WEBVTT NOTE XVIII. Action in the Passing of Time (continued) 1 00:00:00.000 --> 00:00:07.800 4. Period of Production, Waiting Time and Period of Provision 2 00:00:07.800 --> 00:00:12.880 If one were to measure the length of the period of production spent in the fabrication of 3 00:00:12.880 --> 00:00:18.540 the various goods available now, one would have to trace back their history to the point 4 00:00:18.540 --> 00:00:25.200 at which the first expenditure of original factors of production took place. One would 5 00:00:25.200 --> 00:00:31.440 would have to establish when natural resources and labor were first employed for processes 6 00:00:31.440 --> 00:00:37.760 which, besides contributing to the production of other goods, also contributed ultimately 7 00:00:37.760 --> 00:00:41.320 to the production of the good in question. 8 00:00:41.320 --> 00:00:46.040 The solution of this problem would require the solubility of the problem of physical 9 00:00:46.040 --> 00:00:48.040 imputation. 10 00:00:48.040 --> 00:00:54.880 It would be necessary to establish in quantitative terms to what extent tools, raw materials 11 00:00:54.880 --> 00:01:01.300 and Labor, which directly or indirectly were used in the production of the good concerned 12 00:01:01.300 --> 00:01:04.080 contributed to the result. 13 00:01:04.080 --> 00:01:09.680 One would have to go back in these inquiries to the very origins of capital accumulation 14 00:01:09.680 --> 00:01:15.840 by saving on the part of people who previously lived from hand to mouth. 15 00:01:15.840 --> 00:01:21.160 It is not only practical difficulties which prevent such historical studies. 16 00:01:21.160 --> 00:01:27.480 The very insolubility of the problem of physical imputation stops us at the first step of such 17 00:01:27.480 --> 00:01:29.560 ventures. 18 00:01:29.560 --> 00:01:35.960 Neither acting man himself nor economic theory needs a measurement of the time expended in 19 00:01:35.960 --> 00:01:40.360 the past for the production of goods available today. 20 00:01:40.360 --> 00:01:44.920 They would have no use for such data even if they knew them. 21 00:01:44.920 --> 00:01:50.520 Acting man is faced with the problem of how to take best advantage of the available supply 22 00:01:50.520 --> 00:01:51.900 of Goods. 23 00:01:51.900 --> 00:01:57.680 He makes his choices in employing each part of this supply in such a way as to satisfy 24 00:01:57.680 --> 00:02:02.360 the most urgent of the not yet satisfied wants. 25 00:02:02.360 --> 00:02:07.680 For the achievement of this task he must know the length of the waiting time which separates 26 00:02:07.680 --> 00:02:13.800 him from the attainment of the various goals among which he has to choose. 27 00:02:13.800 --> 00:02:20.240 As has been pointed out and must be emphasized again, there is no need for him to look backward 28 00:02:20.240 --> 00:02:24.800 to the History of the Various Capital Goods Available. 29 00:02:24.800 --> 00:02:32.720 Acting Man Counts Waiting Time and the Period of Production Always from Today On. 30 00:02:32.720 --> 00:02:38.620 In the same way in which there is no need to know whether more or less labor and material 31 00:02:38.620 --> 00:02:44.840 factors of production have been expended in the production of the products available now, 32 00:02:44.840 --> 00:02:50.980 There is no need to know whether their production has absorbed more or less time. 33 00:02:50.980 --> 00:02:55.880 Things are valued exclusively from the point of view of the services they can render for 34 00:02:55.880 --> 00:02:59.200 the satisfaction of future wants. 35 00:02:59.200 --> 00:03:06.240 The actual sacrifices made and the time absorbed in their production are beside the point. 36 00:03:06.240 --> 00:03:09.920 These things belong to the dead past. 37 00:03:09.920 --> 00:03:16.400 It is necessary to realize that all economic categories are related to human action and 38 00:03:16.400 --> 00:03:22.840 have nothing at all to do directly with the physical properties of things. 39 00:03:22.840 --> 00:03:25.840 Economics is not about goods and services. 40 00:03:25.840 --> 00:03:29.560 It is about human choice and action. 41 00:03:29.560 --> 00:03:35.800 The praxeological concept of time is not the concept of physics or biology. 42 00:03:35.800 --> 00:03:42.680 It refers to the sooner or the later as operative in the actor's judgments of value. 43 00:03:42.680 --> 00:03:48.320 The distinction between capital goods and consumers' goods is not a rigid distinction 44 00:03:48.320 --> 00:03:53.840 based on the physical and physiological properties of the goods concerned. 45 00:03:53.840 --> 00:03:59.680 It depends on the position of the actors and the choices they have to make. 46 00:03:59.680 --> 00:04:05.200 The same goods can be looked upon as capital goods and as consumers' goods. 47 00:04:05.200 --> 00:04:11.040 A supply of goods ready for immediate enjoyment is capital goods from the point of view of 48 00:04:11.040 --> 00:04:16.960 a man who looks upon it as a means for his own sustenance and that of hired workers during 49 00:04:16.960 --> 00:04:19.640 a waiting time. 50 00:04:19.640 --> 00:04:25.040 An increase in the quantity of capital goods available is a necessary condition for the 51 00:04:25.040 --> 00:04:31.060 adoption of processes in which the period of production, and therefore waiting time, 52 00:04:31.060 --> 00:04:32.660 are longer. 53 00:04:32.660 --> 00:04:39.060 If one wants to attain ends which are temporally farther away, one must resort to a longer 54 00:04:39.060 --> 00:04:45.460 period of production, because it is impossible to attain the end sought in a shorter period 55 00:04:45.460 --> 00:04:47.420 of production. 