WEBVTT NOTE Introduction to Economics: Part 3 1 00:00:00.000 --> 00:00:02.000 The consumers want to purchase more than is available. 2 00:00:02.000 --> 00:00:04.000 So there's 300,000 pounds available. 3 00:00:04.000 --> 00:00:06.000 The consumers want to purchase 500,000 pounds. 4 00:00:06.000 --> 00:00:08.000 And suddenly it disappears in their shelf. 5 00:00:08.000 --> 00:00:10.000 You can expect it to last a couple of days. 6 00:00:10.000 --> 00:00:12.000 By 10 in the morning, it's gone. 7 00:00:12.000 --> 00:00:14.000 That's the so-called shortage. 8 00:00:14.000 --> 00:00:17.000 So what happens in the market is the shortage disappears very quickly. 9 00:00:17.000 --> 00:00:19.000 The businessmen say, hey, it's going very rapidly. 10 00:00:19.000 --> 00:00:21.000 I can raise the price. 11 00:00:21.000 --> 00:00:24.000 And as they raise the price, the shortage begins to disappear. 12 00:00:24.000 --> 00:00:26.000 Finally, they back up. 13 00:00:26.000 --> 00:00:28.000 It's a equilibrium point. 14 00:00:28.000 --> 00:00:35.000 And this is very fast, and again, because of the motivation, if a price is free to move, 15 00:00:35.000 --> 00:00:38.000 the motivation is to make profits and avoid losses. 16 00:00:38.000 --> 00:00:44.000 And you get to the price which clears the market, and the supply and demand are exactly equal. 17 00:00:44.000 --> 00:00:51.000 Where people want, say, 200,000, 300,000 pounds of features available, people want to buy 300,000 pounds. 18 00:00:51.000 --> 00:00:55.000 Exact clearance of the market. Supply and demand are equilibrated. 19 00:00:55.000 --> 00:00:56.680 One of the reasons that we're equilibrium. 20 00:01:01.200 --> 00:01:05.880 And the higher price, the higher the rate of demand, 21 00:01:05.880 --> 00:01:07.160 so you have the surplus. 22 00:01:07.160 --> 00:01:09.160 The lower price, the higher the rate of the supply, 23 00:01:09.160 --> 00:01:11.120 so you have a shortage. 24 00:01:11.120 --> 00:01:13.400 And what the free price movement does 25 00:01:13.400 --> 00:01:15.360 is wipes out short surpluses and shortages 26 00:01:15.360 --> 00:01:18.520 as soon as they appear. 27 00:01:18.520 --> 00:01:20.600 You never have on a free market anything 28 00:01:20.600 --> 00:01:22.800 like a permanent surplus or a permanent shortage, 29 00:01:22.800 --> 00:01:25.680 Anything beyond a couple of days is pretty quick. 30 00:01:25.680 --> 00:01:28.000 If you do have a permanent or several permanent shortage, 31 00:01:28.000 --> 00:01:30.960 the government is always in there interfering with it. 32 00:01:30.960 --> 00:01:32.960 I am the block. 33 00:01:32.960 --> 00:01:41.960 All right, so this is sort of an orthodox economist 34 00:01:41.960 --> 00:01:43.920 have a similar approach here, except if you notice 35 00:01:43.920 --> 00:01:46.320 that this black area is vertical. 36 00:01:46.320 --> 00:01:48.920 The orthodox textbook approaches black areas forward slowly. 37 00:01:48.920 --> 00:01:49.400 Oh, my god. 38 00:01:49.400 --> 00:01:51.520 Turn it back. 39 00:01:51.520 --> 00:01:55.480 The Austrian view is the cycle with verticals, who are dealing with a day-to-day situation. 40 00:01:55.480 --> 00:01:59.640 How much is there, and how much are people's, how much is there in the supply, 41 00:01:59.640 --> 00:02:04.320 how much are people evaluating, and what way are people evaluating their value scales as to demand. 42 00:02:04.320 --> 00:02:10.000 So you have, in other words, things around, resources, goods, various stages of production, 43 00:02:10.000 --> 00:02:13.080 and people evaluating those things. 44 00:02:13.080 --> 00:02:15.320 Demand and supply, interactive. 45 00:02:15.320 --> 00:02:23.200 And these are the only two things that are going to affect price and supply and demand. 46 00:02:23.200 --> 00:02:27.840 And again, go, I think, rapidly through these things. 47 00:02:27.840 --> 00:02:31.680 Oh, another reason for the word equilibrium is an analogy of physics and physical science 48 00:02:31.680 --> 00:02:37.600 is where an equilibrium is something which tends to move toward and tends to go back 49 00:02:37.600 --> 00:02:48.600 and go back to it if it's displaced from it because it doesn't stay in this particular spot and go back to it if it's displaced. 50 00:02:48.600 --> 00:02:52.600 So then the question is, and the next question is, is we observe the prices change all the time. 51 00:02:52.600 --> 00:02:56.600 How come prices change? Why don't they fix? Why don't they stay frozen forever at this equilibrium point? 52 00:02:56.600 --> 00:03:02.600 Obviously because, and only because, either demand changes or supply changes are both. 53 00:03:02.600 --> 00:03:05.600 So these are the two ways in which prices can change. 54 00:03:15.600 --> 00:03:17.600 Okay, then we have the familiar thing. 55 00:03:17.600 --> 00:03:22.600 I guess everybody knows this, but at any rate, I'll zip through it. 56 00:03:22.600 --> 00:03:26.600 Stop me if you want to inject any comment or anything. 57 00:03:26.600 --> 00:03:30.600 Let's say the famous case I always think of. 58 00:03:30.600 --> 00:03:38.600 Every few years the coffee freezes in Brazil, a big frost, a coffee crop is destroyed or something, half of it disappears. 59 00:03:38.600 --> 00:03:43.600 This happened about five years ago, and then there's a big drop in the supply of coffee coming in. 60 00:03:43.600 --> 00:03:49.600 So the supply curve shifts to the left. 61 00:03:49.600 --> 00:03:58.600 So this means that the old market clearing, let's see, before the last frost, the price of coffee is something like a dollar a pound, something like that. 62 00:03:58.600 --> 00:04:08.600 That was the market clearing price before the force. Then the force comes and wipes out at the profit problem. 63 00:04:08.600 --> 00:04:14.600 These are the old prices that don't have market clearing because now the demand is very much greater than supply. 64 00:04:14.600 --> 00:04:18.600 Shortage develops and therefore the price zips up to clear it. 65 00:04:18.600 --> 00:04:23.600 As it clears it, you wind up with a higher equilibrium price. 66 00:04:23.600 --> 00:04:30.600 Another thing that shows is how price performs a so-called rationing function. 67 00:04:30.600 --> 00:04:39.600 In other words, there's only a little amount, everything is scarce, there's not enough coffee for everybody to drink 10 cups of coffee every day in the world. 68 00:04:39.600 --> 00:04:43.600 And so, somehow it has to be allocated. Somebody's going to get the coffee, somebody isn't. 69 00:04:43.600 --> 00:04:45.600 Somebody's going to get a certain amount. How is it allocated? 70 00:04:45.600 --> 00:04:49.600 The free market allocates it based on individual choices, preferences. 71 00:04:49.600 --> 00:04:54.400 As the supply drops from a million pounds to four feet or five hundred thousand, whatever it was, 72 00:04:54.400 --> 00:04:58.800 it's like cut in half, there's two ways of allocating the scarce supply. 73 00:04:58.800 --> 00:05:05.400 You have a government rationing committee, you know, so you, you and you can only drink half of what you drank before. 74 00:05:05.400 --> 00:05:11.600 If you drink more than half, if you still drink the same amount, we shoot you, or whatever, you know, more than equivalent. 