WEBVTT NOTE Introduction to Economics: Part 4 1 00:00:00.000 --> 00:00:04.000 After I spend the five bucks, there isn't any more course. It's finished. 2 00:00:04.000 --> 00:00:09.000 Well, this course is ex ante, is the term here. 3 00:00:09.000 --> 00:00:13.000 It's prospective. 4 00:00:13.000 --> 00:00:16.000 Ex ante is a Latin term meaning beforehand. 5 00:00:16.000 --> 00:00:20.000 Ex post, ex ante is you're looking totally actually just about to do something. 6 00:00:20.000 --> 00:00:22.000 And you're looking ahead at what's going to happen. 7 00:00:22.000 --> 00:00:24.000 Consequences of a value to do something. 8 00:00:24.000 --> 00:00:29.000 Ex post is looking back, so on account of looking back, what happened last year, last month. 9 00:00:29.000 --> 00:00:59.000 And so, costs are only ex-ante. Before you spend the money, before you spend your time, whatever the expenditure is, before you make your choices, you have your value scales, your pick, these things are the top value to you, the cost is your second highest value, and the cost disappears after you do it. After you do it, there's no more cost. You can go back and say, well, gee, I shouldn't have done that, or did do that, or something. That's some sort of history. 10 00:00:59.000 --> 00:01:00.680 It's not cost. 11 00:01:00.680 --> 00:01:02.520 So cost is ephemeral and disappears 12 00:01:02.520 --> 00:01:04.440 after the action occurs. 13 00:01:06.440 --> 00:01:11.200 There's a question, for example, of so-called sunk cost, 14 00:01:11.200 --> 00:01:16.200 where, well, for example, a businessman spends $10,000 15 00:01:18.160 --> 00:01:20.040 on a product, produces a product, 16 00:01:20.040 --> 00:01:22.600 he'd like to sell it for $12,000, 17 00:01:22.600 --> 00:01:26.240 let's say, anticipates a profit of 20% or something. 18 00:01:26.240 --> 00:01:28.000 He's already spent the $10,000, 19 00:01:28.000 --> 00:01:31.180 The product is there, so we can't sell it for $12,000. 20 00:01:31.180 --> 00:01:33.040 Nobody wants to buy it. 21 00:01:33.040 --> 00:01:36.560 He sells it for $5,000, let's say. 22 00:01:36.560 --> 00:01:39.960 But if he says to himself, I can't sell it for less than $10,000, 23 00:01:39.960 --> 00:01:43.160 then my cost would be excessive. 24 00:01:43.160 --> 00:01:44.960 I'd have to hold on to it and not sell it. 25 00:01:44.960 --> 00:01:48.600 It's pretty ridiculous, because the cost has already disappeared. 26 00:01:48.600 --> 00:01:50.240 It's too bad he spent the $10,000. 27 00:01:50.240 --> 00:01:51.240 But he's done it already. 28 00:01:51.240 --> 00:01:52.800 Now he's stuck with this thing. 29 00:01:52.800 --> 00:01:55.840 Now it's the figure, what's the most value I can get for it? 30 00:01:55.840 --> 00:02:00.840 And so, if it's $5,000, then it's $5,000, there's no more. 31 00:02:01.080 --> 00:02:02.720 The $10,000 cost has already been expended 32 00:02:02.720 --> 00:02:05.840 and it's finished, out the window. 33 00:02:05.840 --> 00:02:08.680 He now tries to get what he can get for it. 34 00:02:08.680 --> 00:02:13.680 So, as a result, they're basing something on costs, 35 00:02:16.120 --> 00:02:18.920 what costs supposedly are as an entity, as non-existent. 36 00:02:20.480 --> 00:02:23.040 This goes in welfare, economics, and politics, 37 00:02:23.040 --> 00:02:24.400 this is all over the place. 38 00:02:24.400 --> 00:02:30.080 For example, economists dealing with government projects will say, 39 00:02:30.080 --> 00:02:31.040 should the government do something? 40 00:02:31.040 --> 00:02:32.040 Should it build a dam? 41 00:02:32.040 --> 00:02:34.120 Or should it build a highway? 42 00:02:34.120 --> 00:02:37.040 Or should it build a steel plant? 43 00:02:37.040 --> 00:02:40.040 Economists will say, well, you have to engage in cost-benefit analysis. 44 00:02:40.040 --> 00:02:44.080 You take the social benefits, you add it up, put a money figure on it. 45 00:02:44.080 --> 00:02:47.520 Take the social costs and add them up, put a money figure on that. 46 00:02:47.520 --> 00:02:50.320 And if the social benefits are higher than the social costs, you should do it. 47 00:02:50.320 --> 00:02:52.160 Government should do this project. 48 00:02:52.160 --> 00:02:54.920 If social costs are higher than social benefits, you shouldn't do it. 49 00:02:54.920 --> 00:02:56.080 Sounds terrific. 50 00:02:56.080 --> 00:02:56.960 Only two problems with it. 51 00:02:56.960 --> 00:02:58.680 One, nobody knows what the benefits are. 52 00:02:58.680 --> 00:03:00.680 Two, nobody knows what the costs are. 53 00:03:00.680 --> 00:03:05.680 Benefits are psychic, subject to each individual. 54 00:03:05.680 --> 00:03:08.720 Costs are also psychic, subject to each individual. 55 00:03:08.720 --> 00:03:11.560 And there's no way to add them up. 56 00:03:11.560 --> 00:03:13.480 Even an individual, it'd be tough to add them up, 57 00:03:13.480 --> 00:03:16.320 because there's no room to, certainly across, 58 00:03:16.320 --> 00:03:18.560 between individuals, you can't add them up. 59 00:03:18.560 --> 00:03:20.080 So there ain't no such thing as social costs. 60 00:03:20.080 --> 00:03:21.480 There ain't no such thing as social benefits, 61 00:03:21.480 --> 00:03:34.480 This is the main economic prop for most government action now, many economists, even so-called free market economists. 62 00:03:34.480 --> 00:03:38.480 Well, we add up the social costs, we add up the social benefits, and see what's what. 63 00:03:38.480 --> 00:03:44.480 There are no such things as social costs and social benefits, because they're not addable, and they're ephemeral and all that. 64 00:03:44.480 --> 00:03:57.480 So it polishes off in like five minutes, almost all welfare economics that goes down the brink, all economic justifications for most government action. 65 00:03:57.480 --> 00:04:04.480 Of course sometimes you see that sales-free marketing, sometimes they say, well we added up and it looks like it shouldn't build this dam, but the social costs are greater than social benefits. 66 00:04:04.480 --> 00:04:09.480 So you say, well gee, this guy's pretty good, he's blocking that dam. Okay, that's true. 67 00:04:09.480 --> 00:04:14.480 And on the other hand, he's also justifying the other 90% of stuff that government wants to do. 68 00:04:18.480 --> 00:04:26.480 Okay, so another thing about costs is, looking at pure expenses now, monetary expenses, 69 00:04:26.480 --> 00:04:30.480 the cost of how much you have to pay out, the costs themselves are not given. 70 00:04:30.480 --> 00:04:37.480 The costs themselves, as another great Austrian insight, are determined by the utility of the value of the consumer's place on the product. 71 00:04:37.480 --> 00:04:56.480 In other words, let's say there's a product and entrepreneurs think the consumer will spend $10,000 on it and let's say $12,000, my original example, 72 00:04:56.480 --> 00:05:04.480 and therefore they're willing to pay out $10,000 on wages, labor, rent and material and whatever. 73 00:05:04.480 --> 00:05:15.480 They're willing to pay out the $10,000 because they expect their anticipated consumer demand is $12,000. 74 00:05:15.480 --> 00:05:20.480 Otherwise they wouldn't be paying the $10,000. They expect the consumers would only pay $8,000 for this thing. 75 00:05:20.480 --> 00:05:25.480 They would not pay the $10,000 for the course of production, just in terms of money, payment. 76 00:05:25.480 --> 00:05:31.480 Because then the term is not a fixed item, God-given, somehow, and long run and eternal. 