56 00:04:47.420 --> 00:04:52.600 If one wants to resort to methods of production with which the quantity of output is higher 57 00:04:52.600 --> 00:04:59.240 per unit of input expended, one must lengthen the period of production. 58 00:04:59.240 --> 00:05:05.560 For the processes with which output is smaller per unit of input have been chosen only on 59 00:05:05.560 --> 00:05:12.120 account of the shorter period of production they require, but, on the other hand, not 60 00:05:12.120 --> 00:05:18.380 every employment chosen for the utilization of capital goods accumulated by means of additional 61 00:05:18.380 --> 00:05:24.920 saving requires a process of production in which the period of production from today 62 00:05:24.920 --> 00:05:33.260 on to the maturing of the product is longer than with all processes already adopted previously. 63 00:05:33.260 --> 00:05:39.540 It may be that people, having satisfied their more urgent needs, now want goods which can 64 00:05:39.540 --> 00:05:43.500 be produced within a comparatively short period. 65 00:05:43.500 --> 00:05:49.460 The reason why these goods have not been produced previously was not that the period of production 66 00:05:49.460 --> 00:06:06.260 If one chooses to assert that every increase in the supply of capital goods available results 67 00:06:06.260 --> 00:06:12.380 in a lengthening of the period of production and of waiting time, one reasons in the following 68 00:06:12.380 --> 00:06:19.860 Way. If A are the goods already previously produced, and B the goods produced in the 69 00:06:19.860 --> 00:06:26.320 new processes started with the aid of the increase in capital goods, it is obvious that 70 00:06:26.320 --> 00:06:33.900 people had to wait longer for A and B than they had to wait for A alone. In order to 71 00:06:33.900 --> 00:06:40.300 produce A and B, it was not only necessary to acquire the capital goods required for 72 00:06:40.300 --> 00:07:07.060 The Treatment of the Capital Problem customary with those economists who are opposed to the 73 00:07:07.060 --> 00:07:18.060 The so-called Austrian view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge. 74 00:07:18.060 --> 00:07:26.060 The Austrian economists, on the other hand, show that it is the supply of capital goods available at each moment 75 00:07:26.060 --> 00:07:33.060 that determines which of the many known technological methods of production will be employed. 76 00:07:33.060 --> 00:07:38.500 The correctness of the Austrian point of view can easily be demonstrated by a scrutiny of 77 00:07:38.500 --> 00:07:42.300 the problem of scarcity of capital. 78 00:07:42.300 --> 00:07:47.940 Let us look at the condition of a country suffering from scarcity of capital. 79 00:07:47.940 --> 00:07:53.420 Take for instance the state of affairs in Romania about 1860. 80 00:07:53.420 --> 00:07:57.700 What was lacking was certainly not technological knowledge. 81 00:07:57.700 --> 00:08:03.100 There was no secrecy concerning the technological methods practiced by the advanced nations 82 00:08:03.100 --> 00:08:04.620 of the West. 83 00:08:04.620 --> 00:08:09.580 They were described in innumerable books and taught at many schools. 84 00:08:09.580 --> 00:08:14.940 The elite of Romanian youth had received full information about them at the technological 85 00:08:14.940 --> 00:08:19.460 universities of Austria, Switzerland and France. 86 00:08:19.460 --> 00:08:25.400 Hundreds of foreign experts were ready to apply their knowledge and skill in Romania. 87 00:08:25.400 --> 00:08:31.640 What was wanting was the capital goods needed for a transformation of the backward Romanian 88 00:08:31.640 --> 00:08:39.180 apparatus of production, transportation and communication according to Western patterns. 89 00:08:39.180 --> 00:08:44.860 If the aid granted to the Romanians on the part of the advanced foreign nations had consisted 90 00:08:44.860 --> 00:08:50.580 merely in providing them with technological knowledge, they would have had to realize 91 00:08:50.580 --> 00:08:56.520 says that it would take a very long time until they caught up with the West. 92 00:08:56.520 --> 00:09:01.940 The first thing for them to have done would have been to save in order to make workers 93 00:09:01.940 --> 00:09:08.360 and material factors of production available for the performance of more time-consuming 94 00:09:08.360 --> 00:09:09.940 processes. 95 00:09:09.940 --> 00:09:15.120 Only then could they successively produce the tools required for the construction of 96 00:09:15.120 --> 00:09:20.840 of those plants, which, in the further course, were to produce the equipment needed for the 97 00:09:20.840 --> 00:09:28.500 construction and operation of modern plants, farms, mines, railroads, telegraph lines, 98 00:09:28.500 --> 00:09:34.680 and buildings. Scores of decades would have passed until they had made up for the time 99 00:09:34.680 --> 00:09:41.420 lost. There would not have been any means of accelerating this process than by restricting 100 00:09:41.420 --> 00:09:48.220 in current consumption as far as physiologically possible for the intermediary period. 101 00:09:48.220 --> 00:09:52.220 However, things developed in a different way. 102 00:09:52.220 --> 00:09:58.700 The capitalist West lent to the backward countries the capital goods needed for an instantaneous 103 00:09:58.700 --> 00:10:03.620 transformation of a great part of their methods of production. 104 00:10:03.620 --> 00:10:09.500 It saved them time and made it possible for them to multiply very soon the productivity 105 00:10:09.500 --> 00:10:11.500 of their Labor. 106 00:10:11.500 --> 00:10:17.140 The effect for the Romanians was that they could immediately enjoy the advantages derived 107 00:10:17.140 --> 00:10:20.540 from the modern technological procedures. 108 00:10:20.540 --> 00:10:28.940 It was as if they had started at a much earlier date to save and to accumulate capital goods. 