75 00:05:11.600 --> 00:05:16.600 That's one way to do it, totalitarian, evil, inefficient, everything. 76 00:05:16.600 --> 00:05:22.600 The free market is allocated smoothly and harmoniously, with each individual assigning his or her own basis. 77 00:05:22.600 --> 00:05:29.600 As the coffee price starts going up, those people who love coffee will keep either buying the same amount or cut their purchases a little bit. 78 00:05:29.600 --> 00:05:36.600 Others, you know, coffee is sort of marginal. They say, how about I'm shifting to tea, or shifting to cocoa, or Pepsi, or whatever. 79 00:05:36.600 --> 00:05:38.600 And that's exactly what happened, by the way. 80 00:05:38.600 --> 00:05:52.600 I think in the last coffee for us, people started shifting massively, massively wind up with this kind of higher, lower supply allocated very smoothly to each individual choices at a higher price. 81 00:05:54.600 --> 00:06:04.600 Conversely, as the pie goes up, due to a better fertilizer or whatever, better agricultural techniques, 82 00:06:04.600 --> 00:06:10.600 In an opposite situation, the old market theory of price is now a surplus. 83 00:06:10.600 --> 00:06:13.600 People don't want to buy that much coffee, or whatever. 84 00:06:13.600 --> 00:06:16.600 And so in order to induce them to buy more, you have to cut the price. 85 00:06:16.600 --> 00:06:21.600 And if you cut the price, why not lower the price? 86 00:06:21.600 --> 00:06:25.600 So this accounts for price changes on the supply side. 87 00:06:25.600 --> 00:06:33.600 In a free market economy, a capitalist economy, usually the tendency is, for most businesses, is an increase in supply. 88 00:06:33.600 --> 00:06:57.600 saw a little bit of a lot. So the tendency is toward falling prices, and for example in the 19th century, which was the great century of the Industrial Revolution, prices fell all the time except during wartime, and why it rose during wartime is another story we'll get to that this evening. 89 00:06:57.600 --> 00:07:05.600 The point is, without any interruptions or exogenous forces coming from the government, prices tend to fall. 90 00:07:05.600 --> 00:07:13.600 Dramatic examples are TV, calculators and computers. 91 00:07:13.600 --> 00:07:15.600 I was going to say personal computers. 92 00:07:15.600 --> 00:07:19.600 Yeah, go on, because I know less about personal computers than anybody in Rome, probably. 93 00:07:19.600 --> 00:07:22.600 It's unbelievable, they keep falling every day. 94 00:07:22.600 --> 00:07:28.600 The enormous supply increases, productivity increases, the whole thing just explodes. 95 00:07:28.600 --> 00:07:35.600 I remember a lower tech example is, when did the hand calculators come out? About 12 years ago or something? 96 00:07:35.600 --> 00:07:39.600 Well, that's 10 years ago. 97 00:07:39.600 --> 00:07:42.600 Oh yeah, that's 10 years ago. 12 years ago. 98 00:07:42.600 --> 00:07:47.600 So I teach at the engineering university, something like this I guess. 99 00:07:47.600 --> 00:07:52.600 And a friend of mine, on the EE department, electrical engineering department, ran it in the elevator. 100 00:07:52.600 --> 00:07:55.600 Even though we were high tech, we called ourselves the Engineering Center of Excellence. 101 00:07:55.600 --> 00:07:57.600 The elevators never work. 102 00:07:57.600 --> 00:08:03.600 Why didn't you have a field trip or something to fix the damn elevator? 103 00:08:03.600 --> 00:08:08.600 This is of course too low for them. That's done by other low types. 104 00:08:08.600 --> 00:08:12.600 And when they do work, they're very, very slow. 105 00:08:12.600 --> 00:08:17.600 Well, you go off seven floors, it takes about ten minutes, you have time for a long nightly conversation in the elevator. 106 00:08:17.600 --> 00:08:20.600 So one of those guys in the elevator says, look, I got this magic thing. 107 00:08:20.600 --> 00:08:26.600 It's a fantastically new product, and since I know the vice president of this firm, I have a first copy or whatever. 108 00:08:26.600 --> 00:08:32.600 It's this magic thing, you hold it in your hand, you press the dots and so the buttons, it multiplies and divides like that, fantastic. 109 00:08:32.600 --> 00:08:35.600 That's only $400. 110 00:08:35.600 --> 00:08:40.600 So now we have a much better account of this for $18. 111 00:09:10.600 --> 00:09:13.600 ______ 15, but the features have increased. 112 00:09:13.600 --> 00:09:18.600 Yeah, right, quality goes up. Of course, again this is homogenous in a sense. You have to consider the unit quality. 113 00:09:18.600 --> 00:09:23.600 You can do it with a very different measure of quality obviously. You have to consider if you're comparing prices over time, 114 00:09:23.600 --> 00:09:29.600 consider the price per unit quality. And if the calculator is still $18 a day, but you have a much better calculator, 115 00:09:29.600 --> 00:09:37.600 there's a really much lower price per unit quality in the calculator. It's TB sets, another example, lower tech, older example. 116 00:09:37.600 --> 00:09:54.600 For example, TV sets first came out in 1949, they were $2,000, $7,000 or $8,000 in current money or something, for a crummy set, you couldn't see anything, murky, of course black and white, but also very murky and shadowy and only about two programs on anyway. 117 00:09:54.600 --> 00:10:04.600 And also, the first family, one family in each neighborhood had it, so everybody pooped in every night and watched a little brawl or something. 118 00:10:04.600 --> 00:10:14.600 So now you have a situation where you have color telephysology that's for 200 or 300, much infinitely better quality, unbelievable, with cable and everything, you can see everything, it's fantastic. 119 00:10:14.600 --> 00:10:24.600 Plus lots of programs with 45 channels or whatever, plus everybody's got about 8 TV sets, including one on the bathroom, just watch TV and everything else. 120 00:10:24.600 --> 00:10:29.600 So even people who are certified below the property level are most fair, lots of TV sets. 121 00:10:29.600 --> 00:10:38.600 So, I mean, it shows, again, what happens with mass production, tendency to lower prices. 122 00:10:38.600 --> 00:10:39.600 Isn't that beautiful? 123 00:10:39.600 --> 00:10:40.600 Yeah. 124 00:10:40.600 --> 00:10:51.600 So, at any rate, that, so a question you might ask, why do prices keep going up? 125 00:10:51.600 --> 00:10:55.600 In general, let's, I say tonight, we get to the micro part of it. 126 00:10:55.600 --> 00:11:03.600 OK, so one other thing here is that where does cost come in this whole thing? 127 00:11:03.600 --> 00:11:14.600 The usual doctrine of businessmen, a lot of businessmen, a lot of late persons say that prices are determined by cost in production. 128 00:11:14.600 --> 00:11:24.600 This was the Smith and Ricardo basically, so that Marshall and the standard British classical economics and neoclassical coming down in the 1930s or so. 129 00:11:24.600 --> 00:11:29.400 If costs are higher, prices will be higher vice versa. 130 00:11:29.400 --> 00:11:31.200 And where's the cost in here? 131 00:11:31.200 --> 00:11:32.880 You've already gotten the analysis. 132 00:11:32.880 --> 00:11:35.040 I haven't spoken about the times we've shifted in demand. 133 00:11:35.040 --> 00:11:40.680 I forgot that, but it's pretty clear that if the demand increases, 134 00:11:40.680 --> 00:11:42.960 you have an increased price or something. 