WEBVTT NOTE Interest Rates and Course Review 1 00:00:00.000 --> 00:00:07.000 First I'm going to finish up with what we have to cover, and the second I will review the term and answer questions and what all the rest of it. 2 00:00:07.000 --> 00:00:21.000 So, having covered the labor market, supply of labor, population, unions, etc. and the price and wage rates, 3 00:00:21.000 --> 00:00:29.000 we now have to wrap up two things, well, interest rates and along with it the difference between unit prices and the price of the whole product. 4 00:00:29.000 --> 00:00:41.220 When we talk about wage rates, or prices as factors of production, we've been talking 5 00:00:41.220 --> 00:00:46.920 about how the demand is determined by the marginal revenue product, which is marginal 6 00:00:46.920 --> 00:00:52.720 physical product times the marginal revenue. 7 00:00:52.720 --> 00:01:00.320 So what we want to do now is to focus on the time dimension, in other words, physical product 8 00:01:00.320 --> 00:01:05.720 means how much product is produced by one extra worker or whatever, one more acre of 9 00:01:05.720 --> 00:01:07.640 land in a certain time period. 10 00:01:07.640 --> 00:01:12.280 This of course means in a certain, that's been implicit all along, it's how much product 11 00:01:12.280 --> 00:01:15.260 is produced in a given time period. 12 00:01:15.260 --> 00:01:19.600 So the wage rate or the price of the land or the price of capital goods will be that 13 00:01:19.600 --> 00:01:28.880 that price given a certain time period so this means that the price per time period 14 00:01:28.880 --> 00:01:36.360 in other words for workers or for labor its wages either per hour or per month or per 15 00:01:36.360 --> 00:01:44.180 year because it's product per month or per year we're dealing with so in other words 16 00:01:44.180 --> 00:01:48.840 when we've been talking about prices especially prices of factors of production labor, land 17 00:01:48.840 --> 00:01:57.360 and Capital, we talk about the price per unit time, so it's the price per unit time, because 18 00:01:57.360 --> 00:02:01.400 it's also production per unit time, production takes place over a certain time period, so 19 00:02:01.400 --> 00:02:05.760 when you talk about a product, you know, you add one laborer to a certain amount of capital 20 00:02:05.760 --> 00:02:10.480 goods and land, and it produces 20 more bushes of wheat, 20 more bushes of wheat in what 21 00:02:10.480 --> 00:02:11.480 time period? 22 00:02:11.480 --> 00:02:14.880 Well, whatever the time period is, a month or a year, whatever, so therefore we're now 23 00:02:14.880 --> 00:02:19.440 I'm now going to focus on the time period involved here. 24 00:02:19.440 --> 00:02:25.600 So price per unit time means exactly that, wages per hour, and for physical products 25 00:02:25.600 --> 00:02:26.600 it means rent. 26 00:02:26.600 --> 00:02:32.800 In other words, the rent is the price per unit time. 27 00:02:32.800 --> 00:02:38.320 So for example, what we've really been talking about up until now is that workers are hired, 28 00:02:38.320 --> 00:02:40.120 they're paid per unit time. 29 00:02:40.120 --> 00:02:46.840 When an entrepreneur buys capital equipment, let's say, or land, you can either buy it 30 00:02:46.840 --> 00:02:47.840 or rent it. 31 00:02:47.840 --> 00:02:51.720 In other words, if you're a business man, you can either rent your building or rent 32 00:02:51.720 --> 00:02:54.320 your land, or rent machines or plants. 33 00:02:54.320 --> 00:02:59.160 There's a lot of renting going on in business, largely for tax purposes, get out of income 34 00:02:59.160 --> 00:03:00.160 tax. 35 00:03:00.160 --> 00:03:03.080 But there's a lot of rent, so you can either buy something or rent it. 36 00:03:03.080 --> 00:03:05.880 These are the choices which you have in any business. 37 00:03:05.880 --> 00:03:09.880 So what we've been talking about up till now, and we talk about price of factors of production, 38 00:03:09.880 --> 00:03:15.320 So we've really been talking about the price per unit time, wages per hour, and rent. 39 00:03:15.320 --> 00:03:22.200 In other words, price per unit, let's say, rental price per month or per year. 40 00:03:22.200 --> 00:03:27.560 So when you rent a house, as a consumer or a businessman, you're renting it for a year 41 00:03:27.560 --> 00:03:33.120 or a land, for a year or for a month or whatever, you're renting it for a time period. 42 00:03:33.120 --> 00:03:36.200 So the rental price of anything is the price per unit time. 43 00:03:36.200 --> 00:03:42.600 So, in a sense, what we're dealing with, what we've been talking about is the price determination 44 00:03:42.600 --> 00:03:47.560 of marginal productivity, price determination for rental prices, the price per month or 45 00:03:47.560 --> 00:03:53.080 per year of land or capital goods or labor, because what a wage really is, is really a 46 00:03:53.080 --> 00:03:54.080 rent of labor. 47 00:03:54.080 --> 00:03:59.120 In other words, since you can't buy a laborer, except under slavery, in a free system you 48 00:03:59.120 --> 00:04:03.760 can only rent a person, you can't buy him, buy his whole product, so to speak. 49 00:04:03.760 --> 00:04:08.760 So you're renting from the labor himself, you're renting services per unit time. 50 00:04:08.760 --> 00:04:10.760 So a wage is also a rent. 51 00:04:10.760 --> 00:04:16.760 In other words, I'm dealing with rent now, not just for land. 52 00:04:16.760 --> 00:04:19.760 A rent is for anything. When you rent something out, it means a price per unit time. 53 00:04:19.760 --> 00:04:21.760 When you rent a TV, you can either buy a TV set or rent it. 54 00:04:21.760 --> 00:04:24.760 You can either buy a car or lease it. 55 00:04:24.760 --> 00:04:28.760 It's all the same thing. In other words, when you rent a car for a year, for a day, or whatever it is, 56 00:04:28.760 --> 00:04:32.760 you're using its services per unit time. 57 00:04:32.760 --> 00:04:40.400 When you buy the thing as an outright, when you buy the house or buy the car, you're buying all the future services that the thing can give you. 58 00:04:40.400 --> 00:04:43.120 So you're buying the whole product or the whole thing. 59 00:04:43.120 --> 00:04:48.800 Whereas when you buy it per hour, per month or whatever, you're renting it. 60 00:04:48.800 --> 00:04:54.680 So we're using the term rent, not the way the textbooks use it usually, we're using it as a common sense phrase, 61 00:04:54.680 --> 00:04:59.480 as a price per unit time of anything, of any product that can give you a service. 62 00:04:59.480 --> 00:05:08.480 You're buying the services per unit, you can either rent a TV set or buy it, you can even rent tuxedos and things like that. 63 00:05:08.480 --> 00:05:19.480 The consumer or the producer is always faced with the choice of rental or buying the unit service or buying the whole thing and enjoying all the unit services, all future unit services. 64 00:05:19.480 --> 00:05:25.480 So rent is a really generalized concept to mean the price of any unit service. 65 00:05:25.480 --> 00:05:30.680 So, what we're saying here is that the prices are factors of production. The rental price 66 00:05:30.680 --> 00:05:38.680 of anything, the rental price is equal to the marginal revenue of product, or the demand 67 00:05:38.680 --> 00:05:45.200 for the labor service will yield the rent to be equal to the marginal revenue of product. 68 00:05:45.200 --> 00:05:49.040 So, the rental price, in a way, we're looking at it. 69 00:05:49.040 --> 00:05:54.040 Now, under slavery, one of the interesting things about slavery is that it illustrates 70 00:05:54.040 --> 00:05:58.920 The general concept for labor as well as for anything else, under slavery, slaves are often 71 00:05:58.920 --> 00:06:03.200 rented as well as bought. In other words, somebody who wants to say you're operating 72 00:06:03.200 --> 00:06:09.680 a plant or plantation or whatever seasonally, the master often instead of buying a slave 73 00:06:09.680 --> 00:06:15.600 would rent the slaves out from other masters. In that case, in other words, you can either 74 00:06:15.600 --> 00:06:19.680 buy a slave or rent them. So again, you have a situation where there's some kind of relationship 75 00:06:19.680 --> 00:06:25.400 between the rent and the purchase price. The rent, the slave rent, in other words, under 76 00:06:25.400 --> 00:06:32.400 slavery, you have a demand for labor, the demand curve is the marginal revenue product, 77 00:06:32.400 --> 00:06:44.680 this is the wage rate. In a free system, in a free labor system, the market wage will 78 00:06:44.680 --> 00:06:48.560 be equal to the marginal revenue product and the intersection of the marginal revenue product 79 00:06:48.560 --> 00:06:51.520 of the demand curve and the supply curve. 80 00:06:51.520 --> 00:06:53.120 Under slavery, it's still the same thing. 81 00:06:53.120 --> 00:06:54.480 Every slave has a marginal revenue product, 82 00:06:54.480 --> 00:06:55.960 usually lower than under a free system 83 00:06:55.960 --> 00:06:57.720 because there's not much incentive to work 84 00:06:57.720 --> 00:07:00.480 or to be creative or anything like that. 85 00:07:00.480 --> 00:07:05.480 But under a slave system, the slave master appropriates, 86 00:07:06.400 --> 00:07:09.960 the slave master rents out the slave. 87 00:07:09.960 --> 00:07:13.080 The rent is equal to marginal revenue product, it's up here. 88 00:07:13.080 --> 00:07:16.400 But the slave master will only pay the slave 89 00:07:16.400 --> 00:07:21.800 the amount, enough to keep a slave functioning, keep him eating and reproducing, and the master 90 00:07:21.800 --> 00:07:27.840 gets the appropriate or expropriates the difference, the surplus value, so to speak, goes to the 91 00:07:27.840 --> 00:07:28.840 slave master. 