109 00:10:28.940 --> 00:10:34.380 Shortage of capital means that one is further away from the attainment of a goal sought 110 00:10:34.380 --> 00:10:39.300 than if one had started to aim at it at an earlier date. 111 00:10:39.300 --> 00:10:45.380 As one neglected to do this in the past, the intermediary products are wanting, although 112 00:10:45.380 --> 00:10:51.620 the nature-given factors from which they are to be produced are available. 113 00:10:51.620 --> 00:10:54.740 Capital shortage is dearth of time. 114 00:10:54.740 --> 00:10:59.980 It is the effect of the fact that one was late in beginning the march toward the aim 115 00:10:59.980 --> 00:11:01.680 concerned. 116 00:11:01.680 --> 00:11:07.580 It is impossible to describe the advantages derived from capital goods available and the 117 00:11:07.580 --> 00:11:13.300 The disadvantages resulting from the paucity of capital goods without resorting to the 118 00:11:13.300 --> 00:11:17.800 time element of sooner and later. 119 00:11:17.800 --> 00:11:24.140 To have capital goods at one's disposal is tantamount to being nearer to a goal aimed 120 00:11:24.140 --> 00:11:25.620 at. 121 00:11:25.620 --> 00:11:32.160 An increment in capital goods available makes it possible to attain temporally remotor ends 122 00:11:32.160 --> 00:11:35.580 without being forced to restrict consumption. 123 00:11:35.580 --> 00:11:41.340 A loss in capital goods, on the other hand, makes it necessary either to abstain from 124 00:11:41.340 --> 00:11:48.960 striving after certain goals which one could aim at before, or to restrict consumption. 125 00:11:48.960 --> 00:11:55.380 To have capital goods means, other things being equal, a temporal gain. 126 00:11:55.380 --> 00:12:01.500 As against those who lack capital goods, the capitalist, under the given state of technological 127 00:12:01.500 --> 00:12:08.020 College is in a position to reach a definite goal sooner without restricting consumption 128 00:12:08.020 --> 00:12:15.200 and without increasing the input of labor and nature-given material factors of production. 129 00:12:15.200 --> 00:12:18.860 His head start is in time. 130 00:12:18.860 --> 00:12:25.140 Arrival endowed with a smaller supply of capital goods can catch up only by restricting his 131 00:12:25.140 --> 00:12:27.240 consumption. 132 00:12:27.240 --> 00:12:32.120 The start which the peoples of the West have gained over the other peoples consists in 133 00:12:32.120 --> 00:12:37.800 the fact that they have long since created the political and institutional conditions 134 00:12:37.800 --> 00:12:46.440 required for a smooth and by and large uninterrupted progress of the process of larger scale saving, 135 00:12:46.440 --> 00:12:49.600 capital accumulation and investment. 136 00:12:49.600 --> 00:12:56.040 Thus, by the middle of the 19th century, they had already attained a state of well-being 137 00:12:56.040 --> 00:13:02.380 which far surpass that of poorer races and nations, less successful in substituting the 138 00:13:02.380 --> 00:13:08.680 ideas of acquisitive capitalism for those of predatory militarism. 139 00:13:08.680 --> 00:13:14.340 Left alone and unaided by foreign capital, these backward peoples would have needed much 140 00:13:14.340 --> 00:13:21.860 more time to improve their methods of production, transportation and communication. 141 00:13:21.860 --> 00:13:27.500 It is impossible to understand the course of world affairs and the development of the relations 142 00:13:27.500 --> 00:13:33.460 between West and East in the last centuries, if one does not comprehend the importance 143 00:13:33.460 --> 00:13:37.540 of this large-scale transfer of capital. 144 00:13:37.540 --> 00:13:44.320 The West has given to the East not only technological and therapeutical knowledge, but also the 145 00:13:44.320 --> 00:13:50.800 capital goods needed for an immediate practical application of this knowledge. 146 00:13:50.800 --> 00:13:56.440 These nations of Eastern Europe, Asia and Africa have been able, thanks to the foreign 147 00:13:56.440 --> 00:14:02.800 capital imported, to reap the fruits of modern industry at an earlier date. 148 00:14:02.800 --> 00:14:07.960 They were, to some extent, relieved from the necessity of restricting their consumption 149 00:14:07.960 --> 00:14:12.960 in order to accumulate a sufficient stock of capital goods. 150 00:14:12.960 --> 00:14:19.060 This was the true nature of the alleged exploitation of the backward nations on the part of Western 151 00:14:19.060 --> 00:14:24.620 and Capitalism about which their nationalists and the Marxians lament. 152 00:14:24.620 --> 00:14:31.140 It was a fecundation of the economically backward nations by the wealth of the more advanced 153 00:14:31.140 --> 00:14:32.460 nations. 154 00:14:32.460 --> 00:14:35.220 The benefits derived were mutual. 155 00:14:35.220 --> 00:14:40.500 What impelled the capitalists of the West to embark upon foreign investment was the 156 00:14:40.500 --> 00:14:43.420 demand of the consumers. 157 00:14:43.420 --> 00:14:49.000 Consumers asked for goods which could not be produced at all at home, and for a cheapening 158 00:14:49.000 --> 00:14:56.000 of Money, The Theory of Money and State, The Theory of Money and State, The Theory of Money 159 00:15:19.000 --> 00:15:24.120 Catallactics but of history to deal with the consequences of the internationalization of 160 00:15:24.120 --> 00:15:30.680 the capital market, its working, and its final disintegration brought about by the expropriation 161 00:15:30.680 --> 00:15:35.480 policies adopted by the receiving countries. 162 00:15:35.480 --> 00:15:43.220 Catallactics has only to scrutinize the effects of a richer or poorer supply of capital goods. 