135 00:11:42.960 --> 00:11:44.960 If the demand drops, you have a lower price. 136 00:11:44.960 --> 00:11:48.760 And this, by the way, determines these future resources. 137 00:11:48.760 --> 00:11:53.760 I should get into that before I get to costs. 138 00:11:53.760 --> 00:12:16.760 If given the money supply, the man can only, if somebody's out there printing money all the time, which is what's happening in real life, then all demand curves will rise, because everybody's got more money in their pocket, and so every person will pay more money for the same, will buy more at a given price. 139 00:12:16.760 --> 00:12:20.760 So you have a general floating upward demand curves. 140 00:12:20.760 --> 00:12:26.060 Aside from that, without that entering a picture, if the amount of money is fixed, 141 00:12:26.060 --> 00:12:31.660 you don't have this constant printing money, people have a certain amount of income, 142 00:12:31.660 --> 00:12:33.860 if they buy more on one thing, they have to buy less on something else, 143 00:12:33.860 --> 00:12:40.360 so demand curves will tend to shift around, and according to consumer preferences and values, 144 00:12:40.360 --> 00:12:45.260 which change, you know, unpredictably, anyway, so. 145 00:12:45.260 --> 00:12:49.060 The standard example back in the 1930s was that people shift from pork to beef 146 00:12:49.060 --> 00:12:52.100 So they get more affluent, which is still true. 147 00:12:52.100 --> 00:12:54.380 Somehow pork is considered low-type. 148 00:12:54.380 --> 00:12:57.300 And so it's like those people get higher living standards. 149 00:12:57.300 --> 00:12:59.540 They tend to shift from pork to beef. 150 00:12:59.540 --> 00:13:03.580 They have a portion, and then they buy shifts. 151 00:13:03.580 --> 00:13:05.900 So then you have the pork market to beef market. 152 00:13:05.900 --> 00:13:15.580 And then, that one or any moral condemnation or food 153 00:13:15.580 --> 00:13:39.580 And what you have initially is a demand meaning how much people pay them to give them the price. 154 00:13:39.580 --> 00:13:44.580 Nobody knows exactly what it is, by the way. It's another key point that Austrian always make. 155 00:13:44.580 --> 00:13:50.580 The textbooks always say, here's the man curve, here's the cost curve, and you grind out how much will be produced, and nobody knows what they are in the real world. 156 00:13:50.580 --> 00:13:57.580 Businessmen and entrepreneurs, in the uncertain world of entrepreneurship, try to estimate, try to find out what the man curve is and what the costs are. 157 00:13:57.580 --> 00:14:04.580 It's one of the key differences between Austrian economics and the Maurrasians, who are now dominating the economics profession. 158 00:14:04.580 --> 00:14:14.580 And it says there on the textbooks, given the demand curve, given the cost curve, this isn't how much will be produced in generally the Ludwig you haven't gotten to yet. 159 00:14:14.580 --> 00:14:18.580 But the point is, given the whom, nobody knows it, it's not given at all. 160 00:14:18.580 --> 00:14:24.580 The market is a process of trying to find out what's going on, and hopefully learning and adjusting the changes and so forth and so on. 161 00:14:24.580 --> 00:14:26.580 It's a very, very different kind of approach. 162 00:14:26.580 --> 00:14:49.580 OK, so then there's a higher price for beef and a lower price for pork, initially, in reaction, because, again, at the old price, people don't want to buy as much pork, surplus piles up, so the price has to fall, so people will be induced to buy the same amount of pork as they did before. 163 00:14:49.580 --> 00:15:01.580 The beef market, again, more people want to buy beef at any given price, so the price of beef has to go up to eliminate this transitory shortage. 164 00:15:05.580 --> 00:15:11.580 Other more modern examples, since World War II, there's been a big shift in consumer preference from red wine to white wine. 165 00:15:11.580 --> 00:15:41.580 California wine, enormous shift, so that the, part of these California wines are not very big because California reds are not too hot, California whites are just as good as French whites, so as the, as preferences shifted from red to white, the old age, you're only supposed to drink white with fish and chicken, now people drink white with everything, so that means the California whites don't become very big, so the demand curve for white wine goes up, the demand curve for red wine goes down, also it's happened with the tremendous shift in alcohol preferences, 166 00:15:41.580 --> 00:15:45.260 This is out of bourbon, for example, into vodka. 167 00:15:45.260 --> 00:15:49.860 So 1940 already back vodka, except for a few Russian emigres. 168 00:15:49.860 --> 00:15:51.100 And nowadays, vodka is enormous. 169 00:15:51.100 --> 00:15:52.220 So there's a big shift. 170 00:15:52.220 --> 00:15:55.340 And they're both the same toward the so-called lightness. 171 00:15:55.340 --> 00:15:57.920 I guess heavy drinks until the light breaks. 172 00:15:57.920 --> 00:16:00.500 So again, you have an increase in the mangrove for vodka, 173 00:16:00.500 --> 00:16:01.700 the mangrove for bourbon. 174 00:16:01.700 --> 00:16:03.500 Now, what happens then, and this brings us 175 00:16:03.500 --> 00:16:05.300 out of production, driving away the lightness. 176 00:16:05.300 --> 00:16:09.260 So far, I've been talking about the given supply line, 177 00:16:09.260 --> 00:16:10.500 how much is available. 178 00:16:10.500 --> 00:16:13.900 If we haven't talked about yet, who decides how much is going to be available? 179 00:16:13.900 --> 00:16:16.900 Who decides there's going to be 200,000 pounds of peaches today? 180 00:16:16.900 --> 00:16:18.500 Or a million loaves of Wonder Bread, or whatever? 181 00:16:18.500 --> 00:16:21.900 Well, producers have decided, you know, five years ago, two years ago, 182 00:16:21.900 --> 00:16:27.600 ten years ago, depending on what kind of technology and how long it takes to produce stuff. 183 00:16:27.600 --> 00:16:32.700 They decide on the basis of expectations, expected demand, what they think the demand will be, 184 00:16:32.700 --> 00:16:34.700 what they think the price will be, what they think the cost will be. 185 00:16:34.700 --> 00:16:36.200 Sometimes they're right, sometimes they're wrong. 186 00:16:36.200 --> 00:16:39.900 Those who are right make profits, those who are wrong suffer losses. 187 00:16:39.900 --> 00:16:54.900 So, what happens here is that the case of, let's say, red wine and white wine, it's more interesting if we're going to be... 188 00:16:54.900 --> 00:17:00.900 Here, there's the white people, and they say, well, you know, they see that there's a big increase in the amount of white wine, drop in the amount of red wine. 189 00:17:00.900 --> 00:17:02.900 They have to figure out whether it's going to be permanent or not. 190 00:17:02.900 --> 00:17:09.900 Is it transitory? Will it only last a couple of months because, I don't know, Kennedy likes white wine or whatever? 191 00:17:09.900 --> 00:17:13.900 They have to make a decision whether it will be semi-permanent or transitory. 192 00:17:13.900 --> 00:17:17.900 They make the decision, let's say the science will be permanent, they turn out to be right, 193 00:17:17.900 --> 00:17:22.900 they start retooling, if they're smart, if they will be able to survive. 