WEBVTT

NOTE The Firm and Strategic Factor Markets: the Role of the Firm in the Creation of Factor Mistakes

1
00:00:00.000 --> 00:00:02.240
My name is client student number one.

2
00:00:07.000 --> 00:00:09.860
So I'm gonna talk to you about the firm

3
00:00:09.860 --> 00:00:11.440
and strategic factor markets.

4
00:00:11.440 --> 00:00:15.180
In this presentation, I'm gonna use factors, capital,

5
00:00:15.180 --> 00:00:17.880
means of production interchangeably.

6
00:00:17.880 --> 00:00:21.780
So whatever word I use, I kind of talk about machines

7
00:00:21.780 --> 00:00:23.000
and labor factors.

8
00:00:24.900 --> 00:00:25.860
Let's see here.

9
00:00:27.720 --> 00:00:29.400
The outline of this presentation.

10
00:00:30.000 --> 00:00:35.000
First I'll remind you of the problem, and I think you'll recognize it as soon as you see it.

11
00:00:35.000 --> 00:00:41.000
I'll go on to talk about the power of the market, the way we see it.

12
00:00:41.000 --> 00:00:45.000
And then I'll talk about the limits of the market.

13
00:00:45.000 --> 00:00:52.000
I'll talk about the dynamics of the market, the market process and what makes the market progress.

14
00:00:52.000 --> 00:01:00.000
And then I talk about a possible solution to a problem that I've identified.

15
00:01:00.000 --> 00:01:04.000
So let's see if you can follow me when I tie along here.

16
00:01:04.000 --> 00:01:12.000
So, for the reminder, some of you might recognize this as a problem.

17
00:01:12.000 --> 00:01:19.000
Many of you probably think about the common denominator of everything going on on Capitol Hill.

18
00:01:19.000 --> 00:01:23.000
And that's basically it. Socialism is the problem.

19
00:01:23.000 --> 00:01:29.000
Now, of course we know that socialism is impossible. That's what Mises taught us back in 1920.

20
00:01:29.000 --> 00:01:34.000
But why is it impossible? It's not impossible because you don't have all the knowledge, as Hayek was talking about,

21
00:01:34.000 --> 00:01:39.000
but because you don't have private ownership of the means of production.

22
00:01:39.000 --> 00:01:46.000
Which means that you don't have markets for all these capital and labor.

23
00:01:46.000 --> 00:01:51.000
You only have pretend markets for the consumption products.

24
00:01:51.000 --> 00:01:57.000
Which means that an entrepreneur cannot really calculate if something is going to be profitable or not.

25
00:01:57.000 --> 00:02:04.000
You cannot figure out if something is being done efficiently or not.

26
00:02:04.000 --> 00:02:06.000
So that is the main problem.

27
00:02:06.000 --> 00:02:11.000
In any capitalist economy, you have private ownership all throughout this process.

28
00:02:11.000 --> 00:02:21.880
Now, in this paper, I started thinking about imputation, which is the process of how factors

29
00:02:21.880 --> 00:02:28.400
are valued in the market, how you can set a price on machines and so forth.

30
00:02:28.400 --> 00:02:33.480
And as Austrians, we see imputation as something going from consumption products and the value

31
00:02:33.480 --> 00:02:38.920
that consumers put on the products they're consuming, and then how it's imputed back

32
00:02:38.920 --> 00:02:44.800
Backup, it's not a cost plus kind of thing that neoclassicals would do.

33
00:02:44.800 --> 00:02:52.800
So then I started thinking, what does Mises and Rothbard and all these people say about

34
00:02:52.800 --> 00:02:53.800
this?

35
00:02:53.800 --> 00:02:57.920
Well, they talk about if you have factor markets, then you're going to have the social valuation

36
00:02:57.920 --> 00:03:03.040
of these factors and then you have imputation and that's not a problem.

37
00:03:03.040 --> 00:03:06.640
Well then I thought, where do these markets come from?

38
00:03:06.640 --> 00:03:08.840
What if you invent a new machine?

