WEBVTT NOTE Scarcity and Choice 1 00:00:00.000 --> 00:00:07.800 Well, economics really begins with the concept of scarcity and choice. 2 00:00:07.800 --> 00:00:17.160 We hear a lot of material, a lot of writings in the press by sociologists and bell-letterists 3 00:00:17.160 --> 00:00:25.480 and other such low-types, low-type intellectuals, that we're now living in a post-scarcity age 4 00:00:25.480 --> 00:00:29.640 And that maybe in the 19th century, there was such a thing as economics. 5 00:00:29.640 --> 00:00:33.000 In the 19th century, there was economics, there was prices and things like that. 6 00:00:33.000 --> 00:00:37.400 You had to worry about things like supply and demand. 7 00:00:37.400 --> 00:00:44.440 But now in the 20th century, especially post-1970, we now live in a post-scarcity age, we don't 8 00:00:44.440 --> 00:00:49.160 have to worry about such a thing as scarcity, and now there isn't any more economics. 9 00:00:49.160 --> 00:00:59.160 Well, the first thing any economist is trained to think in terms of is that this is all nonsense because everything is scarce. 10 00:00:59.160 --> 00:01:08.160 If it wasn't scarce, it's a very good test, I think, when something is scarce or not, when resources are scarce or not. 11 00:01:08.160 --> 00:01:17.160 If it wasn't scarce, then everything would be free and not only free but immediate, instantaneous at hand. 12 00:01:17.160 --> 00:01:37.160 I like to call the Garden of Eden model, the Garden of Eden model essentially that as soon as you wish for something, it's right there, as soon as you wish for the bottle of Pepsi, it's trickling down your throat with no effort or investment of resources on anybody's part. 13 00:01:37.160 --> 00:01:43.160 And we obviously are not in that kind of situation. We never will be in that sort of situation. 14 00:01:43.160 --> 00:01:53.160 And if we were in any way approximating that situation, we would be in a state where everything 15 00:01:53.160 --> 00:01:59.160 was more or less almost free like that. I mean, catallact could be selling as a nickel, 16 00:01:59.160 --> 00:02:05.160 as an approximate. And when we get to the stage when catallacts are a nickel or Pepsi 17 00:02:05.160 --> 00:02:13.160 ______ your wish, then we can think about revising or scrapping economic and going on to the more utopian post-scarcity future. 18 00:02:13.160 --> 00:02:27.160 I used this ploy and debate, a very good debating tactic, against a post-scarcity type a couple of years ago and I said, 19 00:02:27.160 --> 00:02:39.160 If you really live in a world with post-scarcity, all you people who are talking about post-scarcity will be burning your salary checks because there's no point in having a salary because everything is free, etc. 20 00:02:39.160 --> 00:02:53.160 And my opponent shot back with a statement, well, since we still live in an evil capitalist world where everybody's brainwashed by capitalism, therefore they haven't gotten to the point yet where they can throw off the shackles. 21 00:02:53.160 --> 00:03:00.160 Okay, resources are scarce. Resources consist of time, material objects, and all sorts of consumer capital goods, we haven't gotten to that yet. 22 00:03:23.160 --> 00:03:30.360 I'm not explaining them yet, but what we have to do with these resources, we have to make 23 00:03:30.360 --> 00:03:35.880 sure the resources are allocated to the most useful, most important ends rather than the 24 00:03:35.880 --> 00:03:36.880 poorest ends. 25 00:03:36.880 --> 00:03:40.400 And here we get to the difference between economics on the one hand and technology on 26 00:03:40.400 --> 00:03:41.400 the other. 27 00:03:41.400 --> 00:03:43.200 Many people don't really see the difference. 28 00:03:43.200 --> 00:03:48.800 Technologically, lots of things are possible, feasible, they're not feasible at all economically. 29 00:03:48.800 --> 00:03:59.800 For example, it might be, it might be, I don't know, since I'm not really technologically expert, but it might very well be technologically possible to build a tunnel from here to San Francisco. 30 00:03:59.800 --> 00:04:05.800 Not only that, but a tunnel lined in platinum and precious jewels and so forth. 31 00:04:05.800 --> 00:04:13.800 It might very well be possible. It will take, of course, 20 trillion dollars or something, and we wouldn't be able to eat for about five years, but we could do it. 32 00:04:13.800 --> 00:04:19.800 The question then is, should we do it? What are we giving up in the process of doing this? 33 00:04:19.800 --> 00:04:28.800 And so a tunnel, that sort of tunnel, might be technologically feasible, but obviously it would be economically unfeasible. 34 00:04:28.800 --> 00:04:36.800 Economically unfeasible meaning that the resources, the precious, scarce land, labor, capital, 35 00:04:36.800 --> 00:04:54.800 which would have to be used to build the silly tunnel, would much better be used, much more properly used, producing food, TV sets, clothing, automobiles, etc., etc., all the things that we need much more than we need the tunnel. 36 00:04:54.800 --> 00:05:03.840 So, the economic problem is a problem of allocating scarce means, scarce resources to the most 37 00:05:03.840 --> 00:05:07.780 important ends rather than the least important ends, and as a matter of fact, the definition 38 00:05:07.780 --> 00:05:13.440 of waste, which is really an economic concept rather than a technological concept, the definition 39 00:05:13.440 --> 00:05:20.760 of waste is taking scarce resources and applying them to less than the most important ends, 40 00:05:20.760 --> 00:05:22.760 for example, building this tunnel. 41 00:05:22.760 --> 00:05:27.260 It might be a great tunnel once it's through. It might be a feasible tunnel. 42 00:05:27.260 --> 00:05:31.260 The tunnel might hold up. It might not collapse. 43 00:05:31.260 --> 00:05:35.660 But, in other words, it would be technologically feasible. 44 00:05:35.660 --> 00:05:47.660 But, it would be a waste of resources because almost anything else done with $2-3 trillion would be better than wasting it on this tunnel. 45 00:05:47.660 --> 00:05:52.660 So, it would be economically ridiculous, even though it would be technologically feasible. 46 00:05:54.660 --> 00:06:01.660 Alright, I'd like to, at this point, go into what's known in economics as Crusoe economics. 47 00:06:03.660 --> 00:06:10.660 Crusoe is a, I find a very interesting figure here. First of all, students tend to get very confused at this point. 48 00:06:10.660 --> 00:06:15.660 They say, why are we worrying about Robinson Crusoe? We're supposed to be worrying about the modern world. 49 00:06:15.660 --> 00:06:22.220 And I try to tell them at that point that I don't really care about Robinson Crusoe or the other. 50 00:06:22.220 --> 00:06:32.620 But the purpose of Crusoe economics is to isolate, it's the first to take one person, one man and pit him vis-a-vis nature, so to speak. 51 00:06:32.620 --> 00:06:45.420 And isolate one man vis-a-vis nature and then see what happens, see how we can analyze his actions and then bring in other people, bring in Friday and other people, etc. 52 00:06:45.420 --> 00:06:53.420 Because we find out we can grasp most of the basic economic concepts just by studying the actions of Robinson Crusoe. 53 00:06:54.420 --> 00:07:00.420 Okay, let's take Crusoe on a desert island. Let's say, well, it's better if it's not a desert island. It's a pretty bountiful island. 54 00:07:00.420 --> 00:07:03.420 If it's really a desert island, it'd be in pretty bad shape. 55 00:07:03.420 --> 00:07:11.420 He's shipwrecked. He starts off with certain resources that have come in. 56 00:07:11.420 --> 00:07:13.420 First of all, he's got his own personal energy. 57 00:07:15.420 --> 00:07:20.420 Commanding this personal energy, he has his own technological knowledge built up over the course of the years. 58 00:07:20.420 --> 00:07:25.420 He knows how to make a net, he knows how to make a bow and arrow and all that sort of stuff. 59 00:07:25.420 --> 00:07:29.420 How to build a law cabin and so forth. 60 00:07:29.420 --> 00:07:35.420 So he has technological knowledge, he knows what he, he certainly knows what ends he wants to pursue. 61 00:07:35.420 --> 00:07:39.420 In fact, he has lots of ends that he has to pursue very, very quickly or else he's going to die out, 62 00:07:39.420 --> 00:07:43.420 such as finding food, shelter, clothing, etc. 63 00:07:43.420 --> 00:07:57.420 And then he looks around for these limited resources, his command, he tries to achieve, waste as little as possible, achieve his most important ends with the resources he's got. 64 00:07:57.420 --> 00:08:05.420 He tries to achieve his most important values with as limited time and resources available. 65 00:08:05.420 --> 00:08:14.420 Okay, so he's got his personal energy. What else has he got? He's got nature. He's got the island, whatever that happens to be. 66 00:08:14.420 --> 00:08:27.420 So he starts off with personal energy and nature. These are the two original resources, they're called. 67 00:08:27.420 --> 00:08:34.420 Energy is called, and here we have a heritage from late 18th century, early 19th century economics. 68 00:08:34.420 --> 00:08:47.420 Personal energy is called labor, and this has caused a lot of confusion over the years because when we think of labor now, we think of labor in proletarian terms or Marxian terms as somebody who's employed by an employer. 