WEBVTT

NOTE A Defense of the Rothbardian Structure of Production

1
00:00:00.000 --> 00:00:06.520
My paper is titled, A Defense of the Rothbardian Structure Production, and in it, recently,

2
00:00:06.520 --> 00:00:13.240
as someone mentioned a little earlier, Professor Holzman has written a couple of papers criticizing

3
00:00:13.240 --> 00:00:22.340
the traditional Rothbardian or Austrian, some very big statements about time preference

4
00:00:22.340 --> 00:00:25.240
and how it's related to the structure production.

5
00:00:25.240 --> 00:00:30.860
The aggregate proportion between consumption and investment is not systematically related

6
00:00:30.860 --> 00:00:39.640
to the interest rate and this leads to very different conclusions than what has been previously

7
00:00:39.640 --> 00:00:41.740
thought by Austrian economists.

8
00:00:41.740 --> 00:00:48.040
So one of his main, what I'll be concentrating on in this presentation, one of his main critiques

9
00:00:48.040 --> 00:00:57.240
is that Austrian economics has neglected the change in the demand for present goods, and

10
00:00:57.240 --> 00:01:04.240
that this leads to a wildly, a very different framework for the structure of production

11
00:01:04.240 --> 00:01:06.040
and different conclusions.

12
00:01:06.040 --> 00:01:07.040
Okay.

13
00:01:07.040 --> 00:01:08.040
So, start.

14
00:01:08.040 --> 00:01:09.040
All right.

15
00:01:09.040 --> 00:01:13.160
So, just a, I know a lot of people have been talking about time preference, just very brief

16
00:01:13.160 --> 00:01:18.800
Review of Time Preference, Law of Time Preference, present good is preferred to a future good,

17
00:01:18.800 --> 00:01:22.680
present consumption is preferred to future consumption, so that means there's a premium

18
00:01:22.680 --> 00:01:29.400
on present consumption, and the rate of time preference is this premium on present goods

19
00:01:29.400 --> 00:01:33.240
and it's the degree to which an actor prefers present goods to future goods.

20
00:01:33.240 --> 00:01:37.680
And this is his interest rate, you know, if you think of it in Crusoeconomics, and then

21
00:01:37.680 --> 00:01:42.280
you have the interest rate in the catalaxies, so in the money economy, it's the societal

22
00:01:42.280 --> 00:01:47.480
the premium on present goods, which is money that can be spent on consumer goods, over

23
00:01:47.480 --> 00:01:53.440
future money, which is money earned from investments. So it's the premium on present money over

24
00:01:53.440 --> 00:01:58.980
future money, and it's the degree to which society prefers present consumption to future

25
00:01:58.980 --> 00:02:08.640
consumption. Okay. So, all right, Rothbard says that time preference systematically influences

26
00:02:08.640 --> 00:02:14.160
with a proportion of consumption in investment, and this still holds in the aggregate and

27
00:02:14.160 --> 00:02:20.280
this aggregate proportion of consumption in investment determines the interest rate.

28
00:02:20.280 --> 00:02:24.020
So the proportion between consumption and investment is systematically related to the

29
00:02:24.020 --> 00:02:26.400
interest rate in Rothbard's framework.

30
00:02:26.400 --> 00:02:30.640
So if there's an increase in that proportion, there's going to be a higher interest rate.

31
00:02:30.640 --> 00:02:34.360
If there's a decrease in that proportion, there's going to be a decrease in interest

32
00:02:34.360 --> 00:02:35.360
rate.

33
00:02:35.360 --> 00:02:56.360
By him, by the interest rate, I'm talking about the pure rate of interest, so no price premium, there could be psychic component, an entrepreneurial risk component, I'm talking strictly about the pure time reference as an example as you'd see in the imaginary and impossible economy of the evenly rotating economy.

34
00:02:56.360 --> 00:03:03.460
So for Holzman, it's only a contingent relationship due to a changing demand for the present goods.

35
00:03:03.460 --> 00:03:09.860
So for instance, traditional Austrian economics shows that there will be an increase in supply

36
00:03:09.860 --> 00:03:13.120
of present goods on a constant demand curve.

37
00:03:13.120 --> 00:03:16.640
So that's going to lead to a lowering of the rate of interest and an increase in the

38
00:03:16.640 --> 00:03:17.760
quantity of savings.

