WEBVTT NOTE Introduction to Economics: Part 2 1 00:00:00.000 --> 00:00:14.000 The definition, an entity consisting of inhomogeneous units, does that apply to the concept that if you said ice is a good, that means that all ice is a good. 2 00:00:14.000 --> 00:00:20.000 Any specific unit of ice, though, can be a different good from any other specific unit of ice. 3 00:00:20.000 --> 00:00:29.000 But it requires somebody desiring that unit before you can even determine that. 4 00:00:29.000 --> 00:00:34.000 It's only when it's in an unused or undesired state that they are in fact the same. 5 00:00:34.000 --> 00:00:39.000 But once somebody wants it, then they are different, can be different. 6 00:00:39.000 --> 00:01:08.000 Utility is part of the characteristic of the good, usefulness in a general sense, utility in whichever way you want to take it is part of the characteristic of the good, so it's not just the physical ingredients, so water for example is essential, cold water or lukewarm water is of the same good. 7 00:01:08.000 --> 00:01:15.000 Let's take another example. Let's say you need, I don't know, let's say you need, usually, 8 00:01:15.000 --> 00:01:19.000 we haven't gotten the law of diminishing marginal utility yet, but it's coming, it's teetering on it. 9 00:01:19.000 --> 00:01:25.000 Usually, if you have a supply of something, you get one more unit you value it less than the previous unit. 10 00:01:25.000 --> 00:01:29.000 So if you have four eggs, you value the fifth egg less than the fourth than the other four. 11 00:01:29.000 --> 00:01:34.000 However, supposing you need five eggs to bake a cake, you can't bake a cake without four eggs. 12 00:01:34.000 --> 00:01:39.000 If you get the fifth egg, you can make a cake. 13 00:01:39.000 --> 00:01:43.000 You can then value the fifth egg more than the previous four eggs and pay more for it. 14 00:01:43.000 --> 00:01:46.000 Because, by God, you're not going to get a cake. 15 00:01:46.000 --> 00:01:54.000 The fifth egg is higher utility and is more serviceable to you than the other four eggs. 16 00:01:54.000 --> 00:01:57.000 You know, each egg is the same, physically. 17 00:01:57.000 --> 00:02:02.000 The fifth egg can bring you a whole new thing, so you can value it more highly. 18 00:02:02.000 --> 00:02:15.000 You know that something isn't good if it consists of homogeneous humans. How do you know if it consists of homogeneous humans? What's the criterion? 19 00:02:15.000 --> 00:02:25.000 It seems to me that the ice cream and the ambiance do not constitute an entity that consists of homogeneous humans. 20 00:02:25.000 --> 00:02:28.000 Well, it does, but it varies. 21 00:02:28.000 --> 00:02:51.000 I understand what it means to say that this carton of milk, the milk of this carton, consists of homogeneous units, each molecule of milk is exactly like each other. 22 00:02:51.000 --> 00:03:06.000 But what are the units in the ice cream, in this ice cream parlor, and the ambiance and what not, which are like each other? I mean, it doesn't look as though ice cream is like ambiance. 23 00:03:06.000 --> 00:03:20.000 The question is, you've got an homogenous unit, she's saying only one unit and there's more than one unit in this. 24 00:03:20.000 --> 00:03:30.000 There's not only the ambiance, there's not only the ice cream, there's also the thickness of the carpet, the number of layers, and this sort of stuff. 25 00:03:30.000 --> 00:03:40.000 So, the second fortune of ice cream would be enough, so is it good in multiple goods sometimes? 26 00:03:40.000 --> 00:03:43.000 So, one good could be several individual goods as well? 27 00:03:43.000 --> 00:03:48.000 Isn't it an entirely subjective thing, what homogenous is? 28 00:03:48.000 --> 00:03:50.000 So, what's the criteria? 29 00:03:50.000 --> 00:03:57.000 What the criteria is, is if the people involved in whatever transaction is involved with the goods, 30 00:03:57.000 --> 00:04:03.500 If the people believe that they're homogeneous, well, they're homogeneous for that transaction. 31 00:04:03.500 --> 00:04:08.000 But somebody else observing it from outside may say that they're either are homogeneous 32 00:04:08.000 --> 00:04:13.000 and the people involved in the transaction don't see it that way, or conversely, they 33 00:04:13.000 --> 00:04:16.000 might say those are not homogeneous, the person involved. 34 00:04:16.000 --> 00:04:21.000 It's the people involved in the transaction, their view of the transaction that's important, 35 00:04:21.000 --> 00:04:24.000 their view of whether the goods are homogeneous or not. 36 00:04:24.000 --> 00:04:47.000 Not what any external observer sees. What you're trying to, what seems to be going on here is people are trying to use this definition as an objective definition, get an objective definition of things out of it, whether homogeneity in this sense is entirely a subjective thing from the people involved in the transaction. 37 00:04:47.000 --> 00:04:51.000 People never think in terms of this is a good with homogeneous units. 38 00:04:51.000 --> 00:04:52.000 True. 39 00:04:52.000 --> 00:04:57.000 But look, let's say you buy a portion of ice cream at Swensley's or whatever it is. 40 00:04:57.000 --> 00:04:59.000 You're not confronted with the question, should I buy a second portion? 41 00:04:59.000 --> 00:05:01.000 Well, the second portion is the same unit. 42 00:05:01.000 --> 00:05:04.000 Now, however, you presumably value a second portion less than the first portion, 43 00:05:04.000 --> 00:05:07.000 so whether full or whatever. 44 00:05:07.000 --> 00:05:09.000 Whatever the reason. 45 00:05:09.000 --> 00:05:12.000 So you have homogeneous units to that person. 46 00:05:12.000 --> 00:05:19.000 So it's two, when you compare two goods, it's then that you say they consist of homogenous units. 47 00:05:19.000 --> 00:05:25.000 I thought, looking at one good, I thought this was an analysis of one good, you know. 48 00:05:25.000 --> 00:05:27.000 This good consists of homogenous units. 49 00:05:27.000 --> 00:05:28.000 Right. 50 00:05:28.000 --> 00:05:32.000 Is that the Austrian definition of the word good? 51 00:05:32.000 --> 00:05:33.000 Yeah. 52 00:05:33.000 --> 00:05:35.000 Sorry, it's comparative, isn't it? 53 00:05:35.000 --> 00:05:38.000 You're comparing values, whether they're homogenous. 54 00:05:38.000 --> 00:05:39.000 Yeah, that's... 55 00:05:39.000 --> 00:05:49.000 It's not, you don't, you just describe one good as, that's just too much, that's not the next one. 56 00:05:49.000 --> 00:05:56.000 Svensons would say that ice cream, that ice cream parlor and everything is one, homogenous, one... 57 00:05:56.000 --> 00:06:02.000 Ice cream at, dash at Svensons would be a unit, okay? You have one portion, second portion, third portion. 58 00:06:02.000 --> 00:06:05.000 How much, how many portions do you buy, so you're profitable of this? 59 00:06:05.000 --> 00:06:08.000 There's only a third portion, let's say, you stay back with it. 60 00:06:08.000 --> 00:06:21.000 The World Point is just to know what you mean by the word goods when you're speaking and the fact that it's different than another economic system. 