194 00:17:22.900 --> 00:17:27.900 They start increasing the production of white wine and reducing the production of red wine, 195 00:17:27.900 --> 00:17:29.900 or increasing the production of beef, reducing the production of pork. 196 00:17:29.900 --> 00:17:30.900 Fork 197 00:17:30.900 --> 00:17:34.900 A different technological unit, so some things take two weeks to be tooled, some things take 198 00:17:34.900 --> 00:17:36.900 ten years, it depends on what you're producing. 199 00:17:36.900 --> 00:17:40.900 But what happens is over time you'll have an increase in the shift of the supply line 200 00:17:40.900 --> 00:17:41.900 to the right here. 201 00:17:41.900 --> 00:17:47.900 The response of the higher profits expected to be made because of the increased demand 202 00:17:47.900 --> 00:17:49.900 wind up with something like this. 203 00:17:49.900 --> 00:17:54.900 So in the long run you wind up with a price somewhere in between and greater production 204 00:17:54.900 --> 00:17:56.900 of white wine. 205 00:17:56.900 --> 00:18:02.700 And the red line starts shifting out of it as the supply lines keep going to the left. 206 00:18:02.700 --> 00:18:06.500 You wind up somewhere in between over here. 207 00:18:06.500 --> 00:18:14.580 And this is a long-run response to changes in demand. 208 00:18:14.580 --> 00:18:19.020 So what happens is that this indicates one thing, for example, 209 00:18:19.020 --> 00:18:23.340 how production is the response of the anticipator, expected demand, or consumer. 210 00:18:23.340 --> 00:18:25.700 The consumer is the driver of the engine. 211 00:18:25.700 --> 00:18:30.500 Producers are very anxious to figure out what consumers are going to buy next year, 10 years from now, whatever. 212 00:18:30.500 --> 00:18:36.800 And they move into the situation, if they think consumers are the one that will want white wine heavily, they'll move into that, they'll move out of red wine. 213 00:18:36.800 --> 00:18:42.600 If they're mistaken, they lose money. If they're correct, they make money, make profits, and lose money if they don't. 214 00:18:42.600 --> 00:18:47.600 Usually on the market, entrepreneurs tend to be pretty good at it, because otherwise they go bankrupt and drop out. 215 00:18:47.600 --> 00:18:52.100 It's a sort of law of survival of the fittest. So if you're... 216 00:18:52.100 --> 00:19:04.100 It doesn't necessarily happen, sometimes we make a lot of boo-boos, but basically, the tendency is for successful forecasters and entrepreneurs to do well and they might remain in the market and for unsuccessful ones to drop out. 217 00:19:04.100 --> 00:19:19.100 At any rate, if you take the locus of any given shift in demand, hypothetically, take this intersection, the lower right intersection, and you'll get a line like that. 218 00:19:19.100 --> 00:19:24.100 This is the textbook supply curve, forward-sloping supply curve. 219 00:19:24.100 --> 00:19:28.100 The reason why Austrianists stress the vertical supply curve is because the longer supply curve is totally different. 220 00:19:28.100 --> 00:19:34.100 It doesn't belong in the same diagram, because time is involved here. 221 00:19:34.100 --> 00:19:37.100 It needs three dimensions. 222 00:19:37.100 --> 00:19:40.100 There are different things, like apples and peaches. 223 00:19:40.100 --> 00:19:43.100 The demand curve is instantaneous. It's a freeze-frame situation. 224 00:19:43.100 --> 00:19:48.100 At any given day, how much will be bought at different prices? 225 00:19:48.100 --> 00:19:50.780 And nobody knows exactly what they are, but we do know it's falling, that's what we know. 226 00:19:50.780 --> 00:19:55.820 We know that people, consumers, buy less at a higher price and more at a lower price. 227 00:19:55.820 --> 00:20:00.140 Supply curve at any given day is instantaneous, there it is, the stuff is there, 300,000 features. 228 00:20:00.140 --> 00:20:05.980 Over the long run, this is how much will be evoked for the man curve to keep shifting, 229 00:20:05.980 --> 00:20:13.340 and prices such and such is how much will be supplied in the long run by white line manufacturers, vice versa. 230 00:20:13.340 --> 00:20:20.620 So that's, and this thing is philosophically sloppy too, 231 00:20:20.620 --> 00:20:22.260 that forward sloping, backward sloping. 232 00:20:22.260 --> 00:20:24.180 Two different things involved, see, 233 00:20:24.180 --> 00:20:26.140 the Austrian position focuses on the, 234 00:20:26.140 --> 00:20:28.540 not only does it have the correct axes 235 00:20:28.540 --> 00:20:30.580 for the correct time period, 236 00:20:30.580 --> 00:20:32.420 the Austrian position focuses on people 237 00:20:32.420 --> 00:20:35.980 subjectively evaluating goods and services 238 00:20:35.980 --> 00:20:38.220 which are there, ready for sale. 239 00:20:38.220 --> 00:20:39.740 This thing focuses on really nothing, 240 00:20:39.740 --> 00:20:41.100 so it doesn't focus on any of that. 241 00:20:41.100 --> 00:20:42.780 It becomes mechanical, it becomes mechanistic, 242 00:20:42.780 --> 00:20:45.940 I'm just removed from actual action. 243 00:20:45.940 --> 00:20:49.780 So that's the name of it. 244 00:20:49.780 --> 00:20:51.100 I've been talking about it for an hour now. 245 00:20:51.100 --> 00:20:52.560 Anybody have any comments or questions? 246 00:20:52.560 --> 00:20:55.060 Yeah, I was just sort of glancing at your book, 247 00:20:55.060 --> 00:20:58.060 and you have a vertical supply curve diagram. 248 00:20:58.060 --> 00:21:02.780 Right next, you have a positive supply curve diagram. 249 00:21:02.780 --> 00:21:04.420 We have a lot of- 250 00:21:04.420 --> 00:21:05.820 That's the locus. 251 00:21:05.820 --> 00:21:08.140 We have a whole bunch of little ones. 252 00:21:08.140 --> 00:21:09.780 But that's useful, too. 253 00:21:09.780 --> 00:21:10.460 It's just a different- 254 00:21:10.460 --> 00:21:12.100 Yeah, it's useful to show that, yeah, 255 00:21:12.100 --> 00:21:18.100 If you pay a higher price, you'll get more in the long run. More will be produced in the long run. 256 00:21:18.100 --> 00:21:23.100 It's not two or four for Rembrandts. That's why Rembrandts are fixed, frozen forever. 257 00:21:23.100 --> 00:21:30.100 Nobody produces any more Rembrandts. Rembrandts are dead. Unless you have a perfect forger. 258 00:21:30.100 --> 00:21:40.100 One of the other faults of that type is that the demand curve crosses the supply curve, mislabeled as the supply curve. 259 00:21:40.100 --> 00:21:50.100 It doesn't allow for the different situations that you find in some markets that are much more volatile. 260 00:21:50.100 --> 00:21:55.100 In a lot of things, you have other ways that the price is determined. 261 00:21:55.100 --> 00:22:13.100 The main thing is you have unique items. And in a unique item, if I don't have any great time preference, an upper bound on what I'm willing to pay is what I think I could produce another item for given time of the same sort. 262 00:22:13.100 --> 00:22:30.100 The lower bound on what I'm willing to pay is my value of a nice return over future value, present value of future cash flow given the savings I have given to everybody by an apartment building. 