39
00:03:17.760 --> 00:03:24.560
So traditional canonical Austrian depictions of a change in the production structure.

40
00:03:24.560 --> 00:03:28.640
For Holzman, though, he could say that, well, in fact, Austrian economics has neglected

41
00:03:28.640 --> 00:03:33.760
the demand for present goods, and there could be an increase in demand for present goods.

42
00:03:33.760 --> 00:03:37.280
And you can just look at this chart from basic price theory.

43
00:03:37.280 --> 00:03:41.800
It could lead to a higher interest rate at an increase in quantity savings.

44
00:03:41.800 --> 00:03:49.720
So the proportion between consumption investment is no longer systematically determines the

45
00:03:49.720 --> 00:03:57.400
and the rate of interest in that this, in fact, this change can lead to very different reconfigurations

46
00:03:57.400 --> 00:03:59.400
in the production structure.

47
00:03:59.400 --> 00:04:04.920
Okay, so just elaboration on the demand for present goods.

48
00:04:04.920 --> 00:04:13.920
So okay, all right, before I just like to say, so capitalists supply present money to both

49
00:04:13.920 --> 00:04:21.000
Both the original factors of production and prior capitalists selling their finished product.

50
00:04:21.000 --> 00:04:24.120
So they supply present goods in exchange for future goods.

51
00:04:24.120 --> 00:04:29.640
And original factors supply, they demand present goods, the money a capitalist can spend to

52
00:04:29.640 --> 00:04:33.680
them, and they supply future goods.

53
00:04:33.680 --> 00:04:36.220
And in this sense, the future goods is the future money.

54
00:04:36.220 --> 00:04:41.080
So it's the present, as I quote Rothbard, it is the present anticipation of a yield

55
00:04:41.080 --> 00:04:46.360
of Money and the Future from the sale of the final product.

56
00:04:46.360 --> 00:04:51.680
So for him, the future goods of capitalists supply, they obviously apply a working circulating

57
00:04:51.680 --> 00:04:59.920
capital but in terms of the interest rate, they supply a greater amount of future money.

58
00:04:59.920 --> 00:05:04.800
So the demand for present goods, it can be split in terms of the aggregate time market,

59
00:05:04.800 --> 00:05:10.600
as I said, the demand by the original factors of production and the demand by capitalists.

60
00:05:10.600 --> 00:05:17.840
And the demand by capitalists is a more precise way of describing the capitalist time market

61
00:05:17.840 --> 00:05:22.760
function would be they supply present goods and they demand, quote Rothbard, present goods

62
00:05:22.760 --> 00:05:26.480
that are more distantly future than the product he supplies.

63
00:05:26.480 --> 00:05:30.480
So although capitalists demand present goods in the future, it is dependent on the amount

64
00:05:30.480 --> 00:05:34.480
of present goods capitalists are willing to save beforehand.

65
00:05:34.480 --> 00:05:38.520
And capitalists cannot demand present goods when they sell a product unless they have

66
00:05:38.520 --> 00:05:41.160
have supplied present goods in an earlier time period.

67
00:05:41.160 --> 00:05:46.600
So this is why Rothbard, he says that a capitalist's demand for present goods is, quote, strictly

68
00:05:46.600 --> 00:05:52.160
derivative independent and a capitalist's activities are guided by his role as a supplier.

69
00:05:52.160 --> 00:05:56.120
So this would make sense because, you know, capitalists have to save first and they have

70
00:05:56.120 --> 00:06:00.240
to, in order for them to demand present goods when they sell their product, they've had

71
00:06:00.240 --> 00:06:04.020
to have saved money beforehand in order to make that product.

72
00:06:04.020 --> 00:06:12.220
So as Rothbard says, if we cross that out, you say, okay, it's derived.

73
00:06:12.220 --> 00:06:17.720
And then we go as Rothbard describes the original factor demand, he says, quote, the pure demanders

74
00:06:17.720 --> 00:06:21.780
of present goods on the time market are the various groups of laborers and landowners,

75
00:06:21.780 --> 00:06:25.460
the sellers of the services of original productive factors.

76
00:06:25.460 --> 00:06:32.620
So for him, it is the independent demand or the pure demand for present goods.