61 00:06:21.000 --> 00:06:30.000 That we know what you mean when you say the word goods and we understand that it's different than it is in their other system. 62 00:06:30.000 --> 00:06:32.760 Well, let's see, let's give another angle here. 63 00:06:32.760 --> 00:06:36.760 The famous Coase Theorem, now, which is very big 64 00:06:36.760 --> 00:06:39.080 in so-called public choice economics 65 00:06:39.080 --> 00:06:42.200 among alleged free-market economists. 66 00:06:42.200 --> 00:06:47.200 And theorem is, well, parts of it is that if, 67 00:06:51.320 --> 00:06:53.320 well, here's the actual example of Coase, 68 00:06:53.320 --> 00:06:55.560 the famous article written about 15 years ago. 69 00:06:57.160 --> 00:06:59.040 A railroad is chugging along, 70 00:06:59.040 --> 00:07:06.480 Locomotive is pouring out smoke, and smoke is lighting the orchards around the farms. 71 00:07:06.480 --> 00:07:13.400 And the question is, these are costs, in other words, which the railroad is imposing on the farms. 72 00:07:13.400 --> 00:07:20.960 And according to the coast people, the coastians, public choice people, it's important for somebody to pay the costs. 73 00:07:20.960 --> 00:07:24.080 In other words, this is so called externality or external cost. 74 00:07:24.080 --> 00:07:27.480 The railroad is imposing on the farmers. 75 00:07:27.480 --> 00:07:36.480 And they view it that it doesn't matter whether the railroad has to pay the farmers or the farmers have to pay the railroad to stop it. 76 00:07:36.480 --> 00:07:47.480 In other words, they don't care whether the farmer has property rights to be injured, or the railroad has property rights in the smoke and the farmers have to pay them off to stop the smoke. 77 00:07:47.480 --> 00:07:50.480 And that's, of course, because they don't have the theory of property rights. 78 00:07:50.480 --> 00:07:57.480 But the basic, the point I want to focus on now is, their view is, okay, let's say the railroad is supposed to compensate the former. 79 00:07:57.480 --> 00:08:04.480 The railroad then compensates at a market price. So you have an orchard which is destroyed by the smoke. 80 00:08:04.480 --> 00:08:10.480 If the market price is $10,000, the railroad pays you off $10,000 and that's it, it takes care of it. 81 00:08:10.480 --> 00:08:17.480 The Austrian viewer is that the value to the former might not be the $10,000, it might be higher, let's say. 82 00:08:17.480 --> 00:08:20.480 We might love that orchard. The orchard came down from his grandmother. 83 00:08:20.480 --> 00:08:22.480 The value of him, therefore, is a lot more. 84 00:08:22.480 --> 00:08:25.480 If they really compensate him, the railroad has to pay a lot more. 85 00:08:25.480 --> 00:08:27.480 It's like extroperating a little old greenhouse. 86 00:08:27.480 --> 00:08:28.480 Exactly. 87 00:08:28.480 --> 00:08:30.480 There's just no way to evaluate it. 88 00:08:30.480 --> 00:08:36.480 Exactly. And the interesting thing here is that the Austrian position is that you can't evaluate just on market price, 89 00:08:36.480 --> 00:08:38.480 because the valuations of each individual are different value. 90 00:08:38.480 --> 00:08:41.480 And the interesting thing is you can't know what the value is. 91 00:08:41.480 --> 00:08:45.480 Because a little old lady can say, I love this house so much I need a million dollars. 92 00:08:45.480 --> 00:08:48.480 There's no way that she might be a liar. There's no way to say she's a liar. 93 00:08:48.480 --> 00:08:51.480 It could be priceless. Right, exactly. 94 00:08:51.480 --> 00:08:54.480 There's no reason why it can't. So no money. 95 00:08:54.480 --> 00:08:58.480 This is not a voluntary market transaction. There's no way to figure out what this person is doing. 96 00:08:58.480 --> 00:09:02.480 The only way is to somehow go back in time, make your offers for the house in a free-market situation, 97 00:09:02.480 --> 00:09:05.480 and say what you would say and what you would take. 98 00:09:05.480 --> 00:09:08.480 But this whole theory of so-called welfare economics, 99 00:09:08.480 --> 00:09:12.480 where the government messes people up, confiscates their land and whatever, 100 00:09:12.480 --> 00:09:15.120 Compensation on the basis of what they think is a proper compensation. 101 00:09:15.120 --> 00:09:18.000 A proper compensation is a so-called objective basis. 102 00:09:18.000 --> 00:09:21.400 OK, the value is $20,000, I'll pay you $20,000. 103 00:09:21.400 --> 00:09:24.200 You can't do that, because you don't know what the person's value was, 104 00:09:24.200 --> 00:09:25.880 the subjective value of this thing. 105 00:09:25.880 --> 00:09:26.360 Yeah? 106 00:09:26.360 --> 00:09:28.200 What about in the issue of property damage? 107 00:09:28.200 --> 00:09:32.760 You have one party suing the other. 108 00:09:32.760 --> 00:09:39.760 What will stand as Austrian economic state if my neighbor's dog has been 109 00:09:39.760 --> 00:10:09.760 I've been ruining my garbage, all of my property, or has been biting my children, obviously my children are priceless, but of course I recognize that it's market free for children, obviously, yes, but maybe in the region it would be, but I think the NP will work in the right way, but what I'm wondering is that at least in some cases where things that are tradeable on the market, how do you figure that people are going to be reasonable? 110 00:10:09.760 --> 00:10:12.560 in an honest settlement, like that. 111 00:10:12.560 --> 00:10:14.360 I don't think there's any scientific way to do that. 112 00:10:14.360 --> 00:10:15.560 It's just, what's the point? 113 00:10:15.560 --> 00:10:18.160 There's no, I mean, a judge or arbitrator 114 00:10:18.160 --> 00:10:21.160 or whatever you want to call it can make some kind of estimate, 115 00:10:21.160 --> 00:10:23.160 kind of talking to both parties wherever you want to do it. 116 00:10:23.160 --> 00:10:26.960 But there's no scientific, in a sense, precisely accurate way 117 00:10:26.960 --> 00:10:30.160 of saying this is worth 50,000 today or something. 118 00:10:30.160 --> 00:10:34.560 It's just something, you know, just do it the best way you can. 119 00:10:34.560 --> 00:10:37.760 And I don't see any other, there's no other words. 120 00:10:37.760 --> 00:10:39.660 So even though the judge or arbitrator might do that, 121 00:10:39.660 --> 00:10:43.660 That doesn't mean that you know the person's value scale. 122 00:10:43.660 --> 00:10:45.660 That's getting off into the legal field. 123 00:10:45.660 --> 00:10:47.660 Yeah, it's going off into the legal theory. 124 00:10:47.660 --> 00:10:50.660 Actually, it's just about time to take a break. 125 00:10:50.660 --> 00:10:51.660 Do you want to take that one more question? 126 00:10:51.660 --> 00:10:53.660 Yeah, well, just one more point. 127 00:10:53.660 --> 00:10:57.660 See, what we're doing here, we're talking about there's a science of economics, 128 00:10:57.660 --> 00:11:01.660 there's a discipline, there's a theory, and then there's the art, which is applying it. 129 00:11:01.660 --> 00:11:04.660 And scientifically, we could say to define a good like this, 130 00:11:04.660 --> 00:11:07.660 we can talk about more of the mission, more of the utility, all this other stuff. 