263 00:22:30.100 --> 00:22:37.100 I'm probably unwilling to pay more than what I think I could put a similar apartment building up for. 264 00:22:37.100 --> 00:22:47.100 On the other hand, I'm at least willing to pay a price that the cash flow will give me a, say, 20% return on my money, so I have some balance on it. 265 00:22:47.100 --> 00:22:59.100 And then I also look at what similar credit abilities have been bought for, but I think there's other measures of what you're willing to buy and pay. 266 00:22:59.100 --> 00:23:17.500 Most of these things that you're talking about, the red wine, white wine, the beef, pork, are fairly non-business-like decisions. 267 00:23:17.500 --> 00:23:26.300 They're decisions, what do I do with my money? I've got to eat some tonight, so let's flip a coin. Who cares whether I eat beef or pork? It's just sort of... 268 00:23:26.300 --> 00:23:33.700 There are decisions that are made on the sort of spur-of-the-moment thing. 269 00:23:33.700 --> 00:23:36.140 Why the spur-of-the-moment? It might be or might not. 270 00:23:36.140 --> 00:23:41.740 Well, it's maybe from the aspect of the consumer, but certainly not from the aspect of the seller or the producer or the port. 271 00:23:41.740 --> 00:23:42.980 You've got to anticipate. 272 00:23:42.980 --> 00:24:06.980 The demand, the swing is seems to me, right now, over the long run, I would hope that if the producers are rationing, then the price of production does, in a sense, determine the supply. 273 00:24:06.980 --> 00:24:35.980 One other point that really bothered me. Why did you say that Austrian economists aren't valuable to business, or that there aren't jobs for them in business. It seems to me that what business should want is a rational view of the world. 274 00:24:35.980 --> 00:24:47.980 and two of the best possible tools that they can have for predicting future events. 275 00:24:47.980 --> 00:24:56.980 And if your view of the world is correct, then presumably it is also better than other views of the world 276 00:24:56.980 --> 00:25:00.980 of predicting future events, therefore you should be valuable to this. 277 00:25:00.980 --> 00:25:05.980 more so than somebody that's incorrect and badly bad. 278 00:25:05.980 --> 00:25:09.980 But economists can say, and economics, a few more economists can say the following. 279 00:25:09.980 --> 00:25:13.980 If the demand for white wine goes up, such things will happen. 280 00:25:13.980 --> 00:25:17.980 Price will go up and then more people, if entrepreneurs anticipate it 281 00:25:17.980 --> 00:25:21.980 and they think it's permanent and it is permanent, there will be more production. 282 00:25:21.980 --> 00:25:23.980 But we don't know what the white wine price is. 283 00:25:23.980 --> 00:25:25.980 We don't have to think about the demand for white wine. 284 00:25:25.980 --> 00:25:32.780 We have a formal set of tools here, and I don't think the entrepreneur needs that. 285 00:25:32.780 --> 00:25:40.280 I mean, he knows that in a stick of land anyway, he knows that if people pay more for it, he won't be more profitable going into it. 286 00:25:40.280 --> 00:25:44.480 What we're doing is essentially analyzing individual actions and entrepreneurial action. 287 00:25:44.480 --> 00:25:49.980 The Austrian economists are now invaluable in the sense of the business map because of government intervention. 288 00:25:49.980 --> 00:25:52.980 We can predict the results of government intervention, they can. 289 00:25:52.980 --> 00:25:55.380 If you totally free market, we have no role at all. 290 00:25:55.380 --> 00:25:57.980 Now we can say, look, if there's price control, 291 00:25:57.980 --> 00:25:59.380 things are going to be a shortage, 292 00:25:59.380 --> 00:26:02.380 or if the money's flying, there's going to be inflation. 293 00:26:02.380 --> 00:26:04.980 I didn't even buy that, because in a totally free market, 294 00:26:04.980 --> 00:26:06.380 you've got to keep it that way. 295 00:26:06.380 --> 00:26:07.580 Yeah, of course. 296 00:26:07.580 --> 00:26:09.180 So, therefore, there's the education... 297 00:26:09.180 --> 00:26:10.380 Oh, yeah. No, no, no. 298 00:26:10.380 --> 00:26:12.380 We always have an educational function. 299 00:26:12.380 --> 00:26:15.380 I'm just saying, as a business, if you're employed by IBM or something, 300 00:26:15.380 --> 00:26:17.780 an economist, right now, it's really... 301 00:26:17.780 --> 00:26:20.780 Well, I mean, really employed, but it looks ridiculous. 302 00:26:20.780 --> 00:26:39.780 It seems to me the problem is that businessmen would rather have somebody who says he can predict, even if he predicts wrong, than an Austrian who says, I can't predict, so he can't do anything. 303 00:26:39.780 --> 00:26:47.780 Our discussion last night about altruism versus greed and grab and all that jazz. 304 00:26:47.780 --> 00:27:02.780 Right now, though, economists are employed in general in business to set a given pattern and then advise government on how to put that in place, isn't that how they're working? 305 00:27:02.780 --> 00:27:11.780 In general, very general. For example, you take an industry like, what industry could I use? Well, accounting. We have some accounting room. 306 00:27:11.780 --> 00:27:41.780 take an industry like the accounting practice and an economist would say okay if all people were required to file income tax returns in a certain way then we would provide the service of filling out income tax returns for them we would limit the number of people who came into the market and so on and so forth and they start with this given model and then conspire to or try to achieve the regulation that will put that model in place 307 00:27:41.780 --> 00:27:45.780 Is that how economists work in the business world now? 308 00:27:45.780 --> 00:27:47.780 In general. 309 00:27:47.780 --> 00:27:49.780 I'm going to cry. 310 00:27:49.780 --> 00:27:52.780 Let's go this way. Economists have certain functions. 311 00:27:52.780 --> 00:27:55.780 I'm not a business economist, but I know some. 312 00:27:55.780 --> 00:27:59.780 First of all, they write speeches for their Chairman of the Board of Presidents. 313 00:27:59.780 --> 00:28:01.780 That's an important function. 314 00:28:01.780 --> 00:28:03.780 Usually, his speeches are pretty good. 315 00:28:03.780 --> 00:28:05.780 If you look at business, a friend of mine used to be an economist. 316 00:28:05.780 --> 00:28:07.780 He used to work for Businessweek. 317 00:28:07.780 --> 00:28:14.100 The business writer, for different corporations, he says, 318 00:28:14.100 --> 00:28:20.700 these features are great, they also have a core free market, and actions are totally different for the same people. 319 00:28:20.700 --> 00:28:26.780 But the business speech is usually pretty good, so that's one thing economists do, they write speeches. 320 00:28:26.780 --> 00:28:35.420 But it's also a sort of PR function. We have an economist too and he does something such and it looks good to the public. 321 00:28:35.420 --> 00:28:42.420 The stockholders, there's also a problem with stockholders' suits, there's lots of stockholders' suits, stockholders' suing them in the management. 322 00:28:42.420 --> 00:28:47.420 And so the manager says, yeah, they cover their rear, so to speak. 323 00:28:47.420 --> 00:28:52.420 We made this decision, we had a fleet of top PhDs who were going to advise us on this. 324 00:28:52.420 --> 00:28:54.420 It's another function. 