WEBVTT NOTE 1.09. The Formation of Capital 1 00:00:00.000 --> 00:00:05.080 9. The Formation of Capital 2 00:00:05.080 --> 00:00:10.880 With the nature-given elements limited by his environment and his labor restricted both 3 00:00:10.880 --> 00:00:18.360 by its available supply and its disutility, there is only one way by which man can increase 4 00:00:18.360 --> 00:00:25.280 his production of consumers' goods per unit of time, by increasing the quantity of capital 5 00:00:25.280 --> 00:00:32.760 Goods. Beginning with unaided labor and nature, he must, to increase his productivity, mix 6 00:00:32.760 --> 00:00:39.360 his labor energy with the elements of nature to form capital goods. These goods are not 7 00:00:39.360 --> 00:00:45.240 immediately serviceable in satisfying his wants, but must be transformed by further 8 00:00:45.240 --> 00:00:53.040 labor into lower-order capital goods and, finally, into the desired consumer's goods. 9 00:00:53.040 --> 00:00:58.700 In order to illuminate clearly the nature of capital formation and the position of capital 10 00:00:58.700 --> 00:01:04.960 in production, let us start with the hypothetical example of Robinson Crusoe, stranded on a 11 00:01:04.960 --> 00:01:06.560 desert island. 12 00:01:06.560 --> 00:01:13.520 Robinson, on landing, we assume, finds himself without the aid of capital goods of any kind. 13 00:01:13.520 --> 00:01:18.840 All that is available is his own labor and the elements given him by nature. 14 00:01:18.840 --> 00:01:24.840 It is obvious that without capital he will be able to satisfy only a few wants, of which 15 00:01:24.840 --> 00:01:27.320 he will choose the most urgent. 16 00:01:27.320 --> 00:01:33.960 Let us say that the only goods available without the aid of capital are berries and leisure. 17 00:01:33.960 --> 00:01:39.680 Say that he finds that he can pick twenty edible berries an hour, and on this basis 18 00:01:39.680 --> 00:01:46.240 works ten hours in berry picking and enjoys fourteen hours a day of leisure. 19 00:01:46.240 --> 00:01:52.360 It is evident that without the aid of capital, the only goods open to him for consumption 20 00:01:52.360 --> 00:01:56.680 are goods with the shortest period of production. 21 00:01:56.680 --> 00:02:02.460 Leisure is the one good that is produced almost instantaneously, while berries have a very 22 00:02:02.460 --> 00:02:04.720 short production period. 23 00:02:04.720 --> 00:02:08.540 Twenty berries have a production period of one hour. 24 00:02:08.540 --> 00:02:14.480 Goods with longer periods of production are not available to him unless he acquires capital 25 00:02:14.480 --> 00:02:15.640 goods. 26 00:02:15.640 --> 00:02:21.240 There are two ways in which longer processes of production through the use of capital may 27 00:02:21.240 --> 00:02:23.520 increase productivity. 28 00:02:23.520 --> 00:02:31.540 One, they may provide a greater production of the same good per unit of time, or two, 29 00:02:31.540 --> 00:02:37.440 they may allow the actor to consume goods that are not available at all with shorter 30 00:02:37.440 --> 00:02:40.440 processes of production. 31 00:02:40.440 --> 00:02:46.120 As an example of the first type of increase in productivity, Robinson may decide that 32 00:02:46.120 --> 00:02:52.160 if he had the use of a long stick, he could shake many berries off the trees instead of 33 00:02:52.160 --> 00:02:54.240 picking them by hand. 34 00:02:54.240 --> 00:02:59.880 In that way, he might be able to step up his production to 50 berries an hour. 35 00:02:59.880 --> 00:03:03.080 How might he go about acquiring the stick? 36 00:03:03.080 --> 00:03:09.020 Obviously, he must expend labor in getting the materials, transporting them, shaping 37 00:03:09.020 --> 00:03:16.340 Let us say that ten hours would be necessary for this task. 38 00:03:16.340 --> 00:03:23.860 This means that to obtain the stick, Crusoe must forgo ten hours' production of consumers' 39 00:03:23.860 --> 00:03:24.860 goods. 40 00:03:24.860 --> 00:03:31.660 He must either sacrifice ten hours of leisure or ten hours of berries at twenty per hour, 41 00:03:31.660 --> 00:03:35.940 two hundred berries, or some combination of the two. 42 00:03:35.940 --> 00:03:42.620 He must sacrifice for ten hours the enjoyment of consumers' goods and expand his labor 43 00:03:42.620 --> 00:03:49.860 on producing a capital good, the stick, which will be of no immediate use to him. 44 00:03:49.860 --> 00:03:56.180 He will be able to begin using the capital good as an indirect aid to future production 45 00:03:56.180 --> 00:03:59.480 only after the ten hours are up. 46 00:03:59.480 --> 00:04:03.960 In the meantime, he must forgo the satisfaction of his wants. 47 00:04:03.960 --> 00:04:11.000 He must restrict his consumption for ten hours and transfer his labor for that period from 48 00:04:11.000 --> 00:04:18.200 producing immediately satisfying consumers' goods into the production of capital goods, 49 00:04:18.200 --> 00:04:22.380 which will prove their usefulness only in the future. 50 00:04:22.380 --> 00:04:28.920 The restriction of consumption is called saving, and the transfer of labor and land to the 51 00:04:28.920 --> 00:04:33.880 formation of capital goods is called investment. 52 00:04:33.880 --> 00:04:38.640 We see now what is involved in the process of capital formation. 53 00:04:38.640 --> 00:04:44.760 The actor must decide whether or not to restrict his consumption and invest in the production 54 00:04:44.760 --> 00:04:49.280 of capital goods by weighing the following factors. 55 00:04:49.280 --> 00:04:55.600 Does the utility yielded by the increased productivity of the longer process of production 56 00:04:55.600 --> 00:05:01.680 outweigh the sacrifice that I must make of present goods to acquire consumer's goods 57 00:05:01.680 --> 00:05:03.380 in the future? 58 00:05:03.380 --> 00:05:09.600 We have already seen above the universal fact of time preference, that a man will always 59 00:05:09.600 --> 00:05:14.560 prefer obtaining a given satisfaction earlier than later. 60 00:05:14.560 --> 00:05:22.120 Here, the actor must balance his desire to acquire more satisfactions per unit of time, 61 00:05:22.120 --> 00:05:29.040 as against the fact that, to do so, he must give up satisfactions in the present to increase 62 00:05:29.040 --> 00:05:31.800 his production in the future. 63 00:05:31.800 --> 00:05:38.440 His time preference for present over future accounts for his disutility of waiting, which 64 00:05:38.440 --> 00:05:44.160 must be balanced against the utility that will be eventually provided by the capital 65 00:05:44.160 --> 00:05:48.200 good and the longer process of production. 66 00:05:48.200 --> 00:05:52.100 How he chooses depends on his scale of values. 67 00:05:52.100 --> 00:05:57.800 It is possible, for example, that if he thought the stick would provide him with only 30 berries 68 00:05:57.800 --> 00:06:27.800 The Theory of Money and Credit 69 00:06:27.800 --> 00:06:30.800 and the combination of berries or leisure. 70 00:06:30.800 --> 00:06:34.800 Setting aside leisure for purposes of simplification, 71 00:06:34.800 --> 00:06:40.800 he may decide to take a whole day off at once and produce no berries at all, 72 00:06:40.800 --> 00:06:43.800 completing the stick in one day. 73 00:06:43.800 --> 00:06:47.800 Or he may decide to pick berries for eight hours instead of ten 74 00:06:47.800 --> 00:06:51.800 and devote the other two hours a day to making the stick, 75 00:06:51.800 --> 00:06:55.800 in which case the completion of the stick will take five days. 76 00:06:55.800 --> 00:07:00.800 Which method he will choose depends on the nature of his value scale. 77 00:07:00.800 --> 00:07:08.380 In any case, he must restrict his consumption by 10 hours worth of labor, 200 berries. 78 00:07:08.380 --> 00:07:15.400 The rate of his restriction will depend on how urgently he wants the increased production, 79 00:07:15.400 --> 00:07:21.040 as compared with the urgency with which he desires to maintain his present supply of 80 00:07:21.040 --> 00:07:22.440 berries. 