He enjoys a sweet moment. Several books by Jesús Huerta de Soto were translated to fourteen languages and they just gave him his third honorary doctorate. His teachings took root in Spain, but practically lack presence in the English-speaking academic elite. “They have banned the Austrians from the US universities,” he regrets. The rejection of mathematics and the scientific method (“economics cannot be contrasted”) have a lot to do with that.
When he was a teenager, Jesús Huerta de Soto had a revelation. He was always passionate about economics and the home of his parents had an extensive library about the subject, but at 16 years they sold it entirely and spent a great deal of time searching for new titles throughout libraries in Madrid. One day, in the streets of Fuencarral, he found one book he didn’t know. “It was titled Human Action and was from some Ludwig von Mises,” he remembers. “I was fascinated.”
Little Jesús already showed great promise then. He read the General Theory of Keynes at 14 years and, even admitting that he understood it “badly”, he couldn’t believe that this pompous gentleman had saved capitalism, as the rest of the world insisted on reassuring him. He expressed this curiosity to his father, who must have looked at his hairless calves and said: “Stop talking nonsense, kid!” What do you know!”
But, after a while, a friend of his father decided to hear him more attentively and was left surprised (or terrified) when he saw that the child was not only citing Mises from memory, but also that “he was working in Man, Economy and State,” from Murray Rothbard.
His father’s friend was part of a small circle of Austrians that were celebrating a weekly meeting in Madrid. They invited him to join in and Huerta de Soto became one of its most frequent participants. “After a little while I enrolled myself in economics at the university,” he says today, “so that, by twist of fate, I had the opportunity to contrast the two lines of thought”: the neoclassical and, what he simply calls, Economic Science.
Subjects and Objects
We are in Seguros España, the family business whose management he combines with a professorship in Economics at the Rey Juan Carlos University. It is an impressive office, in the streets of Príncipe de Vergara. That Huerta de Soto manages an insurance company is another twist of fate that also marked his intellectual evolution. The actuaries, he explains, use mortality tables and statistical calculations to realize their forecasts, as if they deal with a natural science. But Huerta de Soto immediately realized that “what works for the actuaries does not work in the field of economic theory.” The society is characterized by a process of “entrepreneurial discovery”. The actor in economics “is not a rat nor a penguin, but a human being, equipped with an innate creativity,” that is coming up with new things at every instant. Everything is continuously changing, no constancy exists that can be incorporated into mathematical functions.
[quote_left]At 16 years, strolling through the libraries, I found ‘Human Action’ by Ludwig von Mises. I was fascinated.[/quote_left]This subjectivity is the cornerstone of the Austrian School. Its founder, Carl Menger, was a stock-market journalist in Vienna at the end of the nineteenth century and, as the classical theory was not of great use in explaining the jumps in share prices, revived the outlines of the Gymnasium and rediscovered Diego de Covarrubbias, a lawyer of the Salamanca School that in 1555 wrote: “The value of an object does not depend on its objective nature, but on the subjective estimation of men, even if it is irrational.” That fitted far better what Menger saw every day and he decided to re-establish economics on a more realistic foundation than the comfortable fiction of the homo oeconomicus.
Build a science (that is, a grouping of assigned rules to formulate predictions) about an ever-changing reality (that is, an unpredictable reality) can sound contradictory, but from the Austrian School would originate a decisive contribution in the following years: the theory of the impossibility of socialism.
A Pipe Dream
The great attractiveness of communism lies in the promise of a new society, but you have to recognize that Marx was never very clear about the practical details. The most he achieved to write were vague remarks, such as that in a world without classes nobody would have a specific profession and everyone would dedicate himself to whatever he feels like doing. He was convinced that capitalism, of whose productivity he was a sincere admirer, had resolved the problems of scarcity and that the dictatorship of the working class would end the problems of distribution.
This sky in the pie was shattered in pieces with the Soviet famines in the 20’s. Many economists then remembered Mises, who already predicted that socialism would never work, because, without a price system that indicates what is lacking and what is plentiful, resources cannot be assigned correctly.
The reaction by the USSR was to establish a central authority that fixed some orientative prices and, with these as a starting point, organized an auction between the managers of the public enterprises. According to Moscow, this scheme took the best of capitalism (the price system) without its disadvantages (the concentration of wealth).
The argument persuaded many academics, but Friedrich Hayek, a disciple of Mises, dismantled it in a 1945 article: The Use of Knowledge in Society. Hayek explained that the neoclassical models, in which both Soviet as Western economists based themselves, took as given the assumption that they could know the preferences of the citizens, but these vary continuously and are often times not even verbalized. Prices, with their prompt answer to situations of abundance and scarcity, provide a crude code of signals, but could not be substituted to a sufficient extent by a central auctioneer. To unleash the explosion of wealth that fascinated Marx so much, it was also necessary that the actors would be able to take advantage of the business opportunities that those signals give away, and that was impossible if you wouldn’t let them enjoy the fruits of their own discovery.