77 00:05:31.480 --> 00:05:36.980 Cost of production is itself a function of how much entrepreneurs think consumers will pay for it. 78 00:05:36.980 --> 00:05:42.480 So rather than saying that in the long run, prices are determined by cost of production, 79 00:05:42.480 --> 00:05:47.480 consumer prices are determined by factor of prices, the cost of production in terms of money. 80 00:05:47.480 --> 00:05:51.980 Quite the opposite. In the long run, cost of production will indeed equal prices, 81 00:05:51.980 --> 00:05:54.480 except that the other causal factors the other way around. 82 00:05:54.480 --> 00:06:01.280 In the long run, the cost will be determined by how much entrepreneurs think consumers will pay for it. 83 00:06:01.280 --> 00:06:05.000 For the long run, 10,000 is 10,000 or 12,000 or whatever, 84 00:06:05.000 --> 00:06:10.440 as determined by the fact that entrepreneurs and consumers will pay that amount. 85 00:06:10.440 --> 00:06:17.040 So the utility, consumer utility determines cost all the other way around. 86 00:06:17.040 --> 00:06:31.240 So the causal connection goes individual value scales, utility, demand, price, consumer price, costs. 87 00:06:31.240 --> 00:06:45.240 So in addition to the whole problem of long run and shifting, like there is no long run, all the rest of it, another big hole in the neoclassical theory is, which says that in long run, costs determine prices, which is exactly the opposite. 88 00:06:51.240 --> 00:06:55.240 Now you can see this is a very, very great pack of applications. 89 00:06:55.240 --> 00:07:01.240 That's how many conservatives, businessmen, say that inflation is caused by cost going up. 90 00:07:01.240 --> 00:07:04.240 Costs go up, therefore we have to raise prices. 91 00:07:04.240 --> 00:07:09.240 This is by the way the typical PR excuse. 92 00:07:09.240 --> 00:07:14.240 Gee, I'm sorry Mrs. Jones, I have to raise the price of bread, but I have to pay more for it. 93 00:07:14.240 --> 00:07:17.240 Otherwise, I'd love to give it to you next to nothing. 94 00:07:17.240 --> 00:07:22.240 So this is essentially PR, but many people believe it, unfortunately. 95 00:07:22.240 --> 00:07:30.480 It's actually two points to consider here. 96 00:07:30.480 --> 00:07:34.240 One is the price is determined by supply and demand, as I've already said. 97 00:07:34.240 --> 00:07:35.240 Where does cost come in? 98 00:07:35.240 --> 00:07:36.240 Where does cost come in? 99 00:07:36.240 --> 00:07:40.240 This business here doesn't have that equation. 100 00:07:40.240 --> 00:07:44.240 If the supply is this much, the demand is that much, this is what the price will be. 101 00:07:44.240 --> 00:07:46.240 It all depends on what the costs are. 102 00:07:46.240 --> 00:07:50.240 It all depends on how much the entrepreneurs pay for it. 103 00:07:50.240 --> 00:08:01.240 So, the price will be, let's say, 80 cents a loaf, or one bread, it's a cost of money expenditure, cost a sense of that, 104 00:08:01.240 --> 00:08:05.240 go up to a dollar a loaf, they just go out of business, they can't just add on extra 20 cents, 105 00:08:05.240 --> 00:08:09.240 because if they could add on extra 20 cents, why do they wait for costs to go up? 106 00:08:09.240 --> 00:08:13.240 What's the cost going to do with it? It means we'll charge a higher price to begin with. 107 00:08:13.240 --> 00:08:17.240 Nobody waits for costs to raise prices. 108 00:08:17.240 --> 00:08:20.940 If you can raise the price and make a profit out of it, you'll do it at the beginning of the month. 109 00:08:20.940 --> 00:08:26.940 Good example of that. The computer I bought six months ago, I paid $1,200 for it. 110 00:08:26.940 --> 00:08:34.440 Now I can buy two for the price of one. And you know what it costs it to produce them? $20 to $30. 111 00:08:34.440 --> 00:08:40.240 And probably other costs of transportation and stuff, packaging and all that. 112 00:08:40.240 --> 00:08:46.040 So it's the other way around. Prices determine cost rather than vice versa. 113 00:08:46.040 --> 00:08:51.760 And also some of the things that should have no cost at all, more or less, like Rembrandt's. 114 00:08:51.760 --> 00:08:54.560 It doesn't cost anybody to produce Rembrandt's, Rembrandt's dead already. 115 00:08:54.560 --> 00:08:58.560 The painting is there, and yet it has a price, the price shifts. 116 00:08:58.560 --> 00:09:04.400 A nice example of that too would be something like the energy, if the demand for energy goes up then, 117 00:09:04.400 --> 00:09:13.960 because the price goes up, the sources out of which are more costly to produce start producing, so the cost goes up too. 118 00:09:13.960 --> 00:09:22.960 Right, exactly. Those are determined by price. The amount that the businessmen want to pay for copper is determined by how much copper products will sell among the consumers. 119 00:09:22.960 --> 00:09:28.960 So the chain, the cause will change from the consumer back to the, to manufacturing, back to raw material. 120 00:09:28.960 --> 00:09:36.960 And copper will be more expensive because if the demand for copper goes, products go up, which will then revert back to the increase in demand for copper. 121 00:09:36.960 --> 00:09:45.960 So, and this also goes, of course, to the unions, because many servitors and businessmen blame unions for inflation. 122 00:09:45.960 --> 00:09:49.960 Well, the inflation of the unions jack up wage rates, and therefore we have to increase prices. 123 00:09:49.960 --> 00:09:51.960 That's the same sort of thing. 124 00:09:51.960 --> 00:09:57.960 The prices go up anyway, or go down anyway, regardless of unions, regardless of wage rates. 125 00:09:57.960 --> 00:10:02.960 Secondly, the question then asked is, why are entrepreneurs and businessmen willing to pay the higher wage rates? 126 00:10:02.960 --> 00:10:05.960 Why don't they say the people you can't pay will lose money to pay? 127 00:10:05.960 --> 00:10:15.960 The fact they're willing to pay it is a sign that they're willing to incur or determine what they think the prices are going to go up, they're willing to pay higher wage rates. 128 00:10:15.960 --> 00:10:20.960 So the cause will change, once again, from the consumer. 129 00:10:20.960 --> 00:10:25.960 The only time when the costs will contingent on prices is if the supply goes down. 130 00:10:25.960 --> 00:10:29.960 If the supply goes down, indeed, price will go up. 131 00:10:29.960 --> 00:10:41.960 If in some way an increased cost results in a lower price in production, a lower supply, then the price will go up. 132 00:10:41.960 --> 00:10:52.960 You see this, for example, the only time the price will go up from the supply side is if the supply goes down. 133 00:10:52.960 --> 00:10:59.960 Now, the cost going up is not going to do anything unless something happens where the supply also contracts. 134 00:10:59.960 --> 00:11:10.960 For example, if the computer business or whatever costs go up and you can't charge a higher price because you already charged the maximum price which is profitable, 135 00:11:10.960 --> 00:11:17.960 then firms go out of business, let's say, they cut back production and then supply goes down and the price goes up. 136 00:11:17.960 --> 00:11:21.960 So it's not the cost that do it, it's the possible drop in supply. 137 00:11:21.960 --> 00:11:25.960 If you're looking for causes of inflation, of course, supply doesn't go down. 138 00:11:25.960 --> 00:11:29.960 Obviously, production usually goes up every year, in a broad sense. 139 00:11:29.960 --> 00:11:33.960 We don't have a situation where every year, production doesn't serve a 10% less than the year before. 