81 00:07:22.440 --> 00:07:38.440 Analytically, there is little difference between working on consumers' goods, accumulating a stock of them, and then working full-time on the capital good, and working on the capital good and consumer goods simultaneously. 82 00:07:38.440 --> 00:07:45.160 Other things being equal, however, it is possible that one of the methods will prove more productive. 83 00:07:45.160 --> 00:07:52.360 Thus, it may be that the actor can complete the task in less time if he works on it continuously. 84 00:07:52.360 --> 00:07:57.880 In that case, he will tend to choose the former method. On the other hand, the berries might 85 00:07:57.880 --> 00:08:02.920 tend to spoil if accumulated, and this would lead him to choose the latter route. 86 00:08:02.920 --> 00:08:10.320 A balance of the various factors on his value scale will result in his decision. 87 00:08:10.320 --> 00:08:17.240 Let us assume that Robinson has made his decision and after five days begins to use the stick. 88 00:08:17.240 --> 00:08:24.200 On the sixth day and thereafter then, 500 berries a day will begin to pour forth and 89 00:08:24.200 --> 00:08:28.760 he will harvest the fruits of his investment in capital goods. 90 00:08:28.760 --> 00:08:35.200 Crusoe can use his increased productivity to increase his hours of leisure as well as to 91 00:08:35.200 --> 00:08:37.520 increase his output of berries. 92 00:08:37.520 --> 00:08:43.040 Thus, he might decide to cut his daily labor from 10 hours to 8. 93 00:08:43.040 --> 00:08:49.860 His output of berries will then be increased because of the stick from 200 to 400 berries 94 00:08:49.860 --> 00:08:57.880 per day, while Crusoe is able to increase his hours of leisure from 14 to 16 per day. 95 00:08:57.880 --> 00:09:04.080 Obviously, Crusoe can choose to take his increased productivity in various combinations 96 00:09:04.080 --> 00:09:09.620 of increased output of the good itself and of increased leisure. 97 00:09:09.620 --> 00:09:15.420 In this sense, the stick might be called a labor-saving device, although the terminology 98 00:09:15.420 --> 00:09:16.940 is misleading. 99 00:09:16.940 --> 00:09:23.980 It is labor-saving only to the extent that the actor chooses to take the increased productivity 100 00:09:23.980 --> 00:09:26.940 in the form of leisure. 101 00:09:26.940 --> 00:09:32.980 Even more important than its use in increasing output per unit of time is the function of 102 00:09:32.980 --> 00:09:40.580 capital in enabling man to acquire goods which he could not at all obtain otherwise. 103 00:09:40.580 --> 00:09:46.780 A very short period of production enables Crusoe to produce leisure and at least some 104 00:09:46.780 --> 00:09:53.740 berries, but without the aid of capital he cannot attain any of his other wants at all. 105 00:09:53.740 --> 00:09:57.360 To acquire meat, he must have a bow and arrows. 106 00:09:57.360 --> 00:10:00.720 To acquire fish, he must have a pole or net. 107 00:10:00.720 --> 00:10:07.640 To acquire shelter, he must have logs of wood or canvas and an axe to cut the wood. 108 00:10:07.640 --> 00:10:14.080 To satisfy any such wants, he must restrict his consumption and invest his labor in the 109 00:10:14.080 --> 00:10:16.840 production of capital goods. 110 00:10:16.840 --> 00:10:22.800 In other words, he must embark on lengthier processes of production than had been involved 111 00:10:22.800 --> 00:10:29.520 in Culling Berries. He must take time out to produce the capital goods themselves before he 112 00:10:29.520 --> 00:10:36.800 can use them to enjoy consumers' goods. In each case, the decisions that he makes in embarking on 113 00:10:36.800 --> 00:10:44.240 capital formation will be a result of weighing on his value scale the utility of the expected 114 00:10:44.240 --> 00:10:51.920 increased productivity as against the disutility of his time preference for present as compared 115 00:10:51.920 --> 00:10:55.120 to Future Satisfactions. 116 00:10:55.120 --> 00:11:01.080 It is obvious that the factor which holds every man back from investing more and more 117 00:11:01.080 --> 00:11:08.080 of his land and labor in capital goods is his time preference for present goods. 118 00:11:08.080 --> 00:11:14.680 If man, other things being equal, did not prefer satisfaction in the present to satisfaction 119 00:11:14.680 --> 00:11:17.560 in the future, he would never consume. 120 00:11:17.560 --> 00:11:23.960 He would invest all his time and labor in increasing the production of future goods. 121 00:11:23.960 --> 00:11:31.080 But never consuming is an absurdity, since consuming is the end of all production. 122 00:11:31.080 --> 00:11:37.680 Therefore, at any given point in time, all men will have invested in all the shorter 123 00:11:37.680 --> 00:11:44.000 periods of production to satisfy the most urgently felt wants that their knowledge of 124 00:11:44.000 --> 00:11:46.320 recipes allows. 125 00:11:46.320 --> 00:11:53.060 Any further formation of capital will go into longer processes of production. 126 00:11:53.060 --> 00:11:59.740 Other things being equal, that is, the relative urgency of wants to be satisfied and the actor's 127 00:11:59.740 --> 00:12:06.500 knowledge of recipes, any further investment will be in a longer process of production 128 00:12:06.500 --> 00:12:09.500 than is now underway. 129 00:12:09.500 --> 00:12:15.960 Here it is important to realize that a period of production does not involve only the amount 130 00:12:15.960 --> 00:12:22.440 of Time Spent on Making the Actual Capital Good, but refers to the amount of waiting 131 00:12:22.440 --> 00:12:30.120 time from the start of producing the capital good until the consumer's good is produced. 132 00:12:30.120 --> 00:12:35.160 In the case of the stick and the berries, the two times are identical. 133 00:12:35.160 --> 00:12:40.960 But this was so only because the stick was a first-order capital good. 134 00:12:40.960 --> 00:12:47.280 is, it was but one stage removed from the output of consumers' goods. 135 00:12:47.280 --> 00:12:54.000 Let us take for example a more complex case, the building by Crusoe of an axe in order 136 00:12:54.000 --> 00:12:58.480 to chop wood to produce a house for himself. 137 00:12:58.480 --> 00:13:04.000 Crusoe must decide whether or not the house he will gain will be worth the consumers' 138 00:13:04.000 --> 00:13:06.640 goods for gone in the meantime. 139 00:13:06.640 --> 00:13:13.440 Let us say it will take Crusoe 50 hours to produce the axe, and then a further 200 hours 140 00:13:13.440 --> 00:13:19.760 with the help of the axe to chop and transport wood in order to build a house. 141 00:13:19.760 --> 00:13:26.720 The longer process of production, which Crusoe must decide upon, is now a three-stage one, 142 00:13:26.720 --> 00:13:29.480 totaling 250 hours. 143 00:13:29.480 --> 00:13:35.680 First, labor and nature produce the axe, a second-order capital good. 144 00:13:35.680 --> 00:13:45.080 Second, labor plus the axe plus nature-given elements produces logs of wood, a first-order capital good. 145 00:13:45.080 --> 00:13:52.880 Finally, labor and the logs of wood combine to yield the desired consumer's good, a house. 146 00:13:52.880 --> 00:13:58.180 The length of the process of production is the entire length of time 147 00:13:58.180 --> 00:14:06.180 from the point at which an actor must begin his labor to the point at which the consumer's good is yielded. 148 00:14:06.180 --> 00:14:17.180 Again, it must be observed that in considering the length of a process of production, the actor is not interested in past history as such. 149 00:14:17.180 --> 00:14:26.180 The length of a process of production for an actor is the waiting time from the point at which his action begins. 150 00:14:26.180 --> 00:14:32.260 Thus, if Crusoe were lucky enough to find an axe in good condition left by some previous 151 00:14:32.260 --> 00:14:39.500 inhabitant, he would reckon his period of production at 200 hours instead of 250. 152 00:14:39.500 --> 00:14:44.320 The axe would be given to him by his environment. 153 00:14:44.320 --> 00:14:49.660 This example illustrates a fundamental truth about capital goods. 154 00:14:49.660 --> 00:14:55.700 Capital is a way station along the road to the enjoyment of consumers' goods. 