325 00:28:54.420 --> 00:28:58.420 All of us have a certain, you know, begins to take on the mentions of a racket. 326 00:28:58.420 --> 00:29:20.420 There was an article in the regional magazine called The Detectives Press, it was a type of look out of the technocrats at the time, people were training the university to be like us. 327 00:29:20.420 --> 00:29:37.420 Now, by the way, the worst example is the Economic Council of Canada, which is the bank president's idea, you know, he's the head of the big companies, and they're appointed, like, guess who the president is, and they call his people economists. 328 00:29:37.420 --> 00:29:43.420 Well, if you look at the forecasting, it's a big profession now, the enormous amount of money is made up of economic forecasting. 329 00:29:43.420 --> 00:29:47.420 The forecast, if you look at the forecast, they all say about the same things. 330 00:29:47.420 --> 00:29:53.420 You know, GNP is going to be, listen, inflation rate, unemployment rate, and such and such. 331 00:29:53.420 --> 00:30:01.420 Usually they're wrong. Matter of fact, there are people who judge, there are economists who estimate, 332 00:30:01.420 --> 00:30:05.420 who analyze forecasts, they've been doing that for quite a while now. 333 00:30:05.420 --> 00:30:10.420 How good are they? Every survey has ever made a forecast. They totally flop a rule. 334 00:30:10.420 --> 00:30:16.420 In other words, as a matter of fact, if you simply take a ruler... 335 00:30:16.420 --> 00:30:21.420 This is time, right? 1972, 1980s, whatever. 336 00:30:21.420 --> 00:30:24.420 If you take whatever statistic you're drawing back, and it's been going like that, 337 00:30:24.420 --> 00:30:29.420 if you simply draw a ruler and extrapolate trend, you do better than high-speed computer models 338 00:30:29.420 --> 00:30:33.420 than you can metric forecasts, on the average. Better! 339 00:30:33.420 --> 00:30:41.420 So, of course, you can't charge $500,000 for a corporation to take a ruler and go online, right? 340 00:30:41.420 --> 00:30:48.420 So, and they say, and the Wall Street Journal every once in a while talks about the parallels of forecasting, 341 00:30:48.420 --> 00:30:51.420 and they had one, I think, last about six months ago. 342 00:30:51.420 --> 00:30:59.420 They're complaining about, gee, we can do pretty well when trends don't change. 343 00:30:59.420 --> 00:31:08.420 The problem is to predict when the trend goes down or up. We haven't been able to detect that yet. 344 00:31:08.420 --> 00:31:13.420 So of course, that's the whole point. The problem is the forecast changes in the trend. 345 00:31:13.420 --> 00:31:15.420 You can't do it. Abysmal. 346 00:31:15.420 --> 00:31:20.420 And the forecast is almost always the same in a very small range. 347 00:31:20.420 --> 00:31:22.420 The reason is that nobody wants to be different from the other guys. 348 00:31:22.420 --> 00:31:25.420 The thing is it's like running in packs. 349 00:31:25.420 --> 00:31:37.420 If you're hired by a corporation or if you're, they're forecasting companies, data, I forget the name, data resourcing, just a corporate or something, auto-exit is the biggest one. 350 00:31:37.420 --> 00:31:45.420 If you're hired by companies that forecast, if you're wrong, and most of them are wrong, if you're wrong in tax, they say, oh geez, the state of the art, I couldn't help it, right? 351 00:31:45.420 --> 00:31:49.420 Everybody was wrong, only top economists were wrong, it's the way life is. 352 00:31:49.420 --> 00:31:56.420 But if you're way out of line, if you say inflation would be 2%, the other guy would say 8%, it's 8%, then you're at the end, finished. 353 00:31:56.420 --> 00:31:59.420 You're way out of line with everybody else for your turkey. 354 00:31:59.420 --> 00:32:05.420 So if you're all rolling together, no individual person can be blamed. 355 00:32:05.420 --> 00:32:09.420 So as a result, they all, first of all, interact with each other all the time. 356 00:32:09.420 --> 00:32:11.420 It was the same model as in the lab, it was long. 357 00:32:11.420 --> 00:32:16.420 So they wind up in a very similar range, the difference is very small. 358 00:32:16.420 --> 00:32:22.420 There's also one interesting problem with this thing, which has troubled me for a while, 359 00:32:22.420 --> 00:32:26.420 is that they have investment forecasters and all that, but they're always wrong. 360 00:32:26.420 --> 00:32:31.420 There's investment newsletters, which do forecasting of stocks and commodities and all that. 361 00:32:31.420 --> 00:32:34.420 Take, for example, Elliot Jane White, one of the most famous, 362 00:32:34.420 --> 00:32:37.420 who's been consistently wrong now for about 20 years, way wrong. 363 00:32:37.420 --> 00:32:42.420 I can predict the Dow Jones average is going down to 1,500 in six months. 364 00:32:42.420 --> 00:32:45.420 Six months in a row, it's still about 1,000. 365 00:32:45.420 --> 00:32:48.440 Why doesn't he lose all of his customers? 366 00:32:48.440 --> 00:32:49.820 That's an interesting question. 367 00:32:49.820 --> 00:32:53.460 It seems to me that what the left is called, the state is called market failure, 368 00:32:53.460 --> 00:32:57.580 only in market forecasting business. 369 00:32:57.580 --> 00:33:01.740 So, well, I was walking around asking people about this, 370 00:33:01.740 --> 00:33:03.780 people in the business and so forth. 371 00:33:03.780 --> 00:33:07.780 They admitted this, that people make millions from consistently wrong forecasts. 372 00:33:07.780 --> 00:33:10.700 So what's up here? 373 00:33:10.700 --> 00:33:14.620 Well, it turns out, one of the answers is, well, you get loose suckers coming in. 374 00:33:14.620 --> 00:33:21.620 That's not really good enough, it's not very satisfying because the market is supposed to work so that better people wind up as forecasters. 375 00:33:21.620 --> 00:33:32.620 Well it turns out, and the answer to the given which I think is correct is, essentially forecasting of that sort, especially not for business that prefer individuals with buying market letters, is really consumer good. 376 00:33:32.620 --> 00:33:40.620 It's not really, the purpose is not to find out, not the forecast, that's why nobody checks up on the forecast, nobody cares if you're wrong six months later. 377 00:33:40.620 --> 00:33:50.620 They enjoy reading the forecast, they enjoy listening to the guys say there's going to be a depression in six months, there's going to be wild inflation in six months. That's the enjoyment, it's consumer good. 378 00:33:50.620 --> 00:33:56.620 This is the way, they don't care whether he's right or not, they just like the hero. 379 00:33:56.620 --> 00:33:58.620 It's printed material. 380 00:33:58.620 --> 00:34:06.620 It's like a showmanship, if you notice the guys really make a lot of money, those who are very showman like this guy. 381 00:34:06.620 --> 00:34:22.620 Joe Granville, he goes in a whole act, and so it's like show inches, like watching entertainment, and once I realize that, then my troubles are over, I realize it's not a market failure, it's just a crazy market. 382 00:34:22.620 --> 00:34:27.620 So that shows you what economics is all about. 383 00:34:27.620 --> 00:34:36.620 If I may say something, that there is no need for economists, like there is no need for psychiatrists. 