163 00:15:43.220 --> 00:15:51.420 We compare the conditions of two isolated market systems, A and B. Both are equal in size and 164 00:15:51.420 --> 00:15:57.860 population figures, the state of technological knowledge, and in natural resources. 165 00:15:57.860 --> 00:16:04.260 They differ from one another only in the supply of capital goods, this supply being larger 166 00:16:04.260 --> 00:16:12.120 in A than in B. This enjoins that in A many processes of production are employed with 167 00:16:12.120 --> 00:16:18.920 with which the output is greater per unit of input than with those employed in B. 168 00:16:18.920 --> 00:16:25.080 In B, one cannot consider the adoption of these processes on account of the comparative 169 00:16:25.080 --> 00:16:28.120 scarcity of capital goods. 170 00:16:28.120 --> 00:16:32.840 Their adoption would require a restriction of consumption. 171 00:16:32.840 --> 00:16:39.160 In B, many manipulations are performed by manual labor, which in A are performed by 172 00:16:39.160 --> 00:16:41.840 labor-saving machines. 173 00:16:41.840 --> 00:16:49.800 In A, goods are produced with a longer durability. In B, one must abstain from producing them, 174 00:16:49.800 --> 00:16:55.200 although the lengthening of durability is obtained by a less than a proportionate increase 175 00:16:55.200 --> 00:17:02.680 in input. In A, the productivity of labor and, consequently, wage rates and the standard 176 00:17:02.680 --> 00:17:10.000 of living of the wage earners are higher than in B. 177 00:17:10.000 --> 00:17:17.240 of the period of provision beyond the expected duration of the actor's life. 178 00:17:17.240 --> 00:17:22.600 The judgments of value which determine the choice between satisfaction in nearer and 179 00:17:22.600 --> 00:17:30.920 in remoter periods of the future are expressive of present valuation and not of future valuation. 180 00:17:30.920 --> 00:17:36.760 They weigh the significance attached today to satisfaction in the nearer future against 181 00:17:36.760 --> 00:17:42.520 the significance attached today to satisfaction in the remoter future. 182 00:17:42.520 --> 00:17:50.400 The uneasiness which acting man wants to remove as far as possible is always present uneasiness. 183 00:17:50.400 --> 00:17:58.400 That is, uneasiness felt in the very moment of action and it always refers to future conditions. 184 00:17:58.400 --> 00:18:04.600 The actor is discontented today with the expected state of affairs in various periods of the 185 00:18:04.600 --> 00:18:10.080 of the Future, and tries to alter it through purposive conduct. 186 00:18:10.080 --> 00:18:15.680 If action is primarily directed toward the improvement of other people's conditions, 187 00:18:15.680 --> 00:18:22.100 and is therefore commonly called altruistic, the uneasiness the actor wants to remove is 188 00:18:22.100 --> 00:18:29.000 his own present dissatisfaction with the expected state of other people's affairs in various 189 00:18:29.000 --> 00:18:31.520 periods of the future. 190 00:18:31.520 --> 00:18:38.680 When taking care of other people, he aims at alleviating his own dissatisfaction. 191 00:18:38.680 --> 00:18:44.740 It is therefore not surprising that acting man often is intent upon prolonging the period 192 00:18:44.740 --> 00:18:51.220 of provision beyond the expected duration of his own life. 193 00:18:51.220 --> 00:18:55.620 Some Applications of the Time Preference Theory 194 00:18:55.620 --> 00:19:01.780 Every part of economics is open to intentional misrepresentation and misinterpretation on 195 00:19:01.780 --> 00:19:08.500 the part of people eager to excuse or to justify fallacious doctrines underlying their party 196 00:19:08.500 --> 00:19:10.380 programs. 197 00:19:10.380 --> 00:19:16.500 To prevent such misuse as far as possible, it seems expedient to add some explanatory 198 00:19:16.500 --> 00:19:21.520 remarks to the exposition of the time preference theory. 199 00:19:21.520 --> 00:19:26.840 There are schools of thought which flatly deny that men differ with regard to innate 200 00:19:26.840 --> 00:19:31.180 characteristics inherited from their ancestors. 201 00:19:31.180 --> 00:19:36.080 In the opinion of these authors, the only difference between the white men of Western 202 00:19:36.080 --> 00:19:42.680 civilization and Eskimos is that the latter are in arrears in their progress toward modern 203 00:19:42.680 --> 00:19:45.480 industrial civilization. 204 00:19:45.480 --> 00:19:51.380 This merely temporal difference of a few thousand years is insignificant when compared with 205 00:19:51.380 --> 00:19:56.700 the many hundreds of thousands of years which were absorbed by man's evolution from the 206 00:19:56.700 --> 00:20:03.580 simian state of his ape-like forebears to the conditions of present-day homo sapiens. 207 00:20:03.580 --> 00:20:09.620 It does not support the assumption that racial differences prevail between the various specimens 208 00:20:09.620 --> 00:20:12.660 of mankind. 209 00:20:12.660 --> 00:20:18.220 Praxeology and economics are foreign to the issues raised by this controversy, but they 210 00:20:18.220 --> 00:20:24.340 They must take precautionary measures, lest they become implicated by partisan spirit 211 00:20:24.340 --> 00:20:28.460 in this clash of antagonistic ideas. 212 00:20:28.460 --> 00:20:34.680 If those fanatically rejecting the teachings of modern genetics were not entirely ignorant 213 00:20:34.680 --> 00:20:41.680 of economics, they would certainly try to turn the time preference theory to their advantage. 214 00:20:41.680 --> 00:20:47.140 They would refer to the circumstance that the superiority of the Western nations consists 215 00:20:47.140 --> 00:20:53.740 was merely in their having started earlier in endeavors to save and to accumulate capital 216 00:20:53.740 --> 00:20:54.860 goods. 