155 00:14:55.700 --> 00:15:02.620 He who possesses capital is that much further advanced in time on the road to the desired 156 00:15:02.620 --> 00:15:04.500 consumer's good. 157 00:15:04.500 --> 00:15:10.860 Crusoe without the axe is 250 hours away from his desired house. 158 00:15:10.860 --> 00:15:15.180 Crusoe with the axe is only 200 hours away. 159 00:15:15.180 --> 00:15:21.260 If the logs of wood had been piled up ready-made on his arrival, he would be that much closer 160 00:15:21.260 --> 00:15:23.060 to his objective. 161 00:15:23.060 --> 00:15:28.180 And if the house were there to begin with, he would achieve his desire immediately. 162 00:15:28.180 --> 00:15:33.900 He would be further advanced toward his goal without the necessity of further restriction 163 00:15:33.900 --> 00:15:35.140 of consumption. 164 00:15:35.140 --> 00:15:42.180 Thus, the role of capital is to advance men in time toward their objective in producing 165 00:15:42.180 --> 00:15:44.300 consumers' goods. 166 00:15:44.300 --> 00:15:50.660 This is true for both the case where new consumers' goods are being produced and the case where 167 00:15:50.660 --> 00:15:56.260 Where More Old Goods Are Being Produced Thus in the previous case, without the 168 00:15:56.260 --> 00:16:03.060 stick, Crusoe was 25 hours away from an output of 500 berries. 169 00:16:03.060 --> 00:16:06.860 With the stick, he is only 10 hours away. 170 00:16:06.860 --> 00:16:13.480 In those cases where capital enables the acquisition of new goods, of goods which could not be 171 00:16:13.480 --> 00:16:40.480 It is evident that for any formation of capital there must be saving, a restriction of the enjoyment of consumers' goods in the present, and the investment of the equivalent resources in the production of capital goods. 172 00:16:40.480 --> 00:16:47.480 This enjoyment of consumers' goods, the satisfaction of wants, is called consumption. 173 00:16:47.480 --> 00:16:53.980 The saving might come about as a result of an increase in the available supply of consumers' goods, 174 00:16:53.980 --> 00:16:59.480 which the actor decides to save in part rather than consume fully. 175 00:16:59.480 --> 00:17:05.980 At any rate, consumption must always be less than the amount that could be secured. 176 00:17:05.980 --> 00:17:29.980 Thus, if the harvest on the desert island improves and Crusoe finds that he can pick 240 berries in 10 hours without the aid of a stick, he may now save 40 berries a day for 5 days, enabling him to invest his labor in a stick without cutting back his berry consumption from the original 200 berries. 177 00:17:29.980 --> 00:17:37.280 Saving involves the restriction of consumption compared to the amount that could be consumed. 178 00:17:37.280 --> 00:17:46.380 It does not always involve an actual reduction in the amount consumed over the previous level of consumption. 179 00:17:46.380 --> 00:17:49.880 All capital goods are perishable. 180 00:17:49.880 --> 00:17:58.380 Those few products that are not perishable but permanent become, to all intents and purposes, part of the land. 181 00:17:58.380 --> 00:18:05.980 Otherwise, all capital goods are perishable, used up during the processes of production. 182 00:18:05.980 --> 00:18:13.400 We can therefore say that capital goods during production are transformed into their products. 183 00:18:13.400 --> 00:18:17.020 With some capital goods, this is physically quite evident. 184 00:18:17.020 --> 00:18:23.820 Thus, it is obvious, for example, that when 100 pounds of bread at wholesale are combined 185 00:18:23.820 --> 00:18:31.480 with other factors, to produce 100 pounds of bread at retail, the former factor is immediately 186 00:18:31.480 --> 00:18:36.040 and completely transformed into the latter factor. 187 00:18:36.040 --> 00:18:40.280 The using up of capital goods is dramatically clear. 188 00:18:40.280 --> 00:18:45.680 The whole of the capital good is used up in each production event. 189 00:18:45.680 --> 00:18:50.860 The other capital goods, however, are also used up, but not as suddenly. 190 00:18:50.860 --> 00:18:58.420 A truck transporting bread may have a life of 15 years, amounting to say 3,000 of such 191 00:18:58.420 --> 00:19:03.260 conversions of bread from the wholesale to the retail stage. 192 00:19:03.260 --> 00:19:10.180 In this case, we may say that one three-thousandth of the truck is used up each time the production 193 00:19:10.180 --> 00:19:11.900 process occurs. 194 00:19:11.900 --> 00:19:19.120 Similarly, a mill converting wheat into flour may have a useful life of 20 years, in which 195 00:19:19.120 --> 00:19:25.640 In which case we could say that one twentieth of the mill was used up in each year's production 196 00:19:25.640 --> 00:19:27.000 of flour. 197 00:19:27.000 --> 00:19:33.200 Each particular capital good has a different useful life and therefore a different rate 198 00:19:33.200 --> 00:19:39.200 of being used up, or as it is called of depreciation. 199 00:19:39.200 --> 00:19:44.040 Capital goods vary in the duration of their serviceableness. 200 00:19:44.040 --> 00:19:47.440 Let us now return to Crusoe and the stick. 201 00:19:47.440 --> 00:19:54.760 Let us assume that the stick will have a useful life of 10 days, and is so estimated by Crusoe, 202 00:19:54.760 --> 00:20:01.020 after which it wears out, and Crusoe's output reverts to its previous level of 20 berries 203 00:20:01.020 --> 00:20:02.260 per hour. 204 00:20:02.260 --> 00:20:05.160 He is back where he started. 205 00:20:05.160 --> 00:20:10.620 Crusoe is therefore faced with a choice after his stick comes into use. 206 00:20:10.620 --> 00:20:19.020 His standard of living, now say at 500 berries a day plus 14 hours of leisure, has improved, 207 00:20:19.020 --> 00:20:24.840 and he will not like the prospect of a reduction to 200 when the stick gives out. 208 00:20:24.840 --> 00:20:31.040 If he wishes to maintain his standard of living intact, therefore, he must, during the ten 209 00:20:31.040 --> 00:20:37.340 days, work on building another stick, which can be used to replace the old one when it 210 00:20:37.340 --> 00:20:38.880 wears out. 211 00:20:38.880 --> 00:20:44.480 This act of building another stick involves a further act of saving. 212 00:20:44.480 --> 00:20:51.420 In order to invest in a replacement for the stick, he must again save, restrict his consumption 213 00:20:51.420 --> 00:20:55.080 as compared to the production that might be available. 214 00:20:55.080 --> 00:21:02.480 Thus, he will again have to save ten hours' worth of labor in berries or leisure and devote 215 00:21:02.480 --> 00:21:08.480 He has restricted consumption from his maximum, although he is still much better off than in his original, unaffected life. 216 00:21:08.480 --> 00:21:17.480 Suppose that he does this by shifting one hour a day from his berry production to the labor of producing another stick. 217 00:21:17.480 --> 00:21:24.480 By doing so, he restricts his berry consumption for 10 days to 450 a day. 218 00:21:24.480 --> 00:21:33.480 He has restricted consumption from his maximum, although he is still much better off than in his original unaided state. 219 00:21:33.480 --> 00:21:42.480 Thus the capital structure is renewed at the end of the ten days by saving and investing in a replacement. 220 00:21:42.480 --> 00:21:51.480 After that, Crusoe is again faced with the choice of taking his maximum production of 500 berries per day 221 00:21:51.480 --> 00:21:59.200 and Finding Himself Back to a 200 per day level at the end of 10 more days, or of making 222 00:21:59.200 --> 00:22:05.200 a third act of saving in order to provide for replacement of the second stick when it 223 00:22:05.200 --> 00:22:06.900 wears out. 224 00:22:06.900 --> 00:22:13.280 It is necessary to emphasize that independent acts of saving are necessary for replacement 225 00:22:13.280 --> 00:22:20.680 of goods, since many writers, for example J.B. Clark and Frank H. Knight, tend to assume 226 00:22:20.680 --> 00:22:38.800 If Crusoe decides not to replace the first or the second stick and accepts a later drop 227 00:22:38.800 --> 00:22:45.920 in output to avoid undergoing present saving, he is consuming capital. 