Ep. 16 Joe Salerno on Economic Calculation, Fractional Reserve Banking, and Stories of Rothbard as White Knight

Joe Salerno is Academic Vice President of the Mises Institute and one of the world’s leading economists in the Rothbardian tradition. He discusses his intellectual roots as well as his scholarly work on money and banking. But Bob also asks Joe to recount some of his funny adventures with Murray Rothbard.

Mentioned in the Episode and Other Links of Interest:

The sound engineer for this episode was Chris Williams. Learn more about his work at ChrisWilliamsAudio.com.

About the author, Robert

Christian and economist, Research Assistant Professor with the Free Market Institute at Texas Tech, Senior Fellow with the Mises Institute, and co-host with Tom Woods of the podcast "Contra Krugman."


  1. Thundaga on 02/14/2019 at 12:02 AM

    Excellent episode. Really enjoyed it. It was too short haha.

  2. Billy on 02/14/2019 at 6:28 PM

    Great episode, as usual. Who sings the intro music?

    • Robert Murphy on 02/16/2019 at 12:28 PM

      Thanks. This video gives the background to the song.

  3. Tel on 02/16/2019 at 4:15 AM

    Good interview.

    I don’t accept the practical failure of various Communist states as evidence for the proposition that even if central planners had access to all production functions the calculation is intrinsically impossible. Take a look at what really went wrong during the Great Leap Forward in China for example. Did Mao go around meticulously collecting up the best farming knowledge in order to make a planning committee with deep insights into crop improvement? Quite the opposite, Mao know nothing about farming … everyone was aware that Mao know nothing about farming … then suddenly Mao sends farmers off to swat sparrows with sticks.

    Think about that … there was no attempt to solve the “socialist calculation problem” … just one guy with a hare brained scheme ordering others around for the sake of proving he is boss. Of course it failed. You don’t need to study any economics to know that was going to fail.

    Consider Russia … did Lenin go and study farming techniques and use this as information to assist the central planning process? Nope… both Lenin and Stalin tracked down the most successful farmers, branded them “kulaks” and had them murdered. They literally destroyed the most useful national resource of farming knowledge and replaced it with collective farms based entirely on theoretical ideology. They were far more worried that some people might prove slightly more successful than others. Murdering the kulaks was of political necessity in order to hide the fact that the central planners had not the slightest clue about farming (and uninterested in learning).

    Not only was Hayek correct about the production knowledge being distributed in society … but in the real world, socialists have demonstrated that they are not concerned about making the slightest effort gather up this distributed knowledge … making active efforts to stamp it out. They were moving in the opposite direction to what might be called solving the “socialist calculation problem”.

    • Christopher Colon on 02/16/2019 at 10:45 PM

      So you think if all this distributed knowledge could be gathered up into one person, then that would be a solution to “the socialist calculation problem,” and thus not a theoretical impossibility? The guest as well as the links that Dr. Murphy provides are saying this is not quite right – that the “knowledge problem” is different then the “calculation problem.”

      Specifically Salerno in this particular interview says that even if you had all the production knowledge, and knew the preferences of consumers (or gave the benefit of doubt and assumed away those preferences like Mises did) socialism still could not work because there would “be no prices, no markets.” I had to follow up with the additional links to get what he meant, but what I think he’s saying is that the economic calculations needed to determine the most efficient way to provide something would be impossible because of the lack of prices. Said another way, the socialist cannot ascertain the opportunity costs of employing any one means over another, because he cannot reduce the cost of things to a single unit.

      So I suppose an omniscience and omnibenevolent god could not even get socialism to work?

    • Mike Wagner on 02/18/2019 at 1:41 PM

      I like your comment and I think you are right about socialist leaders not caring about real knowledge. They assume they already know everything they need to know to run society. The whole ideology of socialism leads them to that conclusion.
      I have another thought. There is a serious scalability problem in socialism. Even if the leaders actually wanted to accumulate real information, even if they were humble and didn’t assume omniscience, there is a bottleneck problem with gathering, collating and understanding the information they collect.
      Think of computer systems. In the early days, a CPU was the size of a house and cost millions. An organization could typically afford only one. Terminals were connected to the one CPU for input/output. As more terminals were added, the CPU slowed down and throughput decline drastically. The solution was to have the terminals themselves do the processing as that technology came online. The more distributed the data processing, the faster the system worked.
      Now think of the socialist commonwealth where EVERY decision is to be made at the central hub. Imagine, for example, that EVERY decision has to be made by Congress. In the time it takes Congress to make even ONE decision, the data upon which the decision is made have already changed. The decisions made by Congress are almost always wrong simply because they are always using outdated information. Always.
      I think this was Hayek’s point. I don’t see it as opposed to Mises’ calculation problem, but rather a completely separate problem. Legislatures and bureaucracies are simply not dynamic enough to respond to changing market conditions.