217 00:20:54.860 --> 00:21:00.420 They would explain this temporal difference by accidental factors, the better opportunity 218 00:21:00.420 --> 00:21:03.740 offered by environment. 219 00:21:03.740 --> 00:21:08.980 Against such possible misinterpretations, one must emphasize the fact that the temporal 220 00:21:08.980 --> 00:21:16.060 head start gained by the Western nations was conditioned by ideological factors which cannot 221 00:21:16.060 --> 00:21:20.980 be reduced simply to the operation of environment. 222 00:21:20.980 --> 00:21:27.720 What is called human civilization has up to now been a progress from cooperation by virtue 223 00:21:27.720 --> 00:21:34.380 of hegemonic bonds to cooperation by virtue of contractual bonds. 224 00:21:34.380 --> 00:21:40.220 But while many races and peoples were arrested at an early stage of this movement, others 225 00:21:40.220 --> 00:21:42.740 kept on advancing. 226 00:21:42.740 --> 00:21:47.940 The eminence of the Western nations consisted in the fact that they succeeded better in 227 00:21:47.940 --> 00:21:54.300 checking the spirit of predatory militarism than the rest of mankind, and that they thus 228 00:21:54.300 --> 00:22:02.180 brought forth the social institutions required for saving and investment on a broader scale. 229 00:22:02.180 --> 00:22:07.860 Even Marx did not contest the fact that private initiative and private ownership of the means 230 00:22:07.860 --> 00:22:14.060 of production were indispensable stages in the progress from primitive man's penury 231 00:22:14.060 --> 00:22:21.180 to the more satisfactory conditions of 19th century Western Europe and North America. 232 00:22:21.180 --> 00:22:27.380 What the East Indies, China, Japan and the Mohammedan countries lacked were institutions 233 00:22:27.380 --> 00:22:30.900 of safeguarding the individual's rights. 234 00:22:30.900 --> 00:22:38.460 The arbitrary administration of pashas, kadis, rajas, mandarins and daimeos was not conducive 235 00:22:38.460 --> 00:22:42.140 to large-scale accumulation of capital. 236 00:22:42.140 --> 00:22:49.240 The legal guarantees effectively protecting the individual against expropriation and confiscation 237 00:22:49.240 --> 00:22:56.820 were the foundations upon which the unprecedented economic progress of the West came into flower. 238 00:22:56.820 --> 00:23:03.580 These laws were not an outgrowth of chance, historical accidents and geographical environment. 239 00:23:03.580 --> 00:23:06.760 They were the product of reason. 240 00:23:06.760 --> 00:23:12.140 We do not know what course the history of Asia and Africa would have taken if these 241 00:23:12.140 --> 00:23:14.900 peoples had been left alone. 242 00:23:14.900 --> 00:23:20.820 What happened was that some of these peoples were subject to European rule, and others, 243 00:23:20.820 --> 00:23:27.700 China and Japan were forced by the display of naval power to open their frontiers. 244 00:23:27.700 --> 00:23:32.700 The achievements of Western industrialism came to them from abroad. 245 00:23:32.700 --> 00:23:37.700 They were ready to take advantage of the foreign capital lent to them and invested in their 246 00:23:37.700 --> 00:23:43.020 territories, but they were rather slow in the reception of the ideologies from which 247 00:23:43.020 --> 00:23:46.280 modern industrialism had sprung. 248 00:23:46.280 --> 00:23:51.640 Where assimilation to western ways of life is superficial. 249 00:23:51.640 --> 00:23:57.880 We are in the midst of a revolutionary process, which will very soon do away with all varieties 250 00:23:57.880 --> 00:24:00.060 of colonialism. 251 00:24:00.060 --> 00:24:05.460 This revolution is not limited to those countries which were subject to the rule of the British, 252 00:24:05.460 --> 00:24:07.940 the French and the Dutch. 253 00:24:07.940 --> 00:24:13.300 Even nations which, without any infringement of their political sovereignty, had profited 254 00:24:13.300 --> 00:24:21.100 from Foreign Capital are intent upon throwing off what they call the yoke of foreign capitalists. 255 00:24:21.100 --> 00:24:28.000 They are expropriating the foreigners by various devices, discriminatory taxation, repudiation 256 00:24:28.000 --> 00:24:34.280 of debts, undisguised confiscation, foreign exchange restrictions. 257 00:24:34.280 --> 00:24:40.240 We are on the eve of the complete disintegration of the international capital market. 258 00:24:40.240 --> 00:24:43.960 The economic consequences of this event are obvious. 259 00:24:43.960 --> 00:24:48.120 Its political repercussions are unpredictable. 260 00:24:48.120 --> 00:24:53.120 In order to appreciate the political consequences of the disintegration of the international 261 00:24:53.120 --> 00:25:00.060 capital market, it is necessary to remember what effects were brought about by the internationalization 262 00:25:00.060 --> 00:25:02.740 of the capital market. 263 00:25:02.740 --> 00:25:08.140 Under the conditions of the later 19th century, it did not matter whether or not a nation 264 00:25:08.140 --> 00:25:14.060 Man was prepared and equipped with the required capital in order to utilize adequately the 265 00:25:14.060 --> 00:25:17.260 natural resources of its territory. 266 00:25:17.260 --> 00:25:23.860 There was practically free access for everybody to every area's natural wealth. 267 00:25:23.860 --> 00:25:29.540 In searching for the most advantageous opportunities for investment, capitalists and promoters 268 00:25:29.540 --> 00:25:33.420 were not stopped by national borderlines. 269 00:25:33.420 --> 00:25:39.120 As far as investment for the best possible utilization of the known natural resources 270 00:25:39.120 --> 00:25:44.760 was concerned, the greater part of the earth's surface could be considered as integrated 271 00:25:44.760 --> 00:25:49.180 into a uniform, world-embracing market system. 