131 00:11:07.660 --> 00:11:16.660 Applying it is an art, in the sense that the person who wants to apply it is an historian of a past or a forecaster of the future or an economist analyzing the current situation. 132 00:11:16.660 --> 00:11:22.660 You've got to just say, well, I think this is a good, right? In other words, I think ice cream is a good, except for the case of Swensons or whatever. 133 00:11:22.660 --> 00:11:32.660 And you sort of make these judgments, but they can be fallible because there's no way to precisely say that it's a good, if you're applying it to the real world. 134 00:11:32.660 --> 00:11:37.300 The art of economics requires judgment, entrepreneurship, in a sense. 135 00:11:37.300 --> 00:11:41.940 It's not the same sort of precise science as the theoretical structure. 136 00:11:44.100 --> 00:11:48.500 So a good, by definition, is what is available for sale. 137 00:11:48.500 --> 00:11:50.740 As soon as somebody wants to make a transaction, 138 00:11:50.740 --> 00:11:53.220 it can be something entirely different than what was originally offered. 139 00:11:54.820 --> 00:11:56.020 I wouldn't say entirely different. 140 00:11:56.020 --> 00:11:58.180 It's just a question of what you're buying in this thing. 141 00:11:58.180 --> 00:11:59.460 I'm going to talk to you at 3 o'clock. 142 00:12:02.660 --> 00:12:11.660 This is just an exciting one. We were saying that the difference between what the government thinks your property is worth and what the government thinks your property is worth, right? 143 00:12:11.660 --> 00:12:16.660 Well, Robert Kleinlein in one of his stories, he had to input a property tax. 144 00:12:16.660 --> 00:12:21.660 And the guy suggested that it's a percentage of the value of the property. 145 00:12:21.660 --> 00:12:27.660 The guy suggested that the owner of the property appraised their own property for the tax. 146 00:12:27.660 --> 00:12:36.660 There's a gimmick built into it. The gimmick is that anytime the government can buy the property for that price anytime, not even take the taxes. 147 00:12:36.660 --> 00:12:39.660 That's monstrous. That's not just money, is it? 148 00:12:39.660 --> 00:12:43.660 That's where I heard it. I haven't heard it anywhere else. 149 00:12:43.660 --> 00:12:49.660 Yeah, Gordon Tullock, two distinguished public choice theorists, alleged free market people. 150 00:12:49.660 --> 00:13:14.660 I like that he uses negative feedback so it stabilizes his song, the guy tries to cheat the government by putting in too much 151 00:13:14.660 --> 00:13:26.660 Let me just give you an anecdote about this. 152 00:13:26.660 --> 00:13:30.660 So, Tullock and Alchin came independently to the Mont Pelerin Society meeting, 153 00:13:30.660 --> 00:13:34.660 which is a group of relatively free-market economists. 154 00:13:34.660 --> 00:13:40.660 It's very watered down. Everybody to the right of Trudeau can be in it. 155 00:13:40.660 --> 00:14:10.660 So, at any rate, Alchean and Tala came up with the theory that this is the perfect tax, this is the voluntary tax, this is the ideal tax, where you get everybody to assess your property tax, assess your property and then pay whatever tax is on it, and if you assess your property at $20, you pay a very low tax, but then the government, you have to sell it to the government until the next person who comes along at that price, 156 00:14:10.660 --> 00:14:18.660 If you don't want to sell something that's really expensive to you, you have to set $2 billion on it and then you have to pay 10% or 2% or whatever, $2 billion. 157 00:14:18.660 --> 00:14:24.660 So poor professor Hayek is now the Dean of the Oldest Living Austrian Economist. 158 00:14:24.660 --> 00:14:29.660 But in that case, I have this precious library. I love this library. I've got 10,000 books or whatever. 159 00:14:29.660 --> 00:14:33.660 And that means in order to save my library, I have to value it $2 million. 160 00:14:33.660 --> 00:14:37.660 I have to go to the poor house. And the answer was, who cares about your library? 161 00:14:37.660 --> 00:14:42.660 Recible, free market answer, likely blind library. 162 00:14:42.660 --> 00:14:47.660 So that's the difference between a property rights approach, 163 00:14:47.660 --> 00:14:52.660 whatever, a freedom of choice approach, where you're looking at the technicians trying to 164 00:14:52.660 --> 00:14:57.660 maximize government revenue or maximize something. 165 00:14:57.660 --> 00:15:02.660 Okay, break? 166 00:15:02.660 --> 00:15:10.660 Well, I think we should press on. One thing, I just want to talk to Murray with a break. 167 00:15:10.660 --> 00:15:15.660 I might clarify this as a good question, a homogeneity question. 168 00:15:15.660 --> 00:15:20.660 I guess from the point of view of the actor, the consumer or whatever, so that... 169 00:15:20.660 --> 00:15:26.660 Murray was asking me, well, what if you have 20 ice cream cones almost the same? 170 00:15:26.660 --> 00:15:43.660 are the same, aren't they really different in the sense that one is in a different, occupying a slightly different space, and it's to the left of the other one, but from the point of view of the consumer, it doesn't really care, in other words, I'm a genius, I don't really care which I over-ask people when they get, athletics or whatever, you know, or the story. 171 00:15:43.660 --> 00:15:47.660 So again, the whole thing is from the point of view of the actor, the actual person doing all this stuff. 172 00:15:47.660 --> 00:15:56.660 It's not from the point of view of molecular physics or objective properties of the entity. 173 00:15:56.660 --> 00:15:58.660 I hope that clears up a little bit. 174 00:15:58.660 --> 00:16:03.660 Well, I'm still thinking you have to look at it as an approximation, 175 00:16:03.660 --> 00:16:10.660 because there's no way physically different things can ever be the same and evaluated. 176 00:16:10.660 --> 00:16:17.300 Even if the same waitress comes along and ends in a second ice cream cone and so on, it's at a different time. 177 00:16:17.300 --> 00:16:24.820 It's a different ice cream cone, he's going to feel different, his thoughts are going to be different at that time as well. 178 00:16:24.820 --> 00:16:35.740 It might feel exactly the same, but if we apply it, and apply it to the current old situation as an applied economist, so to speak, then you have to make a judgment level. 179 00:16:35.740 --> 00:16:40.380 I agree. You approximate, you say, well, we won't go beneath this level where... 180 00:16:40.380 --> 00:16:43.980 We don't have to, because the ice cream is off to others, as long as we try not to. 181 00:16:43.980 --> 00:16:47.460 What I got worked out in between after talking to you is, 182 00:16:47.460 --> 00:16:50.620 if I'm sitting at home and I say, I want an ice cream cone, 183 00:16:50.620 --> 00:16:53.500 at that point in time, all my ice cream cones are the same. 184 00:16:53.500 --> 00:16:55.580 They are all homogeneous units. 