Wicked Mr Smith
“Without private property, the entrepreneur stays blind,” says Huerta de Soto. “The USSR belonged in all statistics to the world’s foremost producer of potatoes and tractors, but the Soviets were poor because the tractors were rusting in Siberia and the potatoes rotting in Ukraine. There were no entrepreneurs that said: let’s take the tractors to harvest the potatoes and make a killing… That is the market. It is not perfect, as the neoclassicals maintain. On the contrary. It is full of imbalances, but these imbalances are opportunities that await there, latent, until someone exploits them, in a process of expansion without limits. And without the need for a ministry.
—For you all government intervention is bad.
—All of it!
—But even Adam Smith considered that there are certain tasks that the State must assume: national defense, justice…
—O, please! Adam Smith was a dangerous socialist! In the Wealth of Nations he justifies up to 25 government measures that made no sense at all: the limitation of interest rates, the intervention in education, the fiscal contribution depending on the capacity to pay, the Navigation Acts…And this is not the worst. The worst are his conceptual errors. Adam Smith buried the theory of subjective value and defends that it is costs that determine prices. There is the seed of Marxism! Because, of course, if value depends on the costs and labor is the primary cost, then why shouldn’t the laborer keep the entire value? It is truly awful… I always tell my colleagues of Mont Pélérin [the liberal club founded by Hayek] who walk around with a tie of Adam Smith: “They make me want to strangle you with it.”
Huerta de Soto accompanies his explanations with forceful gestures (raises his arms, pulls out his hair, covers his face), while he balances in an old rocking chair, which squeaks laboriously. As he speaks, it fumes and there was a moment when I asked myself whether the rocking chair would endure the entire interview.
By luck, the appearance of the photographer gave him a respite. Huerta de Soto actively cooperates in the posing session. “Am I well combed?”, he asks. “How do I look? I prefer that you take it from the other side if it’s possible, because in this one I have a spot like Gorbachov and the entire world will say: what a strange guy.”
“Don’t worry,” I reassure him. “The spot will be the least they note when they read what you say.” He laughs pleasurably. “The strange ones are the others,” he repeats, “the only normal one am I.” And he continues laughing.
They just designated Huerta de Soto doctor honoris causa at the Financial University under the Government of the Russian Federation. He already was one for universities in Guatemala and Romanian, but this third distinction is special, because it comes from an institution founded in 1919 by Lenin. In any way, it closes the circle initiated by Mises and it confirms the absolute victory over Marxism. There where they formed the communist elites for decades, they now honor the Austrian School.
Huerta de Soto feels rightfully proud about this recognition, but perhaps he is swept along by his enthusiasm when, without any trace of irony, he proclaims: “What surprises me is that there still remain economists that are not Austrians. We are the only ones that have been able to explain the recession.”
The explanation of the business cycle is, without a doubt, another great contribution by Hayek and one of the reasons why he received the Nobel in 1974. Very briefly, it defends that crises are a product of a prior and irresponsible expansion of liquidity. The authorities embrace a logical fear for recessions and, when they observe any dark side on the horizon (for instance, after 9/11), they flood us with cheap money. For banks are only obliged to maintain a fraction of the deposits of its customers as reserves (therefore it is called fractional reserves), a good part of the new credit is not backed by real savings and ends up producing a bubble.
[quote_right]According to Ratzinger, the great sin of the twentieth century was to think that one could build paradise on Earth[/quote_right]In the beginning, the entire world is delighted. Investment and employment grow, households spend, governments are re-elected, bankers make a killing, and they dedicate books to Greenspan titled Maestro. But many entrepreneurs have undertaken projects (for instance, one million houses) at artificially low interest rates and, when these recover to the level that correspond to the level of genuine savings, they go bankrupt.
It is a very plausible thesis. Whoever drives on the highway of Andalucía and looks through the window at the height of Seseña sees an empirical contrasting. The urbanization of El Polcero, with its half occupied buildings and abandoned cranes, is a monument to bad investor calculations and its lethal effects.
The rocking chair lasted the last attack. It’s almost two o’clock and we have been talking for three hours. “You force me to summarize a course of a year in one morning,” the tired Huerta de Soto friendly complains.
But still he found the energy for a last message. “The sin of humanity in the twentieth century is the worship of the state.” [Joseph] Ratzinger [Pope Benedict XVI] writes it in his latest book Jesus of Nazarath. He mentions social engineering and says: this is the big problem, to think that man is morally autonomous and can establish paradise on earth. That only gets us to hell.”
After a pause, he inclines his head to one side and slightly blinks his eye. “You aren’t very convinced that the State is the reincarnation of the devil,” he tells me. He pats my back. “I understand. You don’t see the alternative, but say: “Holy Mary, please keep me how I am… But I am a revolutionary.”
[This is a translated excerpt from the interview of Jesús Huerta de Soto with Actualidad Económica by Miguel Ors Villarejo (July 2011)]