92 00:07:28.840 --> 00:07:34.320 So this is a subsistence level. 93 00:07:34.320 --> 00:07:39.420 The Marxist analysis of wages are determined by the subsistence level and the capitalists 94 00:07:39.420 --> 00:07:43.960 expropriate everything up to the barge revenue product, basically, only holds true for slavery 95 00:07:43.960 --> 00:07:49.960 where indeed the master can expropriate, the master has the guns to do it. 96 00:07:49.960 --> 00:07:55.160 So the rental price of the slave, the wage rate of the slave, whichever we want to call 97 00:07:55.160 --> 00:08:00.120 it, is still determined by the marginal revenue of the product. 98 00:08:00.120 --> 00:08:04.120 So then the question is, we now have to determine all the rental prices for everything, in other 99 00:08:04.120 --> 00:08:08.800 words, for land, labor and capital, then the question is what determines the price of the 100 00:08:08.800 --> 00:08:12.960 whole thing if you buy it, either a slave under slavery or capital goods or equipment 101 00:08:12.960 --> 00:08:16.720 or Land or whatever you're purchasing. Is there any relationship between the rental 102 00:08:16.720 --> 00:08:23.040 price and the price of the whole thing, so to speak? That's the next step too. So, in 103 00:08:23.040 --> 00:08:26.800 other words, what we've been talking about all this time is really the rental price, 104 00:08:26.800 --> 00:08:32.600 the price per unit, the wage rate, the rental, the land rent and the capital price per, the 105 00:08:32.600 --> 00:08:36.840 rental price of the capital equipment. So now we have to determine what is the relationship 106 00:08:36.840 --> 00:08:40.240 between the price of the whole thing and the rental price of anything, whether it's a TV 107 00:08:40.240 --> 00:08:47.240 or a TV set, or a house, or a laborer under slavery, or a capital good, or a land, or anything else. 108 00:08:47.240 --> 00:08:51.240 All these factors of production can be purchased as a whole. 109 00:08:51.240 --> 00:08:54.240 Okay, so let's look at this. 110 00:08:54.240 --> 00:09:02.240 I call it the price of the whole thing, the price of the whole factor. 111 00:09:02.240 --> 00:09:08.240 When you buy something, when you buy a capital equipment, or you buy a land, or you buy a TV set, or whatever, 112 00:09:08.240 --> 00:09:21.240 What you're doing is you're buying a house, you're buying the right to appropriate all the future services, the future unit product or the future rental product, so to speak, of the item. 113 00:09:21.240 --> 00:09:37.240 So if, for example, a machine has a ten-year life, let's say, and if the revenue product of the machine is, say, $10,000 a year, in other words, you use it, you get a marginal revenue product of $10,000 a year, 114 00:09:37.240 --> 00:09:46.240 You can rent it out, you'll pay $10,000 a year for it. Or if you buy it and you rent it out, somebody else, he will pay you $10,000 a year for it. 115 00:09:46.240 --> 00:09:59.240 So we're just assuming now the rental price of this machine, which is equal to the marginal revenue product, will be $10,000 per year. 116 00:09:59.240 --> 00:10:05.640 So, let's say the machine, let's assume for a minute the machine, you know, dies out at 117 00:10:05.640 --> 00:10:06.640 10 years. 118 00:10:06.640 --> 00:10:08.000 I mean, usually these things are much more variable than that. 119 00:10:08.000 --> 00:10:10.880 Let's assume you use it for 10 years and it collapses like a one-horse shea. 120 00:10:10.880 --> 00:10:20.160 All right, so that means if you buy it, if you buy this machine and then rent it out, 121 00:10:20.160 --> 00:10:26.600 or then if you use it in production, you will earn from it $10,000 per year for 10 years, 122 00:10:26.600 --> 00:10:27.600 okay? 123 00:10:27.600 --> 00:10:32.320 in your life. So the first approximation we can say is the price of the whole thing will 124 00:10:32.320 --> 00:10:45.320 be the summation, price of the machine as a whole, will be the sum of the rental price, 125 00:10:45.320 --> 00:10:50.800 or the sum of the marginal revenue of products over the life of the machine. So it should 126 00:10:50.800 --> 00:10:57.360 be, you'd think it would be $100,000 because you're getting $100,000 worth of equipment. 127 00:10:57.360 --> 00:11:04.360 So that's sort of the initial first approximation. You're getting the sum of the rents, the sum 128 00:11:04.880 --> 00:11:10.720 of the returns. You have a rental value of $10,000 a year from this machine. You buy 129 00:11:10.720 --> 00:11:15.880 the machine, you get 10 years worth, 10 years life, and you will earn either by producing 130 00:11:15.880 --> 00:11:19.480 it, using it in production, or by renting it out to somebody else who uses it in production. 131 00:11:19.480 --> 00:11:24.640 You'll earn $10,000 a year. So you think there it could be $100,000. Of course it won't, 132 00:11:24.640 --> 00:11:31.080 However, it could be a lot less than that because the reason for that is the basic fact 133 00:11:31.080 --> 00:11:32.080 of time preference. 134 00:11:32.080 --> 00:11:37.200 In other words that, which I talked about at the beginning of the class, I haven't mentioned 135 00:11:37.200 --> 00:11:43.560 much since, but the basic point is that everybody prefers income now to income in the future, 136 00:11:43.560 --> 00:11:44.880 to the prospect of income in the future. 137 00:11:44.880 --> 00:11:48.560 In other words, if you're presented with the idea of I'll give you a million dollars now 138 00:11:48.560 --> 00:11:51.760 or anything, give you a hundred dollars now, let's say, or else I'll give you a hundred 139 00:11:51.760 --> 00:11:53.880 $100 10 years from now, aside from price changes. 140 00:11:53.880 --> 00:11:57.480 Let's just forget about prices changing. 141 00:11:57.480 --> 00:11:59.040 You obviously prefer getting $100 now. 142 00:11:59.040 --> 00:12:00.860 Even if you want to save it, save some of it. 143 00:12:00.860 --> 00:12:04.420 You want to control it yourself instead of having me control it. 144 00:12:04.420 --> 00:12:07.360 Everybody prefers getting money or anything else now to waiting for it. 145 00:12:07.360 --> 00:12:11.180 Like they're getting it 2 years from now, 10 years from now, 100 years from now, but 146 00:12:11.180 --> 00:12:13.040 long you have to wait unless you like it. 147 00:12:13.040 --> 00:12:15.480 So there's a basic time preference. 148 00:12:15.480 --> 00:12:23.480 Money prefers present goods, in other words, getting goods now, getting money now or products 149 00:12:23.480 --> 00:12:29.960 now, to future goods, which means the present prospect of getting money in the future. 150 00:12:29.960 --> 00:12:35.280 Notice we're not saying that you prefer to get $100 now than getting it 10 years from 151 00:12:35.280 --> 00:12:36.280 now. 152 00:12:36.280 --> 00:12:39.800 What we're saying is we prefer $100 now to the current prospect of getting $100 10 years 153 00:12:39.800 --> 00:12:41.800 from now, the different point. 154 00:12:41.800 --> 00:12:48.800 In other words, here we are in 1986, we're confronted with two choices. Either we get $100 right now, or else we don't have to wait for it for 10 years. 155 00:12:48.800 --> 00:12:57.800 What we're saying is we prefer right now to get the $100 now, not to wait, than getting an IOU for $100 for 10 years from now. That's the point. 156 00:12:57.800 --> 00:13:05.800 In other words, what we have all over the market, the economy, we have a time market, which permeates the entire system. 157 00:13:05.800 --> 00:13:10.800 Unfortunately, most microeconomics doesn't deal much with. It deals with very peripherally. 158 00:13:10.800 --> 00:13:16.800 There's a time market. There's a market of present goods and future goods all over the place. 159 00:13:16.800 --> 00:13:22.800 And part of the market is the most obvious part of the market, of course, is the loan market. 160 00:13:22.800 --> 00:13:28.800 I loan you $100, $1,000 and get an IOU for the future. 161 00:13:28.800 --> 00:13:38.040 So here we have a time market, in other words the time market is a vast market where present 162 00:13:38.040 --> 00:13:43.440 and future goes to be an exchange for each other, an exchange of present for future. 163 00:13:43.440 --> 00:13:51.560 Future, for example, the credit market is, as I say, an obvious example of this, a loan 164 00:13:51.560 --> 00:13:52.560 market. 165 00:13:52.560 --> 00:14:04.560 I lend $1,000 to somebody here, and what happens now is the creditor turns over $1,000, which the debtor can use right now. 166 00:14:04.560 --> 00:14:08.560 Here's the creditor and here's the debtor. 167 00:14:08.560 --> 00:14:14.560 So what happens is the creditor, this $1,000 can be used right away as a present good. 168 00:14:14.560 --> 00:14:21.560 In return for that, the other person gives me an IOU saying I will pay you a certain amount next May. 169 00:14:21.560 --> 00:14:31.000 So I get an IOU for a future good, which is from 1987. 170 00:14:31.000 --> 00:14:36.080 Now what I'm saying is that present goods are always worth more than future goods, both 171 00:14:36.080 --> 00:14:37.600 for the creditor and for the debtor. 172 00:14:37.600 --> 00:14:39.720 Everybody in the country, they have different rates of preference. 173 00:14:39.720 --> 00:14:42.980 Some people have a high time preference, some have a high time preference, they want money 174 00:14:42.980 --> 00:14:47.520 right away, they don't care about that much about the future, they're willing to pay up 175 00:14:47.520 --> 00:14:49.720 a lot in the future to get money now. 176 00:14:49.720 --> 00:14:53.720 Others have a much lower time preference, but everybody's got a positive time preference. 