140 00:11:33.960 --> 00:11:39.960 Fortunately, not in that situation. So obviously, it can't be the supply side that causes the problem. 141 00:11:39.960 --> 00:11:48.960 And obviously, something on the demand side that's going to fall, for general increase in prices. 142 00:11:48.960 --> 00:11:57.960 Another thing, for example, people tend to think a sales tax or an excise tax can be just passed on by the business man, just passed on by the consumer. 143 00:11:57.960 --> 00:12:00.960 Well, it doesn't work that way, isn't that automatic? 144 00:12:00.960 --> 00:12:11.960 For example, usually when the price of the movie, when the emission tax in movies goes up, very often the movie owners, theater owners will circulate petitions. 145 00:12:11.960 --> 00:12:16.960 Don't fight a tax, write your city councilman or something against the emission tax. 146 00:12:16.960 --> 00:12:17.800 against the admission tax. 147 00:12:17.800 --> 00:12:19.720 They wouldn't do that, they could just pass it on automatically. 148 00:12:19.720 --> 00:12:21.520 Why should they bother? 149 00:12:21.520 --> 00:12:23.840 If a tax is simply going to be passed on to a consumer, 150 00:12:23.840 --> 00:12:26.920 there's no other problem, the businessmen wouldn't care. 151 00:12:26.920 --> 00:12:28.720 The problem is, of course, because it is passed on, 152 00:12:28.720 --> 00:12:31.520 the consumer spends less, surprises less of it, 153 00:12:31.520 --> 00:12:36.520 it's mainly, yeah, and they're going up to demand curve. 154 00:12:36.760 --> 00:12:39.160 In other words, the supply of movies or theaters 155 00:12:39.160 --> 00:12:40.000 is going to go down. 156 00:12:40.000 --> 00:12:44.220 It could be hurt, the profit margin is going to go down. 157 00:12:44.220 --> 00:12:51.540 So, you can't just pass on a price, you can only do it through a cut in supply, nobody 158 00:12:51.540 --> 00:12:58.740 wants to cut supply unless they might be going out of business, contracting their businesses, 159 00:12:58.740 --> 00:12:59.740 etc. 160 00:12:59.740 --> 00:13:07.940 By the way, on the subject of taxes, it's kind of interesting because, at least in the 161 00:13:07.940 --> 00:13:11.780 United States, a lot of the taxes, there is of course very heavy taxes on liquor for various 162 00:13:11.780 --> 00:13:12.780 reasons. 163 00:13:12.780 --> 00:13:30.780 In the U.S., that's really hurting our convention and tourist business. In the U.S., if you buy a drink in a bar, about 60% of the cost is taxed. In Ontario, it's about 90%. 164 00:13:30.780 --> 00:13:34.780 Taxes on taxes. That's unbelievable. 165 00:13:34.780 --> 00:13:38.780 We go to this place to buy cheap wine. 166 00:13:38.780 --> 00:13:40.780 We like your taxes. 167 00:13:40.780 --> 00:13:52.780 So, part of that is revenue works for the government, part of it is fundamentalism where liquor is evil and makes the sinners pay. 168 00:13:52.780 --> 00:14:00.780 Part of it comes in from businesses themselves. For example, in the United States, for example, there are fixed taxes on stills. 169 00:14:00.780 --> 00:14:07.780 The idea is to pay a large fixed amount regardless of the size of the still. 170 00:14:07.780 --> 00:14:12.780 What this does obviously is put in by large liquor manufacturers to shaft their small competitors. 171 00:14:12.780 --> 00:14:19.780 If you have a fixed tax, if every liquor producer has to pay a million dollars as a fixed amount, 172 00:14:19.780 --> 00:14:23.780 regardless of how much they produce, obviously a small liquor person is forced out of business. 173 00:14:23.780 --> 00:14:27.780 Big liquor people know that full well. 174 00:14:27.780 --> 00:14:37.780 For example, in hysteria, we have a person in the Appalachian mountains, we have a great tradition of the moonshine or heroic farmers, moonshiners, 175 00:14:37.780 --> 00:14:46.780 out there producing illegal liquor. Why is it illegal? It's illegal because they don't pay a still tax, which is enormous, which prevents them from setting up their equipment. 176 00:14:46.780 --> 00:14:52.780 So there's a constant fight between the revenuers and the moonshiners. I guess that's a good note, moonshine, isn't it? 177 00:14:52.780 --> 00:15:02.780 Okay, any quick questions before we wrap up the session? 178 00:15:02.780 --> 00:15:06.780 There's no such thing as a quick question. 179 00:15:06.780 --> 00:15:14.780 I just have one comment there, that this fixed amount of tax, but also various government 180 00:15:14.780 --> 00:15:18.780 agreements, just the fact that it's the same amount of work for a small company to make 181 00:15:18.780 --> 00:15:20.780 and Income Tax and Terminus for large companies. 182 00:15:20.780 --> 00:15:26.780 There are all sorts of these fixed things, and they are what lead very much to the fakeness of companies that we have. 183 00:15:26.780 --> 00:15:30.780 I don't think that in every market there would be so many big companies in proportion to small companies. 184 00:15:30.780 --> 00:15:36.780 That's a big reason. For example, Berkman's Compensation Law, which came in 1900, 1910, 185 00:15:36.780 --> 00:15:42.780 were put in largely by bigger businesses. You have to have a certain, you know, full of paperwork on what's going on. 186 00:15:42.780 --> 00:15:47.780 You want to impose higher costs on their smaller competitors and drive them out of business. 187 00:15:47.780 --> 00:15:58.780 Before we go, does anybody have a preference of our restaurant recommendations here? 188 00:15:58.780 --> 00:16:03.780 Well, I think I want to try to get more discussion here this time. 189 00:16:03.780 --> 00:16:10.780 Going onto a more advanced so-called area, obviously it's skipping a lot of stuff in between and it's logically changed. 190 00:16:10.780 --> 00:16:23.780 At any rate, I want to do a little bit more comparison of Austrian economics with orthodox economics and the political implications of them, because it would be law and law. 191 00:16:23.780 --> 00:16:35.780 Those of you who have taken micro, for example, there are several motivations for antitrust legislation, antitrust action. 192 00:16:35.780 --> 00:16:38.980 One of them, I'm convinced, which is another story, 193 00:16:38.980 --> 00:16:43.780 but there's mostly one group of businessmen trying to shaft the other group. 194 00:16:43.780 --> 00:16:48.380 And there are now, for example, in the United States, a lot of private antitrust suits, 195 00:16:48.380 --> 00:16:54.180 controlled data corporations, it's like IBM, it's too efficient, they file a suit saying it's unfair competition, 196 00:16:54.180 --> 00:16:56.780 and they try to restrict them and request them from doing stuff. 197 00:16:56.780 --> 00:16:58.180 So there's a lot of that. 198 00:16:58.180 --> 00:17:02.980 A lot of the antitrust suits that have been filed over the years by the Department of Justice, 199 00:17:02.980 --> 00:17:08.980 This is a Federal Trade Commission or done to be has the one set of competitors trying to eliminate or cripple the other set. 200 00:17:08.980 --> 00:17:15.980 So, in addition to that, there's, I know of course, there's also the attorney motivation. 201 00:17:15.980 --> 00:17:22.980 One of the great, one of the attorney, one of the ways you achieve fame and fortune in the legal profession in the United States. 202 00:17:22.980 --> 00:17:29.980 You become an assistant here, young lad out of, nowadays young lass also, out of Harvard Law School. 