272 00:25:49.180 --> 00:25:54.540 It is true that this result was attained in some areas, like the British and the Dutch 273 00:25:54.540 --> 00:26:01.220 East Indies and Malaya, only by colonial regimes, and that autochthonous governments 274 00:26:01.220 --> 00:26:10.220 The independence of these territories would probably not have created the institutional setting indispensable for the importation of capital. 275 00:26:10.220 --> 00:26:20.220 But Eastern and Southern Europe and the Western Hemisphere had of their own accord joined the community of the international capital market. 276 00:26:20.220 --> 00:26:30.220 The Marxians were intent upon indicting foreign loans and investments for the lust for war, conquest and colonial expansion. 277 00:26:30.220 --> 00:26:36.220 In fact, the internationalization of the capital market, together with free trade and the freedom 278 00:26:36.220 --> 00:26:43.480 of migration, was instrumental in removing the economic incentives to war and conquest. 279 00:26:43.480 --> 00:26:49.260 It no longer mattered for a man where the political boundaries of his country were drawn. 280 00:26:49.260 --> 00:26:53.460 The entrepreneur and the investor were not checked by them. 281 00:26:53.460 --> 00:26:59.320 Precisely those nations which, in the age preceding the First World War, were paramount 282 00:26:59.320 --> 00:27:07.200 in Foreign Lending and Investment were committed to the ideas of peace-loving, decadent liberalism. 283 00:27:07.200 --> 00:27:14.280 Of the foremost aggressor nations, Russia, Italy and Japan were not capital exporters. 284 00:27:14.280 --> 00:27:21.120 They themselves needed foreign capital for the development of their own natural resources. 285 00:27:21.120 --> 00:27:27.600 Germany's imperialistic adventures were not supported by its big business and finance. 286 00:27:27.600 --> 00:27:33.360 The disappearance of the international capital market alters conditions entirely. 287 00:27:33.360 --> 00:27:37.880 It abolishes the freedom of access to natural resources. 288 00:27:37.880 --> 00:27:43.240 If one of the socialist governments of the economically backward nations lacks the capital 289 00:27:43.240 --> 00:27:48.700 needed for the utilization of its natural resources, there will be no means to remedy 290 00:27:48.700 --> 00:27:50.840 this situation. 291 00:27:50.840 --> 00:27:55.440 If this system had been adopted a hundred years ago, it would have been impossible to 292 00:27:55.440 --> 00:28:02.440 to exploit the oil fields of Mexico, Venezuela and Iran, to establish the rubber plantations 293 00:28:02.460 --> 00:28:09.460 in Malaya, or to develop the banana production of Central America. It is illusory to assume 294 00:28:09.580 --> 00:28:15.360 that the advanced nations will acquiesce in such a state of affairs. They will resort 295 00:28:15.360 --> 00:28:22.000 to the only method which gives them access to badly needed raw materials. They will resort 296 00:28:22.000 --> 00:28:29.600 to Conquest. War is the alternative to freedom of foreign investment as realized by the international 297 00:28:29.600 --> 00:28:37.160 capital market. The inflow of foreign capital did not harm the receiving nations. It was 298 00:28:37.160 --> 00:28:43.480 European capital that accelerated considerably the marvelous economic evolution of the United 299 00:28:43.480 --> 00:28:50.160 States and the British dominions. Thanks to foreign capital, the countries of Latin America 300 00:28:50.160 --> 00:28:55.840 America and Asia are today equipped with facilities for production and transportation which they 301 00:28:55.840 --> 00:29:02.920 would have had to forego for a very long time if they had not received this aid. 302 00:29:02.920 --> 00:29:07.940 Real wage rates and farm yields are higher today in those areas than they would have 303 00:29:07.940 --> 00:29:11.140 been in the absence of foreign capital. 304 00:29:11.140 --> 00:29:17.320 The mere fact that almost all nations are vehemently asking today for American credits 305 00:29:17.320 --> 00:29:21.320 explodes the fables of the Marxians and the Nationalists. 306 00:29:21.320 --> 00:29:28.480 However, the mere lust for imported capital goods does not resuscitate the international 307 00:29:28.480 --> 00:29:31.080 capital market. 308 00:29:31.080 --> 00:29:36.540 Investment and lending abroad are only possible if the receiving nations are unconditionally 309 00:29:36.540 --> 00:29:43.280 and sincerely committed to the principle of private property, and do not plan to expropriate 310 00:29:43.280 --> 00:29:46.880 the foreign capitalists at a later date. 311 00:29:46.880 --> 00:29:54.320 It was such expropriations that destroyed the international capital market. 312 00:29:54.320 --> 00:29:59.000 Intergovernmental loans are no substitute for the functioning of an international capital 313 00:29:59.000 --> 00:30:00.000 market. 314 00:30:00.000 --> 00:30:05.280 If they are granted on business terms, they presuppose no less than private loans the 315 00:30:05.280 --> 00:30:08.640 full acknowledgement of property rights. 316 00:30:08.640 --> 00:30:14.180 If they are granted, as is usually the case, as virtual subsidies without any regard for 317 00:30:14.180 --> 00:30:21.300 For payment of principle and interest, they impose restrictions upon the debtor nation's sovereignty. 318 00:30:21.300 --> 00:30:29.620 In fact, such loans are, for the most part, the price paid for military assistance in coming wars. 319 00:30:29.620 --> 00:30:39.540 Such military considerations already played an important role in the years in which the European powers prepared the great wars of our age. 320 00:30:39.540 --> 00:30:45.620 The outstanding example was provided by the huge sums which the French capitalists, pressed 321 00:30:45.620 --> 00:30:51.180 hard by the government of the Third Republic, lent to Imperial Russia. 