39
00:03:08.840 --> 00:03:13.840
There's no market for something you just invented, you don't have the bidding, you don't have

40
00:03:13.840 --> 00:03:17.900
multiple buyers and sellers for this machine that no one knows anything about.

41
00:03:17.900 --> 00:03:22.440
So that is kind of the problem that I started to work on a little bit.

42
00:03:22.440 --> 00:03:27.980
So let's move on to the economic puzzle.

43
00:03:27.980 --> 00:03:33.400
Now as Austrians we have a few of these pieces of the puzzle, we have entrepreneurship of

44
00:03:33.400 --> 00:03:34.400
course.

45
00:03:34.400 --> 00:03:48.400
I mean entrepreneurship, the entrepreneurs are bidding for the factors and through this bidding back and forth you get the true value of the factors used in production.

46
00:03:48.400 --> 00:03:55.400
Of course you have economic calculation, which is the calculation of whether this is going to be profitable or not.

47
00:03:55.400 --> 00:04:02.400
It's a calculation of whether you're using materials and machines efficiently or not.

48
00:04:02.400 --> 00:04:09.680
You have heterogeneous assets, which is not at all part of the neoclassical view.

49
00:04:09.680 --> 00:04:14.160
I mean, you could say, those of you with an object of this bent, you know that A is A.

50
00:04:14.160 --> 00:04:17.760
I mean, what this really means is that K is not K and L is not L.

51
00:04:19.680 --> 00:04:25.040
K for capital is not the same as capital, because a machine is not like any other machine.

52
00:04:25.040 --> 00:04:27.840
It's very specific, right? And the same with labor.

53
00:04:27.840 --> 00:04:34.980
Remember, if I work somewhere, and if Chris works somewhere else, we can't do exactly

54
00:04:34.980 --> 00:04:36.800
the same things.

55
00:04:36.800 --> 00:04:41.440
We are not else, we're different kinds of else.

56
00:04:41.440 --> 00:04:49.040
Now there's an extra piece of the puzzle here that I think actually provides the solution

57
00:04:49.040 --> 00:04:55.120
to the problem that I mentioned in the beginning, and the funny thing is that I'm not going

58
00:04:55.120 --> 00:04:57.160
I'm not gonna really talk about this piece.

59
00:04:57.160 --> 00:04:59.840
Actually, I'm gonna leave this for the next session

60
00:04:59.840 --> 00:05:03.720
where I talk about my theory of this piece of the puzzle.

61
00:05:03.720 --> 00:05:06.360
I'm only gonna talk about how this piece fits

62
00:05:06.360 --> 00:05:09.080
with the other pieces, which means that I still have

63
00:05:09.080 --> 00:05:12.200
to talk a little bit about what it means, right?

64
00:05:12.200 --> 00:05:15.040
So, oh, I should mention here, too,

65
00:05:15.040 --> 00:05:18.420
that JC is talking about the same piece,

66
00:05:20.040 --> 00:05:24.240
but obviously he's wrong, because it's not me,

67
00:05:24.240 --> 00:05:27.000
And you know that L is not L, right?

68
00:05:27.000 --> 00:05:28.540
But, I mean, you can listen to him.

69
00:05:28.540 --> 00:05:29.860
It's an interesting theory and all,

70
00:05:29.860 --> 00:05:32.960
but you should stay put a couple of hours

71
00:05:32.960 --> 00:05:35.940
until I do the presentation on what this piece is.

72
00:05:35.940 --> 00:05:37.980
And that's the true one.

73
00:05:37.980 --> 00:05:40.500
Oh, Peter Klein is also wrong, by the way.

74
00:05:40.500 --> 00:05:41.540
Just so that you know.

75
00:05:42.980 --> 00:05:45.340
Okay, so what is the power of the market?

76
00:05:45.340 --> 00:05:47.840
If we just step back and do it from the beginning?

77
00:05:48.980 --> 00:05:52.780
Well, the division of labor is what makes the market glorious.

78
00:05:52.780 --> 00:05:58.780
The division of labor, specialization, is why we have trade at all.

79
00:05:58.780 --> 00:06:06.780
Like I said before, Chris and I are different else. If we did exactly the same things, why would we trade at all?