69 00:08:47.420 --> 00:08:57.420 This is not what labor means in economic language. Labor means anybody who's using personal energy in the process of, let's just say, production. 70 00:08:57.420 --> 00:08:59.920 In the process of production, I haven't explained what production is yet. 71 00:08:59.920 --> 00:09:05.920 Anyway, anybody who's using personal energy in the process of production would be a laborer. 72 00:09:05.920 --> 00:09:10.920 So on that basis, on that, for example, where the president of General Motors would be a laborer, in this sense, 73 00:09:10.920 --> 00:09:16.920 the stockholder, somebody who's simply flipping coupons, would not be a laborer. 74 00:09:16.920 --> 00:09:21.420 So anybody who's involved directly in using personal energy is using labor. 75 00:09:21.420 --> 00:09:25.920 This was the original 18th century, early 19th century definition. 76 00:09:25.920 --> 00:09:36.920 And then there's nature. Nature has another term for it in economics, which again means sort of the same thing but not quite, which therefore leads to a lot of confusion. 77 00:09:36.920 --> 00:09:52.920 That's called land. So the reason why it's sort of the same thing but not quite is that it's true there's land there, and there's the forest and so on, but also, for example, there's the river, which has fish in it. 78 00:09:52.920 --> 00:10:01.920 Well, the river is called land in economics, in economic theory. In common sense, in English, it would not be called land, it would be called water. 79 00:10:01.920 --> 00:10:06.920 So, in other words, land includes water. 80 00:10:06.920 --> 00:10:12.920 On the other hand, land in economics does not include any structure, any man-made structure built on top of it. 81 00:10:12.920 --> 00:10:15.920 It's the original nature given resource. 82 00:10:15.920 --> 00:10:21.920 That means land would include the space underneath this building, but not the building on top of it. 83 00:10:21.920 --> 00:10:22.920 That's not land. 84 00:10:22.920 --> 00:10:30.920 Of course, usually we tend to think, again in the common sense in English, we tend to think of land including the buildings on top of it. 85 00:10:30.920 --> 00:10:34.920 So, here's Crusoe. 86 00:10:34.920 --> 00:10:37.920 He has his goals he set out for himself. 87 00:10:37.920 --> 00:10:40.920 He has his values he's trying to achieve. 88 00:10:40.920 --> 00:10:50.920 And he's got limited scarce resources, land and labor, which he has to apply very quickly to achieving these ends. 89 00:10:50.920 --> 00:10:54.920 Now the ends that he has to achieve, he ranks on a scale of values. 90 00:10:54.920 --> 00:11:00.920 He has to rank them because he's got to choose, how does he allocate his time, for example? 91 00:11:00.920 --> 00:11:05.920 Does he spend the next three hours looking for berries or hunting fish or whatever? 92 00:11:05.920 --> 00:11:12.920 So, you've got to decide whether, you decide how to allocate his time on the basis of the value scale. 93 00:11:12.920 --> 00:11:17.920 And the value scale, it doesn't have to be very elaborate. As a matter of fact, it's something like, 94 00:11:17.920 --> 00:11:24.920 an example again I use for students is, you know, a choice of how to spend a block of three hours a night. 95 00:11:24.920 --> 00:11:28.920 And you have, you know, like eight choices. You actually have a lot more in New York. 96 00:11:28.920 --> 00:11:38.920 You can go to half a dozen movies, a party and concert and so forth, and way down the list is reading your homework, number 20 or something. 97 00:11:38.920 --> 00:11:48.920 You make up a little chart for yourself, and you pick what you think is going to be the highest in your value scale, and you allocate your three hours to that. 98 00:11:48.920 --> 00:11:58.920 So, this value scale, it's amazing how much heavy weather is made out of this very simple concept of economics. 99 00:11:58.920 --> 00:12:04.920 How much millions of wasted words have been spent on this topic. 100 00:12:04.920 --> 00:12:08.920 At any rate, it's really a fairly simple concept, basically. 101 00:12:08.920 --> 00:12:12.920 Namely, that it's a strictly ordinal scale in the first place. 102 00:12:12.920 --> 00:12:17.920 In other words, you're ranking the first movie, second movie, and third movie. 103 00:12:17.920 --> 00:12:23.920 You're not saying, well, I think I would prefer this movie 2.8 times more than the second movie. 104 00:12:23.920 --> 00:12:27.920 That's obviously nonsense. What do you mean by 2.8? One second. 105 00:12:27.920 --> 00:12:31.920 You're making strictly ordinal choices. 106 00:12:31.920 --> 00:12:37.920 Rankings, first, second, and third. 107 00:12:37.920 --> 00:12:45.920 Anything else is really meaningless if you prefer seeing this person 2.7 times more than seeing that person. 108 00:12:45.920 --> 00:12:50.920 It's ridiculous, there's no unit that you can use for measurement. 109 00:12:50.920 --> 00:12:57.920 So, Crusoe or anybody else ranks his values on this ordinal value scale. 110 00:12:57.920 --> 00:13:00.920 And the scale can change over time. 111 00:13:00.920 --> 00:13:06.920 It usually does, people learn more, they satisfy one want, another one pops up, and so forth. 112 00:13:06.920 --> 00:13:11.920 And of course, different people have different values and different value scales. 113 00:13:11.920 --> 00:13:24.920 The point that this value scale is strictly ordinal and cannot be measured is really still being thought out in economics. It's an amazing thing. 114 00:13:24.920 --> 00:13:30.920 But I guess people need something to do. It's part of the activity. 115 00:13:30.920 --> 00:13:48.920 Okay, so Crusoe finds that nature is bigger than we say, in other words, well, he's got that personal energy, all right, he's got the stream there and the fish, there's not too much else, so he's got to work hard to do what? 116 00:13:48.920 --> 00:13:57.800 I work hard to take these natural resources, take the land, and transform it very quickly 117 00:13:57.800 --> 00:14:04.920 into uses and methods and patterns by which he can start using enjoyingly the fruits. 118 00:14:04.920 --> 00:14:09.640 In other words, he has to start getting, he has to construct a bow and arrow and hunt 119 00:14:09.640 --> 00:14:10.640 deer or something. 120 00:14:10.640 --> 00:14:16.600 I have to build a net and hunt fish, get a log, chop down, get an axe and chop down trees 121 00:14:16.600 --> 00:14:18.120 and build a log cabin. 122 00:14:18.120 --> 00:14:24.560 So it's only after he gets the fish and after he gets the, in other words, the fish he wants, 123 00:14:24.560 --> 00:14:31.600 the fish in the cabin and the deer and the meat that he wants, the other stuff simply 124 00:14:31.600 --> 00:14:43.200 means byways, paths by which he finally gets to the desired direct use, the directly useful 125 00:14:43.200 --> 00:14:54.880 The final goal is consumer goods, so he eats the fish, he lives in a log cabin, he eats 126 00:14:54.880 --> 00:14:56.000 the meat and so forth. 127 00:14:56.000 --> 00:14:59.880 This is where he wears the clothing, these are direct consumer goods. 128 00:14:59.880 --> 00:15:07.200 Everything else, everything else is a process of transformation, of getting from the original 129 00:15:07.200 --> 00:15:10.920 nature or natural brook and so forth down to the consumer goods. 130 00:15:10.920 --> 00:15:14.920 All these other things are called capital goods. 131 00:15:14.920 --> 00:15:28.920 So now we have...all these other things are called capital goods. 132 00:15:28.920 --> 00:15:35.920 So now we have a category of capital goods which are stations on the way to the consumer good. 133 00:15:35.920 --> 00:15:43.680 Anything else, anything which is not either personal energy or land, original land, or 134 00:15:43.680 --> 00:15:49.880 is not directly useful, which are consumer goods, all these other things are capital goods. 135 00:15:49.880 --> 00:15:55.760 Capital goods are, of course, very heterogeneous, obviously, they consist of all sorts of stuff. 136 00:15:55.760 --> 00:16:00.480 For example, in the case of Crusoe, there's only the axe, and there's not too many, there's 137 00:16:00.480 --> 00:16:13.680 In the modern world, getting back to the modern world, there's an enormous number of capital 138 00:16:13.680 --> 00:16:19.240 goods of all sorts of processes and stages of this process, this transformation process. 139 00:16:19.240 --> 00:16:21.960 The transformation process is called production. 140 00:16:21.960 --> 00:16:28.880 What we mean by production is the use of personal energy operating on land and transforming 141 00:16:28.880 --> 00:16:33.880 Land into the process of the capital goods to finally get to the consumer goods. 142 00:16:33.880 --> 00:16:43.880 Take for example early stages of production that are involved in me eating a ham sandwich tomorrow. 143 00:16:43.880 --> 00:16:52.880 The enormous number of stages involving millions of people, literally, and scattered all over the world. 