77
00:06:32.620 --> 00:06:38.820
So it is also important to note that capital earns only a gross, not a net rent.

78
00:06:38.820 --> 00:06:45.380
So the capitalists, they earn only interest and all capital goods, as Rothbard says, they

79
00:06:45.380 --> 00:06:51.160
are stored up labor, land and time and capital is not an independent productive factor like

80
00:06:51.160 --> 00:06:53.140
land and labor.

81
00:06:53.140 --> 00:06:59.940
So capital goods are no interest return, no pure return in their discounted marginal value

82
00:06:59.940 --> 00:07:03.780
Products can be traced back to the original factors and interest.

83
00:07:03.780 --> 00:07:09.540
So as I was saying earlier about the future goods, the original factors supply and a production,

84
00:07:09.540 --> 00:07:14.340
the future money, this is based off of their discounted marginal value product.

85
00:07:14.340 --> 00:07:22.300
So according to the law of imputation, this is that what consumers are willing to spend,

86
00:07:22.300 --> 00:07:27.300
so the consumption, prices determines cost and that what consumers are willing to spend

87
00:07:27.300 --> 00:07:32.180
in the economy that it radiates and percolates throughout the economy and that determines

88
00:07:32.180 --> 00:07:41.180
the very, it determines the discounted marginal value products or the marginal value products

89
00:07:41.180 --> 00:07:43.980
of factors of production.

90
00:07:43.980 --> 00:07:48.260
So at each stage the future money that the factors supply in the time market or their

91
00:07:48.260 --> 00:07:53.820
isolable discount marginal value product is strictly limited by the amount consumers

92
00:07:53.820 --> 00:07:57.340
are willing to pay for an end product of a production process.

93
00:07:57.340 --> 00:08:02.900
So we would think that this makes sense that, you know, as we know that, you know, cost

94
00:08:02.900 --> 00:08:09.500
does not influence price and that price determines, in fact, determines cost.

95
00:08:09.500 --> 00:08:13.380
This is the Austrian analysis of value.

96
00:08:13.380 --> 00:08:19.060
So we, so since capital orange is only a gross, not a net rent, canceling these out leaves

97
00:08:19.060 --> 00:08:23.300
the net supply of future goods.

98
00:08:23.300 --> 00:08:33.400
And this net supply of future goods in the evenly rotating economy, this abstract equilibrium

99
00:08:33.400 --> 00:08:38.580
situation that allows Austrians to deduce laws is equal to interest income, which is

100
00:08:38.580 --> 00:08:42.820
the net income that capitalists earn, and original factor income, which is what the

101
00:08:42.820 --> 00:08:46.220
landowners and the laborers earn.

102
00:08:46.220 --> 00:08:51.180
And this is equal in the equilibrium situation, this is equal to consumption.

103
00:08:51.180 --> 00:08:55.680
And the main point I try and argue is that consumption limits the pure demand for present

104
00:08:55.680 --> 00:08:56.840
goods.

105
00:08:56.840 --> 00:09:02.380
And to quote Rothbard, he says, it is, quote, overall, it is consumption that provides the

106
00:09:02.380 --> 00:09:08.460
net income in the equilibrium situation and is the, quote, he says, fund out of which

107
00:09:08.460 --> 00:09:13.340
money prices and net incomes are paid to the original factors.

108
00:09:13.340 --> 00:09:19.140
So consumption provides the fund, you know, the fund from, for which net income is paid

109
00:09:19.140 --> 00:09:23.300
out of and only consumption can change the independent demand for present goods.

110
00:09:23.300 --> 00:09:32.340
This is not to say that capitalists certainly save money and it's not to say that consumption

111
00:09:32.340 --> 00:09:37.180
fuels the economy and that savings are needed, but this is saying that the amount that consumers

112
00:09:37.180 --> 00:09:48.300
spend in an economy, this determines the discounted marginal value products and that this in fact

113
00:09:48.300 --> 00:09:53.940
and the, you know, capitalists will only spend, you know, a certain amount on original factors

114
00:09:53.940 --> 00:09:57.060
based on what they expect to earn from them, okay.

115
00:09:57.060 --> 00:10:05.640
So all right, and what I'm trying to, so exchange demand for money is different than the demand

116
00:10:05.640 --> 00:10:07.360
for present goods on the time market.