80
00:06:06.780 --> 00:06:12.780
If we start doing different things, we specialize in different things, there are gains from trade.

81
00:06:12.780 --> 00:06:15.780
We're both better off through specializing.

82
00:06:15.780 --> 00:06:19.780
And of course, Mises recognized this. Mises recognized almost everything.

83
00:06:19.780 --> 00:06:25.780
He said, the mechanization can be employed only in the social environment under the division of labor.

84
00:06:25.780 --> 00:06:32.780
Every step forward on the road toward the use of more specialized, more refined and more productive machines requires a further specialization on tasks.

85
00:06:32.780 --> 00:06:37.780
So here we have an identification of how the market progresses.

86
00:06:37.780 --> 00:06:48.780
You increase specialization, you have an increased division of labor all the time, which means you get more products for less labor, less effort, less materials, so forth.

87
00:06:48.780 --> 00:06:54.780
So you can satisfy more consumer wants with less means, basically.

88
00:06:54.780 --> 00:07:05.280
And of course, I want to just make sure that glorious is a value-free term, so this is positive science.

89
00:07:05.280 --> 00:07:07.580
That was a joke, by the way.

90
00:07:07.580 --> 00:07:09.780
It's okay to laugh.

91
00:07:09.780 --> 00:07:18.680
Now, in this market with a high degree of specialization and division of labor,

92
00:07:18.680 --> 00:07:25.240
You compete and you bid for different factors to use in your production structures.

93
00:07:25.240 --> 00:07:29.800
That is pretty obvious, but that's where I'm starting at.

94
00:07:29.800 --> 00:07:36.680
Now in a capital structure, as Lachman showed us, these factors are complementary in different

95
00:07:36.680 --> 00:07:37.680
ways.

96
00:07:37.680 --> 00:07:41.680
A certain tube fits with a certain machine and so forth.

97
00:07:41.680 --> 00:07:48.020
So this tube might not fit with another machine, but those with this kind of machine or those

98
00:07:48.020 --> 00:07:51.860
and also finding a use for this tube, they bid for the tube.

99
00:07:51.860 --> 00:07:56.020
And thereby we get the value, the market value of this bank.

100
00:07:57.820 --> 00:07:59.880
But there's also a limit to this market.

101
00:07:59.880 --> 00:08:02.600
And Adam Smith talked about this limit

102
00:08:02.600 --> 00:08:05.320
in his The Wealth of Nations.

103
00:08:05.320 --> 00:08:08.980
And the limit is the extent of the market.

104
00:08:08.980 --> 00:08:11.320
Of course you cannot go outside of the scope

105
00:08:11.320 --> 00:08:15.620
or the extent of the market to sell this tube or whatever.

106
00:08:15.620 --> 00:08:22.540
And the way I interpret this is that you really have incompatible specialization levels.

107
00:08:22.540 --> 00:08:30.180
So this tube has a certain radius and so forth, so it's specialized or specific in a certain

108
00:08:30.180 --> 00:08:35.500
way, which means that it doesn't fit with other things, which means it's very complementary

109
00:08:35.500 --> 00:08:39.180
with other things, right?

110
00:08:39.180 --> 00:08:41.100
So this is how I interpret it.

111
00:08:41.100 --> 00:08:44.780
You always need a graph.

112
00:08:44.780 --> 00:08:52.540
Now in this, what we're looking at here is from the point of view of one factor, anything,

113
00:08:52.540 --> 00:08:54.500
it doesn't matter what it is.

114
00:08:54.500 --> 00:09:00.300
So what you have is the total market for this factor, that is how many buyers and sellers

115
00:09:00.300 --> 00:09:03.660
for this thing are there, that you can actually reach.

116
00:09:03.660 --> 00:09:11.640
Now you have a level of specialization for this thing.

117
00:09:11.640 --> 00:09:16.820
And if you are at the same level basically as everything else, so the tube is at the

118
00:09:16.820 --> 00:09:21.800
same level as the machine, you have someone who can make the tube, and everything is basically

119
00:09:21.800 --> 00:09:26.680
on the same level, then the market is almost endless.