144 00:16:52.880 --> 00:16:57.880 I can't even trace all the stuff going back. 145 00:16:57.880 --> 00:17:27.880 going back, you start just with the ham, you have to then go to the wholesaler of the ham and then the jobber, then the meatpacker, and then the slaughterhouse, and then back to the pig raiser, and then back to the corn raiser who feeds the pig, so forth and so on, and the machinery that's used in all this process, plus the land that's used in all this stuff, plus the trucks that are used to transport them, the tires and the gasoline, all these things, you know, reduce all the way back. 146 00:17:27.880 --> 00:17:36.080 Many, many decades, and scattered over a large area, and all these things are in the process 147 00:17:36.080 --> 00:17:43.240 of production, whether it's the wholesale, whether it's the stockyards, or the trucks, 148 00:17:43.240 --> 00:17:49.300 or the inventory of armor, ham, or whatever, all these things are capital, until they finally 149 00:17:49.300 --> 00:17:55.200 get to the retail store, the restaurant, and you buy them. 150 00:17:55.200 --> 00:18:07.200 And then, of course, you get to the bread and the whole process going up to the flour and the miller and all that stuff and back to the wheat farmer and the crushing machine and it's way, way back. 151 00:18:07.200 --> 00:18:11.200 And when you get to the butter on the bread, you go through the whole process again. 152 00:18:11.200 --> 00:18:16.200 And the amount of capital that is enormous, in each stage of production, land and labor 153 00:18:16.200 --> 00:18:26.840 is involved in this whole process. 154 00:18:26.840 --> 00:18:38.200 Okay we have Crusoe allocating his resources, I'm going back to Crusoe, he's allocating 155 00:18:38.200 --> 00:18:46.200 He has, let's say, a bunch of logs. This is a famous example used by Boehm-Bawerk, an Austrian economist. 156 00:18:46.200 --> 00:18:55.200 He has a bunch of logs, each of which are homogeneous. In other words, each can be just as good as, each log is just as good as every other log. 157 00:18:55.200 --> 00:19:01.200 I think Boehm-Bawerk's example is of horses, which is trickier because some horses might be different, 158 00:19:01.200 --> 00:19:18.200 So, here's Krusel with a certain number of forces, excuse me, a certain number of logs. 159 00:19:18.200 --> 00:19:22.200 He has various uses he can apply them to. 160 00:19:22.200 --> 00:19:28.200 He arranges these uses on a value scale, ordinal value scale, which can be something like this. 161 00:19:28.200 --> 00:19:35.480 ranking, again, depend on his personal choices and his needs at the time, it can be something 162 00:19:35.480 --> 00:19:45.080 like this, ranking number one, fire to cook tonight's food, number two, ranking number 163 00:19:45.080 --> 00:19:55.520 19, second, building a fence, ranking third, keep the walls out, ranking third, extending 164 00:19:55.520 --> 00:20:01.640 Ranking the log cabin, ranking fourth, storing the log for tomorrow's food, and ranking 165 00:20:01.640 --> 00:20:05.880 fifth, a real luxury item, building a boardwalk down to the beach so you don't have to get 166 00:20:05.880 --> 00:20:06.880 feet full of sand. 167 00:20:06.880 --> 00:20:19.240 Okay, so you have, let's say, these five alternative uses for his logs, and the point is that if 168 00:20:19.240 --> 00:20:26.760 If he has five laws available, he will then satisfy each one of these five uses. 169 00:20:26.760 --> 00:20:30.440 He will then satisfy first, second, third, fourth and fifth use. 170 00:20:30.440 --> 00:20:34.240 If he has only three available, then he's going to allocate them to the first, second 171 00:20:34.240 --> 00:20:39.840 and third rank use and leave the fourth and fifth unsatisfied, because obviously he's not 172 00:20:39.840 --> 00:20:46.000 going to bother building a boardwalk if he hasn't got enough food to eat at night. 173 00:20:46.000 --> 00:20:54.940 So, if he loses, if he happens to have three logs available, and he loses one, one gets 174 00:20:54.940 --> 00:21:03.440 washed away by the tide or something, then the value that he places on this log, the loss 175 00:21:03.440 --> 00:21:10.760 of a log, how much it means to him is the ranking of a third, the third rank use, because 176 00:21:10.760 --> 00:21:12.760 it's the third rank use he's giving up. 177 00:21:12.760 --> 00:21:18.760 The other hand, if he has five logs, he loses one and he's losing only a fifth ranking use. 178 00:21:18.760 --> 00:21:30.760 And still on the other hand, if he has only one log and that guy got squashed away and he doesn't eat tonight, he's going to feel very badly and he loses the highest ranking use. 179 00:21:30.760 --> 00:21:40.760 So, from this we conclude the First Great Law of Economics, namely that. 180 00:21:40.760 --> 00:22:10.260 The more he has of a product, more anybody has of a product, I should sayivid that will be any unit the lower any value be placed on any given unit of that product. 181 00:22:10.260 --> 00:22:18.900 In other words, if somebody has a lot of something and loses one of it, that will not mean as 182 00:22:18.900 --> 00:22:22.540 much to him, it will not be ranked as high to him as if he has only a little bit and 183 00:22:22.540 --> 00:22:26.380 he loses one of it. 184 00:22:26.380 --> 00:22:29.860 This is called the law of diminishing marginal utility. 185 00:22:29.860 --> 00:22:33.780 The utility means the same thing as value in economics. 186 00:22:33.780 --> 00:22:38.940 Again, it's a peculiar use of the term because utility usually is thought of meaning something 187 00:22:38.940 --> 00:22:46.220 which is concretely useful, technologically useful. In economics, the word utility applies 188 00:22:46.220 --> 00:22:51.780 to valuation, to the subjective value on the part of the CUSO or anybody else who happens 189 00:22:51.780 --> 00:23:02.780 to do the valuing. So we just replace utility by value, instead of saying ordinal value 190 00:23:02.780 --> 00:23:07.340 by utility, instead of saying ordinal value scale, we say ordinal utility scale. Very 191 00:23:07.340 --> 00:23:21.340 The marginal refers to the individual unit. You lose one unit or you gain one unit of something, it refers to concentrating on individual units, either giving up a unit or gaining a unit. 192 00:23:21.340 --> 00:23:31.340 So the rule of diminishing marginal utility means if you increase your supply of something, supply meaning N units of whatever product you've got, 193 00:23:31.340 --> 00:23:37.340 If you increase your supply of something, the amount that you will value each given unit will be less. 194 00:23:37.340 --> 00:23:43.340 If you decrease your supply of something, the amount you will value any given unit will be greater. 195 00:23:43.340 --> 00:23:49.340 This can be obviously seen with, I'll take for example, water. 196 00:23:49.340 --> 00:23:55.340 The amount of utility that you would place on any given glass of water right now is pretty low. 197 00:23:55.340 --> 00:24:06.340 Hello. You can go out to the hall down here and get some water. You're not going to pay much, for example, for a glass of water. 198 00:24:06.340 --> 00:24:21.340 In most cases, in New York, you can get it free, almost. On the other hand, if you're trudging down across the Sahara and your canteen is just about given out and your supply of water is almost zero, you're going to pay a heck of a lot for it. 199 00:24:21.340 --> 00:24:35.740 some, you're approaching an oasis, because in New York City the amount of water is very abundant, the number of glasses of water available are very abundant, and so the value placed in any given glass is very low. 200 00:24:35.740 --> 00:24:49.340 The other half here, out in the Sahara, the supply of water is very small, so the amount of value you place in any given glass is extremely high, so that's the law of diminishing marginal utility. 201 00:24:49.340 --> 00:25:00.340 One might think this is fairly obvious, but as in all great truths in sciences, social or otherwise, it's only obvious after somebody has thought of it, 202 00:25:00.340 --> 00:25:07.340 because centuries were spent worrying about problems that were finally solved with the law of diminishing marginal utility. 203 00:25:07.340 --> 00:25:16.340 To be more specific, classical economics, which came in in the late 18th century and the early 19th, 204 00:25:16.340 --> 00:25:40.340 In the mid-19th century, he was hung up on a certain basic problem. They couldn't really analyze consumption very much because they came up with a basic philosophical problem, so they said, look, here's bread, we all know bread is very important for the stack of life and all that, and yet bread is very cheap, the price of bread is very low. 205 00:25:40.340 --> 00:25:47.340 The other hand here are diamonds, which everybody knows are luxury and frippery and so on, yet they're very expensive. 206 00:25:47.340 --> 00:25:52.340 This was known for many years as a value paradox. 207 00:25:52.340 --> 00:25:57.340 And they couldn't understand that the market can't solve it. They couldn't solve it. 208 00:25:57.340 --> 00:26:03.340 They finally said, the classical economists finally said, well, the only thing we can say is that there are two kinds of value, 209 00:26:03.340 --> 00:26:09.060 use of value and value in exchange and we have to say the bread is high in use 210 00:26:09.060 --> 00:26:13.540 value and low in exchange value and diamonds are low in use value and high 211 00:26:13.540 --> 00:26:18.100 in exchange value. It's not a very satisfactory way of handling the problem, the 212 00:26:18.100 --> 00:26:22.860 obvious way, the best they could do. And then the classical economists spend very 213 00:26:22.860 --> 00:26:27.260 little time on consumption, zipped over to the business men and they can analyze much 214 00:26:27.260 --> 00:26:32.060 more readily because they can analyze the profit mechanism and that sort of stuff. 