177 00:14:53.720 --> 00:14:56.720 Everybody prefers, to some extent, present to future goods. 178 00:14:56.720 --> 00:15:01.720 And the time market will then resolve this to one price system like anything else. 179 00:15:01.720 --> 00:15:04.720 Some people have a high time preference, others have a low time preference. 180 00:15:04.720 --> 00:15:08.720 And they exchange it until interest rates become more or less the same. 181 00:15:08.720 --> 00:15:10.720 These tend to become more or less the same. 182 00:15:10.720 --> 00:15:12.720 And so let's say it's 8%. 183 00:15:12.720 --> 00:15:20.720 An IOU for future goods, so that the, I'm exchanging $1,000 now for an IOU for $1,080, so that's 8%. 184 00:15:20.720 --> 00:15:25.720 In other words, in that case, the price of time, so to speak, is 8%. 185 00:15:25.720 --> 00:15:31.720 That's the time rate, per annum, of course, per year. 186 00:15:31.720 --> 00:15:36.720 When interest rates are lower, they were in the old days, for various reasons. 187 00:15:36.720 --> 00:15:41.720 If interest rates are 5%, then you exchange this for IOU for $1,050. 188 00:15:41.720 --> 00:15:56.420 So that's, in the days when it was up to 20% for a year or so, it was up to about 20% in the early 70s, then it would have been $1,200 or 10% of $1,100. 189 00:15:56.420 --> 00:16:02.020 So depending on what the interest rate is, this is more or less the tendency of what the time rate will be. 190 00:16:02.020 --> 00:16:06.120 And that is, the time rate is the interest rate, it's the basic interest rate. 191 00:16:06.120 --> 00:16:13.120 There are other factors going into this, the basic or pure or whatever you want to call it. It's called the basic interest rate. 192 00:16:13.720 --> 00:16:17.640 So in other words, interest is the price of time. It's the time market. 193 00:16:17.640 --> 00:16:20.000 It's exchanging present goods and future goods. 194 00:16:20.000 --> 00:16:24.160 So when you borrow from the American Express or whatever, or get a mortgage app, 195 00:16:24.160 --> 00:16:29.280 you're getting money now in exchange for which you're paying the creditor 196 00:16:29.280 --> 00:16:33.560 a premium for, you know, you're paying back in the future. 197 00:16:33.560 --> 00:16:35.680 So that's the present-future market. 198 00:16:35.680 --> 00:16:41.120 So, when you go to a restaurant, you buy a TV set or something, you use a credit card, 199 00:16:41.120 --> 00:16:45.720 what happens there is the American Express, or Masters, whatever it is, pays the guy right 200 00:16:45.720 --> 00:16:53.760 now, more or less right now, pays the restaurant owner of the TV owner, the store right now, 201 00:16:53.760 --> 00:16:58.640 in exchange for which you pay the American Express, whatever it is, 20% or 10% or whatever 202 00:16:58.640 --> 00:17:05.600 the rate is until you pay it off, and an interest return, annual return, let's say 20% or 15%. 203 00:17:05.600 --> 00:17:09.520 The metaphor also fluctuates in accordance with the basic interest rates. 204 00:17:09.520 --> 00:17:15.880 So in other words, the basic interest rate is the time rate, and all throughout the market 205 00:17:15.880 --> 00:17:17.640 you have this kind of time market going on. 206 00:17:17.640 --> 00:17:20.900 One of which is the credit market, the most obvious one. 207 00:17:20.900 --> 00:17:28.280 But also, when a businessman hires labor or buys machines, what he's doing is he's getting 208 00:17:28.280 --> 00:17:29.280 a future return. 209 00:17:29.280 --> 00:17:33.800 In other words, he's saying, okay, or rents a machine or whatever. 210 00:17:33.800 --> 00:17:40.040 We'll pay you now in return for which we're going to produce the product and sell it a 211 00:17:40.040 --> 00:17:44.200 year from now, or two years from now, and get a certain return from it. 212 00:17:44.200 --> 00:17:47.520 The worker and the landlord, etc., etc., don't get the full marginal revenue product. 213 00:17:47.520 --> 00:17:50.200 They get the marginal revenue product actually discounted by the rate of interest. 214 00:17:50.200 --> 00:17:53.400 In other words, they're getting a... 215 00:17:53.400 --> 00:17:56.880 Because if you didn't have a capitalist doing this, everybody would have to work on the 216 00:17:56.880 --> 00:17:57.880 equipment. 217 00:17:57.880 --> 00:18:01.040 They'd have to work five years on something, a computer firm, whatever, IBM, and finally 218 00:18:01.040 --> 00:18:03.080 they sell the product and then you get paid. 219 00:18:03.080 --> 00:18:09.080 So you'd have to wait two years, five years, depending on ten years, depending on what the product was, before any payment came in. 220 00:18:09.080 --> 00:18:12.080 Most of us can't afford to wait ten years for a paycheck. 221 00:18:12.080 --> 00:18:23.080 So the capitalist saves the money up, pays out the money now as a present good to workers, landlords, whatever, machine people, sell them more materials. 222 00:18:23.080 --> 00:18:30.080 And he then waits, then works on the product, directs the working of the product, and then gets the return in the future. 223 00:18:30.080 --> 00:18:36.580 And in return for this waiting, in return for this time preference, he gets the 8% or 6% of whatever the interest charge is. 224 00:18:36.580 --> 00:18:43.080 So interest is a general feature of production, part of the production system, long-run interest, 225 00:18:43.080 --> 00:18:48.280 which exists even in equilibrium when all the profits and losses are washed out, even in long final equilibrium, 226 00:18:48.280 --> 00:18:53.580 because as a return for hanging out money now and waiting for it late until the future. 227 00:18:53.580 --> 00:19:01.340 In other words, it's part of the discount of future goods against present goods. 228 00:19:01.340 --> 00:19:06.580 In the case of the price of the whole thing in rental charge, what you've got is, when 229 00:19:06.580 --> 00:19:11.460 you buy a machine and expect to get $10,000 a year for rent for 10 years, it's true you'll 230 00:19:11.460 --> 00:19:18.460 get it, but the price of $100,000, especially over 10 years now, is not $100,000, so you 231 00:19:18.460 --> 00:19:19.460 have to wait for it. 232 00:19:19.460 --> 00:19:23.620 It's $10,000 discounted each year by whatever the interest rate is. 233 00:19:23.620 --> 00:19:31.380 So in other words, if the interest rate is 10%, to make it simple, you're buying a machine 234 00:19:31.380 --> 00:19:35.420 which will get, everybody agrees, let's say, it will give you $10,000 rental return or 235 00:19:35.420 --> 00:19:38.940 productivity per year. 236 00:19:38.940 --> 00:19:42.540 For the first year, let's say that, well, for the first year, let's say you get the 237 00:19:42.540 --> 00:19:48.380 money right now, for the first year you pay $10,000, worth $10,000, the next year it's 238 00:19:48.380 --> 00:19:50.940 it's only worth ten percent of that, so you deduct 239 00:19:50.940 --> 00:19:53.940 a thousand dollars, that makes it nine thousand 240 00:19:53.940 --> 00:19:55.980 and then you deduct another 241 00:19:55.980 --> 00:19:58.380 ten percent, that makes it eighty one hundred 242 00:19:58.380 --> 00:20:00.460 and on into the future, so instead of 243 00:20:00.460 --> 00:20:06.580 instead of adding up to a hundred thousand, you add up to something, whatever, fifty three thousand, something like that, in other words, you add up 244 00:20:06.580 --> 00:20:09.580 because you're getting ten percent a year interest 245 00:20:09.580 --> 00:20:12.860 so, if it's fifty three thousand 246 00:20:12.860 --> 00:20:19.340 When you buy 53,000, you use it for 10 years and you get your 10% interest per year for the 10 years. 247 00:20:19.340 --> 00:20:21.740 So in other words, 248 00:20:21.740 --> 00:20:24.880 the capital, the price of the whole product 249 00:20:24.880 --> 00:20:26.340 on the market, whether it's 250 00:20:26.340 --> 00:20:30.020 a labor under slavery or a labor under slavery or whether it's a capital 251 00:20:30.020 --> 00:20:32.260 machine or a piece of land, 252 00:20:32.260 --> 00:20:35.540 the price of the whole product 253 00:20:35.540 --> 00:20:38.820 will tend to be, not the sum of 254 00:20:38.820 --> 00:20:45.180 of Future Rents, which is what we first said, the sum of future rents discounted by the 255 00:20:45.180 --> 00:20:52.180 rate of interest. So discounted sum, discounted future rents. We multiply i times each rental 256 00:21:00.460 --> 00:21:07.460 return in other words. If rental return per year is a capital R, the first approximation 257 00:21:07.460 --> 00:21:17.460 would have been the sum of r, $10,000 a year for 10 years. Now we're saying each r is discounted by the right of interest. You multiply by the right of interest to get the actual amount. 258 00:21:17.460 --> 00:21:27.460 We call the price of the whole product, it's an awkward term obviously, so the term is generally used as capital value. 259 00:21:27.460 --> 00:21:35.420 Capital Value. So in other words, if you buy a house or if you buy a machine and you 260 00:21:35.420 --> 00:21:39.860 land and rent it out, the price of the whole thing to buy it is called the capital value 261 00:21:39.860 --> 00:21:45.660 of that good. The capital value is the sum of future rights, this capital right of interest, 262 00:21:45.660 --> 00:21:58.660 R divided by I. So the formula, the famous formula C equal capital R over I, this only 263 00:21:58.660 --> 00:22:02.820 works this way, it's only this simple if you have a permanent good, if you have a ten year 264 00:22:02.820 --> 00:22:07.660 life it gets more complicated. But basically, for example, land is considered a permanent 265 00:22:07.660 --> 00:22:12.220 good, if you buy land, if it's still going to be in use forever, let's say you buy land 266 00:22:12.220 --> 00:22:18.220 50th Street and Broadway. You're buying the land forever. You're getting the use of it for all time, so to speak. 