120
00:09:26.680 --> 00:09:29.000
The market is huge, right?

121
00:09:29.000 --> 00:09:34.160
Now if you think about labor factors, it might be easier, because if you specialize in a

122
00:09:34.160 --> 00:09:39.880
certain very very very narrow task, and do something very very small, and you can't really

123
00:09:39.880 --> 00:09:42.560
You can't really fit it with anything else.

124
00:09:42.560 --> 00:09:48.000
Of course you're going to be very specialized up here, but you're not going to have a market.

125
00:09:48.000 --> 00:09:51.920
Who is going to use what you're doing, right?

126
00:09:51.920 --> 00:09:53.640
You can't fit it with anything else.

127
00:09:53.640 --> 00:09:59.920
And of course if you don't specialize at all, if you go back to being Robinson Crusoe, then

128
00:09:59.920 --> 00:10:04.000
the market goes back to one, right, it's just you.

129
00:10:04.000 --> 00:10:11.240
So this is how I interpret the extent of the market limitation as Adam Smith saw it.

130
00:10:11.240 --> 00:10:19.400
So let's move on a little bit and now I'll try to put everything together at the end.

131
00:10:19.400 --> 00:10:25.220
So this is just going to seem like very loose pieces of the puzzle, I mean I showed you

132
00:10:25.220 --> 00:10:28.240
in the beginning how they fit together.

133
00:10:28.240 --> 00:10:33.760
The market process, now back to entrepreneurship which is the driving force in the market as

134
00:10:33.760 --> 00:10:41.560
as Mises saw it. Now, entrepreneurship means you do something new, something that hasn't

135
00:10:41.560 --> 00:10:51.280
been done before. You see an opportunity, you're alert to it, or you have a superior

136
00:10:51.280 --> 00:10:54.480
judgment or something like that, and you do something that no one has done before, in

137
00:10:54.480 --> 00:11:01.480
a way that no one has done it before, or something that is novel in this way. I mean, if you

138
00:11:01.480 --> 00:11:08.020
To do that, if you create this new tube, this new machine or something, it means that there

139
00:11:08.020 --> 00:11:09.680
are no buyers and sellers.

140
00:11:09.680 --> 00:11:14.200
There is no market already there for this thing because why would they buy and sell

141
00:11:14.200 --> 00:11:17.520
what is not existent yet, right?

142
00:11:17.520 --> 00:11:25.000
Which means that you cannot have a basis for economic calculation if you use the Mises

143
00:11:25.000 --> 00:11:31.400
and Rothbard discussion on this because you have to have the buyers and sellers who bid

144
00:11:31.400 --> 00:11:39.040
over each other to get this thing. That's how you get the market value.

145
00:11:39.040 --> 00:11:48.680
So what explains the process towards a higher degree of specialization and a greater division

146
00:11:48.680 --> 00:11:55.840
of labor? In other words, how can this new, more specialized thing be introduced in the

147
00:11:55.840 --> 00:12:01.840
The Market. If there is no market at all, how do you create this new market?

148
00:12:01.840 --> 00:12:08.840
And that's what I say here, the highly specialized capital, that market, how does it emerge?

149
00:12:08.840 --> 00:12:16.840
Of course, that's the missing piece, right? And I wanted to rely on an authority here,

150
00:12:16.840 --> 00:12:22.840
but Charlie Sheen is kind of not an authority anymore, so I couldn't use him.

151
00:12:22.840 --> 00:12:30.840
I went to another one, Tom Cruise, the firm, and that's the missing piece of the puzzle.

152
00:12:30.840 --> 00:12:36.840
That's what I'm going to talk about in the next session, how the firm offers a solution to this problem.

153
00:12:36.840 --> 00:12:42.840
Now I'm going to just quickly summarize the way I see the firm and how it fits into this,

154
00:12:42.840 --> 00:12:49.840
and of course talk about how this solves the problem with imputation and the factor markets.

155
00:12:49.840 --> 00:12:55.840
Now, the way I see it is that firms are islands of specialization.