215 00:26:32.060 --> 00:27:02.060 But there was a big whole in classical discussion. This problem of value paradox was finally solved in the early 1870s with the arrival of so-called neoclassical economics, where, as in many other cases in the history of science or invention, a given problem is solved by several people independently in different countries, in this case Carl Menger in Austria and William Jevons in England 216 00:27:02.060 --> 00:27:14.060 and Leon Valra and Lausanne, Switzerland, each one came up independently with different forms, different ways of solving this question, basically coming up with a similar solution. 217 00:27:14.060 --> 00:27:21.060 Namely, well, namely what they said was, on the market, people don't deal in terms of philosophical categories. 218 00:27:21.060 --> 00:27:28.060 In other words, on the market, in the real world, people are not asked to choose between all the better in the world and all the diamonds in the world. 219 00:27:28.060 --> 00:27:33.520 If somehow the Angel Gabriel came down to us and said, you will now be forced to choose 220 00:27:33.520 --> 00:27:37.180 forever and ever between all the diamonds in the world, here and forever, and all the 221 00:27:37.180 --> 00:27:40.540 bread in the world, we might very well pick all the bread in the world. 222 00:27:40.540 --> 00:27:51.380 The point is we select or buy or not buy individual units, loaves of bread versus carats of diamonds, 223 00:27:51.380 --> 00:28:00.060 And what must happen is that the supply of bread has been so expensive, so abundant, 224 00:28:00.060 --> 00:28:05.500 that the value to any given loaf is very low. 225 00:28:05.500 --> 00:28:12.580 On the other hand, the supply of diamonds is quite small, and therefore the price of 226 00:28:12.580 --> 00:28:16.260 the value to any given carat of diamonds is very high. 227 00:28:16.260 --> 00:28:30.260 In other words, you can't deal with consumption in broad, philosophical categories, you have to deal with them in terms of how much is this thing valued on the basis of their given supply. 228 00:28:30.260 --> 00:28:40.260 Supplies are very abundant, I mean, if bread, as I say, if bread had a certain bread drought or something, if you can only get, if bread became extremely scarce, 229 00:28:40.260 --> 00:28:47.900 We have to buy $1,000 a loaf of bread, we can easily get to that point sometimes. 230 00:28:47.900 --> 00:28:54.100 So the point is that you always have to examine the relationship between the supply of the 231 00:28:54.100 --> 00:28:59.100 thing available and the demand for it. 232 00:28:59.100 --> 00:29:11.460 So that's the way in which the neoclassically autonomous solved the so-called value paradox. 233 00:29:11.460 --> 00:29:16.220 And as I say, after after, it seemed self-evident, but it didn't seem self-evident before the 234 00:29:16.220 --> 00:29:17.220 1870s. 235 00:29:17.220 --> 00:29:23.860 It was at least a century or more of a headache before this whole question was resolved. 236 00:29:23.860 --> 00:29:27.300 And this whole incidentally, the Austrian and other neoclassical, especially the Austrian 237 00:29:27.300 --> 00:29:33.540 and Methods and analyzing economic problems in general was this sort of method of analyzing 238 00:29:33.540 --> 00:29:38.980 individual action of how does the individual in the real world act. 239 00:29:38.980 --> 00:29:45.860 And contrast the classically Thomas Smith and Ricardo, et cetera, who tend to think 240 00:29:45.860 --> 00:29:51.620 in broad aggregate categories of who's getting wages, who's getting profits, and how are 241 00:29:51.620 --> 00:29:54.340 these things being allocated and distributed and so forth. 242 00:29:54.340 --> 00:30:01.580 and if you start with broad aggregate categories, that starts building blocks from the individual, 243 00:30:01.580 --> 00:30:07.500 you get completely thrown askew, the whole analysis gets messed up and you wind up with 244 00:30:07.500 --> 00:30:15.700 tremendous inherent fallacies in the argument. 245 00:30:15.700 --> 00:30:28.180 In Crusoe, we have production, consumption, land, labor, capital goods, also another thing 246 00:30:28.180 --> 00:30:33.580 about Crusoe is, which is true about us as well, he's a favor of achieving his wants 247 00:30:33.580 --> 00:30:34.580 as quickly as possible. 248 00:30:34.580 --> 00:30:40.300 He'd like to get his log cabin built today rather than next week, and the sooner as far 249 00:30:40.300 --> 00:30:42.300 as he's concerned, the better. 250 00:30:42.300 --> 00:30:46.300 This concept is a basic concept of human action, which is called time preference. 251 00:30:46.300 --> 00:30:51.300 People are trying to achieve, if they have any goals at all, which they do, 252 00:30:51.300 --> 00:30:55.300 and they try to achieve these goals now rather than later. 253 00:30:55.300 --> 00:30:58.300 This is known in contrast to the motto, 254 00:30:58.300 --> 00:31:00.300 we can revise the old motto and say, 255 00:31:00.300 --> 00:31:03.300 a bird in the hand is always worth more than a bird in the bush, 256 00:31:03.300 --> 00:31:05.300 one bird in the bush. 257 00:31:05.300 --> 00:31:19.380 Also, the concept of psychic profit, Fusso is always trying to benefit from any action 258 00:31:19.380 --> 00:31:24.940 that he takes, which we try to do also, at least in the psychic sense. 259 00:31:24.940 --> 00:31:31.140 In other words, if he feels that he would rather rest for two hours than go and chop 260 00:31:31.140 --> 00:31:32.980 about Chopped Trees. 261 00:31:32.980 --> 00:31:35.580 He's doing it because he feels a need for leisure. 262 00:31:35.580 --> 00:31:39.900 And so he's then saying, well, this is my most profitable 263 00:31:39.900 --> 00:31:43.180 action for the next two hours, in the sense of psychic profit, 264 00:31:43.180 --> 00:31:50.180 in the words, psychic gain or rising in his value scale. 265 00:31:50.180 --> 00:31:52.900 If you don't reap the psychic profit from your actions, 266 00:31:52.900 --> 00:31:55.740 then you'll be reaping a psychic loss. 267 00:31:55.740 --> 00:32:01.020 It's something that's going back to the movie choices again. 268 00:32:01.020 --> 00:32:04.820 If you choose, if you say, well, I'm going to spend the next two, three hours in movie A, 269 00:32:04.820 --> 00:32:09.220 you're doing it because you think that movie A is a better movie than movie B or movie C, 270 00:32:09.220 --> 00:32:12.620 or it's a better way of spending your time than some other way. 271 00:32:12.620 --> 00:32:16.020 And if you go to movie A and you like it, then you say, okay, this is great, 272 00:32:16.020 --> 00:32:19.420 I could reap the psychic profit from this action. 273 00:32:19.420 --> 00:32:24.220 On the other hand, if the movie turns out to be a big bomb, 274 00:32:24.220 --> 00:32:28.820 then you say, well, this is a terrible thing, I really took it with a waste of time, 275 00:32:28.820 --> 00:32:52.820 Or, this was a psychic loss, in other words, you would rather have gone, if you look at it from hindsight, you'd rather have gone to movie B, which is the, and what then happens is you hope for the next time, the director makes another movie, you won't go and see it, so that you learn from your experience, learning on the market, the feedback relationship of the market. 276 00:32:52.820 --> 00:33:03.820 So the concept of psychic profit, everybody's trying to gain a psychic profit, everybody's trying to avoid psychic losses and everything that he does. 277 00:33:03.820 --> 00:33:12.820 And another thing about Rokuso and us is the concept of uncertainty. The world is always uncertain, we never can predict the future totally. 278 00:33:12.820 --> 00:33:20.820 And this aspect of trying to anticipate the future, trying to predict it, trying to forecast and hoping it will succeed, 279 00:33:20.820 --> 00:33:25.820 Trying to determine whether the movie is going to be any good, having a pretty good idea, hoping it would be right. 280 00:33:25.820 --> 00:33:31.820 This is the entrepreneurial aspect of action, in other words, the aspect of meeting uncertainty of the future. 281 00:33:34.820 --> 00:33:43.820 Okay, we have Prusso now, and he pretty well analyzes his action. 282 00:33:43.820 --> 00:33:47.820 We now bring in Friday for the picture. 283 00:33:47.820 --> 00:34:03.820 And either you can have a situation where CUSO is on one island and Friday is another island and one of them builds a rowboat contact with the other, or one of them is on one half of the island and the other one is on the other half and they contact each other, at any rate, you now have interpersonal contact. 284 00:34:03.820 --> 00:34:06.820 And the question is what are they going to, what's going to happen now? 285 00:34:06.820 --> 00:34:15.820 Basically, economically, there are two kinds of relationships that can now be hammered out, so to speak. 286 00:34:15.820 --> 00:34:22.820 One is that either Crusoe or Friday can hit the other guy over the head and steal his 287 00:34:22.820 --> 00:34:29.500 accumulated, his vast accumulated hoard of meat in the log cabin or whatever. 288 00:34:29.500 --> 00:34:32.780 Obviously, it's not going to be very much, but he can do that. 289 00:34:32.780 --> 00:34:35.820 He can knock him over the head or kill him or something. 