228 00:22:45.920 --> 00:22:52.280 In other words, he is electing to consume instead of to save and maintain his capital 229 00:22:52.280 --> 00:22:56.360 structure and future rate of output. 230 00:22:56.360 --> 00:23:04.480 Consuming his capital enables Crusoe to increase his consumption now from 450 to 500 berries 231 00:23:04.480 --> 00:23:06.440 per day. 232 00:23:06.440 --> 00:23:12.600 But at some point in the future, here in 10 days, he will be forced to cut his consumption 233 00:23:12.600 --> 00:23:15.600 back to 200 berries. 234 00:23:15.600 --> 00:23:22.680 It is clear that what has led Crusoe to consume capital is his time preference, which in this 235 00:23:22.680 --> 00:23:30.960 case has led him to prefer more present consumption to greater losses in future consumption. 236 00:23:30.960 --> 00:23:39.040 Thus any actor at any point in time has the choice of A. adding to his capital structure, 237 00:23:39.040 --> 00:23:46.680 B. Maintaining his capital intact, or C. Consuming his capital. 238 00:23:46.680 --> 00:23:50.700 Choices A and B involve acts of saving. 239 00:23:50.700 --> 00:23:57.760 The course adopted will depend on the actor's weighing his disutility of waiting, as determined 240 00:23:57.760 --> 00:24:04.220 by his time preference, against the utility to be provided in the future by the increase 241 00:24:04.220 --> 00:24:08.120 in his intake of consumers' goods. 242 00:24:08.120 --> 00:24:13.720 At this point in the discussion of the wearing out and replacement of capital goods, we may 243 00:24:13.720 --> 00:24:20.880 observe that a capital good rarely retains its full powers to aid in production and then 244 00:24:20.880 --> 00:24:24.360 suddenly loses all its serviceability. 245 00:24:24.360 --> 00:24:30.320 In the words of Professor Benham, capital goods do not usually remain in perfect technical 246 00:24:30.320 --> 00:24:36.160 condition and then suddenly collapse like the wonderful one-horse shea. 247 00:24:36.160 --> 00:24:43.400 Crusoe's Barry output, instead of remaining 500 for 10 days and then falling back to 200 248 00:24:43.400 --> 00:24:51.760 on the 11th day, is likely to decline at some rate before the stick becomes completely useless. 249 00:24:51.760 --> 00:24:55.440 Another method of maintaining capital may now prove available. 250 00:24:55.440 --> 00:25:02.000 Thus, Crusoe may find that by spending a little time repairing the stick, breaking off weaker 251 00:25:02.000 --> 00:25:16.480 In short, he may be able to add to his capital structure via repairs. 252 00:25:16.480 --> 00:25:23.000 Here again he will balance the added increase in future output of consumers' goods against 253 00:25:23.000 --> 00:25:31.320 the present loss in consumers' goods which he must endure by expending his labor on repairs. 254 00:25:31.320 --> 00:25:38.960 Making repairs therefore requires an independent act of saving and a choice to save. 255 00:25:38.960 --> 00:25:44.800 It is entirely possible, for example, that Crusoe will decide to replace the stick and 256 00:25:44.800 --> 00:25:50.920 spend his labor on that purpose, but will not consider it worthwhile to repair it. 257 00:25:50.920 --> 00:25:57.560 Which course he decides to take depends on his valuation of the various alternative outputs 258 00:25:57.560 --> 00:26:00.760 and his rate of time preference. 259 00:26:00.760 --> 00:26:07.160 An actor's decision on what objects to invest in will depend on the expected utility of 260 00:26:07.160 --> 00:26:13.160 the forthcoming consumer's good, its durability, and the length of his waiting time. 261 00:26:13.160 --> 00:26:19.520 Thus, he may first invest in a stick and then decide it would not be worthwhile to invest 262 00:26:19.520 --> 00:26:21.000 in a second stick. 263 00:26:21.000 --> 00:26:26.960 Instead, it would be better to begin building the axe in order to obtain a house. 264 00:26:26.960 --> 00:26:33.280 For he may first make a bow and arrows with which to hunt game, and after that begin working 265 00:26:33.280 --> 00:26:35.040 on a house. 266 00:26:35.040 --> 00:26:41.440 Since the marginal utility of the stock of a good declines as the stock increases, the 267 00:26:41.440 --> 00:26:47.920 more he has of the stock of one consumer's good, the more likely he will be to expend 268 00:26:47.920 --> 00:26:51.800 his new savings on a different consumer's good. 269 00:26:51.800 --> 00:26:58.180 Since the second good will now have a higher marginal utility of product to his invested 270 00:26:58.180 --> 00:27:04.960 labor and waiting, and the marginal utility of the first will be lower. 271 00:27:04.960 --> 00:27:11.940 If two consumers' goods have the same expected marginal utility in daily serviceability and 272 00:27:11.940 --> 00:27:17.680 have the same period of waiting time, but one is more durable than the other, then the 273 00:27:17.680 --> 00:27:21.780 The actor will choose to invest in production of the former. 274 00:27:21.780 --> 00:27:28.180 On the other hand, if the total serviceableness of two expected consumer's goods is the same, 275 00:27:28.180 --> 00:27:33.840 and the length of their period of production is the same, the less durable good will be 276 00:27:33.840 --> 00:27:39.760 invested in, since its total satisfactions arrive earlier than the other. 277 00:27:39.760 --> 00:27:46.640 Also, in choosing between investing in one or the other of two consumer's goods, the 278 00:27:46.640 --> 00:27:55.640 Any actor will, other things being equal, choose that good with the shorter period of production, as has been discussed above. 279 00:27:55.640 --> 00:28:03.640 Any actor will continue to save and invest his resources in various expected future consumers' goods, 280 00:28:03.640 --> 00:28:11.640 as long as the utility, considered in the present, of the marginal product of each unit saved and invested, 281 00:28:11.640 --> 00:28:20.640 is greater than the utility of present consumer's goods which he could obtain by not performing that saving. 282 00:28:20.640 --> 00:28:28.640 The latter utility of present consumer's goods foregone is the disutility of waiting. 283 00:28:28.640 --> 00:28:38.640 Once the latter becomes greater than the utility of obtaining more goods in the future through saving, the actor will cease to save. 284 00:28:38.640 --> 00:28:45.160 Allowing for the relative urgency of wants, man, as has been demonstrated above, tends 285 00:28:45.160 --> 00:28:51.360 to invest first in those consumer's goods with the shortest processes of production. 286 00:28:51.360 --> 00:28:57.480 Therefore, any given saving will be invested either in maintaining the present capital 287 00:28:57.480 --> 00:29:05.400 structure or in adding to it capital in more and more remote stages of production, that 288 00:29:05.400 --> 00:29:13.080 is in longer processes of production, thus any new saving beyond maintaining the structure 289 00:29:13.080 --> 00:29:20.600 will tend to lengthen production processes and invest in higher and higher orders of capital goods. 290 00:29:21.720 --> 00:29:28.200 In a modern economy the capital structure contains goods of almost infinite remoteness 291 00:29:28.200 --> 00:29:34.760 from the eventual consumers goods. We saw above some of the stages involved in the production 292 00:29:34.760 --> 00:29:52.920 It is evident that the problems of measurement that arose in previous sections would be likely 293 00:29:52.920 --> 00:29:57.880 to pose a grave difficulty in saving and investing. 294 00:29:57.880 --> 00:30:04.140 How do actors know when their capital structure is being added to or consumed? 295 00:30:04.140 --> 00:30:08.940 and the types of capital goods and consumers' goods are numerous. 296 00:30:08.940 --> 00:30:16.180 Obviously, Crusoe knows when he has more or fewer berries, but how can a modern complex 297 00:30:16.180 --> 00:30:23.220 economy with innumerable capital goods and consumers' goods make such decisions? 298 00:30:23.220 --> 00:30:29.100 The answer to this problem, which also rests on the commensurability of different goods, 299 00:30:29.100 --> 00:30:32.420 will be discussed in later chapters. 