117
00:10:07.360 --> 00:10:13.340
So a original laborer, he can, if he tries to do, if he wants to work more, he can increase

118
00:10:13.340 --> 00:10:14.340
is the way to make money.

119
00:10:14.340 --> 00:10:19.340
So, the idea is that if you're trying to increase the supply of labor and you try and get more

120
00:10:19.340 --> 00:10:23.980
job, more hours, or even if we could say if there's a huge influx in immigration, which

121
00:10:23.980 --> 00:10:28.660
is an example in what Holzman provides, just the increase in the labor supply, that this

122
00:10:28.660 --> 00:10:32.700
will increase the demand for present goods on the time market.

123
00:10:32.700 --> 00:10:37.300
But unless consumption has changed, the aggregate amount of consumption has changed, if there's,

124
00:10:37.300 --> 00:10:41.300
we just sort of as a thought experiment, we imagine that the labor supply has increased,

125
00:10:41.300 --> 00:10:47.420
is doubled overnight, and if consumption has to change in the relative spending patterns,

126
00:10:47.420 --> 00:10:50.740
all that's going to happen is wages are just going to fall off a cliff.

127
00:10:50.740 --> 00:10:57.460
It's not as if original factors are going to be able to obtain a greater amount of the

128
00:10:57.460 --> 00:11:03.700
savings and push the interest rate up, because if we have this same, what I was explaining

129
00:11:03.700 --> 00:11:08.140
earlier, just with numbers, if the demand for present goods increases, it's going to

130
00:11:08.140 --> 00:11:12.460
And since there's going to be a higher interest rate and an increase in the quantity of present

131
00:11:12.460 --> 00:11:15.620
goods supplied, and since there's going to be a higher interest rate, there's going to

132
00:11:15.620 --> 00:11:17.780
be a higher amount of future goods.

133
00:11:17.780 --> 00:11:22.100
But if we're assuming that consumption has an increase, then the amount of future goods

134
00:11:22.100 --> 00:11:25.400
the original factors have supplied can't increase.

135
00:11:25.400 --> 00:11:31.820
So in reality, you can only have a diagram that looks like this if the interest rate

136
00:11:31.820 --> 00:11:37.820
in fact has, if consumption has in fact increased on the original factor time market.

137
00:11:37.820 --> 00:11:50.820
So, okay, all right, so I won't go, don't need to go into the entire step by step here,

138
00:11:50.820 --> 00:11:54.820
but just, I know this was explained, criticized a little earlier.

139
00:11:54.820 --> 00:12:00.820
I'm just using the evenly rotating economy as a given round of economic activity

140
00:12:00.820 --> 00:12:07.060
is an abstract concept, especially with these production stages.

141
00:12:07.060 --> 00:12:12.820
So if we look at the typical diagram Rothbard had, as sort of what I explained earlier with

142
00:12:12.820 --> 00:12:20.300
the net income fund, the total amount of income can be broken down into gross income and gross

143
00:12:20.300 --> 00:12:21.300
expenditures.

144
00:12:21.300 --> 00:12:29.380
And then this goes from the income from capitalist save, the income that is from consumption,

145
00:12:29.380 --> 00:12:33.960
And this is equal to total gross consumption plus total gross investment.

146
00:12:33.960 --> 00:12:38.980
And overall, this is capitalist, the interest income from saving plus the original factor

147
00:12:38.980 --> 00:12:41.700
income from saving.

148
00:12:41.700 --> 00:12:45.300
And there's this name, I just have the pure capital fund.

149
00:12:45.300 --> 00:12:48.520
It has nothing to do with Frank Knight.

150
00:12:48.520 --> 00:12:55.920
It's just a name for the gross volume of expenditures that does not go either to the original factors

151
00:12:55.920 --> 00:12:57.360
or interest income.

152
00:12:57.360 --> 00:13:07.360
It's not meant to endorse a perpetual source of capital without saving, and in an evenly rotating economy, all net income, all income can be traced back to original factor and interest income.

153
00:13:07.360 --> 00:13:20.360
But this is just looking at the aggregate amount of the, you know, the helicopter view of expenditures, and that this almost sort of the pure capital fund can give an idea of how much is spent on, quote, capital goods.