267 00:22:18.220 --> 00:22:26.220 If the returns weren't discounted, if the rents weren't discounted by the rate of interest, you'd never be able to buy that land because the land price would be infinite. 268 00:22:26.220 --> 00:22:32.220 In other words, you'd be getting, let's say, $100,000 a year, say, for valuable land, forever. 269 00:22:32.220 --> 00:22:36.220 So you can never sum it up. Land would be infinitely high in price. 270 00:22:36.220 --> 00:22:39.720 The fact that land is not infinitely high in price, which obviously isn't, since people 271 00:22:39.720 --> 00:22:43.520 are pretty high here, but you still can buy it, it means that it's discounted by the rate 272 00:22:43.520 --> 00:22:44.520 of interest. 273 00:22:44.520 --> 00:22:47.920 So the fact that you might get $100,000 from it 200 years from now doesn't mean a hell 274 00:22:47.920 --> 00:22:48.920 of a lot to you. 275 00:22:48.920 --> 00:22:49.920 It's almost negligible. 276 00:22:49.920 --> 00:22:54.840 So all these things are incorporated by being discounted into the interest return. 277 00:22:54.840 --> 00:22:59.840 So this formula is particularly accurate with land because it's considered to have infinite 278 00:22:59.840 --> 00:23:00.840 life. 279 00:23:00.840 --> 00:23:01.840 It's not limited. 280 00:23:01.840 --> 00:23:06.320 But this is a basic proportion. It demonstrates to you that the capital value of something 281 00:23:06.320 --> 00:23:11.920 is directly proportional to the average productivity of the rent, rental return, and inversely 282 00:23:11.920 --> 00:23:17.520 proportional to the rate of interest. In other words, if the rate of interest is, let's say 283 00:23:17.520 --> 00:23:25.360 it's 10%, so every year it's worth a sum of 10,000 plus 9,000 plus 8,100, etc., etc., 284 00:23:25.360 --> 00:23:29.560 the yield of final lump sum that's worth right now on the market. Well, if the rate of interest 285 00:23:29.560 --> 00:23:38.560 If the interest rate goes up to 20%, then it's obviously going to be worth only $10,000 plus $8,000 plus $6,400 or so. It's going to be worth a lot less. 286 00:23:38.560 --> 00:23:47.560 If the interest rate goes down, say, 5%, then it's worth $9,500 or so. It's going to be worth a lot more, as you sum it up. 287 00:23:47.560 --> 00:23:54.560 So in other words, every piece of capital means land, slaves under slavery and machines. 288 00:23:54.560 --> 00:24:05.560 Worth more if the rent goes up, the annual productivity or rent, and worth less if the interest rate goes up, inversely proportional to the interest rate, directly proportional to the annual rent. 289 00:24:08.560 --> 00:24:18.560 And this is why, by the way, the stock market has acted in a rather peculiar way for many years. 290 00:24:18.560 --> 00:24:23.560 The stock market, the papers have been talking a lot recently about the stock market boom. 291 00:24:23.560 --> 00:24:47.560 The boom is only relative. In other words, the boom is relative to what it was a year ago, but basically the stock average, the so-called Dow Jones average is the most famous one, where you take the 30 top stocks, leading stocks, and then average them into an index, you get an absolute number, which doesn't mean anything in itself, it just means it's relative to each other. 292 00:24:47.560 --> 00:24:55.560 The other numbers, if you go down the years, since 1920, when they first started the Dow Jones Index. 293 00:24:55.560 --> 00:25:07.560 In 1966, the average Dow Jones stock was $1,000, and $1,000 was the number averaging all the various stock values. 294 00:25:07.560 --> 00:25:14.520 Last year, 1985, it was still down to about 1200. As a matter of fact, it hadn't gone 295 00:25:14.520 --> 00:25:22.000 above 1000 for a long time. So this means that in 20 years, let's say, the average 296 00:25:22.000 --> 00:25:28.680 stock is only going up by 20% as an average number. On the other hand, prices, the price 297 00:25:28.680 --> 00:25:42.680 The price level has tripled since 1956. This is the price level, the consumer's price index. It's 3,000 now, so this means that the average stock value has been wiped out. 298 00:25:42.680 --> 00:25:50.680 In other words, the average person who held blue chip stocks or average, let's say, Dow Jones stocks, which usually are the top stocks, most of the best companies, the biggest companies in the world, 299 00:25:50.680 --> 00:25:55.680 But they just held on to it, they've essentially been semi-wiped out, in other words, they've 300 00:25:55.680 --> 00:25:59.960 not only have they not been keeping pace with the price index, it's way below it, so your 301 00:25:59.960 --> 00:26:05.240 capital value is going down almost by two-thirds since 1966. 302 00:26:05.240 --> 00:26:11.640 It's now up to about 1800, so there's been a big boom of 1700-something in last year, 303 00:26:11.640 --> 00:26:15.680 but it's still not that great if you consider it should be 3000 if you're really going 304 00:26:15.680 --> 00:26:20.800 to match what stock prices were in 1966. 305 00:26:20.800 --> 00:26:24.560 So the thing that just kept a damper on the stock market for a long time now, even though 306 00:26:24.560 --> 00:26:28.000 there's been a lot of prosperity, that even though profits are going up, in other words, 307 00:26:28.000 --> 00:26:31.880 the rental value of the capital equipment of these corporations is going up, interest 308 00:26:31.880 --> 00:26:34.400 rates are also going up, at least until a couple years ago. 309 00:26:34.400 --> 00:26:39.840 So as interest rates go up, this puts a permanent damper on stocks, because even though the 310 00:26:39.840 --> 00:26:45.520 profits are going up, so that the value of a corporation's assets go up, interest rates 311 00:26:45.520 --> 00:26:49.800 You're also going up with inflation, as you see in macroeconomics. 312 00:26:49.800 --> 00:26:53.880 As you inflate, as people catch on to what's happening, the interest rates add on to the 313 00:26:53.880 --> 00:26:59.120 interest return, but the creditors get wiped out in inflation, so you add on a return. 314 00:26:59.120 --> 00:27:02.720 And this puts an almost permanent damper on the stock market. 315 00:27:02.720 --> 00:27:12.520 Stocks are a, what stocks are, they're essentially the people's evaluation of a corporate asset. 316 00:27:12.520 --> 00:27:16.360 The assets of each corporation, every corporation has got a certain amount of assets, expected 317 00:27:16.360 --> 00:27:22.120 returns on the assets, hopeful profits, current profits and hopeful future profits, and these 318 00:27:22.120 --> 00:27:25.600 get incorporated into the valuation of the assets that the market puts on them. 319 00:27:25.600 --> 00:27:31.320 This is capital equipment, buildings, goodwill and all sorts of stuff, which incorporate 320 00:27:31.320 --> 00:27:34.840 into the profits and the profits of the corporation. 321 00:27:34.840 --> 00:27:42.800 So if the profits or expected profits go up, expected future profits go up, stock prices 322 00:27:42.800 --> 00:27:51.080 will go up, expected return, but if interest rates go up, again this puts a damper, the 323 00:27:51.080 --> 00:27:54.580 price of stocks goes down. 324 00:27:54.580 --> 00:28:01.160 So this is basically what reason why stocks are not a good inflation hedge, and most people 325 00:28:01.160 --> 00:28:02.160 think, boy, why not? 326 00:28:02.160 --> 00:28:13.160 Why not? It heads you against inflation. If you expect future inflation, you buy a lot of stock, but the problem with that is even though profits go up, interest rates also go up, and this tends to put a ceiling on stock prices. 327 00:28:13.160 --> 00:28:27.160 The same way with the bond market. The bond market, which is by the way bigger than the stock market by far in overall numbers, what you have is bonds, either government bonds or corporate bonds. 328 00:28:27.160 --> 00:28:35.160 Corporation, let's say, issues a bond, saying, we will pay, let's say it's a thousand dollar bond. 329 00:28:35.160 --> 00:28:42.160 So this means the bond is a thousand dollars and it's due in 25 years, let's say, in 25 years they'll pay off the whole thousand dollars. 330 00:28:42.160 --> 00:28:51.160 In the meantime, they'll pay, let's say, 10 percent, 10 percent is an easy figure, 10 percent car interest. 331 00:28:51.160 --> 00:28:57.680 So, in other words, a corporation, General Motors or whatever, is committed to paying 332 00:28:57.680 --> 00:29:02.400 every year on a certain date, let's say December 1st or whatever, a hundred bucks, it's a coupon, 333 00:29:02.400 --> 00:29:06.600 you give a coupon to the bottom of the bond, and every year you take the coupon, there's 334 00:29:06.600 --> 00:29:11.840 25 coupons, let's say, for a 25-year bond, every year you take, you clip the, you clip 335 00:29:11.840 --> 00:29:15.400 the tarot and send it to the corporation headquarters and they send you a hundred bucks. 336 00:29:15.400 --> 00:29:22.800 In other words, what a bond gives you is a right to $100 a year, over a 25-year period. 337 00:29:22.800 --> 00:29:28.920 It's a claim or a right to $100 a year. 338 00:29:28.920 --> 00:29:30.320 So the par interest isn't that important. 