203 00:17:29.980 --> 00:17:39.980 So you become attached to the Attorney General Division, Department of Justice, you work up an anti-trust suit against DuPont or IBM or something. 204 00:17:39.980 --> 00:17:44.980 It takes you about five years to become one of the world's foremost experts prosecuting IBM or DuPont. 205 00:17:44.980 --> 00:17:50.980 But then lo and behold, you leave the Justice Department and you become Chief Attorney for IBM and DuPont fighting in a suit. 206 00:17:50.980 --> 00:17:55.980 So this is essentially, of course, a racket. 207 00:17:55.980 --> 00:18:03.980 So that's one of the reasons for antitrust prosecutions, this is quite prevalent. 208 00:18:03.980 --> 00:18:12.980 Anyway, in the economic sphere, in economic theory, the big, which fits in both theory and political application, 209 00:18:12.980 --> 00:18:19.980 the big, a little bit weak in that, it's still the big thing to read micro textbooks, that's always in there, 210 00:18:19.980 --> 00:18:27.940 The big reason for breaking up business, for government regulation, for divesting parts 211 00:18:27.940 --> 00:18:33.140 and breaking up firms and all that sort of stuff is so-called monopolistic competition 212 00:18:33.140 --> 00:18:35.620 or imperfect competition or whatever. 213 00:18:35.620 --> 00:18:38.260 The competition is not perfect. 214 00:18:38.260 --> 00:18:44.980 The competition does not meet the standards by which economics applies to the real world. 215 00:18:44.980 --> 00:18:54.260 And it goes basically something like this. 216 00:18:54.260 --> 00:18:55.660 This is sort of a standard thing. 217 00:18:55.660 --> 00:19:00.340 There's another diagram. 218 00:19:00.340 --> 00:19:02.380 This is almost, despite all the millions of words 219 00:19:02.380 --> 00:19:06.420 that have been written about that, this is basically it. 220 00:19:06.420 --> 00:19:12.660 You have dollars, y-axis, quantity 221 00:19:12.660 --> 00:19:24.660 Produced on the x-axis, we have so-called average cost curve, which is considered to be U-shaped. 222 00:19:24.660 --> 00:19:31.660 I won't go the whole thing on this because I don't agree with cost curves anyway. 223 00:19:31.660 --> 00:19:39.660 Basically, it is the common sense kind of way that if you're building an automobile plant 224 00:19:39.660 --> 00:19:44.660 and you have this huge amount of equipment. You've got $200 million invested in equipment. 225 00:19:44.660 --> 00:19:52.660 If you produce one automobile per year, it's very costly because you're geared for the optimum of $100,000 automobiles a year. 226 00:19:52.660 --> 00:19:58.660 If you're only producing one, of course you're like, I don't know, $250,000 per car or something like that. 227 00:19:58.660 --> 00:20:01.660 So if you look at average cost, it starts very high. 228 00:20:01.660 --> 00:20:07.660 And you keep using up the, what really is, in the Austrian view, it really is because of indivisibility. 229 00:20:07.660 --> 00:20:12.660 You have different kinds of machinery and buildings in order to really use them in an optimal sense. 230 00:20:12.660 --> 00:20:17.660 If you start too low, you're going to be extremely costly per unit. 231 00:20:17.660 --> 00:20:22.660 So, you keep going and the average cost declines. 232 00:20:22.660 --> 00:20:27.660 Finally, you reach a point where everything is sort of using the capacity or whatever. 233 00:20:27.660 --> 00:20:32.660 You wind up with an average cost turning up, where you get a so-called U-shape average cost curve. 234 00:20:32.660 --> 00:20:36.660 Total cost in terms of dollars per unit produced. 235 00:20:42.660 --> 00:20:45.660 The assumption is, by the way, that it's a smooth arc. 236 00:20:45.660 --> 00:20:48.660 This is various other problems with average cost. 237 00:20:48.660 --> 00:20:54.660 This is a fact that you don't know what the cost is because, one thing, the cost depends on the time horizon. 238 00:20:54.660 --> 00:20:59.660 If you're going to produce something over a two-year period, of course it'll be one set of curves. 239 00:20:59.660 --> 00:21:01.660 If you produce it over a five-year period, it's another set of curves. 240 00:21:01.660 --> 00:21:06.660 You have a whole bunch of things going on, which can't be incorporated into this. 241 00:21:06.660 --> 00:21:10.660 At any rate, you don't know, not only that, cleaning everything out, 242 00:21:10.660 --> 00:21:13.660 just like you don't know that the man curve has a particular shape, 243 00:21:13.660 --> 00:21:15.660 you don't know what the shape of this thing is. 244 00:21:15.660 --> 00:21:17.660 It doesn't have to be a smooth arc. 245 00:21:17.660 --> 00:21:21.660 All you know is it falls at one point and finally reaches the bottom somewhere and then goes up. 246 00:21:21.660 --> 00:21:23.660 That's all. 247 00:21:23.660 --> 00:21:33.660 It could be anything, it could be something like that, it could be something like this, it could be jagged, something, whatever. 248 00:21:33.660 --> 00:21:42.660 Making it a smooth arc leads to various seemingly simple questions, seemingly trivial, it leads to all sorts of implications. 249 00:21:42.660 --> 00:21:49.660 You make it a smooth arc so you can get a tangency. You can't get a tangency if you've got something like that, what's a tangency? 250 00:21:49.660 --> 00:21:54.660 So that's the firm. 251 00:21:54.660 --> 00:22:01.220 All right, that's the average cost per the firm, Lund's firm. 252 00:22:01.220 --> 00:22:02.660 Then you've got the demand curve. 253 00:22:02.660 --> 00:22:07.220 According to, I've already talked about it, it's following the demand curve. 254 00:22:07.220 --> 00:22:08.700 The demand curve of the week is full. 255 00:22:08.700 --> 00:22:14.060 According to neoclassical, Lawrasian, current mainstream orthodox theory, 256 00:22:14.060 --> 00:22:16.060 it's true that the demand curve of the industry falls. 257 00:22:16.060 --> 00:22:32.060 But, in the true, correct, proper competition, what they call perfect competition, perfect or pure, notice the loaded terminology here, these are economists who claim to be value-free, totally value-free, 258 00:22:32.060 --> 00:22:42.060 they don't have no good application, no moral application, they use the word perfect, to me in the case that's good, okay, imperfect seems to be bad, alright, so then, 259 00:22:42.060 --> 00:22:48.060 At any rate, perfect competition is when the demand curve for each firm is horizontal. 260 00:22:48.060 --> 00:22:52.060 Perfectly following horizontal like that. 261 00:22:52.060 --> 00:22:59.060 Now, if you look at this thing, if you really analyze it, it's totally ridiculous, 262 00:22:59.060 --> 00:23:02.060 because how do you have a horizontal demand curve? 263 00:23:02.060 --> 00:23:07.060 The implication is, if you have, the famous example is the wheat industry. 264 00:23:07.060 --> 00:23:10.060 Each farmer is so small compared to the rest of the industry, 265 00:23:10.060 --> 00:23:21.060 He has no impact on the price of wheat. In other words, he can multiply his product almost infinitely, maybe even infinitely, and still have no impact on the total supply of wheat. 266 00:23:21.060 --> 00:23:30.060 Therefore, whatever he does to manage over his particular wheat being horizontal, one of the problems with this is that if the angel Gabriel comes down to him and says, 267 00:23:30.060 --> 00:23:36.060 Zeeck, I love you, and therefore I'll be able to multiply your wheat by 2 billion fold. 268 00:23:36.060 --> 00:23:42.060 So instead of whatever Bush was going to enter, getting 3 billion times that, he will have an impact on the wheat market. 