156
00:12:55.840 --> 00:13:03.840
It's not an island of conscious power, which is how the mainstream uses this concept now.

157
00:13:03.840 --> 00:13:13.840
Coase quotes, is it Richardson or Robertson or something like that, saying that firms are like islands of conscious power.

158
00:13:13.840 --> 00:13:20.600
And maybe that fits in the 30s, but I don't see it that way.

159
00:13:20.600 --> 00:13:26.240
Now the way I see it is that an entrepreneur can, through the firm, get all these factors

160
00:13:26.240 --> 00:13:32.120
together, create all these factors and make them specialized or co-specialized so that

161
00:13:32.120 --> 00:13:34.880
you can actually create this new thing.

162
00:13:34.880 --> 00:13:44.580
You can follow the imagined opportunity that the entrepreneur has.

163
00:13:44.580 --> 00:13:53.640
So a firm is simply encapsulated, because you do it within the boundaries of the firm.

164
00:13:53.640 --> 00:13:57.000
You don't do it, it's through market contracting.

165
00:13:57.000 --> 00:14:01.480
It's high density, which means that you collect all these resources and everything very closely

166
00:14:01.480 --> 00:14:02.480
together.

167
00:14:02.480 --> 00:14:10.480
It doesn't necessarily mean that you're standing in the same place, but that you're very closely communicating or whatever.

168
00:14:10.480 --> 00:14:12.480
It's a process, obviously.

169
00:14:12.480 --> 00:14:16.480
Now, and it uses the extra market specialization.

170
00:14:16.480 --> 00:14:20.480
It's a higher degree.

171
00:14:20.480 --> 00:14:29.480
So, this would facilitate the introduction of new factors and use of new factors.

172
00:14:29.480 --> 00:14:36.480
Simply because they're used within the firm to produce something that is compatible with the market as a whole.

173
00:14:36.480 --> 00:14:43.480
And I'll get back to this in the next session, so stay put.

174
00:14:43.480 --> 00:14:50.480
Now, the question is, is this a solution to the problem?

175
00:14:50.480 --> 00:14:58.480
Well, I would claim it is, but leaving the firm, what about the factor of markets, right?

176
00:14:58.480 --> 00:15:06.480
So, how do we get back to this beautiful thing?

177
00:15:06.480 --> 00:15:08.480
How do we solve the problem?

178
00:15:08.480 --> 00:15:12.480
How do we get to the point where capitalism actually has these markets

179
00:15:12.480 --> 00:15:16.480
that are necessary for the evaluation of the capital and labor

180
00:15:16.480 --> 00:15:19.480
that is very specialized?

181
00:15:19.480 --> 00:15:22.480
Now, the market process, if you start from the beginning,

182
00:15:22.480 --> 00:15:27.480
then you would have a lot of people and a lot of capital, maybe,

183
00:15:27.480 --> 00:15:31.080
running around and doing market contracting. They would be specialized to basically the

184
00:15:31.080 --> 00:15:36.200
same degree. If someone specializes further, you wouldn't be able to trade with anyone,

185
00:15:36.200 --> 00:15:44.160
so it would be suicide basically. Now they work together on the same level like this

186
00:15:44.160 --> 00:15:54.120
to satisfy the wants of the consumer. And consumer is king, of course. Now let's have

187
00:15:54.120 --> 00:15:55.400
Let's have a look at this.

188
00:15:55.400 --> 00:16:00.640
This doesn't really support the progression towards higher degree or extent of division

189
00:16:00.640 --> 00:16:08.600
of labor, higher specialization, unless they all specialize at the same time.

190
00:16:08.600 --> 00:16:15.600
If they all get together and they work on more narrowly defined tasks doing the same

191
00:16:15.600 --> 00:16:20.280
thing so that they can do it more efficiently, the question is how do you get all these people

192
00:16:20.280 --> 00:16:34.040
Well, how do you introduce these new fancy machines, or this one?

193
00:16:34.040 --> 00:16:36.120
That is the question, right?