384 00:34:36.620 --> 00:34:41.620 People like to go to psychiatrists because they want to talk to somebody. 385 00:34:41.620 --> 00:34:46.620 They want to listen to economists in business because it is nice to hear. 386 00:34:46.620 --> 00:34:53.620 Nobody takes them seriously, especially, but it's nice to have a long-range planning committee 387 00:34:53.620 --> 00:35:23.620 for the next 20 years, because you know, it doesn't matter what they do, but the whole difference is simply that Austrian economists and the classical, basically, British-based economists, the English, that the Austrian, being Austrians, coming from middle Europe, they don't take them so seriously, this is, and they don't have this scholastic seriousness, this academism, and this is, 388 00:35:23.620 --> 00:35:29.220 Why they can't come to that conclusion, and I think this is the nature of the Austrian economy, 389 00:35:29.220 --> 00:35:34.900 that they don't take them so seriously, and they see that there are an amount of uncertainty, 390 00:35:34.900 --> 00:35:39.780 that everything is relative, I am judging the values through my own judgment, 391 00:35:39.780 --> 00:35:45.380 there is no objective values, there are no definitions like goods which you are looking, 392 00:35:45.380 --> 00:35:52.500 because what is it? Every item, the end, every item in that definition is relative, 393 00:35:52.500 --> 00:35:58.020 through my own judgement. So they come to the final conclusion that the economy, 394 00:35:58.020 --> 00:36:03.780 by the Austrians who invented the psychiatry, they came in also with the same conclusions. 395 00:36:03.780 --> 00:36:11.540 And it is exactly the same Viennese intellectual who in the Viennese coffee house had nothing else to do after 396 00:36:11.540 --> 00:36:20.900 playing chess to go into economic theory or to go into psychiatry. Some became Freud, the other became Menger. 397 00:36:20.900 --> 00:36:30.900 But one thing is involved here also. In Austrian theory, all economic laws are qualitative and not quantitative. 398 00:36:30.900 --> 00:36:38.900 We know that if the price falls, more people will buy it, more will be purchased, and more will be assorted. 399 00:36:38.900 --> 00:36:47.900 There's no economic law that tells you how much the price will fall, what the shape of the man curve is, what the price will be next week, and so forth. 400 00:36:47.900 --> 00:36:55.900 And it's considered, and this is really, I guess, a real important philosophical point about Austrian method, which is, as I was telling you earlier today, 401 00:36:55.900 --> 00:37:02.900 it's much more, we're much more in a minority nowadays, the free market, the sort of, a lot of free market economists, they're not as consistent as the Austrians are, 402 00:37:02.900 --> 00:37:08.900 but they're more or less so semi-free market economists now. So the real minority we're really in is methodological and philosophical. 403 00:37:08.900 --> 00:37:13.900 They can't stand the fact we say there's no such thing as quantitative rules. You can't predict the future quantitatively. 404 00:37:13.900 --> 00:37:19.900 You can't say a price of corn is going to be such-and-such in six weeks, ten years from now or something. 405 00:37:19.900 --> 00:37:27.900 And so those people who believe that there are, you can have quantitative logic and say, 406 00:37:27.900 --> 00:37:33.900 no, no, the man curve is 0.3 times or whatever, are really determinists. 407 00:37:33.900 --> 00:37:36.900 They really think that you can sort of determine the future, but it doesn't pretty well. 408 00:37:36.900 --> 00:37:39.900 Human action doesn't change. People are like objects or molecules. 409 00:37:39.900 --> 00:37:44.500 Therefore, you can therefore chart them like you can chart molecules. 410 00:37:44.500 --> 00:37:46.900 That's what physics, they're quantitative laws, right? 411 00:37:46.900 --> 00:37:51.300 It's how the missile will fall as it's being shot. 412 00:37:51.300 --> 00:37:55.300 And these people tended to think, and it's something in modern scientific methods, 413 00:37:55.300 --> 00:37:56.900 so-called modern scientific methods, 414 00:37:56.900 --> 00:37:59.700 something in the idea that people can be treated just like objects or molecules, 415 00:37:59.700 --> 00:38:03.500 and then chart their course and determine everything they're going to do. 416 00:38:03.500 --> 00:38:06.300 So that's a key difference, and that's why Austrian is very much in the minority, 417 00:38:06.300 --> 00:38:08.700 and that reason alone is very interesting. 418 00:38:08.700 --> 00:38:13.380 Most hard scientists, so to speak, in economics, I think they're hard scientists, 419 00:38:13.380 --> 00:38:16.740 want to get the prestige of physics and mathematics, which is real science, 420 00:38:16.740 --> 00:38:20.740 can't stand them, they just go bananas. 421 00:38:20.740 --> 00:38:24.980 That's an important, very important point. 422 00:38:24.980 --> 00:38:31.660 So, because now, so-called social sciences, or sciences of human action, Mises would put it, 423 00:38:31.660 --> 00:38:36.660 it's now considered, the only real science is math and numbers and all that, that's what science is, 424 00:38:36.660 --> 00:38:46.660 And that's how you build the atom bomb or whatever, and that still is a very dominant profession. 425 00:38:46.660 --> 00:38:51.660 So that's it. Who's your point? By the way, I can't resist this. There's nothing to do with the point. 426 00:38:51.660 --> 00:38:55.660 I'm talking about old Vienna. Mises used to be full of great anecdotes about old Vienna. 427 00:38:55.660 --> 00:39:01.660 He was my mentor and he lived there for all his life until the 1930s. 428 00:39:01.660 --> 00:39:05.660 And so one time he was walking down the street and the logical positivists were then digging in Vienna. 429 00:39:05.660 --> 00:39:25.660 So, Max Schuyler, who was an distinguished German economist, German philosopher, was walking down the streets of Vienna with Mises, and he said, tell me, Lew, how is it, why is it, what is there on the climate of Vienna that produces all these damn logical positivists? 430 00:39:25.660 --> 00:39:34.660 Mises took a little shrug and said, well, he said, well, Max, there are six million people in Vienna, three million people in Vienna, they're only total logical positivists, they can't be the climate. 431 00:39:34.660 --> 00:39:39.660 Anyway, that's a typical Misesian anecdote. 432 00:39:44.660 --> 00:39:54.660 One thing about forecasting, I can't resist this one too, is the outside economists, again, always try to say, 433 00:39:54.660 --> 00:40:00.660 criticizing the market, saying there should have been more steel produced, or there should have been less of that produced, more of that. 434 00:40:00.660 --> 00:40:06.660 And Mises' response was always, why don't they go and produce it, because the market's fed, there's a hole in the market. 435 00:40:06.660 --> 00:40:09.660 As entrepreneurs, they should go out there and fill the gap. 436 00:40:09.660 --> 00:40:20.660 And on forecasting, he would say, oh, people, for example, still claim they can predict the stock market, commodity market, to a T, that system. 