339 00:29:30.320 --> 00:29:32.920 The important thing is you have a right to $100 a year. 340 00:29:32.920 --> 00:29:37.840 By the way, that's why bondholders are often called coupon clippers, because they make 341 00:29:37.840 --> 00:29:43.680 their money by taking the coupon, clipping off an edge of it, and sending it in. 342 00:29:43.680 --> 00:29:48.760 Now the question is, so this is a new bond that comes on the market, it has a certain par interest rate, 343 00:29:48.760 --> 00:29:52.760 but the bonds are traded all the time, back and forth, there's a huge bond market, 344 00:29:52.760 --> 00:29:57.400 corporate and government bonds, and people buying and selling them, old bonds, all the time. 345 00:29:57.400 --> 00:30:00.480 And how much they buy or sell for depends on the supply and demand of the market, 346 00:30:00.480 --> 00:30:03.720 and basically it depends on what the interest rate is, the general interest rate, 347 00:30:03.720 --> 00:30:08.960 because if the general interest rate is let's say 10%, 348 00:30:08.960 --> 00:30:15.400 The interest rate goes up to 20%, which it was in the early 70s for a while, a couple 349 00:30:15.400 --> 00:30:16.400 of years. 350 00:30:16.400 --> 00:30:23.080 At a 20% interest rate, nobody is going to spend a thousand bucks, they're asking you 351 00:30:23.080 --> 00:30:28.200 here, when the bond was first issued, you pay a thousand dollars for the right to get 352 00:30:28.200 --> 00:30:30.760 a hundred dollars a year. 353 00:30:30.760 --> 00:30:32.440 This is a 10% per year return. 354 00:30:32.440 --> 00:30:36.200 Nobody's going to do that if they can get 20% in other places, money market funds or 355 00:30:36.200 --> 00:30:37.200 whatever. 356 00:30:37.200 --> 00:30:43.440 In order to make this attractive, to make the selling of gold bonds attractive, the 357 00:30:43.440 --> 00:30:49.800 bond price falls from $1,000, which it was issued at, to about $500. 358 00:30:49.800 --> 00:30:56.160 At $500, you're willing to buy the right to $100 a year, because then you're getting a 359 00:30:56.160 --> 00:30:57.160 20% return. 360 00:30:57.160 --> 00:31:01.960 In other words, the 20% interest is what's known as the yield on the bond market. 361 00:31:01.960 --> 00:31:05.960 This is what the bond yields from moment to moment as you buy it on the market. 362 00:31:05.960 --> 00:31:10.720 So this is the interest yield. Even though the par interest rate is 10%, that was five 363 00:31:10.720 --> 00:31:15.200 years ago, ten years ago, nobody cares about that. In effect, what happens is, in order 364 00:31:15.200 --> 00:31:20.440 to get a claim on $100 a year, you're willing to buy it, to pay for it, only $500, because 365 00:31:20.440 --> 00:31:25.160 you want a 20% return, because that's what you can get at other places. This way, interest 366 00:31:25.160 --> 00:31:28.920 rates tend to equalize throughout the time market. Not instantaneously, but the tendency 367 00:31:28.920 --> 00:31:34.520 is to equalize, because if you can get 20% somewhere else, you're not going to pay 20% 368 00:31:34.520 --> 00:31:41.080 The bond market, you're not going to buy bonds for 10% if you can get 20% or 18% or whatever 369 00:31:41.080 --> 00:31:43.520 if the money market is fun. 370 00:31:43.520 --> 00:31:52.160 So conversely, if the interest rates go down, let's say to 5% to make it again a simple 371 00:31:52.160 --> 00:31:53.160 arithmetic here. 372 00:31:53.160 --> 00:32:00.760 In other words, here we have our formula, if the interest rates go down, the capital 373 00:32:00.760 --> 00:32:01.760 value goes down. 374 00:32:01.760 --> 00:32:09.480 In this case, if interest rates go up to 20%, the capital value went down to 500. 375 00:32:09.480 --> 00:32:11.200 The rental return is the same all the time. 376 00:32:11.200 --> 00:32:14.200 If it's fixed in a bond, it's fixed at $100 a year forever, because that's the way it 377 00:32:14.200 --> 00:32:16.720 was issued. 378 00:32:16.720 --> 00:32:21.680 If the interest rate goes down to 5%, however, this means that now people are willing to 379 00:32:21.680 --> 00:32:24.360 pay more for $100 a year. 380 00:32:24.360 --> 00:32:36.360 And so, the bond price is bid up to $2,000. At $2,000, then, you pay $2,000 to get $100 381 00:32:36.360 --> 00:32:41.360 a year, you're paying 5%. In other words, as the interest rate falls, in this case, to 382 00:32:41.360 --> 00:32:48.760 5%, the capital value is up to $2,000. So, in other words, the bond yield, interest yield 383 00:32:48.760 --> 00:32:55.600 on bonds is exactly inverse proportion to the interest rate, excuse me, to the price 384 00:32:55.600 --> 00:32:56.600 of the bond. 385 00:32:56.600 --> 00:33:01.280 If the bond price increases, it means the interest return has fallen, if the bond price 386 00:33:01.280 --> 00:33:04.240 goes down, the interest return goes up. 387 00:33:04.240 --> 00:33:07.600 So this is why during an inflation, during the later stages of inflation, when people 388 00:33:07.600 --> 00:33:11.800 catch on with what's going on, only there's constant inflation, interest rates keep going 389 00:33:11.800 --> 00:33:18.040 up because the value of the dollar is worth less when you pay back the debt than when 390 00:33:18.040 --> 00:33:25.000 In other words, if you've charged 10% interest on a loan and two years from now you get the 391 00:33:25.000 --> 00:33:27.680 loan back but now the dollar is only worth half of what it was before, it means you're 392 00:33:27.680 --> 00:33:33.400 getting virtually wiped out. You're getting only 5%. So as the creditors and debtors are 393 00:33:33.400 --> 00:33:37.920 going to wake up to the permanent inflation as it existed in the 70s, the interest rate 394 00:33:37.920 --> 00:33:42.460 and inflation premium gets tacked on the interest rate. As the interest rate goes up, the bond 395 00:33:42.460 --> 00:33:48.380 The bond prices fall. The bond prices start collapsing. So if you have a really severe 396 00:33:48.380 --> 00:33:53.900 inflation, the bond market collapses, as it did in Britain and any other country with 397 00:33:53.900 --> 00:33:58.020 hyperinflation. The first thing that collapses is the bond market. Nobody's going to buy 398 00:33:58.020 --> 00:34:02.260 the right to $100 a year or $1,000 a year. They know that $100 or $1,000 would be worth 399 00:34:02.260 --> 00:34:09.340 peanuts in a year and a half or something. So when inflation was moderated, it was not 400 00:34:09.340 --> 00:34:20.820 The bond market has revived. Before that, the bond market was a point of cracking altogether. 401 00:34:20.820 --> 00:34:25.000 In Britain, when Britain had a severe inflation, which is still more or less still going on 402 00:34:25.000 --> 00:34:28.580 to some extent, the bond market was the first thing to collapse. Nobody would buy bonds, 403 00:34:28.580 --> 00:34:32.620 nobody would invest in it. So if you think there's going to be inflation, if you're 404 00:34:32.620 --> 00:34:35.820 anticipating higher inflation, don't buy bonds of any sort. It's the first thing not 405 00:34:35.820 --> 00:34:47.620 If you're expecting to try to get rid of it some day, sell it, it's the worst thing to 406 00:34:47.620 --> 00:34:48.620 buy. 407 00:34:48.620 --> 00:34:52.140 The first people who wiped out the United States inflation were the guys who bought 408 00:34:52.140 --> 00:34:57.980 savings bonds, those days like 3% or something, you hold on to a savings bond for 20-25 years 409 00:34:57.980 --> 00:35:01.980 and you find out the money you get is worth about half of what it was when you first invested 410 00:35:01.980 --> 00:35:03.380 in it because of inflation. 411 00:35:03.380 --> 00:35:08.780 So that's the last thing to get. 412 00:35:08.780 --> 00:35:14.020 The, okay, see now we see that the interest rate, or the term is actually interest rate 413 00:35:14.020 --> 00:35:20.140 is the time market and time preferences and plus or minus inflation premium, that's really 414 00:35:20.140 --> 00:35:21.140 a macro question. 415 00:35:21.140 --> 00:35:25.380 But anyway, that's the basic cause of it. 416 00:35:25.380 --> 00:35:30.780 And I'd say the time market permeates both for rental, the relationship between rent 417 00:35:30.780 --> 00:35:32.940 and capital value for interest rates in general. 418 00:35:32.940 --> 00:35:49.940 So what you're doing is the capital value of anything, whether it's a bond or stocks or a house or a machine or factories or whatever, is determined by the discounted sum of expected future rents or expected future returns on whatever the product is. 419 00:35:49.940 --> 00:36:04.940 and so the capital value is determined by two things, the expected rents, the expected future rents or returns from the product and the interest rate, the discount rate which you use to apply to it 420 00:36:04.940 --> 00:36:16.940 and this is again why when interest rates go up, future investments become less profitable, investment in long term future construction projects, things like that become much less profitable 421 00:36:16.940 --> 00:36:20.940 When interest rates go down, they become much more profitable. 422 00:36:20.940 --> 00:36:26.260 When the government's trying to evaluate, for example, whether or not a certain future 423 00:36:26.260 --> 00:36:32.700 dam or any other long-range project is profitable or not, it much depends on what interest rate 424 00:36:32.700 --> 00:36:34.740 they consider the correct interest rate to charge. 425 00:36:34.740 --> 00:36:38.380 The government always likes to give itself a low interest rate and make whatever does 426 00:36:38.380 --> 00:36:39.380 seem profitable. 427 00:36:39.380 --> 00:36:43.580 If you take the market interest rate, most of the government projects are uneconomic 428 00:36:43.580 --> 00:37:01.300 So we then have a relationship between capital value now, we determine what the capital value 429 00:37:01.300 --> 00:37:06.380 of everything is or the price of the whole product, namely the sum of future rents or 430 00:37:06.380 --> 00:37:10.020 expected future rents, discounted by the interest rate, interest rate is determined by the time 431 00:37:10.020 --> 00:37:16.100 Market, plus inflation premiums when there's inflation, time preferences. 