300 00:30:32.420 --> 00:30:38.120 In observing the increased output made possible by the use of capital goods, one may very 301 00:30:38.120 --> 00:30:44.580 easily come to attribute some sort of independent productive power to capital and to say that 302 00:30:44.580 --> 00:30:51.180 three types of productive forces enter into the production of consumers' goods, labor, 303 00:30:51.180 --> 00:30:53.540 nature and capital. 304 00:30:53.540 --> 00:30:58.480 It would be easy to draw this conclusion, but completely fallacious. 305 00:30:58.480 --> 00:31:02.960 Capital goods have no independent productive power of their own. 306 00:31:02.960 --> 00:31:08.520 In the last analysis, they are completely reducible to labor and land, which produce 307 00:31:08.520 --> 00:31:11.200 them and time. 308 00:31:11.200 --> 00:31:15.640 Capital goods are stored up labor, land and time. 309 00:31:15.640 --> 00:31:21.320 They are intermediate waystations on the road to the eventual attainment of the consumer's 310 00:31:21.320 --> 00:31:24.180 goods into which they are transformed. 311 00:31:24.180 --> 00:31:30.100 At every step of the way they must be worked on by labor in conjunction with nature in 312 00:31:30.100 --> 00:31:34.100 order to continue the process of production. 313 00:31:34.100 --> 00:31:39.180 Capital is not an independent productive factor like the other two. 314 00:31:39.180 --> 00:31:44.240 An excellent illustration of this truth has been provided by Boehm-Bawerk. 315 00:31:44.240 --> 00:31:47.860 The following analogy will make it perfectly clear. 316 00:31:47.860 --> 00:31:51.900 A man throws a stone at another man and kills him. 317 00:31:51.900 --> 00:31:54.500 Is the stone killed the man? 318 00:31:54.500 --> 00:32:00.540 If the question is put without laying any special emphasis, it may be answered without hesitation 319 00:32:00.540 --> 00:32:02.300 in the affirmative. 320 00:32:02.300 --> 00:32:07.740 But how if the murderer on his trial were to defend himself by saying that it was not 321 00:32:07.740 --> 00:32:11.380 he but the stone that had killed the man? 322 00:32:11.380 --> 00:32:16.460 Taking the words in this sense, should we still say that the stone had killed the man 323 00:32:16.460 --> 00:32:18.240 and acquit the murderer? 324 00:32:18.240 --> 00:32:24.660 Now it is with an emphasis like this that economists inquire as to the independent productivity 325 00:32:24.660 --> 00:32:26.260 of capital. 326 00:32:26.260 --> 00:32:33.740 We are not asking about dependent intermediate causes, but about ultimate independent elements. 327 00:32:33.740 --> 00:32:38.860 The question is not whether capital plays a part in the bringing about of a productive 328 00:32:38.860 --> 00:32:45.280 result, such as the stone does in the killing of the man, but whether, granted the productive 329 00:32:45.280 --> 00:33:14.280 Bernbawerk replies in the negative, pointing out that capital goods are purely way stations in the process of production, worked on at every possible stage by the forces of labor and land. 330 00:33:14.280 --> 00:33:21.680 If today by allying my labor with natural powers I make bricks out of clay, and tomorrow 331 00:33:21.680 --> 00:33:28.720 by allying my labor with natural gifts I obtain lime, and the day after that make mortar and 332 00:33:28.720 --> 00:33:35.640 so construct a wall, can it be said of any part of the wall that I and the natural powers 333 00:33:35.640 --> 00:33:37.520 have not made it? 334 00:33:37.520 --> 00:33:43.640 Again, before a lengthy piece of work, such as the building of a house, is quite finished, 335 00:33:43.640 --> 00:33:51.840 It naturally must be at one time a fourth-finished, then a half-finished, then three-quarters finished. 336 00:33:51.840 --> 00:33:58.520 What now would be said if one were to describe these inevitable stages of the work as independent 337 00:33:58.520 --> 00:34:04.680 requisites of house-building, and maintain that for the building of a house we require, 338 00:34:04.680 --> 00:34:11.920 besides building materials and labor, a quarter-finished house, a half-finished house, a three-quarters 339 00:34:11.920 --> 00:34:13.600 finished house? 340 00:34:13.600 --> 00:34:19.680 In form, perhaps, it is less striking, but in effect it is not a whit more correct to 341 00:34:19.680 --> 00:34:25.760 elevate those intermediate steps in the progress of the work which outwardly take the shape 342 00:34:25.760 --> 00:34:33.080 of capital into an independent agent of production by the side of nature and labor. 343 00:34:33.080 --> 00:34:39.040 And this holds true regardless of how many stages are involved or how remote the capital 344 00:34:39.040 --> 00:34:43.080 good is from the ultimate consumer's good. 345 00:34:43.080 --> 00:34:48.740 Since investment in capital goods involves looking toward the future, one of the risks 346 00:34:48.740 --> 00:34:55.100 that an actor must always cope with is the uncertainty of future conditions. 347 00:34:55.100 --> 00:35:00.820 Producing consumers' goods directly involves a very short period of production, so that 348 00:35:00.820 --> 00:35:07.120 the uncertainty incurred is not nearly as great as the uncertainty of longer processes 349 00:35:07.120 --> 00:35:14.000 of Production, an uncertainty that becomes more and more important as the period of production 350 00:35:14.000 --> 00:35:15.160 lengthens. 351 00:35:15.160 --> 00:35:21.620 This uncertainty is a subjective feeling, hunch or estimate, and cannot be measured 352 00:35:21.620 --> 00:35:23.100 in any way. 353 00:35:23.100 --> 00:35:29.440 The efforts of many popular writers to apply mathematical probability theory to the uncertainty 354 00:35:29.440 --> 00:35:34.380 of future historical events are completely vain. 355 00:35:34.380 --> 00:35:39.660 He knows that Crusoe, while deciding on his investment in the stick, believes that there 356 00:35:39.660 --> 00:35:45.600 is a good possibility of his finding a grove where berries are in abundance, giving him 357 00:35:45.600 --> 00:35:52.200 an output of 50 or more berries per hour without the aid of a stick, and also where the berries 358 00:35:52.200 --> 00:35:56.160 would be so close as to render the stick useless. 359 00:35:56.160 --> 00:36:01.620 In that case, the more likely he thinks are the chances of finding the grove, the less 360 00:36:01.620 --> 00:36:06.380 Most likely he is to make the decision to invest in the stick, which would then be of 361 00:36:06.380 --> 00:36:08.000 no help to him. 362 00:36:08.000 --> 00:36:13.260 The greater the doubt about the usefulness the stick will have after it is ready, the 363 00:36:13.260 --> 00:36:18.500 less likelihood of investing in it, and the more likelihood of either investing in another 364 00:36:18.500 --> 00:36:22.580 good or of consuming instead of saving. 365 00:36:22.580 --> 00:36:28.980 We can consider that there is a sort of uncertainty discount on the expected future utility of 366 00:36:28.980 --> 00:36:35.780 the investment that may be so large as to induce the actor not to make the investment. 367 00:36:35.780 --> 00:36:41.720 The uncertainty factor in this case works with the time preference factor to the disadvantage 368 00:36:41.720 --> 00:36:49.260 of the investment, against which the actor balances the expected utility of future output. 369 00:36:49.260 --> 00:36:54.740 On the other hand, uncertainty may work as an added spur to making the investment. 370 00:36:54.740 --> 00:37:01.020 Thus, suppose that Crusoe believes that a blight may strike the berries very shortly, 371 00:37:01.020 --> 00:37:07.180 and that if this happens, his unaided berry output would dangerously decline. 372 00:37:07.180 --> 00:37:13.460 If the blight struck, Crusoe would be in great need of the stick to even maintain his output 373 00:37:13.460 --> 00:37:15.180 at the present low level. 