437 00:40:20.660 --> 00:40:25.660 Well, if they really could do it, they wouldn't be wasting their time producing newsletters, they'd be making $2 trillion. 438 00:40:25.660 --> 00:40:55.660 and one time I saw a TV show where a talk show panel or something was a panel of forecasters or sports forecasters, people predicting baseball and basketball and all that and the host was talking about forecasting and each of them putting out weekly letters and finally the talk show host by an accident stumbled into a key question and said, well first he said, yes, do people bet on their own predictions? 439 00:40:55.660 --> 00:41:04.660 Oh, of course we do. We believe in you. We convince you wholeheartedly, and we bet on you and you're usually right. Yes, yes, we're right 98% of the time or something. 440 00:41:04.660 --> 00:41:14.660 And he says, then it hits the post, he says, well, in that case, you're missing me making millions of dollars, why are you wasting your time putting it in the newsletter? 441 00:41:14.660 --> 00:41:24.660 And the guy, he's never heard the question before, baseball forecasters, I swear he said it, he said, well, I think it's important to give this information to the public. 442 00:41:24.660 --> 00:41:30.660 I thought it was an altruistic thing. I'm like, no, I'm not discriminated by that. 443 00:41:30.660 --> 00:41:37.660 So anyway, I thought it was a little point of my point of forecasting theory. 444 00:41:37.660 --> 00:41:47.660 So, I guess we have the course now, which we haven't really touched on enough before. 445 00:41:47.660 --> 00:41:53.660 There's a tremendous difference in course theory between Austrian and everybody else, Orthodox. 446 00:41:53.660 --> 00:42:04.660 The classical and neoclassical view is that in the long run, at least, in the long run, prices tend to equal cost of production. 447 00:42:04.660 --> 00:42:12.660 The theory is something like this. Well, if you have an industry with 8% or 20% profits, 448 00:42:12.660 --> 00:42:18.660 another industry with 2% profits, people tend to move out of an industry with low profits or losses, 449 00:42:18.660 --> 00:42:21.660 move into the industry with high profits and get equalization. 450 00:42:21.660 --> 00:42:32.660 So you wind up with more or less equal profit rates across the board, zero profit rate, depending on the theory you're dealing with, and prices then equaling across the production throughout. 451 00:42:32.660 --> 00:42:35.660 So in the long run, as Marshall was famous, two blades of a scissor. 452 00:42:35.660 --> 00:42:43.660 Well, it's true in the short run that somehow they thought it was somehow unimportant, the real world is unimportant. 453 00:42:43.660 --> 00:42:49.660 It's true in day-to-day life, utility determines price, et cetera, and the supply line, the vertical supply line. 454 00:42:49.660 --> 00:42:57.340 The long run is really cost of the determinant. The long run is the famous metaphor of Alfred 455 00:42:57.340 --> 00:43:17.340 Marshall. Alfred Marshall, by the way, was the heir of Smith and McCarroll. The importance of Marshall was that he brought back McCarroll after McCarroll was more or less dead in the water. 456 00:43:17.340 --> 00:43:20.700 in other words, the theory of what was out. 457 00:43:20.700 --> 00:43:22.860 And Marshall has brought it back with tremendous prestige 458 00:43:22.860 --> 00:43:27.380 because he was at Cambridge University, writing in 1890, 459 00:43:27.380 --> 00:43:31.580 whatever, 1820s, 18s. 460 00:43:31.580 --> 00:43:33.700 So Marshall's famous metaphor was, well, it's like waves 461 00:43:33.700 --> 00:43:34.780 of the ocean. 462 00:43:34.780 --> 00:43:36.740 If you look at it in day-to-day prices, 463 00:43:36.740 --> 00:43:40.700 the height of the wave, particular wave, but in the long run, 464 00:43:40.700 --> 00:43:42.420 the price is going to be the level of the ocean, 465 00:43:42.420 --> 00:43:44.820 since the ocean is more important than the individual wave. 466 00:43:44.820 --> 00:43:57.820 So this sets the thing so that economists then get interested only in the long run, which never exists, for the reason we're going to, and not in the short run or the immediate day-to-day thing, which, of course, does exist. 467 00:43:57.820 --> 00:44:05.820 In the long run, prices are going to be equal in cost of production, or determined by the cost of production, worse than that. 468 00:44:05.820 --> 00:44:13.820 The Austrian view of cost is very different. The Austrian view is that the only cost, there's no such thing as a real cost, some kind of objective cost, which is out there, 469 00:44:13.820 --> 00:44:33.820 In the case of me buying a newspaper, the price of the newspaper is the value to me. When I give up, it's $0.30. The cost to me is $0.30 for a newspaper. 470 00:44:33.820 --> 00:44:46.820 More importantly, if you have the choice of saying, where do I spend this evening or something, and you say, well, and that's why I'm at this particular meeting, I'll say next evening, and you say, well, you haven't. 471 00:44:46.820 --> 00:44:53.820 I can go to movie A, movie B, go to party A, party B, I can read book A, book B, I have about ten choices, let's say. 472 00:44:53.820 --> 00:45:02.820 And you decide to allocate your time to movie A, I think that's the most important one, my value scale, you don't have to make a big thing out of me, because you don't have to spend a lot of time on that, but you can spend some time on it. 473 00:45:02.820 --> 00:45:07.820 Okay, I'm going to movie A and that's pretty good, I'm the director or whatever, star. 474 00:45:07.820 --> 00:45:11.820 The cost of going to movie A is you consider the prices as money, 475 00:45:11.820 --> 00:45:15.820 but you also consider it, probably more so, as what you give up for it, 476 00:45:15.820 --> 00:45:18.820 which is probably movie B, which you don't go to. 477 00:45:18.820 --> 00:45:23.820 You sacrifice movie B and go to movie A instead. 478 00:45:23.820 --> 00:45:29.820 So the cost of going to movie A in that sense is movie B. 479 00:45:29.820 --> 00:45:35.820 In other cases, like if the value scale is newspaper 30 cents and the cost is 30 cents. 480 00:45:35.820 --> 00:45:40.820 In other words, the cost of doing something, of taking any action, making any sort of choice, 481 00:45:40.820 --> 00:45:42.820 is the highest value of what you give up. 482 00:45:42.820 --> 00:45:46.820 You give up 10 different things. The highest one is your cost. 483 00:45:46.820 --> 00:45:51.820 Okay, so to conclude from this, cost is subjective to each individual. 484 00:45:51.820 --> 00:45:54.820 Only the individual knows the cost of what it was actually. 485 00:45:54.820 --> 00:45:56.820 Nobody else can know it objectively. 486 00:45:56.820 --> 00:46:02.820 No economist, no government bureau, no statistician knows your cost. 487 00:46:02.820 --> 00:46:06.820 I mean, you can see the guy went to a movie. You can say, well, he gave up. He spent $5. 488 00:46:06.820 --> 00:46:11.820 Not necessarily the cost, because he might have gone to the second movie down the corner, which was also $5. 489 00:46:11.820 --> 00:46:23.820 In other words, put it in here. Take a value scale and movie A, movie B, and $5. 490 00:46:23.820 --> 00:46:33.820 In this situation, the course of going to movie A is not the final, but higher than that is the second movie you give up.