432 00:37:16.100 --> 00:37:25.220 Time preferences can change according to lots of things, cultural points, risk of being 433 00:37:25.220 --> 00:37:26.220 confiscated. 434 00:37:26.220 --> 00:37:30.300 Obviously, if your investment is going to be confiscated, you're not going to invest 435 00:37:30.300 --> 00:37:31.300 very much. 436 00:37:31.300 --> 00:37:36.180 You might spend more currently, figuring what the heck, tomorrow the money is going to be 437 00:37:36.180 --> 00:37:39.740 confiscated anyway, maybe we'll spend it now, things of that sort. 438 00:37:39.740 --> 00:37:46.300 Usually, as the economy gets more affluent, people have lower and lower time preference 439 00:37:46.300 --> 00:37:47.300 rates, usually. 440 00:37:47.300 --> 00:37:50.860 They're willing then to invest more in the future and consume less now because they're 441 00:37:50.860 --> 00:37:51.860 more affluent now. 442 00:37:51.860 --> 00:37:57.020 So usually, as a long-run proposition, interest rates will fall over time, but this is not 443 00:37:57.020 --> 00:37:58.020 necessarily true. 444 00:37:58.020 --> 00:38:01.780 It's just a general tendency, and also interest rates differ. 445 00:38:01.780 --> 00:38:03.140 Time preferences differ over cultures. 446 00:38:03.140 --> 00:38:07.100 Some cultures, people are much more thrifty, save a lot for the future, they have a low 447 00:38:07.100 --> 00:38:08.100 time preference. 448 00:38:08.100 --> 00:38:12.780 and other cultures are going to spend money right now and they have a high time preference 449 00:38:12.780 --> 00:38:13.780 rate. 450 00:38:13.780 --> 00:38:18.180 And over the market, of course, all these things balance out into a general overall interest 451 00:38:18.180 --> 00:38:23.180 rate. 452 00:38:23.180 --> 00:38:29.140 We've now really mopped up, we've finally concluded the analysis of the market and market 453 00:38:29.140 --> 00:38:30.140 pricing. 454 00:38:30.140 --> 00:38:36.220 We've now got consumer goods prices, producer's goods prices, wage rates, rental prices of 455 00:38:36.220 --> 00:38:43.220 and all sorts, and finally the relationship between that and the interest rate and capital value, capital goods, capital values in general. 456 00:38:43.220 --> 00:38:51.220 It's called capitalization, by the way, this process of arriving at capital price, it's called capitalization, capitalization of future rents. 457 00:38:51.220 --> 00:39:04.220 And now we can finally conclude our analysis of things like taxi medallions. Remember we talked about taxi medallions, tobacco rights, rights to grow tobacco, things of that sort. 458 00:39:04.220 --> 00:39:21.220 Of course they're determined by supply and demand, but also in addition to that, supply and demand basically is the value of this monopoly privilege, the taxi medallion, will be, the capital value, will be determined by the sum of future rents, discounted by interest rate. 459 00:39:21.220 --> 00:39:32.220 So as the profits on the taxi business go up, the capital value of the medallion tends to go up, and on the other hand, if interest rates go up, it tends to lower the capital value. 460 00:39:32.220 --> 00:39:39.220 One of the reasons why the medallion was about $60,000, I think, when Miller wrote his book, it's now about $105,000. 461 00:39:39.220 --> 00:39:42.220 One of the reasons for that is the drop in interest rates in the last four or five years. 462 00:39:42.220 --> 00:39:46.220 It dropped from about 12% to about 80% or something like that. 463 00:39:46.220 --> 00:39:48.220 Anyway, it's an argument. Yeah. 464 00:39:48.220 --> 00:39:49.220 Yeah, it's divided, yeah. 465 00:39:49.220 --> 00:39:53.220 Line by is better. I don't want to be looking at it. 466 00:39:53.220 --> 00:39:57.220 So, yeah. 467 00:39:57.220 --> 00:40:03.180 Yeah, it's basically, I mean, you're multiplying by a percentage, you're dividing by a percentage. 468 00:40:03.180 --> 00:40:10.420 So at any rate, so as the interest rates have fallen in the last few years, because inflation 469 00:40:10.420 --> 00:40:18.140 has fallen, the value of capital assets like that, in that case the right to operate, to 470 00:40:18.140 --> 00:40:23.180 run a cab, or drive a cab, own a cab, I should say, has gone way up. 471 00:40:23.180 --> 00:40:28.460 So it's been a reflection of what these medallions are, their rights to monopoly privilege or 472 00:40:28.460 --> 00:40:36.900 monopoly rights to this restricted entry into a restricted profession of operating a cab. 473 00:40:36.900 --> 00:40:41.100 And the same way with tobacco rights and rights of tobacco growing plantations, oil import 474 00:40:41.100 --> 00:40:46.420 rights at the time we had oil import quotas, only certain people can, those who own the 475 00:40:46.420 --> 00:40:50.200 right to have a tobacco farm, those who only like to import oil, these fluctuate in accordance 476 00:40:50.200 --> 00:40:53.920 with Supply and Demand, indeed, but Supply and Demand depends on people's estimates 477 00:40:53.920 --> 00:40:58.040 of future rents, of future returns, and the rate of interest in weighing the two against 478 00:40:58.040 --> 00:40:59.040 each other. 479 00:40:59.040 --> 00:41:06.480 So, I guess that really completes our discussion on the market. 480 00:41:06.480 --> 00:41:11.520 The next hour, we'll sum up the course and have questions and whatever and talk a little 481 00:41:11.520 --> 00:41:12.520 bit about the exam. 482 00:41:12.520 --> 00:41:13.520 Ten minute break. 483 00:41:13.520 --> 00:41:18.920 I was going to be an all objective answer, in other words, multiple, as I said last time, 484 00:41:18.920 --> 00:41:23.080 multiple choice, some multiple choice in a good old manner you're now accustomed to, 485 00:41:23.080 --> 00:41:26.880 some fill in the blanks, and some fill in the blanks with multiple choice, which is 486 00:41:26.880 --> 00:41:32.760 really the same thing as another form of multiple choice. 487 00:41:32.760 --> 00:41:37.560 So the purpose of this review is to help you out here, so if you want to start asking questions 488 00:41:37.560 --> 00:41:46.800 any time, break in, because that's the whole point, whatever is fuzzy, to be clarified. 489 00:41:46.800 --> 00:41:52.600 We started with the law of diminishing marginal utility, the basic form of action, analysis 490 00:41:52.600 --> 00:42:01.440 of action, applied to anything, any consumer goods in particular, if for any, the supply 491 00:42:01.440 --> 00:42:09.440 of any good increases, the value would catch any one unit or decline and because your most 492 00:42:09.440 --> 00:42:13.600 important use comes first and your next important use is separate, separate, so the greater 493 00:42:13.600 --> 00:42:19.920 The lower the supply of a product, the lower the value of each unit of the product. 494 00:42:19.920 --> 00:42:27.320 This solves the so-called paradox of value or value paradox of the diamond bread or diamond 495 00:42:27.320 --> 00:42:29.280 water paradox. 496 00:42:29.280 --> 00:42:35.360 Namely, how come bread, which is very important, or water, which is very important, or staff 497 00:42:35.360 --> 00:42:37.440 of life, how come they're worth very little on the market? 498 00:42:37.440 --> 00:42:38.440 Their prices are very cheap. 499 00:42:38.440 --> 00:42:42.360 On the other hand, diamonds, which are mere frippery and luxury, are very expensive. 500 00:42:42.360 --> 00:42:49.860 So there seems to be a contradiction between use value and exchange value or prices. 501 00:42:49.860 --> 00:42:56.040 And the law of diminishing marginal utility clears that up, namely that in real life we 502 00:42:56.040 --> 00:43:02.360 choose and buy stuff, or not buy stuff, not on the basis of the philosophic value of the 503 00:43:02.360 --> 00:43:09.040 whole, of a class of goods, but on the basis of each unit, we buy units, we buy loaves of 504 00:43:09.040 --> 00:43:15.760 of Bread or TV sets or diamond, carats of diamond or whatever, and we buy them in relation 505 00:43:15.760 --> 00:43:20.520 to the supply that's available, so that because bread and water have a huge supply, huge stock 506 00:43:20.520 --> 00:43:25.200 available, the value of each unit is low, whereas diamonds are quite rare and therefore 507 00:43:25.200 --> 00:43:29.880 and limit very small supply and therefore the value of each unit is higher. 508 00:43:29.880 --> 00:43:37.440 So this clears up the alleged paradox or conflict between use value and exchange value. 509 00:43:37.440 --> 00:43:41.940 From the law of diminishing margin utility we arrive at the falling demand curve, our 510 00:43:41.940 --> 00:43:50.940 basic curve in microeconomics, the prices on the y-axis and the quantities on the x-axis 511 00:43:50.940 --> 00:43:55.180 we get a demand curve, falling in other words the higher the price the less will be purchased 512 00:43:55.180 --> 00:43:59.180 either for each individual or even more for the market as a whole. 513 00:43:59.180 --> 00:44:06.260 So this gives you in other words the locus of how many units will be purchased given 514 00:44:06.260 --> 00:44:08.040 the different prices 515 00:44:08.040 --> 00:44:10.980 and the intersection of the demand curve and the existing supply line 516 00:44:10.980 --> 00:44:13.760 will give the market price 517 00:44:13.760 --> 00:44:15.300 and 518 00:44:15.300 --> 00:44:19.480 we saw why this is true because if the price is higher than the market price 519 00:44:19.480 --> 00:44:24.180 you get a surplus, an unsold surplus means the supply is greater than the demand 520 00:44:24.180 --> 00:44:25.820 at that price 521 00:44:25.820 --> 00:44:30.400 and the unsold surplus, in order to sell the surplus, businessmen who want to increase their profits 522 00:44:30.400 --> 00:44:32.960 decrease their losses 523 00:44:32.960 --> 00:44:36.320 cut the price and as they do that, the surplus is eliminated. 