290 00:34:35.820 --> 00:34:41.940 This is the hegemonic relationship or theft. 291 00:34:41.940 --> 00:34:44.860 It's not going to be too profitable, at least certainly at this stage, not going to be too 292 00:34:44.860 --> 00:35:13.900 and what he's lost is the possibility of a division of labor specialization relationship. 293 00:35:13.900 --> 00:35:22.540 The, fortunately, very fortunately for the human race, it turns out that the specialization 294 00:35:22.540 --> 00:35:27.940 of the division of labor is extremely more productive for all people participating, fantastically 295 00:35:27.940 --> 00:35:34.820 more productive than any kind of self-sufficiency, trying to produce everything in itself. 296 00:35:34.820 --> 00:35:39.300 Just think of what would happen if we had to produce everything in itself. 297 00:35:39.300 --> 00:35:46.580 There's a lot of people, strangely enough, sometimes I think there's, paraphrase H.L. Mencken, 298 00:35:46.580 --> 00:35:51.540 nobody ever went broke underestimating the intelligence of American intellectuals, 299 00:35:51.540 --> 00:35:59.220 because there's still a lot of intellectuals out there who not only say they're going to pose scares to the era, 300 00:35:59.220 --> 00:36:06.420 but also say that we should go back or go on or whatever to a regime of self-sufficiency, 301 00:36:06.420 --> 00:36:36.420 Specialization is evil and alienating, the division of labor also, and therefore everybody should sort of either do everything, which essentially is a Marxian solution, or either do everything and somehow rush around, well Marx put it, I think that everybody in the communist utopia of the future, everybody will spend like an hour a day at the factory and another hour a day at the field, another hour a day writing and rushing around with different, you know, 302 00:36:36.420 --> 00:36:48.100 And in that way, developing themselves, all their facilities in every direction, the thing 303 00:36:48.100 --> 00:36:52.420 is that sort of development in every direction is going to be pretty limited, I mean, nobody's 304 00:36:52.420 --> 00:36:56.820 going to be a great mathematician, for example, by doing math for like half an hour a day 305 00:36:56.820 --> 00:37:01.180 before you're rushing off to the fields, it's not the way it's done. 306 00:37:01.180 --> 00:37:05.820 So creative development, intellectual development is going to be out the window, it's pretty 307 00:37:05.820 --> 00:37:19.820 But aside from that, aside from the sociological aspects of it, there's the basic economic aspect, that by smashing the division of labor, you're really giving up most of the production of the human race. 308 00:37:19.820 --> 00:37:31.820 The, even if it was sociologically or culturally or whatever, beneficial, philosophically beneficial, 309 00:37:31.820 --> 00:37:34.820 ban on division of labor, everybody should do everything. 310 00:37:34.820 --> 00:37:40.820 Most of us starting this regime would die out very, very quickly at the present time, 311 00:37:40.820 --> 00:37:42.820 at the current population level. 312 00:37:42.820 --> 00:37:53.820 Just think, for example, what would it mean to produce your own hi-fi set, trucks, food, clothing, et cetera, et cetera. 313 00:37:53.820 --> 00:37:59.820 Obviously, you have to be reduced down to a very, very low, primitive level, but even there, we mostly die out, 314 00:37:59.820 --> 00:38:06.820 because the entire productivity of the modern world industrial system rests on the division of labor. 315 00:38:06.820 --> 00:38:15.300 Okay, so Crusoe on a Friday happily, hopefully will realize this and they start exchanging 316 00:38:15.300 --> 00:38:21.540 and on a basis each one starts specializing either in what he can do best or and or what 317 00:38:21.540 --> 00:38:23.900 happens to be the closest resource to him. 318 00:38:23.900 --> 00:38:29.500 In other words, if Crusoe is part of the island, there's a lot of fish and if he's an experienced 319 00:38:29.500 --> 00:38:34.500 fisherman from the old days, he gives up all this axe and log production he doesn't like 320 00:38:34.500 --> 00:38:39.780 anyway, and so it's specializing in fish, and Friday might be a lumberjack back home 321 00:38:39.780 --> 00:38:44.220 and he starts, you know, he looks at this kind of chopping logs, two of them then exchange 322 00:38:44.220 --> 00:38:49.560 the logs for the fish. Both of them are getting more logs and more fish by far than they could 323 00:38:49.560 --> 00:38:54.060 have gotten, you know, by trying to be self-sufficient. Now, if this is true for logs and fish, you 324 00:38:54.060 --> 00:39:01.540 can imagine how much is true for high-five sets, etc., etc. 325 00:39:01.540 --> 00:39:11.020 We also, extremely important for the development of the market, and we hear a lot about how 326 00:39:11.020 --> 00:39:15.940 the market economy, the exchange economy, the rule of the jungle, where the weaker force 327 00:39:15.940 --> 00:39:18.380 of the war, stuff like that. 328 00:39:18.380 --> 00:39:21.740 Actually just the other one around, if we really had a situation where resources are 329 00:39:21.740 --> 00:39:25.940 very scarce, there's one water hole and everybody's zeroing in on the water hole, there's no exchange 330 00:39:25.940 --> 00:39:40.940 In a state of a situation where there's no market possible, that's when the law of the jungle does really apply. 331 00:39:40.940 --> 00:39:49.940 But fortunately, not only does everybody participating in the market benefit everybody involved in it, 332 00:39:49.940 --> 00:39:56.260 But, it turns out that even the shloppiest of us, even the least productive, can participate 333 00:39:56.260 --> 00:39:57.260 in the market. 334 00:39:57.260 --> 00:40:02.100 The market is arranged in such a way that even the we, even those, and take the Crusoe 335 00:40:02.100 --> 00:40:03.100 Friday situation. 336 00:40:03.100 --> 00:40:08.180 Supposing Crusoe is better than Friday, or Friday is better than Crusoe, both fishing 337 00:40:08.180 --> 00:40:14.140 and the log cutting, so he's better on both. 338 00:40:14.140 --> 00:40:18.260 And one might think, let's say Crusoe is better on Friday on both, and there's no possibility 339 00:40:18.260 --> 00:40:22.940 for Friday to participate. There's no possibility for a market to be set up because Friday has 340 00:40:22.940 --> 00:40:27.860 nothing to do in this situation. It's too inferior, so to speak. It's not true because 341 00:40:27.860 --> 00:40:34.860 it pays for Crusoe. It's fizzing eight times as good as a log chopper and only five times 342 00:40:34.860 --> 00:40:38.540 as good as a fisherman. It pays for him to concentrate on log chopping, where he's most 343 00:40:38.540 --> 00:40:47.540 best at, and then buy the logs from Friday, where he's Friday being least bad at log chopping. 344 00:40:47.540 --> 00:40:54.500 It takes for him to do that because his level of both incomes go up by doing that. 345 00:40:54.500 --> 00:41:01.060 So, this is known, this was David Ricardo coined this concept, 346 00:41:01.060 --> 00:41:04.340 the law, this is called the law of comparative advantage. 347 00:41:04.340 --> 00:41:08.020 It was originally applied by Ricardo to international trade, 348 00:41:08.020 --> 00:41:13.060 and it was only the Austrians later on who applied this individual exchange, 349 00:41:13.060 --> 00:41:17.300 meaning that even if you're a poor country with very few resources 350 00:41:17.300 --> 00:41:47.300 Pay for other nations to trade with you, because it pays for them to concentrate on what they're most best at, and buy the stuff where you're the least worst at, because they're better off, if for example the United States is six times as productive as Morocco in one area, and only twice as productive as Morocco in another area, it pays for the United States to concentrate on what it's six times as productive at, and buy the stuff from Morocco, even though it's twice as 351 00:41:47.300 --> 00:42:00.200 This law of the power of advantage means that there's room for the shloppiest person or 352 00:42:00.200 --> 00:42:04.820 the shloppiest nation on the free market, in other words, there's room for anybody 353 00:42:04.820 --> 00:42:05.820 to participate. 354 00:42:05.820 --> 00:42:11.860 It means instead of the weakest going under, the weakest have a useful role to play in 355 00:42:11.860 --> 00:42:12.860 the whole process. 356 00:42:12.860 --> 00:42:23.860 Process. So it's really an exhilarating and happy thought, and yet somehow it's not thought of that among the sociologists, intellectuals, etc. 357 00:42:29.860 --> 00:42:38.860 Okay, we now come to, oh, and I've said the basis of this whole market setup, 358 00:42:38.860 --> 00:42:45.420 and the law of comparative advantage and the whole exchange system is that the natural 359 00:42:45.420 --> 00:42:50.100 variety of both individuals and resources known as the fact that every person is different 360 00:42:50.100 --> 00:42:56.180 from every other person, has different abilities, tastes, intelligence, etc. and that every 361 00:42:56.180 --> 00:43:01.740 land area is different, so that one land area has fish and the other land area has grow 362 00:43:01.740 --> 00:43:03.520 wheat and so forth and so on. 363 00:43:03.520 --> 00:43:16.480 These two things provide the conditions for this exchange system. 