famous for ex-plaining the quantity theory of money

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TUI: lUDWIO \101'1 MISI:S INSTITUTE

and State. Then over the years I steadilyincreased my knowledge,AEN: It would seem surprising thateconomics would be so intensely at-tractive to you at such a young age,de SO'1'O: My family business is lifeinsurance, which is the only trait Ihave in common with John MaynardKeynes who in the ]930s chaired theNational Mutual Life Assurance Societyof London, This is a very traditionalbusiness, having evolved for 20 0 yearswithout any state intervention, Workingwith my father I naturally became inter-ested in money, finance, and economicinstitutions. Iwanted to be an actuary,Iwas very good at mathematics.

But Isoon began to realize thatwhat works for actuaries, which dewswith life and death probabilities, can-not work in economic theory becausethere are no constants in human ac-tion. There is creativity, change,choice, and discovery, but there are nofixed correspondents that allow thecreation of functions,

Hans 'Mayer made a very interest-ing argument, which has appeared inIsrael Kirzner's collection of Austrianwritings. Mayer argued that supply anddemand curves cannot reflect realitybecause the information necessary toconstruct them can only be providedover time by the entrepreneurial process. That information never appears atthe same time, as the mathematicsrequire that we assume. It was anargument he took from Mises andfurther developed. But Mayer was apolitical chameleon, especially duringthose crucial years before World WarII, and as a consequence he was nothighly regarded by Mises.AEN: Keynes apparently did not drawthe same lessons about human actionfrom working in the insurance business.de SOTO: It turns out that Keynes notonly corrupted economics. He alsocorrupted the practices of life insur-ance. He broke with the traditionalpolicies of his company by valuing assetsat market value instead of historicalvalue. In the short term, it gave him anenorITLOLIS competitive advantage.

Keynes was able to distribute divi-dends to his clients against unrealizedcapital gains,

When the stock market was goingup, it was wonderful. But when theGreat Depression arrived, his companynearly went bankrupt. Both the Britishand the American insurance industriesare suHering from his disastrous depar-ture from tradition. On the continent it

assets at

thesis written on Mises and Hayek bya leading member of Opus Dei,AEN: T he Pope seems to be correct onmany economic issues, but labor unionsseem to be a sticking point with him.de 50'1'0: In his writings, the Popeoften uses the word "labor" when hereally means "human action," Whenhe says labor is creative, labor is en-trepreneurial, labor is productive, heis not talking about unions. He is

r--~~~~-.-L_~~~-~-. referring to the idea ofReligion,. not

the state, is theprimary meansfor imparting tous a sense ofour obligatlonsto keep ourprom ises andto respect thepreperty of

others.

is still the practice to valuehistorical cost and onlypay dividends againstrealized capital gains.AEN: You have giventhe Mises Institute a pic-ture of King Juan Carlosholding a book by Mises.Is he a Misesian?de SOTO: J wouldn'tsay that, but he likesfree markets and under-stands that we have radi-cal opini on son thesubject. Every year we in -vite h im to a fail' that com-memorates new hooks,and he is kind enough tocome. Considering that he didn'tstudy at the University of Chicago, heis more pro-Austrian than one mightexpect. You never know what individu-als or types oJ groups are going to beattracted to the Austrian SchooLAEN: For example, the influence ofthe Austrians via the Salamancans onthe modern Catholic church.de 501'0: The Catholic church is likea huge transatlantic ocean liner. Ifyouturn the wheel to the right, the boatmoves slowly, slowly, and eventuallybegins to change direction.

There is a powerful Catholicgroup in Spain called Opus Dei. It isvery close to the lope and it is verypro-business. Someone in the orderread the works of Hayek, saw him asvery pro business, an d sent out a mes-sage to the entire organization: OpusDei should back the Austrians.

A U or a sudden, all my books werebeing read by everyone in the order, andI began to lecture to their priests andmembers .. In fact, I recently read a PhD

economic action in ex-change,

Of course, thechurch can be ,,,,rong, asit was for many years onthe question of interest,as Rothbard shows inhis Hist01Jr oj Thought.

The opinions ofthe church on eco-nomic issues should betake n seriously, butthey do not impact onmatters of the faith. Bythe way, on my wall, Ihave a nice picture of

Hayek with th e current Pope.AEN: Do you think economistsshould take religion more seriouslythan they have?de SOTO: Certainly. Religion playsan important role in the life of aneconomy. It transmits from generationto generation certain patterns of be -havior and moral traditions that areessential for the rule of law, whichmakes economic exchange possible.For example, if contracts are not kept,society can fall apart. Religion, not thestate, is the primary means for impart-ing to us a sense of our obligations tokeep our promises and to respect theproperty of others.AEN: Have any economists ever beendeclared saints?de SO'1'O: Two Scholastics, in fact.Two economists among the Scholas-tics became saints: San Bernardino ofSiena and his great student San Allton-ina of Florence, Let's hope they wil lnot be the last.

Summer 1997 ~ u m U ~ H EC ONO MIC S NE WSLETTE R ! 7


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1997 Austrian ScholarsConference Working Papersl.'

Austrian Economics Newsletter Summer 1997

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Transcript of Austrian Economics Newsletter Summer 1997