374 00:37:15.180 --> 00:37:21.580 Thus, the possibility that the stick may be of even greater use to him than he anticipates 375 00:37:21.580 --> 00:37:27.900 will add to the expected utility of his investment and the greater the chance of this possibility 376 00:37:27.900 --> 00:37:35.100 in Crusoe's view, the more likely he will be to invest in the stick. Thus, the uncertainty factor 377 00:37:35.100 --> 00:37:42.300 may work in either direction depending on the specific situation involved. We may explain the 378 00:37:42.300 --> 00:37:49.740 entire act of deciding whether or not to perform an act of capital formation as the balancing of 379 00:37:49.740 --> 00:37:58.240 of Relative Utilities, discounted by the actor's rate of time preference and also by the uncertainty factor. 380 00:37:58.240 --> 00:38:08.240 Thus first let us assume for purposes of simplification that Crusoe in making the stick forgoes 10 hours worth of present goods, 381 00:38:08.240 --> 00:38:16.740 that is, 200 berries, and has acquired 1500 berries three days later as a result of the investment decision. 382 00:38:16.740 --> 00:38:27.240 If the 1500 berries had been immediately available, there would be no doubt that he would have given up 200 berries to acquire 1500. 383 00:38:27.240 --> 00:38:37.240 Thus, 1500 berries in the present might have a rank of 4 on his value scale, while 200 berries have a rank of 11. 384 00:38:37.240 --> 00:38:46.240 Now, how will Crusoe decide between 200 berries in the present and 1500 berries three days from now? 385 00:38:46.240 --> 00:38:50.480 Since all choices have to be made on one value scale, 386 00:38:50.480 --> 00:39:00.380 Crusoe must grade the utility of 1,500 berries three days from now as against the utility of 200 berries now. 387 00:39:00.380 --> 00:39:08.580 If the former is greater, higher on his value scale, he will make the decision to save and invest in the stick. 388 00:39:08.580 --> 00:39:19.080 If the latter is greater and his 200 Berries foregone have a greater value than the expectation of 1500 Berries three days from now, 389 00:39:19.080 --> 00:39:28.080 then his time preference has conquered the increased utility of stock, and he will not make the saving investment decision. 390 00:39:28.080 --> 00:39:43.580 Thus, the actor's value scale may be, in case A, 4, 1,500 berries in the present, 11, 200 berries now, 12, 1,500 berries three days from now. 391 00:39:43.580 --> 00:39:57.580 Or it may be, in case B, 4, 1,500 berries in the present, 9, 1,500 berries three days from now, 11, 200 berries now. 392 00:39:57.580 --> 00:40:03.900 In case B, he will make the decision to invest. In case A, he will not. 393 00:40:03.900 --> 00:40:12.300 We can say that the value of 1500 berries three days from now is the present value of the future good. 394 00:40:12.300 --> 00:40:19.340 The expected future good is discounted by the actor according to his rate of time preference. 395 00:40:19.340 --> 00:40:26.140 The present value of his expected future good is compared to the present value of the present good 396 00:40:26.140 --> 00:40:32.900 on the actor's value scale, and the decision to save and invest is made accordingly. 397 00:40:32.900 --> 00:40:38.180 It is clear that the higher the rate of discount, the lower the present value of the future 398 00:40:38.180 --> 00:40:44.000 good will be, and the greater the likelihood of abstaining from the investment. 399 00:40:44.000 --> 00:40:49.740 On the other hand, the lower the rate of discount, the higher the present value of future goods 400 00:40:49.740 --> 00:40:55.500 will be on the actor's value scale, and the greater the likelihood of its being greater 401 00:40:55.500 --> 00:41:01.500 The President of the United States of America and the United States of America have decided that the investment decision will be greater than the value of present goods foregone, and hence of his making the investment. 402 00:41:01.500 --> 00:41:12.500 Thus the investment decision will be determined by which is greater, the present value of the future good, or the present value of present goods foregone. 403 00:41:12.500 --> 00:41:28.500 The present value of the future good, in turn, is determined by the value that the future good would have if immediately present, say, the expected future value of the future good, and by the rate of time preference. 404 00:41:28.500 --> 00:41:33.500 The greater the former, the greater will be the present value of the future good. 405 00:41:33.500 --> 00:41:41.500 The greater the latter, the rate of discount of future compared to present goods, the lower the present value. 406 00:41:41.500 --> 00:41:48.840 At any point in time an actor has a range of investment decisions open to him of varying 407 00:41:48.840 --> 00:41:53.840 potential utilities for the products that will be provided. 408 00:41:53.840 --> 00:41:59.880 That such a range of investment decisions enabling him to achieve greater future output 409 00:41:59.880 --> 00:42:05.880 must always be open to him is a fundamental truth derived from the assumption of human 410 00:42:05.880 --> 00:42:06.920 action. 411 00:42:06.920 --> 00:42:12.480 If they were not open to him, it would mean that man could not, or rather believed that 412 00:42:12.480 --> 00:42:18.840 he could not, act to improve his lot, and therefore there would be no possibility of 413 00:42:18.840 --> 00:42:19.840 action. 414 00:42:19.840 --> 00:42:25.920 Since we cannot even conceive of human existence without action, it follows that investment 415 00:42:25.920 --> 00:42:29.320 opportunities are always available. 416 00:42:29.320 --> 00:42:35.020 Every actor also has a certain rate of time preference, by which he will discount these 417 00:42:35.020 --> 00:42:45.780 How much he will save and invest in any period will be determined by comparing these present 418 00:42:45.780 --> 00:42:52.660 values with the value of the consumer's goods foregone in making the investment decision. 419 00:42:52.660 --> 00:42:58.740 As he makes one investment decision after another, he will choose to allocate his resources 420 00:42:58.740 --> 00:43:05.940 First, to investments of highest present value, then to those of next highest, etc. 421 00:43:05.940 --> 00:43:11.860 As he continues investing at any given time, the present value of the future utilities 422 00:43:11.860 --> 00:43:13.620 will decline. 423 00:43:13.620 --> 00:43:19.060 On the other hand, since he is giving up a larger and larger supply of consumers goods 424 00:43:19.060 --> 00:43:25.740 in the present, the utility of the consumers goods that he forgoes, leisure and others, 425 00:43:25.740 --> 00:43:30.500 will increase on the basis of the law of marginal utility. 426 00:43:30.500 --> 00:43:36.460 He will cease saving and investing at the point at which the value of goods foregone 427 00:43:36.460 --> 00:43:41.540 exceeds the present value of the future utilities to be derived. 428 00:43:41.540 --> 00:43:47.860 This will determine an actor's rate of saving and investing at any time. 429 00:43:47.860 --> 00:43:51.100 It is evident that the problem again arises. 430 00:43:51.100 --> 00:43:58.820 How can actors decide and compare time preference rates for innumerable possible goods and in 431 00:43:58.820 --> 00:44:01.760 a complex modern economy? 432 00:44:01.760 --> 00:44:08.340 And here too, the answer for a complex economy lies in establishing commensurability among 433 00:44:08.340 --> 00:44:16.260 all the various commodities, present and future, as will be discussed in later chapters. 434 00:44:16.260 --> 00:44:22.380 Now the uncertainty factors enter into the actor's decision in one way or the other. 435 00:44:22.380 --> 00:44:28.260 The delicate procedure of weighing all the various factors in the situation is a complex 436 00:44:28.260 --> 00:44:34.500 process that takes place in the mind of every actor according to his understanding of the 437 00:44:34.500 --> 00:44:35.700 situation. 438 00:44:35.700 --> 00:44:42.700 It is a decision depending purely on the individual judgment, the subjective estimates of each 439 00:44:42.700 --> 00:44:43.700 actor. 440 00:44:43.700 --> 00:44:52.380 The best decision cannot be exactly or quantitatively decided upon in advance by objective methods. 441 00:44:52.380 --> 00:44:59.140 This process of forecasting the future conditions that will occur during the course of his action 442 00:44:59.140 --> 00:45:03.300 is one that must be engaged in by every actor. 