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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

About the author, Robert

Christian and economist, Chief Economist at infineo, and Senior Fellow with the Mises Institute.


  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.

  8. Jack Ramsay on 04/07/2019 at 5:29 PM

    Austrianism’s assertions of categorical indissolubility for its Economic Calculation (or Socialist Computation, or “Vienna”) Problem have become an exceeding popular literary form. One sees them nailed to the internet’s digital church doors everywhere – each with its defiant invitation to PROVE ME WRONG.

    It is as if sufficient repetition of the case will someday prove what is obviously a general negative, i.e.: the efficient economic operations we see going on around us all the time will not be captured in a scientific metaphor. You will never do that to the satisfaction of sentient beings. All you can do is reject the principle of contradiction that has ruled Western science since Galileo.

    The unprovable premise – premise, not anything in the way of realizable fact – of economic non-computability has been falsified by any number of counterexamples that have emerged since the internet opened up the possibility of contradictory demonstrations arriving from unauthorized sources.

    I will choose one of the more developed specimens – specimens, i.e.: something specific that actually exists – of efficient economic calculation for our examination. One mouse-click will take you to the e-text, where you see a looped emulation of an international input/output formulation proceeding efficiently, and with temporal continuity, through all the chaotic physical states and disequilibrium prices leading from one Pareto optimum to another.

    If your installation of MS Office is sufficiently complete and current, you can run this demonstration on your own desktop. It is contained in an ordinary Excel workbook:

    Instructions for operating the desktop prototype are on pages 9 to 14 of this (refereed!, academic!) paper:

    The VBasic program for this prototype is open-sourced within the workbook. (It will alert anti-virus software.)

    If EcoMod is not a distinguished enough source, you can consult the New England Complex Systems Institute:

    If complex systems are not your thing, try Managerial Cybernetics:

    And if you need more prototypes to establish the generality of this system, you will find them under EXEMPLARS at

    Do not, therefore, let it said that you do not have ample instances of artificial economic calculation to examine to any depth you might care to pursue. Such an examination will reveal that the boundary conditions of these mathematical prototypes are nothing more than the production and utility tradeoffs with which Hayek (1945) defined the Vienna Problem’s solution:

    “The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in MATHEMATICAL form: put at their briefest, they are that the MARGINAL RATES OF SUBSTITUTION between any two commodities or factors must be the same in all their different uses.” [emphasis mine]

    Here I would like to pause in anticipation of the objections usually raised at this point. Libertarianism’s leading “public intellectual” Stefan Molyneux will snidely intone “not an argument” – as if that settles anything or even adds anything. If economic science can only be an argument (per Rothbard) then demonstrations are indeed irrelevant. Right you are if you think you are, and there is no point in reading further.

    A related dissent recalls Milton Friedman’s earlier finding that “SFEcon is a fraud as a mathematical possibility.” In other words, economic calculation HAS not been demonstrated because it CAN not be demonstrated. Again, if this is your position, there is little more to say. To say that little bit more, I note that Libertarian stage magician (and Mencken Fellow at Cato) Penn Jillette was once called-upon to pronounce B*llsh*t on SFEcon; but he did not uncover the mechanism by which this “fraud” is perpetrated.

    Austrians’ argument against the possibility of artificial economic calculation turns on Hayek’s presupposition that knowledge must be focused in order to be acted-upon. This is visibly contradicted by naturally-occurring superorganisms (bee hives, ant colonies, termite mounds) that orbit around macroeconomic optimality even though individual insects are incapable of anything resembling ‘knowledge’ – let alone focusing what ever it is that there are aware of.

    It is interesting that the Austrians never mention Hayek’s later realization that macroeconomic order emerges spontaneously – that knowledge does not have to be (indeed, cannot be) focused in order to be acted-upon. Hereupon economic science should resolve to render this spontaneity through emulation.

    At this point the Austrians bring-up another gratuitous assertion to the effect that the structure of any such emulator would be ‘complex beyond the possibility of understanding by the merely human intellect’ (per Walter Williams, Thomas Sowell, et al). Here it becomes necessary to ignore/condemn/vilify the emulators already available for public viewing.

    Then the Austrian informs us that any such emulator MUST be exogenously informed of commodities’ values in order to operate. But, as demonstrated on SFEcon’s YouTube channel . . .

    . . . the market’s sacred function of generating efficient price signals is fully realized WITHIN the emulation.

    Finally, the Austrians willingness to die on the hill of economic calculation seems odd to this outside observer. Formulation of the calculation problem was central to the founding of the Austrian School. Mises himself (according to Lew Rockwell, “The Faith of Entrepreneurs” Mises Daily, 23 December 2005 wished for “a rational understanding of why markets are responsible for astounding levels of productivity that can support exponential increases in population and ever higher living standards.” A solved calculation problem, embodying this “rational understanding,” would seem to fulfill, rather than nullify, the Austrian School.

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