185 00:16:55.580 --> 00:16:58.300 But I want to walk together, so now, it's now, 186 00:16:58.300 --> 00:17:01.820 all the ice cream cones that are within walking distance are homogeneous units. 187 00:17:01.820 --> 00:17:05.060 I decided to go north, now it's all those within walking, and so on, 188 00:17:05.060 --> 00:17:08.060 and the closer you get to making the exact purchase, 189 00:17:08.060 --> 00:17:17.060 is to fewer homogeneous unit there are in the good, until you make that final choice, and now it is not just anyone, it's the one you bought. 190 00:17:17.060 --> 00:17:22.060 But perhaps we should get to the purpose of why we're looking to do it that way. 191 00:17:22.060 --> 00:17:32.060 And that is that it's a good way to refute government interventionist type of economists who would say that it should cost the same amount of money, in the name of fairness, 192 00:17:32.060 --> 00:17:37.560 To mail a letter from Ronald of London, as is this, to mail a letter from Hamilton to St. Louis. 193 00:17:37.560 --> 00:17:38.060 Right. 194 00:17:38.060 --> 00:17:38.560 That's what I did. 195 00:17:38.560 --> 00:17:43.560 Because they are applying externally a value to it, and it's not the actor that's making the decisions. 196 00:17:43.560 --> 00:17:45.060 Right. 197 00:17:45.060 --> 00:17:46.060 Well, that's one of the purposes. 198 00:17:46.060 --> 00:17:49.060 I don't think it's the only purpose. 199 00:17:49.060 --> 00:17:56.060 The first purpose is to have a true body of knowledge, so to speak, to build up an analysis of the economic system. 200 00:17:56.060 --> 00:18:04.060 It then turns out, however, that it has political applications, all this stuff, you know, so it's of a dual purpose. 201 00:18:06.060 --> 00:18:17.060 At any rate, to press on, given the homogeneous units, let's say, like Boehm-Bawerk, 202 00:18:17.060 --> 00:18:21.060 one of the great masters of Austrian economics, I shouldn't really mention who they are. 203 00:18:21.060 --> 00:18:40.020 I'm going to begin with Carl Menger, our beloved founder who taught economics at the University of Vienna, 204 00:18:40.020 --> 00:18:55.380 And therefore, it's called the Austrian School, wrote his book in, I think, 1871, called The Principles of Economic, 205 00:18:55.380 --> 00:18:58.060 just different translations, foundation of economics, whatever. 206 00:18:58.060 --> 00:19:02.100 So this is, he's a great founder of the science. 207 00:19:02.100 --> 00:19:04.940 I recommend the book, The Principles of Economics, it's that called. 208 00:19:04.940 --> 00:19:06.900 I certainly recommend the book, it's a great book. 209 00:19:06.900 --> 00:19:09.540 Robert's book, it's the foundation of the whole cycle. 210 00:19:09.540 --> 00:19:25.340 His great student and disciple, Eugen von Boehm-Bawerk, 211 00:19:25.340 --> 00:19:27.220 also succeeded in University of Vienna, 212 00:19:27.220 --> 00:19:29.380 continued also toward University of Vienna, 213 00:19:29.380 --> 00:19:32.860 and wrote his great masterpiece, Capital and Interest, which 214 00:19:32.860 --> 00:19:35.820 goes into price theory as well, and also utility and price 215 00:19:35.820 --> 00:19:40.540 Theory, and also Discover the Laws of Capital Interest, 216 00:19:40.540 --> 00:19:45.660 and wrote from 1880s to about 1914. 217 00:19:45.660 --> 00:19:51.220 There's a different edition to the book, so it's around that period. 218 00:19:51.220 --> 00:19:55.900 So von Boehm-Bawerk's famous example is horses. 219 00:19:55.900 --> 00:19:58.180 If you know homogeneous horses, what you do with them. 220 00:19:58.180 --> 00:20:01.940 I like to use laws that don't make much difference. 221 00:20:01.940 --> 00:20:17.940 So you've got a Crusoe here, let me see, he has a set of logs, I don't know, you can say a set of logs, I've probably got some of these units here from this point of view. 222 00:20:17.940 --> 00:20:22.940 There's a certain group of logs, I call it the log, just to make it up. 223 00:20:22.940 --> 00:20:29.940 And you can use it for, we're assuming here you can use it for many different uses, like the same unit of stuff. 224 00:20:29.940 --> 00:20:33.540 and use them for different uses. They have a priority of uses. 225 00:20:33.540 --> 00:20:40.340 Most important, let's say, is cooking tonight's fire, if we can have meat, which is not raw. 226 00:20:40.340 --> 00:20:45.940 Cooking, fire, tonight's fire. 227 00:20:51.940 --> 00:20:58.940 So this is the top priority. Second rank, if he has another set of logs, 228 00:20:58.940 --> 00:21:05.540 is, I'll say, adding an extension to his law cabinet, or building his law cabinet, whatever. 229 00:21:09.540 --> 00:21:14.740 Third rank might be storing walks to the bar and ice fire. 230 00:21:14.740 --> 00:21:20.740 He doesn't have to shove around and take an axe and chop wood to mark, so take a rest on that. 231 00:21:20.740 --> 00:21:26.540 So, okay, so you have a little bit of savings here, and cooking tomorrow's fire. 232 00:21:28.940 --> 00:21:38.940 And I'm going to add different stuff. Let's say building a fence around this thing so you can have to keep the wolves out or whatever. 233 00:21:38.940 --> 00:21:47.940 Building a fence. Of course, different busos might have different order of priorities here already. 234 00:21:47.940 --> 00:21:54.940 And fifth, something that you always want to do, which you'll get to eventually, is building a boardwalk so you don't have to have his toes full of sand out of the beach. 235 00:21:54.940 --> 00:22:16.940 So he ranks them, let's say, 1, 2, 3, 4, 5. By the way, an enormous amount of trouble with them, an enormous amount of headaches are incorporated in economics by people claiming they can measure this. 236 00:22:16.940 --> 00:22:20.940 So we're going to solve the law in the set A, B, C, and let's look at your graphical order. 237 00:22:20.940 --> 00:22:24.940 At any rate, this is strictly ordinal, it's ranking-limitant, priority. 238 00:22:24.940 --> 00:22:30.940 And so, now the point is, if he loses one, let's say he has these five sets of laws, 239 00:22:30.940 --> 00:22:33.940 they're all layered, ready, you're going to do this first and second, et cetera, et cetera. 240 00:22:33.940 --> 00:22:39.940 One washes away, a tidal wave comes and washes away one of the sets of laws. 241 00:22:39.940 --> 00:22:42.940 Which use is he going to give up? He's obviously going to give up his lowest ranking use. 242 00:22:42.940 --> 00:22:46.940 He's not going to give this up. He has only four sets of five that he originally had. 243 00:22:46.940 --> 00:22:52.940 He's going to give up the boardwalk while he waits for it, before he gets another set in a couple of weeks or something like that. 244 00:22:52.940 --> 00:22:58.940 So, he gives up then, he has five sets of logs, and he gives up, his supply is five, 245 00:22:58.940 --> 00:23:04.940 supply being defined as your stock amount available of homogeneous units, looks good. 246 00:23:04.940 --> 00:23:10.940 His supply is five, and so he gives up, he loses one of these logs, he doesn't give up, 247 00:23:10.940 --> 00:23:15.780 He gives off the least important use to him, which is the fifth. 