154
00:13:20.360 --> 00:13:29.080
So, all right, so basically the red bars are underlined are, you know, that is the total

155
00:13:29.080 --> 00:13:33.020
gross consumption and the blue bars are total gross investment.

156
00:13:33.020 --> 00:13:36.080
So we will see what happens.

157
00:13:36.080 --> 00:13:42.780
Okay, so this is the, okay, this is the aggregate time market graphs.

158
00:13:42.780 --> 00:13:49.720
So sort of what I was saying earlier, you have the time market overall to the very left.

159
00:13:49.720 --> 00:13:55.880
Capitalist, the original factors, it's the pure demand for the time, it's the pure demand

160
00:13:55.880 --> 00:14:02.080
for our present goods, and we have in the middle the derived demand by capitalists,

161
00:14:02.080 --> 00:14:06.280
and then you add those two together and you get the total gross saving, total gross investment.

162
00:14:06.280 --> 00:14:11.840
Again, these aren't separate markets, you know, these are, it's really just a very abstract

163
00:14:11.840 --> 00:14:16.000
tool that it's not going to say, you know, the original factors are complete, you know,

164
00:14:16.000 --> 00:14:19.680
in this one market and then, you know, capital goods is completely separated.

165
00:14:19.680 --> 00:14:24.680
This is only just sort of splitting apart the, you know, as we always shown, the supply of

166
00:14:24.680 --> 00:14:28.760
present good, the total supply of present goods and the total demand for present goods.

167
00:14:28.760 --> 00:14:35.020
And I know, you know, I didn't say this earlier, this isn't including the other important pure

168
00:14:35.020 --> 00:14:39.880
demand for present goods, which is consumer loans, but that's not fundamental to an economy.

169
00:14:39.880 --> 00:14:40.880
Okay.

170
00:14:40.880 --> 00:14:44.220
And so I'm not analyzing that.

171
00:14:44.220 --> 00:14:49.820
So okay, so we have a decrease in time preference, and so with this, this is, in fact, using

172
00:14:49.820 --> 00:14:55.400
this analysis of the demand for present goods limited by consumption, it leads to the same

173
00:14:55.400 --> 00:15:01.380
conclusion that traditional Austrian economists have explained, mainly the slide on the right,

174
00:15:01.380 --> 00:15:06.060
that the increase in supply of present goods along a constant demand curve, but in fact,

175
00:15:06.060 --> 00:15:12.780
I think it allows for a much richer sort of step-by-step process where, so we know from,

176
00:15:12.780 --> 00:15:19.840
So if consumption decreases, we have a typical decrease in consumption, an increase in investment.

177
00:15:19.840 --> 00:15:25.540
The supply of future goods, the net supply of future goods by original factors will decrease.

178
00:15:25.540 --> 00:15:30.200
So according to the law of marginal utility, a decrease in supply of the good foregone

179
00:15:30.200 --> 00:15:35.260
on a demand schedule increases the relative rankings of the good and decreasing the demand

180
00:15:35.260 --> 00:15:36.260
curve.

181
00:15:36.260 --> 00:15:41.060
So the demand curve to the very right, I mean the very left, excuse me, shifts to the left.

182
00:15:41.060 --> 00:15:47.900
So this is the decrease in consumption and you have the increase in supply because interest

183
00:15:47.900 --> 00:15:54.840
income is falling and there's many ways to do this, I unfortunately don't have time,

184
00:15:54.840 --> 00:16:02.020
but as Rothbard says, original factors, their income, it could either increase, decrease

185
00:16:02.020 --> 00:16:03.020
or stay the same.

186
00:16:03.020 --> 00:16:07.060
And just to provide another quote from Rothbard, he says, but consumption has declined from

187
00:16:07.060 --> 00:16:11.940
from 100 ounces to 80 ounces, and it is consumption that provides the net income in the equilibrium

188
00:16:11.940 --> 00:16:13.020
situation.

189
00:16:13.020 --> 00:16:17.140
Net income, as it were, the, quote, fund out of which money, prices, and incomes are paid

190
00:16:17.140 --> 00:16:18.660
through original factors.

191
00:16:18.660 --> 00:16:19.940
And this fund has declined.