443 00:45:03.300 --> 00:45:08.820 This necessity of guessing the course of the relevant conditions and their possible change 444 00:45:08.820 --> 00:45:35.700 The concept of success or failure in entrepreneurship are thus deducible from the existence of action. 445 00:45:35.700 --> 00:45:41.120 The relatively successful entrepreneur is the one who has guessed correctly the changes 446 00:45:41.120 --> 00:45:47.300 in conditions to take place during the action and has invested accordingly. 447 00:45:47.300 --> 00:45:53.120 He is the crusoe who has decided not to build the stick because his judgment tells him that 448 00:45:53.120 --> 00:45:57.920 he will soon find a new grove of berries which he then finds. 449 00:45:57.920 --> 00:46:03.500 On the other hand, the relatively unsuccessful entrepreneur is the one who has been badly 450 00:46:03.500 --> 00:46:32.660 Suppose now that an investment has already been made, 451 00:46:32.660 --> 00:46:41.660 and Capital Goods have already been built with a goal in view when changing conditions reveal that an error has been made. 452 00:46:41.660 --> 00:46:47.660 The actor is then faced with the problem of determining what to do with the capital good. 453 00:46:47.660 --> 00:46:52.660 The answer depends on the convertibility of the capital good. 454 00:46:52.660 --> 00:47:01.660 If the good becomes worthless in the use for which it is intended, the actor, though having made an error in investing in it in the first place, 455 00:47:01.660 --> 00:47:05.420 Now has it on his hands and has to make the best of it. 456 00:47:05.420 --> 00:47:11.380 If there is another use to which the actor can conveniently transfer the capital good, 457 00:47:11.380 --> 00:47:12.540 he will do so. 458 00:47:12.540 --> 00:47:18.820 Thus, if Crusoe finds that a new grove has rendered his stick useless for berry picking, 459 00:47:18.820 --> 00:47:21.220 he may use it as a walking stick. 460 00:47:21.220 --> 00:47:26.260 He would not have invested in it originally if he had known it would be useless for berry 461 00:47:26.260 --> 00:47:33.460 Picking. But now that he has it, he turns it to its most urgent available use. On the other hand, 462 00:47:33.460 --> 00:47:39.940 he may feel that it is hardly worthwhile to spend time replacing the stick, now that it is usable 463 00:47:39.940 --> 00:47:47.460 only for walking purposes. Or, after working 50 hours and building an axe, he may find a house 464 00:47:47.460 --> 00:47:54.820 left by some previous inhabitant. The axe, however, may be convertible to use in something just a bit 465 00:47:54.820 --> 00:48:22.820 It is clear that the accumulated stock of capital goods, or for that matter, durable consumers' goods, imposes a conservative force on present-day action. 466 00:48:22.820 --> 00:48:29.800 The actor in the present is influenced by his or someone else's actions in the past, 467 00:48:29.800 --> 00:48:33.100 even if the latter were to some extent in error. 468 00:48:33.100 --> 00:48:39.500 Thus, Crusoe might find an axe already available, built by a previous inhabitant. 469 00:48:39.500 --> 00:48:44.880 It might not be the sort of axe that Crusoe would consider the best available, however, 470 00:48:44.880 --> 00:48:51.420 he may decide if it is a serviceable axe, to use it as a capital good, and to wait until 471 00:48:51.420 --> 00:48:55.740 until it wears out before replacing it with one of his choosing. 472 00:48:55.740 --> 00:49:00.780 On the other hand, he may feel that it is so blunt as to be of little use and begin 473 00:49:00.780 --> 00:49:04.340 immediately to work on an axe of his own. 474 00:49:04.340 --> 00:49:11.480 The conservatism of the past exercises a similar influence on the question of location, another 475 00:49:11.480 --> 00:49:14.300 aspect of the same problem. 476 00:49:14.300 --> 00:49:20.380 Thus Crusoe may already have built his house, cleared a field, etc. in one portion of the 477 00:49:20.380 --> 00:49:21.380 the Island. 478 00:49:21.380 --> 00:49:26.940 Then one day, in walking around the island, he might find a section at the other end with 479 00:49:26.940 --> 00:49:31.480 far greater advantages in fishing, fruits, etc. 480 00:49:31.480 --> 00:49:37.660 If he had not invested in any capital goods or durable consumers' goods, he would immediately 481 00:49:37.660 --> 00:49:41.340 shift his location to this more abundant area. 482 00:49:41.340 --> 00:49:46.340 However, he has already invested in certain capital goods. 483 00:49:46.340 --> 00:49:52.500 Some such as the axe are easily convertible to the new location, others such as the cleared 484 00:49:52.500 --> 00:49:58.980 field and the house cannot be converted in their location, therefore he has to decide 485 00:49:58.980 --> 00:50:05.260 on his value scale between the advantages and disadvantages of moving, the more abundant 486 00:50:05.260 --> 00:50:11.860 fish and fruits versus the necessity of working to build a new house, make a new clearing, 487 00:50:11.860 --> 00:50:12.860 etc. 488 00:50:12.860 --> 00:50:17.820 You might decide, for example, to stay in the house and clearing until they have worn 489 00:50:17.820 --> 00:50:25.740 down to a certain point without working on a replacement, and then shift to the new location. 490 00:50:25.740 --> 00:50:32.780 If an actor decides to abandon non-convertible capital such as the stick or the cleared field 491 00:50:32.780 --> 00:50:40.380 in favor of producing other capital and consumers' goods, he is not, as some may think, wasting 492 00:50:40.380 --> 00:50:52.540 When Crusoe abandons his clearing or stick or house, which may be considered in this 493 00:50:52.540 --> 00:50:58.580 connection as equivalent to capital, he is abandoning non-convertible capital for the 494 00:50:58.580 --> 00:51:04.940 sake of using his labor in combination with natural elements or capital goods that he 495 00:51:04.940 --> 00:51:08.100 believes will yield him a greater utility. 496 00:51:08.100 --> 00:51:14.500 Similarly, if he refuses to go deep into a jungle for berries, he is not wasting his 497 00:51:14.500 --> 00:51:21.820 non-convertible supply of land and berries, for he judges doing so of far less utility 498 00:51:21.820 --> 00:51:26.260 than other uses that he could make of his labor and time. 499 00:51:26.260 --> 00:51:33.540 The existence of a capital good not in use reveals an error made by this or by some previous 500 00:51:33.540 --> 00:52:01.540 This discussion provides the clue to an analysis of how actors will employ the original nature-given factors of production. 501 00:52:01.540 --> 00:52:07.220 In many cases, actors have their choice among the varying elements provided by nature. 502 00:52:07.220 --> 00:52:13.420 Thus, suppose that Crusoe, in his explorations of the island, finds that among the possible 503 00:52:13.420 --> 00:52:19.900 locations where he can settle, some are abundant in their output of berries, setting aside 504 00:52:19.900 --> 00:52:26.820 their production of other consumers' goods, some less so, and some useless and barren. 505 00:52:26.820 --> 00:52:32.900 Clearly, other considerations being equal, he will settle on the most fertile, the best 506 00:52:32.900 --> 00:52:40.220 land and employ this factor as far as is determined by the utility of its product, the possibility 507 00:52:40.220 --> 00:52:47.700 of investing in useful capital goods on the land, the value he places on leisure, etc. 508 00:52:47.700 --> 00:52:51.700 The poorer areas of land will remain unused. 509 00:52:51.700 --> 00:52:55.500 As stated above, this development is to be expected. 510 00:52:55.500 --> 00:53:01.180 There is no reason to be surprised at such evidence of unused resources. 511 00:53:01.180 --> 00:53:07.440 On the other hand, if the better areas are used up, then Crusoe will go on to utilize 512 00:53:07.440 --> 00:53:14.260 some of the next best areas, until the utility of the supply produced fails to exceed the 513 00:53:14.260 --> 00:53:17.680 utility of his leisure foregone. 