  4. Matt on 02/16/2019 at 6:27 AM

    Forgive the off-topic comment, but I just wanted to put in a word here regarding a possible future episode. I’d like for you to do a full-disclosure show and reveal to all of us where you stand on certain contentious political issues like borders (closed vs. open), the right of non-association (segregation), and so forth. Are you a minarchist, an anarchist, or a monarchist? All I know about you is that you’re a Christian free-marketeer working within the Austrian school tradition; your long-time association with the Mises Institute and close friendship with Dr. Tom Woods gives me reason to suspect you are an anarchist as well, but it would be nice to this all laid out in the open. Anyway, I love your podcast site design Dr. Murphy, and I look forward to your future auditory disquisitions. Thank you.

  5. Christopher Colon on 02/17/2019 at 12:25 AM

    Suppose a mining operation ‘strikes gold,’ literally speaking. In a no government society where there is free market banking and gold is being voluntarily used as money, how is the effects of finding a lot of gold different than a bank creating money that did not come from a deposit? Are they different? I seem to remember reading an article about this kind of question before, but I don’t remember what the article said or by whom it was written.

    • Robert Murphy on 02/19/2019 at 12:23 AM

      Great question CC, here I give plausible answers either way.

    • Tel on 02/27/2019 at 8:05 AM

      There was a cascade of events in Australia (especially around Melbourne) leading to the boom of 1890 and subsequent crash of 1893. Roughly like this:
      * Victoria Gold rush (1850’s and 1860’s, Ballarat, Bendigo, etc) large surge of wealth also immigration.
      * Bendigo Building Society (established 1858), various other building societies follow.
      * Land rush (1860’s) new land acts offered easy freehold title to agricultural land.
      * First stock exchange in Melbourne (1861), seems to have been somewhat temporary.
      * Sydney Stock Exchange (established 1871).
      * Stock Exchange of Melbourne (established 1884).
      * Surge of foreign investment from British Empire flows into Australia.
      * Melbourne property market boom (rose during 1880’s peak 1891).
      * 1890 Maritime Strike, followed by coal miners strike, shearers strike, etc.
      * Gold discovered in West Australia (1892 Cooldardie, then 1893 Kalgoorlie)
      * Herbert Hoover inspects Sons of Gwalia gold mine (1897, West Australia) and recommends purchase, West Coast gold rush in full swing.
      * Federation Drought (1898 to 1902) and coincidental floods in Queensland, East Coast of Australia slumps into depression.

      How much the gold-rush and monetary injection influenced the subsequent boom and crash is arguable. At the time banks were free to run fractional reserves strictly at their own risk, there was no government deposit guarantee, and notes were fully redeemable for gold by law. Since Australia was at the far end of the British Empire, a lot of the physical gold left the country soon after it had been dug up, but there was still a local wealth effect, population boom, etc. There was also misjudgement of the stability of Australian weather for agricultural purposes, and some of the biggest industrial action in Australian history.

      There was no central bank at the time, although the Bank of England was at least theoretically available as lender of last resort, the discount imposed would have been painful. Governments were eager to get involved and changed the rules to allow rearrangement of the banks after a 3/4 majority vote of creditors, supervised by a court. A total of 12 banks “voluntarily” chose to go along with the rearrangement in 1893 rather than go into liquidation. These were not Limited Liability corporations and shareholders could still be personally liable for debts (difficult to get information on percentage recovery). However, quite a lot of Australian banks survived unscathed. Although times were tough on the Eastern side of Australia (where most of the population lived) there was now a shift towards Perth and the Western goldfields which remains a center of mining today (many minerals including gold).

      It fits the general model of a rush of speculative credit, followed by boom and then crash. There was genuine wealth in the form of both gold and land, as well as expanding industrial activity. I don’t think there’s anything in free market theory that says everyone will get everything right all the time. Australia recovered after the Federation Drought and then we had the lead up to World War I.

  6. Catching Up on Podcasts on 02/17/2019 at 2:25 AM

    […] BMS ep. 16 is my interview with Joe Salerno, which covers some of his work in Austrian economics but also fun […]

  7. Geoff on 02/18/2019 at 7:19 AM

    How was there no discussion of Austrian economic principals? It was all history of your guest. It is very hard to find discussion on Austrian economics and makes no sense why you wouldn’t discuss our current economic climate, or almost anything on the federal reserve. The podcast was way too far in the weeds for anyone who isn’t already really into Austrian economics.

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