248 00:23:15.780 --> 00:23:20.140 So on the other hand, he's got only two sets of logs, and one washes away or loses it. 249 00:23:20.140 --> 00:23:24.100 He can give up the second set of logs and keep the first one. 250 00:23:24.100 --> 00:23:31.020 So we conclude from this, that the more logs he's got, the lower the rank of value 251 00:23:31.020 --> 00:23:34.060 in terms of any one set of logs. 252 00:23:34.060 --> 00:23:37.580 In other words, he's got 10 logs, he only has to give up the 10th usage, right? 253 00:23:37.580 --> 00:23:38.380 Who knows about it? 254 00:23:38.380 --> 00:23:41.180 It's building a little birdhouse, or something like that. 255 00:23:41.180 --> 00:23:46.820 So what you do for that thing is law of diminishing marginal utility, 256 00:23:46.820 --> 00:23:50.620 which was discovered in different ways by Menger, and Ball-Ross, 257 00:23:50.620 --> 00:23:55.860 and Jevons, the third neglected figure. 258 00:23:55.860 --> 00:24:03.820 And about the same period, which is the law of diminishing marginal utility. 259 00:24:07.580 --> 00:24:14.580 which says that the greater the supply of a good, the lower the value of each unit and of course conversely the lower the supply of a good the greater the supply of a good, 260 00:24:37.580 --> 00:24:43.340 And the greater the value of each unit, just the other side of the coin. 261 00:24:43.340 --> 00:24:47.660 And it's called admission margin utility, or valueless call utility. 262 00:24:47.660 --> 00:24:53.900 And the word marginal comes in as reference to a unit. 263 00:24:53.900 --> 00:24:56.420 I'll go into that a little bit as to why this comes in. 264 00:24:56.420 --> 00:24:58.540 But anyway, marginal means at the margin. 265 00:24:58.540 --> 00:25:01.460 You're considering the next group of logs, what to do with it. 266 00:25:01.460 --> 00:25:05.340 You're considering the next portion of ice cream, whether to buy it or not. 267 00:25:05.340 --> 00:25:09.660 So people act in the real world in terms of units. 268 00:25:09.660 --> 00:25:12.200 So it's been called the law of diminishing the market utility. 269 00:25:19.260 --> 00:25:23.500 One of the important reasons for this is this. 270 00:25:23.500 --> 00:25:27.100 Before Adam Smith, the founder of economics really wasn't. 271 00:25:27.100 --> 00:25:28.260 It was a whole other schtick. 272 00:25:31.780 --> 00:25:33.420 I'm so sure you've all heard the name. 273 00:25:33.420 --> 00:25:39.740 Anyway, Adam Smith wrote his famous Wealth of Nation in 1776, the Scotsman. 274 00:25:39.740 --> 00:25:46.340 And for various reasons, which we still look pretty sure about, but can guess at, 275 00:25:46.340 --> 00:25:49.260 Smith, instead of founding economics, rolled economics back, 276 00:25:49.260 --> 00:25:53.060 or economics took a big step backward after the Wealth of Nation. 277 00:25:53.060 --> 00:25:55.980 French, various French economists, for example, 278 00:25:55.980 --> 00:25:58.780 and scholastic, evil scholastic economists on the continent 279 00:25:58.780 --> 00:26:01.660 had already discovered almost this wealth of marginal utility. 280 00:26:01.660 --> 00:26:14.660 If they hadn't gotten to the margin part, they'd have gotten everything else pretty well set, mainly that the rate of the supply would go to, the less the value would be, they didn't get terms of units so much, but that's really just the last cornerstone, the last stone in the edifice. 281 00:26:14.660 --> 00:26:30.660 So before Smith, the general of this figure, the value of a good on the market, the price of a good on the market is determined by the utility and the supply, how much is available, how much people will evaluate the supply, and then if you have greater supply, you value less. 282 00:26:30.660 --> 00:26:41.660 Smith himself, Smith's teachers, Scotland Hutchison, Francis Hutchison, also had the same view, and Smith himself in his previous writings 20 years before that, unpublished lectures, also had. 283 00:26:41.660 --> 00:26:45.660 I guess it wasn't ancient, it takes like 200 years backward. 284 00:26:45.660 --> 00:26:52.660 He says, we can't figure out the famous diamond bread paradox, the diamond water paradox. 285 00:26:52.660 --> 00:26:58.660 This is some sort of paradox of value invented by Smith. 286 00:26:58.660 --> 00:27:02.660 And like most paradoxes, it's a false problem. 287 00:27:02.660 --> 00:27:04.660 The paradox of value is this. 288 00:27:04.660 --> 00:27:06.660 Look, he says, we have bread. 289 00:27:06.660 --> 00:27:08.660 Bread is a stack of life. 290 00:27:08.660 --> 00:27:10.660 It's extremely useful. 291 00:27:10.660 --> 00:27:11.660 People die without it. 292 00:27:11.660 --> 00:27:12.660 It's tremendously useful. 293 00:27:12.660 --> 00:27:14.660 It's philosophically magnificent. 294 00:27:14.660 --> 00:27:16.660 And yet, you look at the market, it's very cheap. 295 00:27:16.660 --> 00:27:20.660 $0.20 a loaf of bread wasn't those days. 296 00:27:20.660 --> 00:27:24.660 And the other thing, so you have bread, which has a high use value. 297 00:27:24.660 --> 00:27:34.660 Red high-use land, and then you have diamonds. Diamonds are a frippery. 298 00:27:34.660 --> 00:27:41.660 This is very important, by the way, and why this occurred. Smith was a devout Calvinist-Presbyterian, 299 00:27:41.660 --> 00:27:48.660 tended to be against consumption anyway. Diamonds are frippery. Yeah, it's sinful. 300 00:27:48.660 --> 00:27:53.660 And here's a simple line that has no use whatsoever. 301 00:27:53.660 --> 00:27:57.660 It actually says that diamonds have zero use value, almost zero. 302 00:28:00.660 --> 00:28:02.660 And yet, diamonds are very expensive. 303 00:28:02.660 --> 00:28:04.660 They're valued very highly on the market. 304 00:28:04.660 --> 00:28:06.660 One diamond costs $10,000. 305 00:28:06.660 --> 00:28:07.660 This is a paradox. 306 00:28:07.660 --> 00:28:12.660 How come red high use value, low exchange value? 307 00:28:12.660 --> 00:28:16.660 The price on the market, how much will it exchange? 308 00:28:16.660 --> 00:28:21.340 And yet, diamonds of zero used to, almost zero used to happen. 309 00:28:21.340 --> 00:28:26.820 Negos were used to happen and have a very high exchange value. 310 00:28:26.820 --> 00:28:30.860 He said he couldn't solve this, and therefore, he just drops out. 311 00:28:30.860 --> 00:28:32.260 He says, this is it. 312 00:28:32.260 --> 00:28:35.140 And his analysis of consumption and consumers drop out. 313 00:28:35.140 --> 00:28:39.660 Classical economics between Smith, Ricardo, and Mill in Great Britain, 314 00:28:39.660 --> 00:28:42.060 they don't talk about consumers, but they can't figure it out. 315 00:28:42.060 --> 00:28:42.820 It's a paradox. 316 00:28:42.820 --> 00:28:45.060 It's a peculiarity of the market. 317 00:28:45.060 --> 00:28:53.060 strange anomaly or whatever, so this of course leaves total hostage open to socialists or leftists later on, we'll see. 318 00:28:53.060 --> 00:29:05.060 Veblen, in many ways more aggravating than Marx even, four star Veblen, said look, coins the idea that there's two kinds of production, production for use and production for profit. 