322 00:30:51.180 --> 00:30:57.180 The Tsars used the capital borrowed for armaments, not for an improvement of the Russian apparatus 323 00:30:57.180 --> 00:30:58.800 of production. 324 00:30:58.800 --> 00:31:00.640 They did not invest it. 325 00:31:00.640 --> 00:31:04.140 They consumed a great part of it. 326 00:31:04.140 --> 00:31:05.680 5. 327 00:31:05.680 --> 00:31:10.080 The Convertibility of Capital Goods 328 00:31:10.080 --> 00:31:15.620 Capital goods are intermediary steps on the way toward a definite goal. 329 00:31:15.620 --> 00:31:21.260 If in the course of the period of production the goal is changed, it is not always possible 330 00:31:21.260 --> 00:31:27.820 to use the intermediary products already available for the pursuit of the new goal. 331 00:31:27.820 --> 00:31:32.820 Some of the capital goods become absolutely useless, and all expenditure made in their 332 00:31:32.820 --> 00:31:44.820 and their production appears now as waste. Other capital goods can be utilized for the new project, but only after having been subjected to a process of adjustment. 333 00:31:44.820 --> 00:31:53.820 It would have been possible to spare the costs required by this alteration if one had, from the start, aimed at the new goal. 334 00:31:53.820 --> 00:32:00.940 A third group of capital goods can be employed for the new process without any alteration, 335 00:32:00.940 --> 00:32:05.540 but if it had been known at the time they were produced that they would be used in the 336 00:32:05.540 --> 00:32:12.340 new way, it would have been possible to manufacture at smaller cost other goods which could render 337 00:32:12.340 --> 00:32:14.180 the same service. 338 00:32:14.180 --> 00:32:20.180 Finally, there are also capital goods which can be employed for the new project just as 339 00:32:20.180 --> 00:32:23.340 well as for the original one. 340 00:32:23.340 --> 00:32:28.620 It would hardly be necessary to mention these obvious facts if it were not essential to 341 00:32:28.620 --> 00:32:31.940 refute popular misconceptions. 342 00:32:31.940 --> 00:32:39.980 There is no such thing as an abstract or ideal capital that exists apart from concrete capital 343 00:32:39.980 --> 00:32:41.220 goods. 344 00:32:41.220 --> 00:32:47.180 If we disregard the role cash-holding plays in the composition of capital, we will deal 345 00:32:47.180 --> 00:32:50.440 with this problem in one of the later sections. 346 00:32:50.440 --> 00:32:57.280 We must realize that capital is always embodied in definite capital goods, and is affected 347 00:32:57.280 --> 00:33:01.360 by everything that happens with regard to them. 348 00:33:01.360 --> 00:33:06.760 The value of an amount of capital is a derivative of the value of the capital goods in which 349 00:33:06.760 --> 00:33:08.800 it is embodied. 350 00:33:08.800 --> 00:33:13.840 The money equivalent of an amount of capital is the sum of the money equivalents of the 351 00:33:13.840 --> 00:33:21.240 and the aggregate of capital goods to which one refers in speaking of capital in the abstract. 352 00:33:21.240 --> 00:33:26.160 There is nothing which could be called free capital. 353 00:33:26.160 --> 00:33:30.780 Capital is always in the form of definite capital goods. 354 00:33:30.780 --> 00:33:36.960 These capital goods are better utilizable for some purposes, less utilizable for others 355 00:33:36.960 --> 00:33:41.720 and absolutely useless for still other purposes. 356 00:33:41.720 --> 00:33:48.660 Every unit of capital is therefore in some way or other fixed capital, that is, dedicated 357 00:33:48.660 --> 00:33:52.440 to definite processes of production. 358 00:33:52.440 --> 00:33:58.000 The businessman's distinction between fixed capital and circulating capital is a difference 359 00:33:58.000 --> 00:34:01.640 of degree, not of kind. 360 00:34:01.640 --> 00:34:07.100 Everything that is valid with regard to fixed capital is also valid, although to a smaller 361 00:34:07.100 --> 00:34:11.520 degree, with regard to circulating capital. 362 00:34:11.520 --> 00:34:18.200 All capital goods have a more or less specific character. Of course, with many of them, it 363 00:34:18.200 --> 00:34:25.440 is rather unlikely that a change in wants and plans will make them entirely useless. 364 00:34:25.440 --> 00:34:31.360 The more a definite process of production approaches its ultimate end, the closer becomes 365 00:34:31.360 --> 00:34:38.880 the tie between its intermediary products and the goal aimed at. Iron is less specific 366 00:34:38.880 --> 00:34:46.080 is more specific in character than iron tubes, and iron tubes less so than iron machine parts. 367 00:34:46.080 --> 00:34:51.480 The conversion of a process of production becomes, as a rule, the more difficult, the 368 00:34:51.480 --> 00:34:57.020 farther it has been pursued, and the nearer it has come to its termination, the turning 369 00:34:57.020 --> 00:35:00.120 out of consumers' goods. 370 00:35:00.120 --> 00:35:06.640 In looking at the process of capital accumulation from its very beginnings, one can easily recognize 371 00:35:06.640 --> 00:35:10.960 is that there cannot be such a thing as free capital. 372 00:35:10.960 --> 00:35:17.000 There is only capital embodied in goods of a more specific character and in goods of 373 00:35:17.000 --> 00:35:19.760 a less specific character. 374 00:35:19.760 --> 00:35:25.520 When the wants or the opinions concerning the methods of want satisfaction change, the 375 00:35:25.520 --> 00:35:30.080 value of the capital goods is altered accordingly. 376 00:35:30.080 --> 00:35:35.840 Additional capital goods can come into existence only through making consumption lag behind 377 00:35:35.840 --> 00:35:38.080 and Current Production. 