269 00:23:42.060 --> 00:23:45.060 It doesn't matter if he's a small farmer. 270 00:23:45.060 --> 00:23:51.060 So it's not really horizontal, maybe slightly like that or something like that. 271 00:23:51.060 --> 00:23:57.060 As soon as you enter any kind of qualification in this thing, the whole theory is shot. 272 00:23:57.060 --> 00:23:59.060 I'll show you why in a minute. 273 00:23:59.060 --> 00:24:10.060 The assumption is that the horizontal, why do they assume that the horizontal, oh, so a small wheat farm, a teeny little wheat farm at the horizontal of the Manchurk or the Zeke, Zeke's wheat. 274 00:24:10.060 --> 00:24:18.060 On the other hand, every other firm in the real world has a foreign Manchurk, because any firm, whether it's IBM or whatever, controlled data or anything, will have some kind of impact. 275 00:24:18.060 --> 00:24:26.060 Wheaties, underbred, if they keep producing more of it, they'll have to cut their price, have an impact on the market, if they're big enough. 276 00:24:26.060 --> 00:24:30.060 I was going to say a question, but why aren't you talking about the supply curve? 277 00:24:30.060 --> 00:24:33.060 You're talking about these guys producing more or less. 278 00:24:33.060 --> 00:24:34.060 Is that the supply? 279 00:24:34.060 --> 00:24:37.060 Yeah, increasing supply, I'm sure. 280 00:24:37.060 --> 00:24:40.060 I don't think the supply curve, I don't think there is a supply curve, 281 00:24:40.060 --> 00:24:43.060 as I've said before, except in a very long-run sense. 282 00:24:43.060 --> 00:24:46.060 That's one reason I don't know about that. 283 00:24:46.060 --> 00:24:51.060 But increasing the supply will probably shift the vertical line to the right 284 00:24:51.060 --> 00:24:53.060 when you get one of these. 285 00:24:53.060 --> 00:24:57.460 But if you have a firm which is infinitely small compared to the industry, 286 00:24:57.460 --> 00:25:00.780 you have 20,000 wheat farms, each wheat farm is teeny, 287 00:25:00.780 --> 00:25:05.300 then you might get something like, in theory you get something like carousel and acre for each wheat farm. 288 00:25:05.300 --> 00:25:08.940 Anything else is evil. Why is it evil? Why is it inefficient? 289 00:25:08.940 --> 00:25:11.420 And a larger firm does have an impact on its market. 290 00:25:11.420 --> 00:25:16.660 And here is the, this, my friends, is the reasoning behind it. 291 00:25:16.660 --> 00:25:21.300 This is why the impetus of economics in the 30s until fairly recently was 292 00:25:21.300 --> 00:25:27.600 You should try to break up industry so that they approach the level of a small-leaf farm, a big-up firm. 293 00:25:27.600 --> 00:25:38.300 If you have a smoothly arcing average cost curve, it's the same given the firm, all right? 294 00:25:38.300 --> 00:25:42.800 Given the firm, important, firm X, producing widgets. 295 00:25:42.800 --> 00:25:48.500 If it has a horizontal demand curve, like that, OK? 296 00:25:48.500 --> 00:25:57.500 Because the average price, this means the average price is $10 a widget, the average cost is $8 a widget, it makes a profit of $2 a widget, alright? 297 00:25:57.500 --> 00:26:05.500 In equilibrium, this is not the market equilibrium we're talking about, this is a different kind of equilibrium, this is totally different kettle of fish, this is long run equilibrium. 298 00:26:05.500 --> 00:26:17.500 Long run equilibrium is such, which the economy is supposedly in, not only intending to open in, according to the orthodox economics, in long run equilibrium, nobody makes any profits. 299 00:26:17.500 --> 00:26:20.500 Nobody makes any losses, because there's no uncertainty. 300 00:26:20.500 --> 00:26:26.500 It frees the economy, it frees the data, it frees value scales, which remain frozen forever. 301 00:26:26.500 --> 00:26:30.500 It frees resources, it frees technology, and that's it. 302 00:26:30.500 --> 00:26:34.500 It frees everything, and then you wind up, if you do that, there's no uncertainty. 303 00:26:34.500 --> 00:26:37.500 If everybody knows in their heart, in their gut, in their mind, 304 00:26:37.500 --> 00:26:40.500 that everything will be exactly the same 2,000 years from now as it is now, 305 00:26:40.500 --> 00:26:44.500 the same values, the same production, the same knowledge, everything, 306 00:26:44.500 --> 00:26:55.500 Then you'll wind out fairly soon in what's called general equilibrium theory, a piece that's called the evenly rotating economy. 307 00:26:59.500 --> 00:27:05.500 Because there's no uncertainty, everybody adjusts to the situation, everybody knows, or even knows for two million years or whatever, 308 00:27:05.500 --> 00:27:12.500 there's certainly X amount of TV sets that are being purchased, X amount of washing machines, it's all fixed, it's all freeze-frozen by the end of April. 309 00:27:12.500 --> 00:27:21.500 And so you wind up, then, with a tangency, and the magnificent heroic tangency occurs, at zero profits. 310 00:27:21.500 --> 00:27:27.500 How do you make zero profit zero? It must mean your total revenue is equal to your total cost. 311 00:27:27.500 --> 00:27:31.500 Total money expended is the same as the total money taken in. 312 00:27:31.500 --> 00:27:40.500 If total revenue is equal to total cost, then by definition, average revenue, which is total revenue divided by the amount you produce, 313 00:27:40.500 --> 00:27:45.500 X is the same as the average cost, the average revenue is the same thing as the man curve. 314 00:27:45.500 --> 00:27:57.500 The man curve is the total revenue per quantity, the same thing as the price. 315 00:27:57.500 --> 00:28:05.500 If, in other words, you sell, you produce 10 widgets, you produce 1,000 widgets and sell them for $10 a widget, 316 00:28:05.500 --> 00:28:10.580 If you're getting $10,000 in, your total revenue is $10,000. 317 00:28:10.580 --> 00:28:12.620 Your number of widgets is 1,000, therefore, 318 00:28:12.620 --> 00:28:17.260 it's the same thing as the price, which is $10. 319 00:28:17.260 --> 00:28:19.740 All right, so in equilibrium, in final and general equilibrium, 320 00:28:19.740 --> 00:28:21.940 this is not market, this is not day-to-day equilibrium. 321 00:28:21.940 --> 00:28:23.420 This is this never-alive-never-alive land, 322 00:28:23.420 --> 00:28:25.700 which you'll see in a minute, never exists, never can exist, 323 00:28:25.700 --> 00:28:26.860 never will exist. 324 00:28:26.860 --> 00:28:31.100 In this situation, where everything is frozen forever, 325 00:28:31.100 --> 00:28:34.820 You will have each firm with a price equal to the average cost. 326 00:28:40.220 --> 00:28:43.620 This thing is a beautiful setup. 327 00:28:43.620 --> 00:28:47.580 If you have a horizontal man curve for each firm, 328 00:28:47.580 --> 00:28:51.060 the only place it can be tangent is right at the bottom. 329 00:28:57.020 --> 00:29:00.700 It's the same firm as an imperfect monopolistic competition, 330 00:29:00.700 --> 00:29:06.700 My definition means that as faces are falling to man curve, there's only one place to be tangent to it. 331 00:29:06.700 --> 00:29:08.380 It's falling, right? 332 00:29:08.380 --> 00:29:13.020 It's falling to man curve, whatever it's falling, it has to be tangent somewhere over here. 333 00:29:13.020 --> 00:29:23.580 So in the final equilibrium, and then these guys say, aha, see, what do we conclude from this? 334 00:29:23.580 --> 00:29:24.700 We conclude from this as follows. 