364 00:43:16.480 --> 00:43:24.480 We now come to the more formal embodiment of these truths I've been saying here, more 365 00:43:24.480 --> 00:43:29.280 than initially marginal utility, etc. 366 00:43:29.280 --> 00:43:36.680 The coming to the famous demand curve, or supply and demand, is the basic concept, really, 367 00:43:36.680 --> 00:43:37.680 in economics. 368 00:43:37.680 --> 00:43:42.680 It used to be said in the 19th century by critics, harsh critics of economics used to 369 00:43:42.680 --> 00:43:48.280 say that if you could teach a parrot economics by simply teaching it to say supply and demand, 370 00:43:48.280 --> 00:43:53.240 supply and demand, and assess a certain amount of truth to that, because these are the two 371 00:43:53.240 --> 00:43:55.600 basic concepts in the field. 372 00:43:55.600 --> 00:44:21.960 The demand curve is how much any given individual will buy of any product at any given time 373 00:44:21.960 --> 00:44:30.600 At any given range of prices, the demand curve is based on, derived from the law of diminishing 374 00:44:30.600 --> 00:44:31.600 marginal utility. 375 00:44:31.600 --> 00:44:37.040 In other words, you might be willing to pay, for example, I'm a chess player of a very 376 00:44:37.040 --> 00:44:45.920 small ability, I might be willing to pay $30 for my first chess set, but then for buying 377 00:44:45.920 --> 00:44:51.520 a second chess set, like for my den or something, a spare chess set, I might be willing to only 378 00:44:51.520 --> 00:44:58.520 So, from this diminishing marginal utility, we get the truth that the man can make money 379 00:45:21.520 --> 00:45:27.520 The demand curve, the demand schedule is falling, in other words, as the quantity of the good 380 00:45:27.520 --> 00:45:44.360 increases and the price falls, the quantity of the purchase will increase and vice-versa. 381 00:45:44.360 --> 00:45:50.320 So that if, for example, I happen to be a great chess fan, I might be willing to spend 382 00:45:50.320 --> 00:45:56.800 $30 on a chess set, but when you get to the point where it's $100, I'm priced out of the market, so to speak. 383 00:45:56.800 --> 00:46:01.400 The other hand, if it gets down to $5, I say I'll buy a second set. 384 00:46:01.400 --> 00:46:05.800 So we get what's known as the fooling demand curve, 385 00:46:05.800 --> 00:46:09.960 this is figure one. 386 00:46:09.960 --> 00:46:14.360 Price is always on the y-axis, for some reason, 387 00:46:14.360 --> 00:46:18.040 and quantity is on the x-axis. 388 00:46:18.040 --> 00:46:25.080 So in this situation, for any given individual, the higher the price, the less he's going 389 00:46:25.080 --> 00:46:29.320 to pay, the less he's going to buy of it, and the lower the price, the more he's going 390 00:46:29.320 --> 00:46:30.320 to buy of it. 391 00:46:30.320 --> 00:46:31.320 You have something like this. 392 00:46:31.320 --> 00:46:38.200 You have a falling demand curve, or DD. 393 00:46:38.200 --> 00:46:41.160 Why you might ask is the demand curve is a straight line. 394 00:46:41.160 --> 00:46:44.680 That's an interesting footnote in the history of economic thought. 395 00:46:44.680 --> 00:46:51.680 For a long time, they drew the demand curve, the textbook writers, as a rectangular hyperbola. 396 00:46:51.680 --> 00:46:54.680 In other words, with the area underneath it always constant. 397 00:46:54.680 --> 00:46:59.680 And they did this for many years, and then suddenly, by the mid-40s, one economist said, 398 00:46:59.680 --> 00:47:02.680 why are they doing this? There's no evidence for it. There's no evidence at all. 399 00:47:02.680 --> 00:47:07.680 Why not have a straight line? And so since then, the demand curve has always been a straight line. 400 00:47:07.680 --> 00:47:12.680 There's no evidence for that either. It's easier to draw it that way. 401 00:47:12.680 --> 00:47:21.680 The one thing you have to realize, I'm a fan of demand and supply curves in a sense, but the one thing I have to always be remembered about them, is we never know what they are. 402 00:47:21.680 --> 00:47:30.680 The big problem with economics texts is that the economics texts say demand curve is given here, given the demand, given the cost, then you crank out the answer. 403 00:47:30.680 --> 00:47:33.680 Crank out production, you can't crank out prices, that's it. 404 00:47:33.680 --> 00:47:38.680 And it all seems like a very mechanical thing, it's like you're putting money in a slot and you get the answer at. 405 00:47:38.680 --> 00:47:45.680 The thing is, in real life, in the real business world, we don't know the man curve. Nobody knows the man curve. Nobody knows the cost, really, either. 406 00:47:45.680 --> 00:47:51.680 So the whole thing is a very uncertain kind of picture. You don't start off, hey, given the man curve, given the cost curve. 407 00:47:51.680 --> 00:47:58.680 Because if that's true, you wouldn't have to, you know, all you have to do is take a course in economics. You can run the whole industry, the whole country, very, very simply. 408 00:47:58.680 --> 00:48:05.680 So the problem is, you know, the economists got enamored of all the curves. 409 00:48:05.680 --> 00:48:12.400 and it's got to the point now where the most people take economics courses come 410 00:48:12.400 --> 00:48:16.800 away from thinking that they're sort of third-rate math courses, a lot of 411 00:48:16.800 --> 00:48:21.920 tangencies and curves on the board and so forth and so on and not knowing too much 412 00:48:21.920 --> 00:48:26.160 about what they mean because the ends of the means have become the ends in 413 00:48:26.160 --> 00:48:31.720 themselves. Originally the curves are supposed to illustrate and clarify thought. What 414 00:48:31.720 --> 00:48:49.760 We have this demand curve, the concept is that at any given time you buy so much of 415 00:48:49.760 --> 00:48:54.720 this product and the price is lower, you buy a lot less, you buy a lot more. 416 00:48:54.720 --> 00:49:03.720 It's pretty obvious if for some reason Wheaties became a nickel a box, there would be a lot more Wheaties purchased. 417 00:49:03.720 --> 00:49:09.720 If for some reason Wheaties were up to a thousand dollars a box, very few people, except real Wheaties fanatics, would buy any. 418 00:49:09.720 --> 00:49:17.720 So it's a fairly simple, again, fairly common sense kind of insight. 419 00:49:17.720 --> 00:49:19.720 Alright, this is the individual demand curve. 420 00:49:19.720 --> 00:49:22.720 Then what you simply do is you sum up, at least conceptually, it's not simple at all, 421 00:49:22.720 --> 00:49:29.700 Conceptually, however, if you want to know, if you want to at least conceptually, how 422 00:49:29.700 --> 00:49:34.560 many, how much, how many weedies will be bought at a certain, at a given price on, on the 423 00:49:34.560 --> 00:49:38.760 whole market, not just for one person, but summed up over everybody, then you sum up 424 00:49:38.760 --> 00:49:46.000 all these individual demand curves into one big market demand curve, which is also falling. 425 00:49:46.000 --> 00:49:51.160 It's falling for two reasons, one thing is the individual demand curves are falling, 426 00:49:51.160 --> 00:49:56.480 So if each individual man curve is falling, then the sum will also be falling. 427 00:49:56.480 --> 00:50:01.240 And secondly, as you keep cutting the price, you tap new people come to the market at all. 428 00:50:01.240 --> 00:50:07.040 In other words, I enter the chess market when it's $25, I'd say. 429 00:50:07.040 --> 00:50:08.780 Other people enter the chess market when it's $10. 430 00:50:08.780 --> 00:50:12.960 So as you keep lowering the price, more people enter the market altogether. 431 00:50:12.960 --> 00:50:17.800 So as you do this, the market, the man curve keeps getting flatter. 432 00:50:17.800 --> 00:50:32.800 So the individual demand curves are flowing and the market demand curve is flowing, and this really is the end of the individual demand curve for all purposes. 433 00:50:32.800 --> 00:50:36.800 We arrive at least conceptually at the market demand curve. 434 00:50:36.800 --> 00:50:49.800 Essentially, what it says is, what the market demand curve says is, at any given time, in other words, if we freeze right now, you know, as of this moment, if we freeze the country, like one of these free shots on the movies, 435 00:50:49.800 --> 00:50:57.800 and if the price then were such-and-such, if the price of Wheaties were $1,000, how many Wheaties would be bought? If the price were $20, how much would be bought? 436 00:50:57.800 --> 00:50:58.660 The 437 00:50:58.660 --> 00:51:00.580 price of a nickel, how much will be bought? 438 00:51:00.580 --> 00:51:05.000 And how do you're following the man curve? 439 00:51:05.000 --> 00:51:08.700 Obviously you don't know what the man curve is, 440 00:51:08.700 --> 00:51:14.120 you don't know how much will be bought, all you know is that it's falling. All you know, all we really know is, theoretically, 441 00:51:14.120 --> 00:51:16.680 is that the more will be purchased when weedies are a nickel, 442 00:51:16.680 --> 00:51:20.760 than if weedies were a thousand dollars a box. 443 00:51:20.760 --> 00:51:24.440 And a lot of attempts of course to measure the man curves, 444 00:51:24.440 --> 00:51:26.880 they're all on nonsense and I don't want to 445 00:51:26.880 --> 00:51:39.880 take up the time in this course to explain why they're not assessed, but one of the basic rules of economic theory is that all the laws we have, all the truths we have are qualitative rather than quantitative. 