319 00:29:05.060 --> 00:29:14.060 There's production for profit, you can go for exchange values and market values, and there's production for use where you're really producing what people really use and need. 320 00:29:14.060 --> 00:29:24.060 This sets out the dichotomy between use and market, or exchange rate, which is extremely pernicious, politically and socially. 321 00:29:24.060 --> 00:29:32.060 What was the resolution of the paradox? The predecessors of this method essentially arrived at this. 322 00:29:32.060 --> 00:29:41.060 Basically it's this, we don't, in the real world, this is again the Austrian approach, it looks at the individual, the acting individual, how he or she chooses. 323 00:29:41.060 --> 00:29:45.060 We don't choose classes of goods. We don't sit around as philosophers and say, 324 00:29:45.060 --> 00:29:48.060 which is more important to mankind, bread or diamonds? 325 00:29:48.060 --> 00:29:51.060 And then others choose between them. Bread is better. 326 00:29:51.060 --> 00:29:55.060 That's not the sort of choice we could front of it on the market. 327 00:29:55.060 --> 00:30:00.060 If indeed the Angel Gabriel came down, this is one of my Angel Gabriel examples. 328 00:30:00.060 --> 00:30:07.060 If the Angel Gabriel came down and said, Earthlings, you know, gathered all the Earthlings together for TV or something, 329 00:30:07.060 --> 00:30:11.060 First things, you're now presented with a choice. I now present you with this choice. 330 00:30:11.060 --> 00:30:16.060 From now on, you have to give up either all the bread in the world now and forever, or also all the diamonds in the world now and forever. 331 00:30:16.060 --> 00:30:24.060 And probably most of us will say, let's give up diamonds. Oh well, bread is more useful in this philosophic sense of a whole class of thoughts. 332 00:30:24.060 --> 00:30:31.060 But we're not confronted with that kind of a choice. The choice we're confronted with on the market is, how much should we pay for a loaf of bread? How much should we pay for a diamond? 333 00:30:31.060 --> 00:30:37.560 So, in the market, in other words, we make marginal choices of units, which is where the marginal unit thing comes in. 334 00:30:37.560 --> 00:30:43.060 And so, what happens is that, okay, you've got the law of diminishing marginal utility, 335 00:30:43.060 --> 00:30:49.060 it so happens in this world that there's a lot of bread around, okay? 336 00:30:49.060 --> 00:30:53.060 There's millions of loaves of bread, wonder bread, silver cup, kind of copper-ish form, 337 00:30:53.060 --> 00:30:55.560 except there's a rye, copper nickel, et cetera. 338 00:30:55.560 --> 00:30:59.260 Okay, so we have a diagram, a simple diagram. 339 00:30:59.260 --> 00:30:59.820 Look at this. 340 00:30:59.820 --> 00:31:08.140 We have marginal utility or whatever value and quantity in the x-axis. 341 00:31:08.140 --> 00:31:14.060 And we have a, we might start off, we have only one loaf of bread that might not have much. 342 00:31:14.060 --> 00:31:18.500 Now, some might not be enormous, excuse me, might be enormous. 343 00:31:18.500 --> 00:31:24.800 Still in all, you wind up with quantity so big that you wind up with a fairly low exchange value 344 00:31:24.800 --> 00:31:26.740 with any given loaf. 345 00:31:26.740 --> 00:31:30.500 They have an enormous supply, 10 million loads, whatever it is, of bread. 346 00:31:30.500 --> 00:31:36.660 Therefore, each person, the value of each load is fairly small. 347 00:31:36.660 --> 00:31:40.060 On the other hand, diamonds might be, if you had only one diamond in the world 348 00:31:40.060 --> 00:31:43.500 versus one piece of loaf of bread, you might choose loaf of bread. 349 00:31:43.500 --> 00:31:46.660 There's so few diamonds around, very scarce, 350 00:31:46.660 --> 00:31:49.580 but then you have something like that, so we're up here. 351 00:31:49.580 --> 00:31:52.060 And so that one carat of diamonds was, of course, 352 00:31:52.060 --> 00:31:55.900 worth a lot more to higher value on the market than the loaf of bread. 353 00:31:55.900 --> 00:32:00.460 So the relative scarcity becomes the key to the whole situation. 354 00:32:00.460 --> 00:32:03.220 Once you look at the acting individuals on the market, 355 00:32:03.220 --> 00:32:08.020 rather than consider them as a holistic, philosophic class, 356 00:32:08.020 --> 00:32:10.100 then you can solve the paradox. 357 00:32:10.100 --> 00:32:12.940 And the mystery of why Smith himself 358 00:32:12.940 --> 00:32:15.820 has sort of seen the light the funniest before. 359 00:32:15.820 --> 00:32:20.820 I think part of it is this Presbyterian outlook 360 00:32:20.820 --> 00:32:28.780 But somehow this frippery should be somehow higher value and more useful. 361 00:32:28.780 --> 00:32:33.380 OK, so we're looking at another way of other things, for example, water. 362 00:32:33.380 --> 00:32:39.820 Water, I wouldn't say it's free, but it's more or less so low in value for so much of it 363 00:32:39.820 --> 00:32:41.580 that you're going to go to the fountain and get water. 364 00:32:41.580 --> 00:32:46.620 You're going to have to pay for each glass, each cup, because it's extremely abundant out here somewhere. 365 00:32:46.620 --> 00:32:50.020 However, if you're walking across the Libyan desert 366 00:32:50.020 --> 00:32:51.780 And you have one canteen. 367 00:32:51.780 --> 00:32:54.980 One cup is an enormous thing, extremely important. 368 00:32:54.980 --> 00:32:58.060 It pays $2 million, your whole life savings in one cup. 369 00:32:58.060 --> 00:33:00.740 It pays zero or next to nothing for one cup here. 370 00:33:00.740 --> 00:33:07.020 So because the amount available to you is extremely small and way 371 00:33:07.020 --> 00:33:11.260 up in your utility scale, the marginal utility scale. 372 00:33:11.260 --> 00:33:14.100 So the relative scarcity becomes a key thing here. 373 00:33:14.100 --> 00:33:17.620 And so the value on the market, which is the exchange value, 374 00:33:17.620 --> 00:33:25.580 which is the price becomes determined by two forces of work here. 375 00:33:25.580 --> 00:33:42.380 One is the amount available at any given time, the supply, the price on the y-axis now, and quantity of the good on the x-axis. 376 00:33:42.380 --> 00:33:51.100 And the supply of a good, conceptually, we don't know exactly what it is, it could be anything, but conceptually we could find out. 377 00:33:51.100 --> 00:33:55.100 Two million loaves of wonder bread, 100,000 pounds of peaches, whatever. 378 00:33:55.100 --> 00:34:08.940 We have demand of evaluation determined by the law of dimension of our utility so that at looking at the rate of the supply, 379 00:34:08.940 --> 00:34:14.940 The less, the lower will be the valuation, the lower will be the price. 380 00:34:14.940 --> 00:34:17.440 There's also a common sense way of looking at this thing, of course. 