335 00:29:24.700 --> 00:29:30.020 Well, if a firm in the economy is a perfect competition, 336 00:29:30.020 --> 00:29:35.900 which is this by definition perfect, its production will be higher 337 00:29:35.900 --> 00:29:38.740 and its price will be lower than if it's an imperfect or monopolistic 338 00:29:38.740 --> 00:29:44.580 competition, QED, end of the analysis. 339 00:29:44.580 --> 00:29:49.980 Therefore, consumers are being shafted by imperfect competition 340 00:29:49.980 --> 00:29:51.820 or the real world. 341 00:29:51.820 --> 00:29:56.820 They would benefit if every firm was so tiny that they were being a perfect competition. 342 00:29:56.820 --> 00:30:03.820 That is inclusion, that's the basis for antitrust legislation and all the rest of it. 343 00:30:03.820 --> 00:30:06.820 There are many holes in this argument. 344 00:30:06.820 --> 00:30:13.820 Maybe you can supply me with some of the holes before I get into my blockbuster conclusion. 345 00:30:13.820 --> 00:30:16.820 See any holes in this liar reasoning? 346 00:30:16.820 --> 00:30:20.820 I didn't understand how you get the definition of perfect just by something. 347 00:30:20.820 --> 00:30:33.820 It's just called perfect, it's the name, it's called perfect, one of the reasons is because the knowledge is perfect by the way, you have perfect knowledge, you know what your man curve is, you know what your course curves are, you know it. 348 00:30:33.820 --> 00:30:36.820 Perfect, it's the perfect mobility of people. 349 00:30:36.820 --> 00:30:38.820 Perfect mobility of life. 350 00:30:38.820 --> 00:30:43.820 Well for one thing, I mean this deliver exists, I mean no fear of man curve is going to be perfect, horizontal no matter what. 351 00:30:43.820 --> 00:30:44.820 Precisely. 352 00:30:44.820 --> 00:30:48.820 So everybody is imperfect, some call it steps, so everybody is getting shot. 353 00:30:48.820 --> 00:31:02.820 And this gives an excuse for the, you set up an ideal, suppose an ideal of perfection, which the market is failing to achieve and therefore the government then is supposed to have a rationale for stepping in and trying to create these perfect conditions. 354 00:31:02.820 --> 00:31:05.820 And then once again they've got the good word. 355 00:31:05.820 --> 00:31:07.820 Yeah, great word. 356 00:31:07.820 --> 00:31:12.820 The other thing would be that a large firm would not necessarily have the same cost per the small firm. 357 00:31:12.820 --> 00:31:22.820 Okay, step number one. Who says that these curves are equal? Who says that the average cost curve of a small firm is the same as a large firm? 358 00:31:22.820 --> 00:31:29.820 Totally bananas. If we broke up, Schumpeter had a great analysis of this in Capitalism, Socialism and Democracy, 359 00:31:29.820 --> 00:31:33.820 which is a very interesting book, he was not a libertarian or free market person, he had very interesting things to say. 360 00:31:33.820 --> 00:31:37.820 And he wasn't an Austrian either, he was a Schumpeterian. 361 00:31:37.820 --> 00:31:43.820 Anyway, and essentially one of the things he said was this, 362 00:31:43.820 --> 00:31:50.820 Okay folks, let's assume you're right, let's assume that in the present state of evil and perfection, we're up here instead of down here. 363 00:31:50.820 --> 00:31:54.820 But, suppose you get time to take General Motors and break it up, try to make it perfect. 364 00:31:54.820 --> 00:32:04.820 Try to make it so that, break it up into teeny little pieces so that each one would be, have a horizontal man curve, you have like 500,000 teeny little firms, each of which has a cost curve. 365 00:32:04.820 --> 00:32:07.740 As a cost curve, however, the way the hell out here, 366 00:32:07.740 --> 00:32:10.220 is you're not taking advantage of large-scale production. 367 00:32:10.220 --> 00:32:12.540 So even though the consumers have a wonderful benefit 368 00:32:12.540 --> 00:32:14.340 of being a down here on the bottom of this thing, 369 00:32:14.340 --> 00:32:18.620 they'd be paying a whole lot more, but much less, okay? 370 00:32:18.620 --> 00:32:20.020 So let's hook our number one. 371 00:32:20.020 --> 00:32:22.620 Who says that the cost curve would be the same? 372 00:32:22.620 --> 00:32:24.700 In fact, the reason why there is a larger business 373 00:32:24.700 --> 00:32:28.140 in many cases, is the cost curves are lower. 374 00:32:28.140 --> 00:32:30.180 You're taking advantage of large-scale production 375 00:32:30.180 --> 00:32:32.580 and the visibility you're able to buy, 376 00:32:32.580 --> 00:32:48.140 doesn't it require does this allow new businesses to enter the market it would 377 00:32:48.140 --> 00:32:52.300 require that everybody has to consume exactly the same amount they do now and 378 00:32:52.300 --> 00:32:59.700 not produce any more net people in the world at a net consumable level of their 379 00:32:59.700 --> 00:33:29.700 There's no innovation, there's no new discoveries, things are given, as the textbooks say, we have given the man curves, given the course curves, given the products and everything, all what real competition is really about, which is trying to find out what's going on, which is trying to beat out the other guy, which is trying to find out, invent new things, out-compete the other guy, all this is tossed aside, but we have perfect knowledge, everybody knows the man curve, everybody knows the product, everybody knows the course curve, and they're grinding this stuff out. 380 00:33:29.700 --> 00:33:35.700 Even as such a simple thing as equipment wearing out would throw this thing right out the window. 381 00:33:35.700 --> 00:33:38.700 The standard of living would just keep going like this. 382 00:33:38.700 --> 00:33:42.700 The equipment is replaced automatically, so at the same rate that it's... 383 00:33:42.700 --> 00:33:44.700 The exact amount of time. 384 00:33:44.700 --> 00:33:48.700 Not only are the cost curves different for different companies, as was pointed out, 385 00:33:48.700 --> 00:33:53.700 but the fact that the free market will tend to produce the lowest cost curves for companies, 386 00:33:53.700 --> 00:33:57.700 and so if you break people up or interfere with it in any way, 387 00:33:57.700 --> 00:34:04.700 You'll get higher cross-curves, therefore you'll get these equilibrium points for each individual company higher up. 388 00:34:04.700 --> 00:34:05.700 Right. 389 00:34:05.700 --> 00:34:13.700 What has just happened, because of the scale of the economy, will be that the cost curves of the imperfect competitors will be lower, and they'll still be imperfect. 390 00:34:13.700 --> 00:34:14.700 Yeah. 391 00:34:14.700 --> 00:34:16.700 And the price will still be lower. 392 00:34:16.700 --> 00:34:18.700 Exactly. And you have this sort of situation. 393 00:34:18.700 --> 00:34:23.700 Let's assume you're in here, and you have the perfect competitors, and there will be teeny little firms that are in the bottom, whatever, 394 00:34:23.700 --> 00:34:32.700 If the cost curve is not smooth, you might get tangencies along with bumps. 395 00:34:32.700 --> 00:34:37.700 Who says these curves are smooth? Nobody says they're evidence for any of this stuff. 396 00:34:37.700 --> 00:34:41.700 Again, the quality, what we know is qualitative, what they try to assume is quantitative. 397 00:34:41.700 --> 00:34:43.700 There's no evidence that has to be like this. 398 00:34:43.700 --> 00:34:45.700 For example, this is one of my favorite things. 