446 00:51:39.880 --> 00:51:49.880 As soon as anybody tells you about quantitative laws, watch out, because there aren't any. 447 00:51:49.880 --> 00:51:58.880 Okay, we have the market demand curve, and then at any given time we have a certain amount of, whatever it is available, a certain amount of supply. 448 00:51:58.880 --> 00:52:07.880 Supply meaning a number of, n number of homogeneous units, whether it's 1 unit, 20 units, 100, 2 million, or whatever. 449 00:52:07.880 --> 00:52:18.880 Now this, since it's at any given time, since we're freezing the economy at this moment, that means the supply line is always vertical, like so, S being vertical. 450 00:52:18.880 --> 00:52:22.880 Now, this of course goes against those of you who have taken economics courses before. 451 00:52:22.880 --> 00:52:27.880 Of course, you all know that supply curves are supposed to be forward-sloping. 452 00:52:27.880 --> 00:52:29.880 But they're really not. They're really vertical. 453 00:52:29.880 --> 00:52:35.880 Because what this is saying is that what you have is you have a bunch of stuff which is there. 454 00:52:35.880 --> 00:52:37.880 How it came there, we're not talking about yet. 455 00:52:37.880 --> 00:52:40.880 That's of course important, but not at this moment. 456 00:52:40.880 --> 00:52:49.880 We have a bunch of stuff, whether it's Wheaties, Hula Hoops, Copper, Spoons, it doesn't matter. 457 00:52:49.880 --> 00:52:53.880 We have a bunch of units of things available. 458 00:52:53.880 --> 00:52:58.880 And then we have people, the whole market, consumers in the market, evaluating them. 459 00:52:58.880 --> 00:53:01.880 And the evaluations would be based on their value scales, 460 00:53:01.880 --> 00:53:04.880 whether it's high on their value scale or low on their value scale. 461 00:53:04.880 --> 00:53:09.880 And the land curve based on these value scales is falling, like so. 462 00:53:09.880 --> 00:53:13.880 The vertical supply line would be vertical because that's what you've got. 463 00:53:13.880 --> 00:53:18.880 You've got, regardless of what the price is, you have 100,000 boxes of Wheaties, 464 00:53:18.880 --> 00:53:20.880 and you can't do much about it, at least for this moment. 465 00:53:20.880 --> 00:53:22.880 Obviously, in the long run, you can change the supply. 466 00:53:22.880 --> 00:53:28.880 But right now, you have so-and-so many spoons, so-and-so many Wheaties, so-and-so many hula hoops, and that's it. 467 00:53:28.880 --> 00:53:33.880 So you have your vertical supply line, and you're flowing the man curve. 468 00:53:33.880 --> 00:53:49.640 Now what this gives you, the interaction of these two, is the intersection point between 469 00:53:49.640 --> 00:53:56.080 the falling demand curve and the vertical supply line, this point here, it's like the equilibrium 470 00:53:56.080 --> 00:54:02.280 point, is the so-called day-to-day or market equilibrium price, and the reason it's called 471 00:54:02.280 --> 00:54:11.280 The price of the equilibrium price is because this is the price at which the price of this product will tend to move and at which it will tend to stay. 472 00:54:11.280 --> 00:54:15.280 If it's displaced from it, it will tend to remain there, roll back to it. 473 00:54:15.280 --> 00:54:22.280 In other words, the intersection of the demand curve and supply curve will tend to determine the price of the product. 474 00:54:22.280 --> 00:54:26.280 So, you want to know what the price of Wheaties is. 475 00:54:26.280 --> 00:54:31.280 The price of Wheaties will be determined by the demand curve for Wheaties and supply line of Wheaties. 476 00:54:31.280 --> 00:54:37.280 the intersection point will be the, when I say 10, I mean, you know, day to day, I mean, very quickly. 477 00:54:37.280 --> 00:54:47.280 Okay, why is that? Why, what are the forces that cause this to be the price-determining factor? 478 00:54:47.280 --> 00:54:56.280 The, okay, let's assume for a minute that the price of this product is higher than the equilibrium, so-called equilibrium price. 479 00:54:56.280 --> 00:55:02.280 The word equilibrium, of course, comes from physics and so forth, meaning that tending to remain in this spot or coming back to it. 480 00:55:02.280 --> 00:55:09.280 That's an attempt, again, of economics to ape so-called hard sciences. 481 00:55:09.280 --> 00:55:14.280 Supposing the price is higher than the equilibrium price. 482 00:55:14.280 --> 00:55:24.280 The price is higher, this means that this is $10 a case, whatever it is, widgets or readies, whatever. 483 00:55:24.280 --> 00:55:41.280 Right now, it's really about the $18 a piece. At that point, supply, the amount offered for sale, by the widgets of Wheaties, is considerably greater than the amount that consumers would buy, the demand for it, quantity of demand. 484 00:55:41.280 --> 00:56:05.280 What you have is this gap here, a surplus. People are trying to sell 100,000 boxes of Wheaties. However, at this high price, consumers can only buy 80,000 boxes. There's 20,000 left over, something which businessmen and sellers don't like. This is what is known as an unsold surplus. You can't get rid of it. 485 00:56:05.280 --> 00:56:19.280 How do you get rid of your unsold surplus? Well, you start lowering your price. As you lower your price, businessmen begin to find magic, the surplus begins to disappear. 486 00:56:19.280 --> 00:56:33.280 As the price is lowered, more and more quantities are purchased, until finally the price is lowered down to the equilibrium point where all the unsold surplus is gone and the market is what is known as cleared. 487 00:56:33.280 --> 00:56:39.280 In other words, the quantity demanded is equal to the quantity supplied at that price. 488 00:56:39.280 --> 00:56:46.280 Up here, at the price above the equilibrium point, the quantity supplied is greater than the quantity demanded and has trouble. 489 00:56:46.280 --> 00:56:48.280 It has an unsold surplus. 490 00:56:48.280 --> 00:56:50.280 There. 491 00:56:50.280 --> 00:56:56.280 Supposing, on the other hand, that the price is below the equilibrium price. 492 00:56:56.280 --> 00:56:58.280 Say, down here. 493 00:56:58.280 --> 00:57:14.280 Well, in this case, Wheaties are 25 cents a box. At that point, well, the five cents a box only have, whatever it was, 100,000 boxes of Wheaties supplies. 494 00:57:14.280 --> 00:57:18.280 People are trying to buy 180,000 boxes. Where's the Wheaties? 495 00:57:18.280 --> 00:57:27.280 What happens is there's a big run on the Wheaties business, and there's a big what-developed shortage. Big shortage develops. You can't find it in the stores anymore. 496 00:57:27.280 --> 00:57:33.280 If, for example, the government decreed tomorrow that Wheaties from now on can be sold in only $0.02 a box, 497 00:57:33.280 --> 00:57:37.280 you can take my word for it, but Wheaties would disappear from the shelves very, very quickly. 498 00:57:37.280 --> 00:57:42.280 Everybody and his brother would rush to get this bargain price for Wheaties. 499 00:57:42.280 --> 00:57:48.280 Wheaties would be cleaning out at the end of it, because nobody is right and want to be producing Wheaties for $0.02 a box. 500 00:57:48.280 --> 00:57:52.280 The shortage develops. 501 00:57:52.280 --> 00:58:22.280 So there's been a response to this shortage, the fact that there's more demand and supply of that price without raising the price, and as they raise the price they find that the gap is eliminated and finally you get to the equilibrium price, again the market is clear, there's neither an unsold surplus nor a shortage, so here above, and any price above the equilibrium price, supply is greater than demand, any price below it, demand is greater than supply, 502 00:58:22.280 --> 00:58:31.280 And at the equilibrium price you have the market being cleared where there's an exact balance between demand and supply. 503 00:58:31.280 --> 00:58:41.280 That means that the equilibrium price, whatever, there's enough people to buy, just enough people to buy whatever is available of a product, 504 00:58:41.280 --> 00:58:45.280 and just enough at that price available for whatever people want to buy. 505 00:58:45.280 --> 00:58:56.280 So the market then has a beautiful built-in mechanism, so to speak, of balancing the amount available with the amount that people want to buy on the product. 506 00:58:56.280 --> 00:59:09.280 And we will soon see what happens when the certain forces, largely the government, try to interfere with this process. 507 00:59:09.280 --> 00:59:15.280 Yeah, this is an equilibrating, beautifully equilibrating mechanism. 508 00:59:15.280 --> 00:59:25.280 So, this is the price determining method on the market. 509 00:59:25.280 --> 00:59:30.280 No, well, alright, if this is true, and I think it's unexceptionable, 510 00:59:30.280 --> 00:59:33.280 then how can a price ever change? 511 00:59:33.280 --> 00:59:35.280 We have a price pretty well set here, 512 00:59:35.280 --> 00:59:41.520 fixed by the net supply of a vertical supply line and the flowing demand curve. 513 00:59:41.520 --> 00:59:44.120 In that case, what would cause a price to change? 514 00:59:44.120 --> 00:59:46.920 Well, obviously either one of two things, or both. 515 00:59:46.920 --> 00:59:49.320 Either the demand changes or the supply changes. 