381 00:34:17.440 --> 00:34:20.740 You don't want to look at the long-admission marginal utility and how you arrive at it. 382 00:34:20.740 --> 00:34:23.540 At a higher price, less will be purchased. 383 00:34:23.540 --> 00:34:24.940 At a lower price, more will be purchased. 384 00:34:24.940 --> 00:34:27.140 It's saying a similar thing. 385 00:34:27.140 --> 00:34:29.340 It's exactly the same way of looking at it. 386 00:34:29.340 --> 00:34:31.640 So this is the example of a man curve. 387 00:34:31.640 --> 00:34:38.540 It's how much will be purchased and then given a price, either by one person or by an aggregate by old people in the market, old consumers, 388 00:34:38.540 --> 00:34:47.340 To sum up, if you have five consumers thinking about whether to buy Wonder Bread, and conceptually, 389 00:34:47.340 --> 00:34:53.380 they arrive at each individual's demand curve, how much they've paid it, buying it at a given price. 390 00:34:53.380 --> 00:34:58.180 And some person might be a marginal Wonder Bread person who will only buy it if it gets down to $0.50 a loaf. 391 00:34:58.180 --> 00:35:01.860 Somebody else might be a fanatic who will buy it if it's up to $10 a loaf. 392 00:35:01.860 --> 00:35:07.860 The so-called falling demand curve for any good. 393 00:35:07.860 --> 00:35:15.860 These are the two forces which determine any prices, any product, any good or service on the market. 394 00:35:15.860 --> 00:35:25.860 These are the only two forces that determine demand for it, how much would be purchased at any given point, 395 00:35:25.860 --> 00:35:29.860 and the supply of it, which is the amount available. 396 00:35:29.860 --> 00:35:33.860 This gives us our famous demand-supply curves. 397 00:35:33.860 --> 00:35:37.860 I haven't talked about Friday because it would probably take too long. 398 00:35:37.860 --> 00:35:42.860 In my courses, I supposed to bring in Friday and focus on Friday Exchange. 399 00:35:42.860 --> 00:35:47.860 That's important, but I'll just leap a little bit here. 400 00:35:47.860 --> 00:35:54.860 Although we can say in this sense about Exchange, I think it's important to say, before we get a lot of price further, 401 00:35:54.860 --> 00:36:03.860 The whole market is like a latticework, it's like a spiderweb or a latticework of millions of different unit exchanges. 402 00:36:03.860 --> 00:36:26.260 So we have me buying this paper, let's say, and so I'm exchanging 30 cents, the New York 403 00:36:26.260 --> 00:36:36.260 And in this case, where both parties benefit, like for, there are two values here that are involved here actually. 404 00:36:36.260 --> 00:36:47.260 There's me, and I rank three cents. I rank New York Times higher than three cents. 405 00:36:47.260 --> 00:36:51.260 I put this in parenthesis because I haven't gotten yet. This is me just before I buy the paper. 406 00:36:51.260 --> 00:36:56.260 I'm looking at this thing as if I would be better off, psychically better off, 407 00:36:56.260 --> 00:37:01.260 of a higher utility, whatever you want to call it, if I spend the $0.30 on the New York Times, 408 00:37:01.260 --> 00:37:06.260 because I value the New York Times higher, more highly than I value the $0.30. 409 00:37:06.260 --> 00:37:13.260 On the other hand, the news dealer is precisely the opposite situation. 410 00:37:13.260 --> 00:37:21.260 He valued the 30 cents, which he hasn't gotten yet, more highly than the New York Times. 411 00:37:21.260 --> 00:37:26.260 He's got a ton of New York Times. It's not his problem. He wants to get money for it. 412 00:37:26.260 --> 00:37:31.260 So we then have here an exchange. This is a unit exchange. Both parties are better off. 413 00:37:31.260 --> 00:37:35.260 As we complete the exchange, which is a transfer of ownership of an exchange, 414 00:37:35.260 --> 00:37:39.260 it's sort of like buying a house, except they have a notarized V and all that. 415 00:37:39.260 --> 00:37:41.620 And you don't have to do that, that goes. 416 00:37:41.620 --> 00:37:43.500 Give him the $0.30, he gives you the times. 417 00:37:43.500 --> 00:37:44.620 That's it. 418 00:37:44.620 --> 00:37:47.920 You don't have to have a lawyer, a fleet of companies 419 00:37:47.920 --> 00:37:49.260 intervening with this. 420 00:37:49.260 --> 00:37:54.460 OK, so I'm better off on a higher utility point, 421 00:37:54.460 --> 00:37:56.340 or whatever you want to call it. 422 00:37:56.340 --> 00:37:58.580 I'm better off by getting the New York Times. 423 00:37:58.580 --> 00:38:00.620 He's benefiting by getting the $0.30. 424 00:38:00.620 --> 00:38:04.100 Mutually beneficial exchange, both parties to it 425 00:38:04.100 --> 00:38:06.060 go higher on their value scales. 426 00:38:06.060 --> 00:38:08.620 They both achieve a couple more of their goals. 427 00:38:08.620 --> 00:38:13.620 And so what we have here, the conditions for a successful exchange are two people. 428 00:38:13.620 --> 00:38:15.620 There are two people involved here. 429 00:38:15.620 --> 00:38:19.620 And two commodities, two goods. 430 00:38:19.620 --> 00:38:21.620 In this case, it's two people, me and you. 431 00:38:21.620 --> 00:38:25.120 Two goods, so $0.30 in New York Times. 432 00:38:25.120 --> 00:38:28.620 And we exchange these two things with both that are off. 433 00:38:28.620 --> 00:38:30.620 The free market is a latticework. 434 00:38:30.620 --> 00:38:33.620 Millions of these exchanges are going on all the time. 435 00:38:33.620 --> 00:38:48.620 So, if somebody works for IBM, let's say, you're selling your labor service to IBM, you're getting money, you prefer getting money, not selling labor service, they prefer getting labor service and keeping the money. 436 00:38:48.620 --> 00:39:01.620 So in each set of cases, there are two people on the case of IBM, a group of people represented by a corporation, and making these exchanges. In each case, each person is better off, each entity is better off. 437 00:39:01.620 --> 00:39:06.620 So we have a situation with the free market, even with that, the efficiency of the free market and all the rest of it. 438 00:39:06.620 --> 00:39:15.620 At each step of the way, each person is maximizing, getting better and better, higher utility at each step of the transaction. 439 00:39:15.620 --> 00:39:22.620 In case of Crusoe and Fight, each one is better off by exchange, fish for meat or whatever the exchange is. 440 00:39:22.620 --> 00:39:32.620 So, we already have here, so we need that for successful exchange, the reverse inequality of values of the two people. 441 00:39:32.620 --> 00:39:36.620 What we need is for me to evaluate the two things differently than him. 442 00:39:36.620 --> 00:39:42.620 If both of us prefer 30 cents New York Times, we don't base it for a transaction. 443 00:39:42.620 --> 00:39:45.620 I have to prefer the New York Times to 30 cents. 444 00:39:45.620 --> 00:39:50.620 If I have the same relative value scale as he's got, we don't make any deal. 445 00:39:50.620 --> 00:39:56.620 So what you have to find for any exchange is a reverse inequality of value of values. 446 00:40:05.620 --> 00:40:10.620 Because values are subjective, they're ordinal, they're value scales upon each individual. 