192
00:16:19.940 --> 00:16:22.580
So this is building on the quote I said earlier.

193
00:16:22.580 --> 00:16:29.260
And in the graph in the middle, we have the derived demand by capitalists, capital goods.

194
00:16:29.260 --> 00:16:33.240
And as I was explaining earlier, since the demand for present goods by capitalists is

195
00:16:33.240 --> 00:16:38.280
is limited by capitalist saving. When there's an increase, an absolute increase in saving,

196
00:16:38.280 --> 00:16:42.800
it's going to push the demand for present goods up. However, the supply of present goods

197
00:16:42.800 --> 00:16:48.360
is going to outstrip that because you're going to have an absolute increase in investment

198
00:16:48.360 --> 00:16:52.480
spending and you're also going to have, capitalists are going to have to supply less money to

199
00:16:52.480 --> 00:16:58.680
this net income fund since that income fund, you know, to the original factors has declined.

200
00:16:58.680 --> 00:17:05.640
So the supply of present goods in that market will strip the increase in demand and it's

201
00:17:05.640 --> 00:17:07.680
going to lead to a lower interest rate.

202
00:17:07.680 --> 00:17:12.360
So in fact, the demand for present goods remains relatively constant in the aggregate, but

203
00:17:12.360 --> 00:17:18.960
as you've seen, there's been a huge revolution, so to speak, in the actual demand because

204
00:17:18.960 --> 00:17:24.120
less is demanded by the original factors and more is demanded by the derived demand by

205
00:17:24.120 --> 00:17:25.640
capitalists.

206
00:17:25.640 --> 00:17:31.280
And I think that Rothbard presents a similar analysis by stating quote, one question that

207
00:17:31.280 --> 00:17:36.600
immediately presents itself is, how can the prices of factors I'm adding in brackets and

208
00:17:36.600 --> 00:17:41.400
the net income fund, you know, in bracket, decline while the gross income remains the

209
00:17:41.400 --> 00:17:44.920
same and gross investment even increases?

210
00:17:44.920 --> 00:17:49.960
The answer is that the larger gross investment fund is absorbed, so to speak, by the higher

211
00:17:49.960 --> 00:17:55.520
prices of high order capital goods in brackets and the gross income of capitalists in the

212
00:17:55.520 --> 00:17:59.520
and the Consequent New Stages of Turnover of These Goods.

213
00:17:59.520 --> 00:18:15.520
I use this because the demand for present goods allows explicit graphical analysis and even, I think, some important linguistic analysis of how growth could change with a change in the money relations.

214
00:18:15.520 --> 00:18:21.060
only consumption decreases and absolute amount of saving stays the same, or if the consumption

215
00:18:21.060 --> 00:18:25.200
and saving decreases at the same proportion, which means interest rate, the interest rate

216
00:18:25.200 --> 00:18:26.200
stays the same.

217
00:18:26.200 --> 00:18:32.240
I go into this later in the paper, unfortunately I don't have time, but I think it's nice

218
00:18:32.240 --> 00:18:37.160
to conclude that it is imperative to reiterate that ultimately changes in the production

219
00:18:37.160 --> 00:18:42.020
structure are systematically determined by consumer and producer spending.

220
00:18:42.020 --> 00:18:48.300
Changes in producer spending exert their influence through an increase in savings, while changes

221
00:18:48.300 --> 00:18:53.060
in consumer spending modify the net income fund and provide or take out an additional

222
00:18:53.060 --> 00:18:57.780
source of monetary savings that could be capitalized in the production structure.

223
00:18:57.780 --> 00:19:02.700
The independent demand for present goods, as portrayed by Hulsman, exerts no exogenous

224
00:19:02.700 --> 00:19:05.420
influence on the structure of production.

225
00:19:05.420 --> 00:19:09.900
The basic elements of time preference that are deduced from Crusoeconomics, such as the

226
00:19:09.900 --> 00:19:14.980
The rate of time preference and the relative allocation of resources between present and

227
00:19:14.980 --> 00:19:21.180
future consumption can be extended to the aggregate as the sole determinants of changes

228
00:19:21.180 --> 00:19:24.620
in the production structure through capital-based macroeconomics.

229
00:19:24.620 --> 00:19:25.820
And thank you very much.