514 00:53:17.680 --> 00:53:23.940 Next best includes all the relevant factors, such as productivity, convenient access to 515 00:53:23.940 --> 00:53:26.940 to the best land, etc. 516 00:53:26.940 --> 00:53:33.060 Areas of potential use, but which the actor chooses not to bring into use because it would 517 00:53:33.060 --> 00:53:39.660 not pay in terms of utilities foregone, are called sub-marginal areas. 518 00:53:39.660 --> 00:53:45.340 They are not objects of action at the moment, but the actor has them in mind for possible 519 00:53:45.340 --> 00:53:47.100 future use. 520 00:53:47.100 --> 00:53:53.380 On the other hand, Crusoe's Island may be so small or so barren that all his available 521 00:53:53.380 --> 00:54:00.100 All useful land or water areas must be pressed into use, thus Crusoe might have to explore 522 00:54:00.100 --> 00:54:04.700 the whole island for his daily output of 200 berries. 523 00:54:04.700 --> 00:54:11.420 In that case, if his resources are such that he must always employ all the possibly useful 524 00:54:11.420 --> 00:54:17.580 nature-given factors, it is obvious that the actor is pretty close to the bear survival 525 00:54:17.580 --> 00:54:18.860 level. 526 00:54:18.860 --> 00:54:24.680 In those cases where nature-given factors are worked on, improved and maintained by 527 00:54:24.680 --> 00:54:31.020 human labor, these are, in effect, thereby changed into capital goods. 528 00:54:31.020 --> 00:54:38.500 Thus, land that has been cleared, tilled, plowed, etc. by human labor has become a capital 529 00:54:38.500 --> 00:54:39.760 good. 530 00:54:39.760 --> 00:54:45.180 This land is a produced good and not an originally given good. 531 00:54:45.180 --> 00:54:51.120 Decisions concerning whether and how much to improve the soil or whether to maintain 532 00:54:51.120 --> 00:54:58.840 it or extract the maximum present consumer's goods at the expense of future losses, erosion, 533 00:54:58.840 --> 00:55:03.920 are on exactly the same footing as all capital formation decisions. 534 00:55:03.920 --> 00:55:10.120 They depend on a comparison of the expected utility of future production as against the 535 00:55:10.120 --> 00:55:14.940 utility of present consumer's goods foregone. 536 00:55:14.940 --> 00:55:21.220 It is clear that capital formation and the concomitant lengthening of the period of production 537 00:55:21.220 --> 00:55:26.060 prolong the period of provision of the actor. 538 00:55:26.060 --> 00:55:31.060 Capital formation lengthens the period in the future for which he is providing for the 539 00:55:31.060 --> 00:55:33.800 satisfaction of wants. 540 00:55:33.800 --> 00:55:39.640 Action involves the anticipation of wants that will be felt in the future, an estimate 541 00:55:39.640 --> 00:55:44.420 of their relative urgency, and the setting about to satisfy them. 542 00:55:44.420 --> 00:55:51.060 The more capital men invest, the longer their period of provision will tend to be. 543 00:55:51.060 --> 00:55:55.900 Goods being directly and presently consumed are present goods. 544 00:55:55.900 --> 00:56:02.100 A future good is the present expectation of enjoying a consumer's good at some point 545 00:56:02.100 --> 00:56:03.540 in the future. 546 00:56:03.540 --> 00:56:10.460 A future good may be a claim on future consumer's goods, or it may be a capital good which will 547 00:56:10.460 --> 00:56:15.180 will be transformed into a consumer's good in the future. 548 00:56:15.180 --> 00:56:21.300 Since a capital good is a way station and nature-given factors are original stations 549 00:56:21.300 --> 00:56:28.680 on the route to consumer's goods, capital goods and nature-given factors are both future 550 00:56:28.680 --> 00:56:29.680 goods. 551 00:56:29.680 --> 00:56:36.780 Similarly, the period of provision can be prolonged by lengthening the duration of serviceableness 552 00:56:36.780 --> 00:56:39.960 of the consumer's goods being produced. 553 00:56:39.960 --> 00:56:46.240 A house has a longer durability than a crop of berries, for example, and Crusoe's investment 554 00:56:46.240 --> 00:56:50.560 in a house considerably lengthens his period of provision. 555 00:56:50.560 --> 00:56:57.200 A durable consumer's good is consumed only partially from day to day, so that each day's 556 00:56:57.200 --> 00:57:03.640 consumption is that of a present good, while the stock of the remainder is a future good. 557 00:57:03.640 --> 00:57:10.840 Thus, if a house is built and will last three thousand days, one day's use will consume 558 00:57:10.840 --> 00:57:16.680 one three thousandth of it, while the remainder will be consumed in the future. 559 00:57:16.680 --> 00:57:22.280 One three thousandth of the house is a present good, while the remaining part is a future 560 00:57:22.280 --> 00:57:23.960 good. 561 00:57:23.960 --> 00:57:29.640 It may be added that another method of lengthening the period of production is the simple accumulation 562 00:57:29.640 --> 00:57:35.640 The definition of stocks of consumers' goods to be consumed in the future instead of the present. 563 00:57:35.640 --> 00:57:43.640 For example, Crusoe might save a stock of 100 berries to be consumed a few days or a week later. 564 00:57:43.640 --> 00:57:53.640 This is often called plain saving, as distinguished from capitalist saving, in which saving enters into the process of capital formation. 565 00:57:53.640 --> 00:58:06.640 Plain saving is not to be confused with an earlier example when Crusoe saved stocks of consumers' goods to be consumed while devoting his labor to the production of capital. 566 00:58:06.640 --> 00:58:20.640 We shall see, however, that there is no essential difference between the two types of saving, and that plain saving is also capitalist saving in that it too results in capital formation. 567 00:58:20.640 --> 00:58:27.180 We must keep in mind the vital fact that the concept of a good refers to a thing, the units 568 00:58:27.180 --> 00:58:31.880 of which the actor believes afford equal serviceability. 569 00:58:31.880 --> 00:58:37.440 It does not refer to the physical or chemical characteristics of the good. 570 00:58:37.440 --> 00:58:44.520 We remember our critique of the popular fallacious objection to the universal fact of time preference, 571 00:58:44.520 --> 00:58:50.220 that in any given winter, ice the next summer is preferred to ice now. 572 00:58:50.220 --> 00:58:56.700 This was not a case of preferring the consumption of the same good in the future to its consumption 573 00:58:56.700 --> 00:58:58.260 in the present. 574 00:58:58.260 --> 00:59:05.220 If Crusoe has a stock of ice in the winter and decides to save some until next summer, 575 00:59:05.220 --> 00:59:12.460 this means that ice in the summer is a different good, with a different intensity of satisfaction 576 00:59:12.460 --> 00:59:17.020 from ice in the winter, despite their physical similarities. 577 00:59:17.020 --> 00:59:20.780 The case of berries or of any other good is similar. 578 00:59:20.780 --> 00:59:26.820 If Crusoe decides to postpone consuming a portion of his stock of berries, this must 579 00:59:26.820 --> 00:59:32.860 mean that this portion will have a greater intensity of satisfaction if consumed later 580 00:59:32.860 --> 00:59:39.360 than now, enough greater, in fact, to overcome his time preference for the present. 581 00:59:39.360 --> 00:59:45.160 The reasons for such difference may be numerous, involving anticipated tastes and conditions 582 01:00:15.160 --> 01:00:25.160 Supposed that, as a resultant of these factors, Crusoe decides to shift 100 berries for this purpose. 583 01:00:25.160 --> 01:00:34.160 In that case, these 100 berries are removed from the category of consumers' goods and shifted to that of capital goods. 584 01:00:34.160 --> 01:00:44.160 These are the sort of capital goods, however, which, like wine, need only maturing time to be transferred into consumers' goods, 585 01:00:44.160 --> 01:01:13.160 The Period of Production will be equal to the time difference between the act of saving and the act of future consumption, as in all other cases of investment. 586 01:01:13.160 --> 01:01:22.160 The saved goods immediately become capital goods, which later mature into more highly valued consumers' goods. 587 01:01:22.160 --> 01:01:27.160 There is no essential difference between the two types of saving.