194
00:16:36.120 --> 00:16:42.300
Well the way I see it, the entrepreneur, he creates a firm within which he can utilize

195
00:16:42.300 --> 00:16:46.680
the power of this extra specialization that is not existent in the market and that is

196
00:16:46.680 --> 00:16:49.400
not compatible with the market as it is.

197
00:16:49.400 --> 00:16:55.320
is something new that he figures out. He collects whatever he needs, he puts it together, he

198
00:16:55.320 --> 00:17:02.440
allows them to co-specialize and thereby create something totally new, something very dense,

199
00:17:02.440 --> 00:17:09.760
something very efficient that hopefully, I mean if it's successful, will beat the market,

200
00:17:09.760 --> 00:17:15.000
produce something more cheaply, produce something totally new or something like that. And of

201
00:17:15.000 --> 00:17:18.760
course if he's successful, he's going to end up with this thing, we heard that before,

202
00:17:18.760 --> 00:17:27.640
Profit, right? But if he manages to get profit, well, then you have these other ones, the

203
00:17:27.640 --> 00:17:35.160
followers, other entrepreneurs who see that he's making profits, they want to share these

204
00:17:35.160 --> 00:17:42.420
profits, obviously. Now, they try to emulate this structure. Now, it's like encapsulated

205
00:17:42.420 --> 00:17:47.160
and there's tested knowledge and whatever in there, so they might not be able to do

206
00:17:47.160 --> 00:17:55.080
exactly exact copies of it but they make something that is similar now if you do

207
00:17:55.080 --> 00:18:03.760
this what happens then well obviously you create a situation where all these

208
00:18:03.760 --> 00:18:10.440
entrepreneurs with their firms can trade with each other using these these

209
00:18:10.440 --> 00:18:14.600
factors they're not compatible with anything else but they're compatible

210
00:18:14.600 --> 00:18:20.880
with all these structures and they can trade with each other, thereby creating a market

211
00:18:20.880 --> 00:18:26.000
for these factors.

212
00:18:26.000 --> 00:18:29.840
So how do the factor markets emerge?

213
00:18:29.840 --> 00:18:36.880
Well successful entrepreneurs, they're emulated because others are also seeking profits, they

214
00:18:36.880 --> 00:18:41.320
want to do what he's doing because he's making so much money.

215
00:18:41.320 --> 00:18:48.600
Now competition here becomes a discovery process just like Hayek talked about simply because

216
00:18:48.600 --> 00:18:51.000
you're trying to do what he is doing.

217
00:18:51.000 --> 00:18:56.600
He obviously did something that was really good and you're trying to do something as

218
00:18:56.600 --> 00:18:59.120
good as he does it or even better.

219
00:18:59.120 --> 00:19:05.280
You're trying to discover what he's doing and discover how he can do it even better.

220
00:19:05.280 --> 00:19:14.080
Now, this also creates, as we saw, markets for factors, but there are non-core competences

221
00:19:14.080 --> 00:19:15.080
in the firm as well.

222
00:19:15.080 --> 00:19:19.800
I mean, you have encapsulated this whole thing, but for the entrepreneur, you want to focus

223
00:19:19.800 --> 00:19:22.480
on what you are best at.

224
00:19:22.480 --> 00:19:27.640
So what you're doing, really, when all these firms start competing, doing these things,

225
00:19:27.640 --> 00:19:32.320
you can take small parts of it and have other entrepreneurs do that.

226
00:19:32.320 --> 00:19:36.860
I'm thinking accounting, IT services, whatever, think something like that.

227
00:19:36.860 --> 00:19:46.160
So suddenly we have a process flow where you might be able to explain outsourcing, which

228
00:19:46.160 --> 00:19:51.600
creates more markets, which just feeds the whole process and it builds on itself.

229
00:19:51.600 --> 00:19:56.200
So it goes faster and faster and faster and you get more division of labor, you get higher

230
00:19:56.200 --> 00:20:03.800
specialization, greater efficiency, more profits to satisfy more of consumers' wants, and the

231
00:20:03.800 --> 00:20:05.960
whole world is happy.

232
00:20:05.960 --> 00:20:07.640
Pretty good, huh?

233
00:20:07.640 --> 00:20:08.640
And that's it.