524 00:44:36.320 --> 00:44:40.560 Similarly, if the price is below the market price, 525 00:44:40.560 --> 00:44:45.200 more people want to buy it than there is available. Demand is greater than supply 526 00:44:45.200 --> 00:44:47.320 as a shortage 527 00:44:47.320 --> 00:44:52.040 and the stuff disappears from the shelf very quickly and then in response to that, 528 00:44:52.040 --> 00:44:56.440 businessmen raise their prices and see that they may as well charge more since the stuff is 529 00:44:56.440 --> 00:44:59.400 disappearing quickly and as they do that, the shortage is eliminated. 530 00:44:59.400 --> 00:45:02.480 So we're back again to the equilibrium point. 531 00:45:02.480 --> 00:45:07.320 At the equilibrium point, and only at that point, is the supply and demand equal. 532 00:45:07.320 --> 00:45:12.880 The market is, in other words, cleared. There's no shortage, there's no surplus. 533 00:45:12.880 --> 00:45:16.200 And that, offered, is exactly how much the people want to buy. 534 00:45:16.200 --> 00:45:20.520 So this is our fundamental analysis of market prices and market in general, that it's 535 00:45:20.520 --> 00:45:22.040 responding to 536 00:45:22.040 --> 00:45:25.920 the demand curve, the values of consumers, 537 00:45:25.920 --> 00:45:30.600 which in turn determine the demand curve, which in turn determine the price given whatever 538 00:45:30.600 --> 00:45:32.400 supply is available. 539 00:45:32.400 --> 00:45:45.900 And then if the demand increases, the demand curve goes up for any reason, price will go up, and then more supply will be brought forth, profits will go up, and therefore people will produce more of it over time. 540 00:45:45.900 --> 00:45:58.400 So over time, the supply curve will keep increasing, say to here, you'll get a larger, in response to the higher demand, you'll get eventually a larger, and the higher price, you'll get eventually a larger production. 541 00:45:58.400 --> 00:46:11.100 And conversely, if the demand curve falls for whatever reason, let's say that people shift their pace from bourbon to vodka, 542 00:46:11.100 --> 00:46:18.600 the demand curve for vodka goes up, the demand curve for bourbon goes down, as that happens the price falls and losses are made, are incurred, 543 00:46:18.600 --> 00:46:26.100 and business spends supply less bourbon over time, and the supply goes down and the price goes up a bit. 544 00:46:26.100 --> 00:46:30.100 Let's see, what you have then, in other words, is in response to the long-term change in 545 00:46:30.100 --> 00:46:35.020 demand, in this case a fall, less bourbon is produced ten years from now than it would 546 00:46:35.020 --> 00:46:37.740 be now because of this long-term shift. 547 00:46:37.740 --> 00:46:41.900 So in other words, resources are determined over time on the basis of land, labor and 548 00:46:41.900 --> 00:46:47.100 capital, how much is being produced in responding to consumer demand and how much they're willing 549 00:46:47.100 --> 00:46:49.780 to pay for the different products. 550 00:46:49.780 --> 00:47:02.780 So at any given time, the market price is determined by the intersection of supply and demand, and in the long run, supply is influenced or determined by long-run demand. 551 00:47:02.780 --> 00:47:14.780 Then we went through the various applications of this and why prices change, and then what happens is that there's a price control by government which messes things up. 552 00:47:14.780 --> 00:47:39.780 In other words, the maximum price control creates a permanent shortage, which gets worse over time, doesn't allow the market to clear the market, creates a permanent shortage and lowers supply over time, which makes the shortage even worse, and various other effects, black markets and rationing through lining up, queuing up and all that sort of stuff, decline in quality, all these things are a product of maximum price control. 553 00:47:39.780 --> 00:47:50.780 And with minimum price control, where the government keeps up, keeps the price above the free market level, 554 00:47:50.780 --> 00:47:55.780 then the supply is greater than the demand permanently, in other words, the permanent surplus, 555 00:47:55.780 --> 00:48:00.780 which increases over time as the people will produce more of it at a higher or greater profit. 556 00:48:00.780 --> 00:48:07.780 So you have a problem of a surplus which gets worse. This is particularly true in two areas, historically. 557 00:48:07.780 --> 00:48:11.940 Farm price supports, which of course are getting worse all the time, and minimum wage laws, 558 00:48:11.940 --> 00:48:20.180 similarly, which create unemployment or surplus labor looking for jobs that are not available. 559 00:48:20.180 --> 00:48:24.220 And so we still have that farm price support, one intervention leads to more interventions 560 00:48:24.220 --> 00:48:25.220 to try to solve these. 561 00:48:25.220 --> 00:48:29.540 In other words, one intervention trying to cure a problem doesn't cure it, it creates 562 00:48:29.540 --> 00:48:35.620 problems which cause more interventions as a supply, as surpluses go up and they try 563 00:48:35.620 --> 00:48:39.620 We try to make the farmers cut their production. If they do it by making them cut their acreage, 564 00:48:39.620 --> 00:48:42.620 the farmers will cut the acreage and then produce more in each acre. 565 00:48:42.620 --> 00:48:46.620 So you wind up with even more surplus and you try to force them to cut the production. 566 00:48:46.620 --> 00:48:53.620 It's an endless chain of events brought about by the initial bad premise and then continuing on the same path. 567 00:48:53.620 --> 00:49:00.620 So we went through a lot of that, what the effects of maximum price control and minimum price control are. 568 00:49:00.620 --> 00:49:17.620 That was about the first half of the term, dealing with that. Then we went on to the theory of the firm and the firm tries to maximize its profits and what exactly that meant. 569 00:49:17.620 --> 00:49:41.620 And so then we had dollars on the y-axis, quantity of production on the x-axis, then total revenue, which is equal to price times quantity, and total cost, which is un-purchased, not spent. 570 00:49:41.620 --> 00:49:48.420 and then total revenue, something like this and we can either go up or go down since price 571 00:49:48.420 --> 00:49:54.700 and quantity are moved inversely. In other words, if the price goes up, quantity so will 572 00:49:54.700 --> 00:50:01.540 go down and vice versa. As we saw from the demand curve, total cost is always rising. 573 00:50:01.540 --> 00:50:05.500 This is the minimum total cost, providing that firms have the incentive to keep the 574 00:50:05.500 --> 00:50:08.780 total cost to the minimum. If I don't have cost plus pricing and defense contract and 575 00:50:08.780 --> 00:50:13.780 and all that, where the cost will balloon upward, because the government, the taxpayers paying them back, 576 00:50:13.780 --> 00:50:18.780 recompensing them, plus the guarantee rate of profit, guarantee markup. 577 00:50:18.780 --> 00:50:25.780 So in this case, the maximum profit will be the maximum distance between the two, say here, 578 00:50:25.780 --> 00:50:32.780 be the production point, and this will tend to be the, also be the, the slope of the tangents are equal, 579 00:50:32.780 --> 00:50:36.780 the marginal revenue is equal to marginal cost. 580 00:50:36.780 --> 00:50:49.780 marginal being the change in total revenue divided by delta Q and marginal cost being the change in total cost for each new unit 581 00:50:49.780 --> 00:50:58.780 so this is, but marginal revenue and marginal, equaling marginal cost is a necessary but not sufficient condition of maximizing total profit 582 00:50:58.780 --> 00:51:04.780 because it could be in a minimum zone here too, in other words the two things are, the tangents are also equal at a minimum 583 00:51:04.780 --> 00:51:08.780 And the only way you can tell whether the maximum minimum is a look at the total 584 00:51:08.780 --> 00:51:11.780 Unless, as the textbooks do, you implicitly assume only one peak 585 00:51:11.780 --> 00:51:15.780 I mean, if you assume only... if you cut the thing off here, then of course it's easy 586 00:51:15.780 --> 00:51:19.780 Then you say, well, whenever the marginals are equal, then it's maximum profit 587 00:51:19.780 --> 00:51:24.780 That's because you're conveniently forgetting about the other possible troughs and peaks 588 00:51:24.780 --> 00:51:27.780 in the production schedule 589 00:51:27.780 --> 00:51:30.780 Okay, this is an area 590 00:51:30.780 --> 00:51:37.780 So in other words, the maximum profit point will be at a point where the demand curve for the firm is elastic. 591 00:51:37.780 --> 00:51:43.780 This is the elastic zone. The demand curve for the firm will never be an inelastic zone. 592 00:51:43.780 --> 00:51:51.780 It means any business firm, regardless of the size or whatever, will always be producing, if it has any smarts at all, 593 00:51:51.780 --> 00:51:55.780 will always be producing an area where the demand for its product is elastic. 594 00:51:55.780 --> 00:52:05.260 Transposing that into the other diagram for this is the average and marginal diagrams. 595 00:52:05.260 --> 00:52:09.620 This is the total revenue and total curve. 