378 00:35:38.080 --> 00:35:44.100 The additional capital is already in the very moment of its coming into existence embodied 379 00:35:44.100 --> 00:35:47.140 in concrete capital goods. 380 00:35:47.140 --> 00:35:54.020 These goods had to be produced before they could, as an excess of production over consumption, 381 00:35:54.020 --> 00:35:56.560 become capital goods. 382 00:35:56.560 --> 00:36:01.540 The role which the intraposition of money plays in the sequence of these events will 383 00:36:01.540 --> 00:36:03.840 be dealt with later. 384 00:36:03.840 --> 00:36:09.520 Here we need only recognize that even the capitalist whose whole capital consists in 385 00:36:09.520 --> 00:36:14.920 money and in claims to money does not own free capital. 386 00:36:14.920 --> 00:36:17.800 His funds are tied up with money. 387 00:36:17.800 --> 00:36:23.740 They are affected by changes in money's purchasing power, and as far as they are invested in 388 00:36:23.740 --> 00:36:30.660 claims to definite sums of money, also by changes in the debtor's solvency. 389 00:36:30.660 --> 00:36:36.220 It is expedient to substitute the notion of the convertibility of capital goods for the 390 00:36:36.220 --> 00:36:42.480 misleading distinction between fixed and free or circulating capital. 391 00:36:42.480 --> 00:36:48.580 The convertibility of capital goods is the opportunity offered to adjust their utilization 392 00:36:48.580 --> 00:36:52.960 to a change in the data of production. 393 00:36:52.960 --> 00:36:54.640 Convertibility is graduated. 394 00:36:54.640 --> 00:37:01.720 It is never perfect, that is, present with regard to all possible changes in the data. 395 00:37:01.720 --> 00:37:07.360 In the case of absolutely specific factors, it is entirely absent. 396 00:37:07.360 --> 00:37:13.600 As the conversion of capital goods from the employment originally planned to other employments 397 00:37:13.600 --> 00:37:19.920 becomes necessary through the emergence of unforeseen changes in the data, it is impossible 398 00:37:19.920 --> 00:37:25.680 to speak of convertibility in general without reference to changes in the data which have 399 00:37:25.680 --> 00:37:29.400 already occurred or are expected. 400 00:37:29.400 --> 00:37:36.480 A radical change in the data could make capital goods previously considered to be easily convertible, 401 00:37:36.480 --> 00:37:42.720 either not convertible at all, or convertible only with difficulty. 402 00:37:42.720 --> 00:37:48.500 It is obvious that in practice the problem of convertibility plays a greater role with 403 00:37:48.500 --> 00:37:54.840 With goods, the serviceability of which consists in rendering a series of services over a period 404 00:37:54.840 --> 00:38:01.880 of time, than with capital goods, the serviceability of which is exhausted by rendering only one 405 00:38:01.880 --> 00:38:05.480 service in the process of production. 406 00:38:05.480 --> 00:38:11.620 The unused capacity of plants and transportation facilities, and the scrapping of equipment 407 00:38:11.620 --> 00:38:18.220 which, according to the plans underlying its production, was designed for longer use, are 408 00:38:18.220 --> 00:38:23.640 are more momentous than the throwing away of fabrics and clothing out of fashion and 409 00:38:23.640 --> 00:38:26.820 of physically perishable goods. 410 00:38:26.820 --> 00:38:33.220 The problem of convertibility is peculiarly a problem of capital and capital goods only 411 00:38:33.220 --> 00:38:40.500 in so far as capital accounting makes it especially visible with regard to capital goods. 412 00:38:40.500 --> 00:38:46.180 Essentially, it is a phenomenon present also in the case of consumers' goods, which an 413 00:38:46.180 --> 00:39:07.500 Capitalists and Entrepreneurs in their capacity as owners of capital are never perfectly free. 414 00:39:07.500 --> 00:39:12.780 They are never on the eve of the first decision and action which will bind them. 415 00:39:12.780 --> 00:39:17.580 They are always already engaged in some way or other. 416 00:39:17.580 --> 00:39:24.940 Their funds are not outside the social process of production, but invested in definite lines. 417 00:39:24.940 --> 00:39:30.440 If they own cash, this is, according to the state of the market, either a sound or an 418 00:39:30.440 --> 00:39:32.480 unsound investment. 419 00:39:32.480 --> 00:39:35.940 But it is always an investment. 420 00:39:35.940 --> 00:39:41.780 They have either let slip the right moment for the purchase of concrete factors of production 421 00:39:41.780 --> 00:40:04.620 Capitalists and entrepreneurs, in expending money for the purchase of concrete factors 422 00:40:04.620 --> 00:40:10.460 of production, value the goods exclusively from the point of view of the anticipated 423 00:40:10.460 --> 00:40:17.420 Future State of the Market. They pay prices adjusted to future conditions, as they themselves 424 00:40:17.420 --> 00:40:24.120 appraise them today. Errors committed in the past in the production of capital goods available 425 00:40:24.120 --> 00:40:32.080 today do not burden the buyer. Their incidence falls entirely on the seller. In this sense, 426 00:40:32.080 --> 00:40:38.360 the entrepreneur who proceeds to buy against money capital goods for future production 427 00:40:38.360 --> 00:40:40.740 crosses out the past. 428 00:40:40.740 --> 00:40:46.460 His entrepreneurial ventures are not affected by changes which in the past occurred in the 429 00:40:46.460 --> 00:40:52.040 valuation and the prices of the factors of production he acquires. 430 00:40:52.040 --> 00:40:59.200 In this sense alone, one may say that the owner of ready cash owns liquid funds and 431 00:40:59.200 --> 00:40:59.960 is free.