447 00:40:10.620 --> 00:40:17.620 Now again, once you stake this, it might seem self-evident, but this already wipes out a huge amount of economics, the history of economic thought. 448 00:40:17.620 --> 00:40:30.620 It's been wiped off with books. It's like all great discoveries or inventions. They're only self-evident after you look at them, or even state it. Before that, it's not so self-evident. 449 00:40:30.620 --> 00:40:45.620 So what happens is that, for example, if you take Karl Marx's Das Kapital, a very interesting book, you don't have to read more than the first two pages, because the prime fallacy of the thing is in the first couple of pages. 450 00:40:45.620 --> 00:40:50.620 I'm not saying it shouldn't be the rest of it, but if you're a man of the kids, you can go ahead and do it. 451 00:40:50.620 --> 00:40:58.620 But time fallacy, which is true of most economic fallacy, most fallacies are in the assumptions of the first couple of papers. 452 00:40:58.620 --> 00:41:01.620 The rest is spinning out. 453 00:41:01.620 --> 00:41:06.620 So, he still wants all this fallacy. There's an exchange. He doesn't use a newspaper. 454 00:41:06.620 --> 00:41:14.620 Whatever. He says two things in exchange for each other. Let's say 30 cents for New York Times, or one pound of bread for two dozen eggs, 455 00:41:14.620 --> 00:41:23.620 So, because they exchange for each other, he says they must be equal in value. 456 00:41:23.620 --> 00:41:35.060 So, then he says, okay, what is there about fish and horses or whatever, to get back beyond 457 00:41:35.060 --> 00:41:39.460 money, let's say fish and horses or eggs and butter or whatever, eggs and horses or whatever, 458 00:41:39.460 --> 00:41:46.460 What is there in these two products, if one is equal to the other, what is there to make them equal in value? 459 00:41:46.460 --> 00:41:52.460 And he looks and says, well, it can't be weight, weight is totally different, it can't be volume, volume is totally different. 460 00:41:52.460 --> 00:41:58.460 And he winds up the quantity of labor hours embodied in the two products. 461 00:41:58.460 --> 00:42:00.460 That's, of course, also the second crazy solution. 462 00:42:00.460 --> 00:42:04.460 But the point is, the whole problem is posing correctly because they're not equal in value. 463 00:42:04.460 --> 00:42:06.460 It wouldn't be exchange if they were equal in value. 464 00:42:06.460 --> 00:42:12.460 The basis for any exchange in the world, if they're really equal, why bother going to the cost of finding the other guy and exchanging? 465 00:42:12.460 --> 00:42:20.460 It's like saying, if I have a nickel, and you have a nickel, and it's numismatically the same thing, so they're both the same data set, 466 00:42:20.460 --> 00:42:23.460 there's no point in me going out and exchanging the nickel for your nickel. 467 00:42:23.460 --> 00:42:27.460 There must be some bizarre personal reason. 468 00:42:27.460 --> 00:42:35.460 Generally, there's no reason, just the pain in the neck, it's a waste of what is now called transaction costs, so no point to it. 469 00:42:35.460 --> 00:42:53.460 So exchanges are, if these two things were really equal, there wouldn't be exchange at all of equal in value, so exchange requires this double inequality, so we can toss out the whole thing, the rest of Marxism can be tossed out just on that basis alone, so the other labor quantity, labor on the rest of the stuff goes into it. 470 00:42:53.460 --> 00:43:11.460 So a less extreme version of the classical economy, Smith and Ricardo, had a less extreme, well they actually had some of that too, Marx, in many ways, Marx was a sort of a consistent Ricardian, Smithian, carrying this thing with his argument of inclusion. 471 00:43:11.460 --> 00:43:19.460 One variant of Smith and Ricardo has the quantity of labor hours, looking for some way to, how do you embody this, what's the physical thing that embodies this value? 472 00:43:19.460 --> 00:43:31.460 Another less extreme variant, coming later on from Marshall, was the cost of production, cost of production must be the same, the same quantity of labor pain, there's all sorts of ways of looking at this. 473 00:43:31.460 --> 00:43:35.460 They're all fallacious because they're not equal in length. 474 00:43:35.460 --> 00:43:44.460 So that's another example of how these things seem to be recognized, seem to be very simple and have important consequences. 475 00:43:44.460 --> 00:44:14.460 Getting back to price determination, supply and demand become the two determinants of price, and then become, and this is not just Austrian, this is generally accepted, so I'm going completely into this thing, but anyway, well there's a variant here which is Austrian, the market price, the day-to-day market price, 476 00:44:14.460 --> 00:44:19.960 The whole market equilibrium price, unfortunately, because there's another equilibrium which is on sound, so it's, again, it's very confusing. 477 00:44:19.960 --> 00:44:28.460 The day-to-day market price will be, will tend to be, very quickly, the intersection point, supply curve, supply line, demand curve. 478 00:44:28.460 --> 00:44:35.460 This will be what prices will be, very, the day-to-day market equilibrium. 479 00:44:35.460 --> 00:44:40.460 I don't know if I have to go into this, or if you're probably going to look at this, do you all know it? 480 00:44:40.460 --> 00:44:44.460 Raise your hands if you don't know it. Those who don't know it already, raise their hands. 481 00:44:44.460 --> 00:44:47.460 Everybody knows it. Okay. 482 00:44:47.460 --> 00:44:49.460 What are we supposed to know? 483 00:44:49.460 --> 00:44:53.460 Well, why it is that the market price will be in it for a million or so. 484 00:44:53.460 --> 00:44:58.460 I'll go very quickly on this. If the price is higher than this, 485 00:44:58.460 --> 00:45:03.460 if this is peaches, let's say, and peaches are 60 cents a pound, I don't know what peaches are all 60 cents a pound, 486 00:45:03.460 --> 00:45:05.460 that's the equilibrium price. 487 00:45:05.460 --> 00:45:14.460 If the price is higher, then people will only buy much less than the 200,000 pounds available, 150,000 pounds. 488 00:45:14.460 --> 00:45:18.460 This will be an unsold surplus. 489 00:45:18.460 --> 00:45:25.460 Because anything a businessman hates is buying something and not having it be sold, or nobody buying it. 490 00:45:25.460 --> 00:45:26.460 Unsold surplus piles up. 491 00:45:26.460 --> 00:45:32.460 In order to eliminate the unsold surplus, this unwanted thing of these things piling up, which you're not selling, 492 00:45:32.460 --> 00:45:44.460 You cut your price, as you cut the price, more is purchased, and finally, lo and behold, you get down to the equilibrium price, there's no more unsold surplus. 493 00:45:44.460 --> 00:45:48.460 So the tendency on the market then is to wipe out very quickly unsold surpluses. 494 00:45:48.460 --> 00:45:52.460 All you need to do is for businessmen to prefer to make money and not lose money. 495 00:45:52.460 --> 00:45:58.460 It's called profit and loss motive. To make money and not to lose it.