516 00:59:49.320 --> 00:59:53.520 And then if we analyze any price, 517 00:59:53.520 --> 00:59:56.360 or any price changes in the field, 518 00:59:56.360 --> 01:00:02.560 we start looking for these two factors. What happened to the demand for it? What happened to the supply of it? 519 01:00:02.560 --> 01:00:25.560 So, well, the man can change for various reasons. The man can change, for example, through fashion, the king, let's say, or the queen comes out with a, you know, I like a certain brand of martini. 520 01:00:25.560 --> 01:00:55.560 Immediately half the country rushes to buy random martini as a price, the man skyrockets for that brand of whiskey, or vice versa, Jackie O'Nassos decrees something or other, seen wearing some kind of thing and everybody starts buying that, or vice versa, the thing drops out of fashion for one reason or another, so man change can change and does change for that race, people, the hula hoop for example had a big 521 01:00:55.560 --> 01:01:10.560 The first big play a few years ago, there was a big increase in demand for hula hoops, then there was a big collapse after about a year or year and a half of hula hoop mania and then the frisbee came in after that, so there was a shift from the hula hoop market to the frisbee market. 522 01:01:10.560 --> 01:01:15.560 The demand curve for hula hoops went up and the demand curve for frisbees, I mean hula hoops went down and the demand curve for frisbees went up. 523 01:01:15.560 --> 01:01:17.560 That's one thing that can change it. 524 01:01:19.560 --> 01:01:21.560 Of course, the supply can change. 525 01:01:21.560 --> 01:01:23.560 Why will the supply change? 526 01:01:23.560 --> 01:01:25.560 Well, the supply can change again for various reasons, 527 01:01:25.560 --> 01:01:27.560 one of which can be in response to demand, 528 01:01:27.560 --> 01:01:29.560 we'll see later. 529 01:01:29.560 --> 01:01:31.560 But one reason, of course, 530 01:01:31.560 --> 01:01:33.560 is purely technological. 531 01:01:33.560 --> 01:01:35.560 In agriculture, for example, 532 01:01:35.560 --> 01:01:39.560 if there's a big drought, 533 01:01:39.560 --> 01:01:43.560 the supply goes down. 534 01:01:43.560 --> 01:02:06.560 For example, in this figure one, the weak drought, half the middle west has too much rain or too little rain or whatever it is, there's a big drop in wheat supply coming in this season. 535 01:02:06.560 --> 01:02:15.560 In that case, the supply curve shifts to the left. The vertical supply line, which this year was X million bushels a week, is now X minus whatever. 536 01:02:15.560 --> 01:02:34.560 So this means that the old price, the old equilibrium price, which before this cleared the market, now doesn't perform this, because now it turns out that the old price is now a big shortage, 537 01:02:34.560 --> 01:02:40.560 and of course, because not enough wheat now to satisfy the demand at that particular price. 538 01:02:40.560 --> 01:02:48.560 So the result of that is, because of the shortage, the price quickly goes up, and as it goes up, the shortage is eliminated, 539 01:02:48.560 --> 01:02:54.560 and we wind up with this new intersection point, or a new equilibrium point, which again clears the market. 540 01:02:54.560 --> 01:03:03.560 It clears the market at a higher price, of course, in order to, again, see to it that there's just enough people to buy 541 01:03:03.560 --> 01:03:07.560 The lower amount of weakness available. 542 01:03:07.560 --> 01:03:11.560 So we now have a lower quantity for a higher price 543 01:03:11.560 --> 01:03:15.560 at the new supply line of, say, S prime. 544 01:03:15.560 --> 01:03:19.560 You can see that one of the functions 545 01:03:19.560 --> 01:03:23.560 that the price system performs is a rationing function. 546 01:03:23.560 --> 01:03:27.560 The fact that if the price of everything was free, everybody would 547 01:03:27.560 --> 01:03:31.560 grab it unlimitedly, infinitely. 548 01:03:31.560 --> 01:03:34.560 Since we don't have an infinite supply of anything, there has to be a price. 549 01:03:34.560 --> 01:03:40.560 The more scarce the product or the more scarce the commodity, the higher the price tends to be. 550 01:03:40.560 --> 01:03:44.560 And these people now get the price out of the market. 551 01:03:44.560 --> 01:03:52.560 These people will have to drop out of the market because of the higher price of the so-called marginal buyers. 552 01:03:52.560 --> 01:04:00.560 And so as the price goes up, the price system performs a very important rationing function. 553 01:04:00.560 --> 01:04:12.560 The only other way of performing a rationing function would be for the government or somebody to choose who would get the product and who wouldn't, which for us leaves us up with many different kinds of problems, at least. 554 01:04:12.560 --> 01:04:42.560 If, on the other hand, the supply goes up, it goes from S' to S, for example, and instead of a weak drought, there's a big increase in wheat production, the climate is very good this season, or there's a much better fertilizer use, or whatever, then the supply curve shifts from S' to S, shifts to the right, and it means that the old price is now a surplus, an unsold surplus, people don't want to buy this new increased product 555 01:04:42.560 --> 01:04:53.560 And so, the price falls and we're back down again to a lower price in order to induce people to buy the increased amount. 556 01:04:53.560 --> 01:05:02.560 So, we have supply curves or supply lines moving up and down given demand curves. 557 01:05:02.560 --> 01:05:11.560 Given the demand curve, given the tastes and wants for a particular product by the public, supply line will move up and down. 558 01:05:11.560 --> 01:05:20.560 In other words, as the supply falls, the price goes up, and as the supply rises, the price goes down. 559 01:05:20.560 --> 01:05:30.560 The price will go down in order to induce people to buy the increased product. 560 01:05:30.560 --> 01:05:38.560 Here we have, of course, one point, which is always a problem with the economic teachers and students. 561 01:05:38.560 --> 01:05:46.120 The difference between the, when the supply goes up and the quantity demanded increases from here to here, 562 01:05:46.120 --> 01:05:50.200 the difference between that and changing the whole demand curve, 563 01:05:50.200 --> 01:05:57.160 and that was the whole demand curve increasing because hula hoops are more fashionable now than they're supposed to be, 564 01:05:57.160 --> 01:06:05.600 the whole demand curve increases that, it means that at any given price more will be purchased than before, 565 01:06:05.600 --> 01:06:12.600 And it's a completely different concept, of course, than going up and down the given demand curve. 566 01:06:12.600 --> 01:06:17.600 Usually in economics, there's a shorthand, if you say. 567 01:06:17.600 --> 01:06:21.600 There's an increase in demand. What's meant is the whole demand curve shifts up. 568 01:06:21.600 --> 01:06:27.600 In other words, at any given price, more will be purchased. 569 01:06:27.600 --> 01:06:30.600 Already, I think we're beginning to see something. 570 01:06:30.600 --> 01:06:33.600 We should be able to see something at this point. 571 01:06:33.600 --> 01:06:41.900 We're not going to get to the money question until much later in this course, but already we should begin to see what can cause all prices to go up. 572 01:06:41.900 --> 01:06:45.100 I mean, we're in a point now, of course, of accelerating inflation. 573 01:06:45.100 --> 01:06:50.100 What can cause a situation where almost every price is going up, some, of course, more than others? 574 01:06:50.100 --> 01:06:56.200 Either because of the supply, everything is rapidly going down, which is obviously not true. 575 01:06:56.200 --> 01:07:01.100 The supply of goods is more or less about what it is now. 576 01:07:01.100 --> 01:07:04.540 is increasing each year, certainly not going down every year, 577 01:07:04.540 --> 01:07:07.580 or because of the demand for everything is going up. 578 01:07:07.580 --> 01:07:09.740 Because the demand for everything is going up, 579 01:07:09.740 --> 01:07:13.980 and we're talking in terms of consumers of a certain given income, 580 01:07:13.980 --> 01:07:19.100 consumers can shift their purchases, say, from Hoogahoops to Frisbees, 581 01:07:19.100 --> 01:07:22.860 in which case the demand for Hoogahoops goes down and the demand for Frisbees goes up. 582 01:07:22.860 --> 01:07:25.100 How can the demand for both Hoogahoops and Frisbees go up? 583 01:07:25.100 --> 01:07:26.460 Where are they getting the money from? 584 01:07:26.460 --> 01:07:32.460 How can, with the consumer getting a certain income, how can a man for everything go up? 585 01:07:32.460 --> 01:07:36.460 Where's the magic source from which the money is flowing? 586 01:07:36.460 --> 01:07:38.460 So they can increase all their man curves. 587 01:07:38.460 --> 01:07:44.460 And this, of course, is the $64 or $54,000 question. 588 01:07:44.460 --> 01:07:47.460 The skip ahead of that is a teaser. 589 01:07:47.460 --> 01:07:54.460 The man curves can only all go up if somewhere now in the basement somebody's printing a lot of money, 590 01:07:54.460 --> 01:08:03.460 and shoveling them out onto the public, so everybody thinks they're better off in spending, happily spending this new money which is going to cause the prices to go up. 591 01:08:03.460 --> 01:08:07.460 That's, of course, just a teaser for later. 592 01:08:16.460 --> 01:08:18.460 That's our first lecture.