399 00:34:45.700 --> 00:34:49.700 What if the cost curve is a little bumpy? Something like that. 400 00:34:49.700 --> 00:34:55.700 Something like that. Then it only hits a tendency, like here, where it's going to easily disrupt the situation, 401 00:34:55.700 --> 00:35:02.700 where the falling demand curve is just as tangent at the same spot as it is at the horizontal mark. 402 00:35:02.700 --> 00:35:09.700 Only a little twist here, and as I say, there's no evidence for any of this stuff. In fact, why think it's smooth? 403 00:35:09.700 --> 00:35:12.700 The exact opposite of what somebody just mentioned. 404 00:35:12.700 --> 00:35:16.700 Wouldn't they say, well, if you had General Motors and it ended up being the only car company, 405 00:35:16.700 --> 00:35:20.700 that of course there's supposedly no limit on their prices. 406 00:35:20.700 --> 00:35:23.700 Well, that's something else. That's not the cost problem, you see. 407 00:35:23.700 --> 00:35:24.700 That's a little different. 408 00:35:24.700 --> 00:35:29.700 Now you're dealing with the real world where you're not assuming zero profits and zero losses. 409 00:35:29.700 --> 00:35:32.700 But that's an interesting area. 410 00:35:32.700 --> 00:35:34.700 That whole cartels thing is... 411 00:35:34.700 --> 00:35:38.700 We should go into it because it's important anyway. 412 00:35:38.700 --> 00:35:40.700 There's two other things. 413 00:35:40.700 --> 00:35:42.700 What is the basic effect of that? 414 00:35:42.700 --> 00:35:44.700 Assuming people are prepared to work for zero profit. 415 00:35:44.700 --> 00:35:50.700 I can't see now, if they're only small companies, people are prepared to work for zero profit. 416 00:35:50.700 --> 00:35:55.700 Why are they working for zero profit? Well, they're trying to get around that. 417 00:35:55.700 --> 00:36:01.700 The two ways of thought, tripair or self-thought, in an angelic equilibrium, there'd be zero profit. 418 00:36:01.700 --> 00:36:07.700 I don't know why you maintain your capital with zero profit. I just won't let the whole thing run down. 419 00:36:07.700 --> 00:36:17.700 The more rational view of it was that the profit would be more than one rate of interest, just enough, three percent, six percent, whatever, just enough to keep maintaining the capital. 420 00:36:17.700 --> 00:36:24.700 And so you'd have wages of management, which I'll take into consideration, you'd have interest... 421 00:36:24.700 --> 00:36:27.700 Supposedly it's owner-managed. 422 00:36:27.700 --> 00:36:57.700 But yeah, you can conceptually, yeah, well you can conceptually separate an ad, say in other words, you say wow, here's a guy who owns his own firm, you can say wow, part of his returns are wages to his management, part of it is interest on his capital investment, you can sort of separate ads, obviously, great disposal of practice, conceptually you can say okay, he's got his labor of management, whatever that is, and he's got the capital investment, 423 00:36:57.700 --> 00:37:02.100 You see, the capital investment is very different here, you assume it won't change, everything is certain. 424 00:37:02.100 --> 00:37:08.700 Capital investment then is pure time preference, the interest is then a functional time you have to wait, which is important. 425 00:37:08.700 --> 00:37:13.900 If you cut out profits and losses, which is the entrepreneurial part, which is the other... 426 00:37:13.900 --> 00:37:17.900 Well, Austrians adopted this refining knife, in some ways it was in Austria, 427 00:37:17.900 --> 00:37:25.200 and that you take the return on a business firm's investment, there are two parts to it. 428 00:37:25.200 --> 00:37:39.200 As a return for waiting, for just simply for, well for waiting in a sense of, well two things, one is, the capitalist provides to the workers and the landowners the other factor of production. 429 00:37:39.200 --> 00:37:53.200 That's important service. They, let's say, have a certain productivity, they would get their return. Let's put it this way, let's say you have a corporation which are owned by the workers, the consumer producers co-ops, owned by workers and landlords. 430 00:37:53.200 --> 00:37:56.560 If they did that, they would have, let's say they'd get the same payment, 431 00:37:56.560 --> 00:37:58.960 forget about differences of management and entrepreneurship. 432 00:37:58.960 --> 00:38:04.400 They would get, let's say they'd get the same, whatever, I guess $10,000 a year to get it. 433 00:38:04.400 --> 00:38:08.400 But he'd have to wait three years or six years, whatever, for the product to come rolling off the 434 00:38:08.400 --> 00:38:13.280 assembly line before he gets it. He'd have to wait if he had no paycheck until the money comes in. 435 00:38:13.280 --> 00:38:17.360 Essentially, that's what happened out of Yugoslavia, which are more or less worker-owned firms. 436 00:38:17.360 --> 00:38:21.760 They have to wait, which is a tough proposition. Many people don't have the capital and they want to wait. 437 00:38:21.760 --> 00:38:26.420 A capitalist provides, even in a world without uncertainty, 438 00:38:26.420 --> 00:38:31.400 a capitalist provides the savings to provide the money to pay them now before the three years. 439 00:38:31.400 --> 00:38:32.800 They don't have to wait. 440 00:38:32.800 --> 00:38:36.760 For this service, the workers, in a sense, pay him the capitalist a discount. 441 00:38:36.760 --> 00:38:38.920 They pay him a time preference discount. 442 00:38:38.920 --> 00:38:41.060 They pay him six percent, eight percent, whatever. 443 00:38:41.060 --> 00:38:44.660 They're happy to do that because they're getting money now 444 00:38:44.660 --> 00:38:46.660 instead of having to wait three, six years for it. 445 00:38:46.660 --> 00:38:48.560 That's the time preference. 446 00:38:48.560 --> 00:39:05.560 really are interests, where you have a, where essentially in a time market, this is one of the contributions of Austrians, by the way. 447 00:39:05.560 --> 00:39:13.560 Interest is not just a loan, it's the whole, the whole profit system, interest pervades the whole capitalist system or market system. 448 00:39:13.560 --> 00:39:18.960 On a long list, we're easy to see this, right? 449 00:39:18.960 --> 00:39:25.040 And by the way, a little more on our interest, 450 00:39:25.040 --> 00:39:30.960 the creditor, okay, let's say, gives to the debtor, 451 00:39:30.960 --> 00:39:35.120 an exchange, or the creditor gives to the debtor right now, say $10,000, 452 00:39:35.120 --> 00:39:42.400 and he, in return, for an IOU, saying I will pay you, 453 00:39:42.400 --> 00:39:45.400 $11,000 a year from now. 454 00:39:54.400 --> 00:40:00.400 What some of the creditors are doing is giving the debtor command over immediate resources to use the money right now, 455 00:40:00.400 --> 00:40:04.400 which is what he wants, the debtor wants to pay stuff, buy stuff, invest it, whatever. 456 00:40:04.400 --> 00:40:08.400 So this is a present good, that's why it's called a present good. 457 00:40:08.400 --> 00:40:11.400 This money is useful right now. 458 00:40:11.400 --> 00:40:14.400 On the other hand, this IOU is a future good. 459 00:40:14.400 --> 00:40:24.400 It's only the creditor can only cash it in or start using the money a year from now. 460 00:40:24.400 --> 00:40:31.400 So the creditor is exchanging $10,000 present money for future money. 461 00:40:31.400 --> 00:40:33.400 Present good for future good. 462 00:40:33.400 --> 00:40:37.400 Because present good, because of time preferences, everybody has a different ratio. 