596 00:52:09.620 --> 00:52:15.460 If we assume only one peak and no trough, if we cut this off here, because the textbook 597 00:52:15.460 --> 00:52:27.780 is always doing to make life easier for them. Then we have total revenue will be since the 598 00:52:27.780 --> 00:52:32.900 man curve is always falling, that's the same thing as the average revenue curve. Marginal 599 00:52:32.900 --> 00:52:39.260 revenue will always be falling below it and falling more sharply. It's mathematically 600 00:52:39.260 --> 00:52:45.440 the way it works out. This is marginal revenue. The cost curve as we've seen is more or less 601 00:52:45.440 --> 00:53:01.440 If it's U-shaped, although not precisely that, anyway, if it's U-shaped, something like that, it decreases the average total cost, decreases over product number produced until it reaches some kind of trough and goes up again. 602 00:53:01.440 --> 00:53:08.440 So marginal cost in something like this will intersect at the trough point. 603 00:53:08.440 --> 00:53:14.600 and a usual marginal average relationship. Namely, whenever an average of anything is 604 00:53:14.600 --> 00:53:17.840 falling and the marginal is below it, whenever the average of anything is rising and the 605 00:53:17.840 --> 00:53:20.600 marginal is above it, and therefore whenever the average of anything is at a trough or 606 00:53:20.600 --> 00:53:27.680 a peak, it intersects the marginal. And so, the maximum profit point then, given all the 607 00:53:27.680 --> 00:53:33.400 assumptions, given that there's only one peak and no trough point, will be wherever these 608 00:53:33.400 --> 00:53:38.860 to intersect, marginal revenue and marginal cost intersect, in other words, if you only 609 00:53:38.860 --> 00:53:43.980 have this diagram, you don't have that one, so this will be here, and then the total profits 610 00:53:43.980 --> 00:53:50.900 will then be, at that point, let's say it's a thousand units or whatever you're producing, 611 00:53:50.900 --> 00:53:59.480 at that thousand units, this is average revenue and this is average cost, so the total profits 612 00:53:59.480 --> 00:54:04.280 And we go average revenue minus average cost times quantity, and in other words, this follows 613 00:54:04.280 --> 00:54:11.800 from that, profits equal total revenue minus total cost, so profits are also equal to total 614 00:54:11.800 --> 00:54:18.520 revenue divided by quantity, which is average cost, average revenue, minus total revenue 615 00:54:18.520 --> 00:54:28.080 divided by cost, average cost, times quantity, like this, these drop out, so in other words, 616 00:54:28.080 --> 00:54:45.080 the total profits will be this area here, this minus that, times that, this will be the total profits, at the maximum profit point, where production is a thousand, let's say, the maximum profit point 617 00:54:45.080 --> 00:54:57.160 Average costs are falling, are U-shaped because they're indivisible, even though the production 618 00:54:57.160 --> 00:55:03.160 function is such, you might think that it should be a constant average cost, because 619 00:55:03.160 --> 00:55:06.860 same causes always yield the same effects. 620 00:55:06.860 --> 00:55:11.560 The average cost curve is falling for a long time because, or for a short time, whatever, 621 00:55:11.560 --> 00:55:24.440 of Indivisibility. Factors of production cannot all be multiplied to the same extent. 622 00:55:24.440 --> 00:55:37.880 So since you can't, you can multiply the number of shipments, freight car shipments by 20% 623 00:55:37.880 --> 00:55:42.880 You can't multiply a number of tracks by 20%. You can only either double them or leave them the same amount. 624 00:55:42.880 --> 00:55:52.880 They have these indivisibilities, and therefore, as you keep increasing in production, you use up more of this fixed cost, more of these big indivisible factors of production. 625 00:55:52.880 --> 00:55:58.880 And I finally get to the point where all of them are being used up and beginning to be overused until the average costs start going up. 626 00:55:58.880 --> 00:56:17.880 In real life, the average cost curve usually goes, instead of going to a fixed one point or one trough point, it usually goes down like that, reaches a plateau and then goes up again. 627 00:56:17.880 --> 00:56:24.600 So there's a whole area here, a zone in which businessmen are interested in, where average 628 00:56:24.600 --> 00:56:30.640 cost is constant, marginal cost is the same as average cost, and it goes up for that length 629 00:56:30.640 --> 00:56:31.640 of time. 630 00:56:31.640 --> 00:56:34.240 Which is why businessmen don't understand what economists are talking about. 631 00:56:34.240 --> 00:56:38.120 Economists are talking about average and marginal, for them, the businessmen, of course, are 632 00:56:38.120 --> 00:56:39.120 always constant. 633 00:56:39.120 --> 00:56:42.360 And the reason is they're dealing with this zone, and they're not interested in a hypothetical 634 00:56:42.360 --> 00:56:46.160 zone when they're never actually functioning. 635 00:56:46.160 --> 00:56:58.080 And then we went on to pricing of factors of production and we're going through a long 636 00:56:58.080 --> 00:57:02.920 elaborate process of showing how factors of production are, the man curve of factors of 637 00:57:02.920 --> 00:57:03.920 production is determined. 638 00:57:03.920 --> 00:57:11.560 It turns out the man curve will be the marginal revenue product curve, which will be falling 639 00:57:11.560 --> 00:57:24.560 We're falling for two reasons. One, because marginal physical product is falling. And two, because demand curve is falling, or marginal revenue is falling. 640 00:57:24.560 --> 00:57:29.560 So when you multiply marginal physical product times marginal revenue, you get a fully marginal revenue product. Yes, sir? 641 00:57:29.560 --> 00:57:41.560 This is the demand curve for the firm, for the product of the firm. 642 00:57:41.560 --> 00:57:47.560 The demand curve for, wonder about it, this is the demand curve of the firm for factors of production, wages, labor, land and capital. 643 00:57:47.560 --> 00:57:49.560 This is the demand curve for the factor. 644 00:57:49.560 --> 00:57:52.560 And this is the demand curve for the product. 645 00:57:52.560 --> 00:57:54.560 The product of the firm. 646 00:57:54.560 --> 00:58:01.280 So this is the man curve for factors of production, and then the supply of factors of production 647 00:58:01.280 --> 00:58:09.080 is whatever it is, whatever the stock of labor, land and capitalism, it will give them the 648 00:58:09.080 --> 00:58:15.440 yield of wage rate or the price of the factors or whatever, intersection of these two things. 649 00:58:15.440 --> 00:58:21.520 And the supply of labor, particularly of course largely determined by population, we went 650 00:58:21.520 --> 00:58:51.000 Contrast the Malthusian Doctrine, which is that people always breed down to subsistence 651 00:58:51.000 --> 00:58:55.260 level, so to speak. And today, of course, we talk about interest rate and the capitalization 652 00:58:55.260 --> 00:59:02.320 and how capitalization is determined by the expected future returns or rents from a product 653 00:59:02.320 --> 00:59:08.720 or equipment or whatever, and the interactions between that and the interest rate, which 654 00:59:08.720 --> 00:59:13.040 is the time preference rate. Okay, are there any questions on any of this stuff? We have 655 00:59:13.040 --> 00:59:19.120 a whole, let's summarize the whole term now, about a half hour, so is there any, yeah. 656 00:59:19.120 --> 00:59:38.920 Most of the blanks, we'll cover the whole term, but we'll cover the major stuff. There'll 657 00:59:38.920 --> 00:59:43.920 be no trick questions about obscure areas. Basically, we'll cover these major things 658 00:59:43.920 --> 00:59:55.420 The final will be, in other words, I'm leaning over backward to help the students. If you 659 00:59:55.420 --> 00:59:58.800 do better on the final than on the midterm, I figure you've increased in stature, you've 660 00:59:58.800 --> 01:00:02.640 learned, etc., so it'll be worth more than 50%. If on the other hand you do worse on 661 01:00:02.640 --> 01:00:12.840 the final, I'll give it 50%. So I'll try my best to, it's not mechanistic. So there'll 662 01:00:12.840 --> 01:00:24.840 There'll be multiple choice, there'll also be fill-in-the-blanks, which is multiple choice, where you have a blank, it's either increased, decreased, remains the same or indeterminate 663 01:00:24.840 --> 01:00:30.840 And as a real fill-in-the-blank, you put your own word in, however, don't worry about the grammar, the key thing is to forget about the grammar 664 01:00:30.840 --> 01:00:36.840 Don't worry about the sentence structure and whether plural or singular or anything like that, just put in what you think is right 665 01:00:36.840 --> 01:00:42.840 and this is not an English course, you don't have to worry about that 666 01:00:42.840 --> 01:00:47.840 and of course, I should mention that the union stuff will be covered as far as the impact of unions on the 667 01:00:47.840 --> 01:00:54.840 wage rate, craft union versus industrial union, the Wagner Act is changing the whole labor market structure 668 01:00:54.840 --> 01:01:03.840 Well, the Wagner Act was 1935, you know that, that's about it 669 01:01:03.840 --> 01:01:14.840 The Wagner Act came in 1935. That's the only date you have to know. 1935 was the Wagner Act. 670 01:01:22.840 --> 01:01:31.840 Once again, there'll be nothing. You should read the chapters that are indicated in the outline, but there won't be anything on exam that I haven't talked about in class. 671 01:01:31.840 --> 01:01:36.840 and a lot of stuff, which of course the book has that I don't talk about and that's not being included. 672 01:01:36.840 --> 01:01:41.840 That's it? Anything else? Okay, God bless you, good luck.