463 00:40:37.400 --> 00:40:44.200 ratio. Everybody prefers money now to money later. In the time market, which is worked out between 464 00:40:44.200 --> 00:40:50.040 creditors and debtors, or between everybody when they have time preference, a certain rate comes out, 465 00:40:50.040 --> 00:40:54.920 let's say eight percent, six percent, ten percent, whatever, in this case ten percent, where both 466 00:40:54.920 --> 00:41:01.320 parties agree in this time preference price that they will pay a discount, a premium of ten percent 467 00:41:01.880 --> 00:41:06.200 for present good or a discount of five percent future good. So in other words, the payment of 468 00:41:06.200 --> 00:41:17.800 The Catholic Church and Scholastic Philosophers are extremely bright economists. They work 469 00:41:17.800 --> 00:41:21.960 out a lot of the stuff I've been talking about, a lot of utility theory, a lot of market analysis 470 00:41:21.960 --> 00:41:26.120 that are very closely marked, as a matter of fact. It's amazing in many cases, a lot of 471 00:41:26.120 --> 00:41:30.680 these guys are Franciscan monks who were living in a hut somewhere, a cave somewhere for 50 years, 472 00:41:30.680 --> 00:41:34.040 can work out a very sophisticated analysis of the market. 473 00:41:34.040 --> 00:41:37.360 And the one thing they couldn't hack, the one thing they 474 00:41:37.360 --> 00:41:39.080 couldn't understand is time preference. 475 00:41:39.080 --> 00:41:40.520 In other words, they can understand about risk, 476 00:41:40.520 --> 00:41:42.360 and instead of about uncertainty and profit. 477 00:41:42.360 --> 00:41:43.720 They all feel that, right? 478 00:41:43.720 --> 00:41:46.960 They couldn't understand why it's legitimate, moral, illicit 479 00:41:46.960 --> 00:41:51.560 to earn an interest on a pure loan, just a pure loan, 480 00:41:51.560 --> 00:41:53.720 and no other, nothing else attached. 481 00:41:53.720 --> 00:41:55.680 And they couldn't, therefore they concluded 482 00:41:55.680 --> 00:41:59.440 it was sinful and evil, a post-natural war, and outlawed it. 483 00:41:59.440 --> 00:42:04.680 All interest was outlawed by the Catholic Church for centuries, thousand years or so. 484 00:42:04.680 --> 00:42:08.560 And it was really tragic, because it meant that nobody, after a while, by the 18th century, 485 00:42:08.560 --> 00:42:14.720 so when everybody, of course, everybody came in favor of interest, they didn't understand my time preference. 486 00:42:14.720 --> 00:42:17.160 They more or less realized that it was important. 487 00:42:17.160 --> 00:42:21.080 These usury laws, they were called, were the spread of this last economic golden era. 488 00:42:21.080 --> 00:42:23.240 In fact, these guys are nutty. 489 00:42:23.240 --> 00:42:26.920 The whole concept, the whole analysis went out the window. 490 00:42:26.920 --> 00:42:29.920 The baby you can throw out with a bathwater, so to speak. 491 00:42:29.920 --> 00:42:36.920 And so it's too bad, because they understood about risk, opportunity, cost, and all that. 492 00:42:36.920 --> 00:42:43.920 They understood that if you could make 20% by investing in some kind of sea voyage, it's okay to charge 20% for a loan, 493 00:42:43.920 --> 00:42:46.920 because then you're giving up the other 20% you would have gotten. 494 00:42:46.920 --> 00:42:48.920 All that sort of stuff, very sophisticated. 495 00:42:48.920 --> 00:42:52.920 They couldn't understand a pure loan, because they never grasped by the time preference. 496 00:42:52.920 --> 00:42:59.920 The time preference, by the way, was the discovery of von Bawerk, when I mentioned before the 1880s. 497 00:42:59.920 --> 00:43:05.920 And before that, well, some people, Arturo, also Arturo, was a really great guy. He's been forgotten. 498 00:43:05.920 --> 00:43:11.920 The pre-French Revolution. And basically, these were people really 499 00:43:11.920 --> 00:43:18.920 copper-riveted why it's just as charged, why it's explainable, why it's understandable, why it's moral to run for a bad way, etc. etc. 500 00:43:18.920 --> 00:43:20.080 and why it's being done. 501 00:43:20.080 --> 00:43:23.520 Otherwise, it always seemed that somehow the creditor was ripping off the debtor one way 502 00:43:23.520 --> 00:43:24.360 or the other. 503 00:43:24.360 --> 00:43:27.680 It was never explained why the debtor would want to agree to pay for this, by the way. 504 00:43:27.680 --> 00:43:31.640 It was one of the hitches in the argument. 505 00:43:31.640 --> 00:43:34.960 So we see how this works in the pure alone. 506 00:43:34.960 --> 00:43:38.420 But as Bob Baupreit pointed out, and Feder, the great American illustrious, 507 00:43:38.420 --> 00:43:41.920 pointed out afterward, Frank Feder, unfortunately, 508 00:43:41.920 --> 00:43:49.000 generally neglected magnificence, value of pricing, bill and market theorist. 509 00:43:49.000 --> 00:43:50.800 But this whole thing pervades the economy. 510 00:43:50.800 --> 00:43:53.840 If you take, for example, the guy who got alone for a minute, 511 00:43:53.840 --> 00:44:01.360 here's a capitalist who, so what does he do? 512 00:44:01.360 --> 00:44:06.560 He buys, he saves up money by not spending it, saves up money. 513 00:44:06.560 --> 00:44:13.760 He then pays workers, landlords, or whatever, for their product production, for their productive services. 514 00:44:13.760 --> 00:44:18.720 So he is paying them, let's say he pays some worker $10,000. 515 00:44:18.720 --> 00:44:21.520 This is the employer now, the capitalist. 516 00:44:21.520 --> 00:44:30.680 And the employee gets the money, and he gets, the employee gets the employer, 517 00:44:30.680 --> 00:44:36.200 the labor services was then incorporated into the products, so to speak, helping to transform the product, eventually sold. 518 00:44:36.200 --> 00:44:44.200 So let's say it's worth $12,000, whereas the amount the employee produces, the so-called marginal product, 519 00:44:44.200 --> 00:44:47.200 the whole question of how you get to that, assuming that. 520 00:44:47.200 --> 00:44:54.200 The employer pays, let's say, $10,000 because the employee is going to accept it because the employee is getting it right now. 521 00:44:54.200 --> 00:44:56.200 It doesn't have to wait five years to get it. 522 00:44:56.200 --> 00:44:59.200 And so what's happening is the employer is providing a presently good. 523 00:44:59.200 --> 00:45:04.200 The employee is giving the employer a future good, which the employer will reap, you know, 524 00:45:04.200 --> 00:45:06.880 after the thing is produced in the Soviet Union. 525 00:45:06.880 --> 00:45:12.120 So what happens is you have a vast time market, where 526 00:45:12.120 --> 00:45:14.840 the employer is essentially the creditor, not legally, 527 00:45:14.840 --> 00:45:17.200 but economically, and the employee is the debtor. 528 00:45:17.200 --> 00:45:19.280 He's getting the money, he's getting the present good. 529 00:45:19.280 --> 00:45:21.440 Now the employee pays the employer 530 00:45:21.440 --> 00:45:25.280 same sort of interest return, let's call it natural interest, 531 00:45:25.280 --> 00:45:30.240 like with Barber, that the debtor pays the creditor. 532 00:45:30.240 --> 00:45:32.360 And in the long run, the tendency is 533 00:45:32.360 --> 00:45:45.360 The tendency is to have a similar rate in one area and the other, because we're going to earn 20% in one place and 5% in another place, we're going to shift out of the 5% and into the 20%. 534 00:45:45.360 --> 00:45:48.800 I'm going to place a shift out of the five percent, into the five percent. 535 00:45:48.800 --> 00:45:51.320 A tens-torrent equalization, the number gets there. 536 00:45:51.320 --> 00:45:53.320 That's the long run equilibrium, tens-torrent.