WEBVTT NOTE 9.06. A Summary of the Market 1 00:00:00.000 --> 00:00:05.500 6. A Summary of the Market 2 00:00:05.500 --> 00:00:12.440 The explanation of the free economic system constitutes a great architectural edifice. 3 00:00:12.440 --> 00:00:18.680 Starting from human action and its implications, proceeding to individual value scales and 4 00:00:18.680 --> 00:00:24.760 a money economy, we have demonstrated that the quantity of goods produced, the prices 5 00:00:24.760 --> 00:00:37.760 The prices of consumers' goods, the prices of productive factors, the interest rate, profits and losses, all can be explained by the same deductive apparatus. 6 00:00:37.760 --> 00:00:50.760 Given a stock of land and labor factors, given existing capital goods inherited from the past, given individual time preferences and, more broadly, technological knowledge, 7 00:00:50.760 --> 00:00:55.560 Capital Good Structure and Total Production is determined. 8 00:00:55.560 --> 00:01:00.560 Individual preferences set prices for the various consumers' goods, 9 00:01:00.560 --> 00:01:05.560 and the alternative combinations of various factors in their production 10 00:01:05.560 --> 00:01:10.560 set the marginal value productivity schedules of these factors. 11 00:01:10.560 --> 00:01:15.360 Ultimately, the marginal value product accruing to capital goods 12 00:01:15.360 --> 00:01:21.360 is resolved into returns to land, labour and interest for time. 13 00:01:21.360 --> 00:01:30.360 The point at which a land or labour factor will settle on its DMVP schedule will be determined by the stock available. 14 00:01:30.360 --> 00:01:38.360 Since each factor will operate in an area of diminishing physical and certainly diminishing value returns, 15 00:01:38.360 --> 00:01:47.360 In these terms, any increased stock of the factor, other things being equal, will enter at a lower DMVP point. 16 00:01:47.360 --> 00:02:00.360 The intersecting points on the DMVP schedules will yield the prices of the factors, also known as rents and wage rates, in the case of labor factors. 17 00:02:00.360 --> 00:02:06.200 Pure interest rate will be determined by the time preference schedules of all individuals 18 00:02:06.200 --> 00:02:08.040 in the economy. 19 00:02:08.040 --> 00:02:14.200 Its chief expression will be not in the loan market, but in the discounts between prices 20 00:02:14.200 --> 00:02:17.880 in the various stages of production. 21 00:02:17.880 --> 00:02:23.520 Interest on the loan market will be a reflection of this natural interest rate. 22 00:02:23.520 --> 00:02:29.400 All the prices of each good, as well as the interest rate, will be uniform throughout 23 00:02:29.400 --> 00:02:43.400 The Capital Value of Every Durable Good will equal the discounted value of the sum of future rents to be obtained from the good, the discount being the rate of interest. 24 00:02:43.400 --> 00:02:54.400 All this is a picture of the evenly rotating economy, the equilibrium situation toward which the real economy is always tending. 25 00:02:54.400 --> 00:03:03.400 If consumer valuations and the supply of resources remained constant, the relevant ERE would be reached. 26 00:03:03.400 --> 00:03:13.400 The forces driving toward the ERE are the profit-seeking entrepreneurs who take the lead in meeting the uncertainties of the real world. 27 00:03:13.400 --> 00:03:23.400 By seeking out discrepancies between existing conditions and the equilibrium situation and remedying them, entrepreneurs make profits. 28 00:03:23.400 --> 00:03:29.440 Profits, those businessmen who unwittingly add to the maladjustments on the market are 29 00:03:29.440 --> 00:03:31.480 penalized with losses. 30 00:03:31.480 --> 00:03:38.420 Thus, to the extent that producers wish to make money, they drive toward ever more efficient 31 00:03:38.420 --> 00:03:45.080 servicing of the desires of the consumers, allocating resources to the most value-productive 32 00:03:45.080 --> 00:03:49.540 areas and away from the least value-productive. 33 00:03:49.540 --> 00:03:55.860 The monetary value productivity of a course of action depends on the extent to which it 34 00:03:55.860 --> 00:03:58.820 serves consumer needs. 35 00:03:58.820 --> 00:04:06.820 But consumer valuations and supplies of resources are always changing so that the ERE goal always 36 00:04:06.820 --> 00:04:10.620 changes as well and is never reached. 37 00:04:10.620 --> 00:04:15.780 We have analyzed the implications of changing elements in the economy. 38 00:04:15.780 --> 00:04:23.380 An increase in the labor supply may lower the DMVP of labor and hence wage rates, or 39 00:04:23.380 --> 00:04:29.540 raise them, because of the further advantages of the division of labor and a more extended 40 00:04:29.540 --> 00:04:30.540 market. 41 00:04:30.540 --> 00:04:34.940 Which will occur depends on the optimum population level. 42 00:04:34.940 --> 00:04:41.100 Since labor is relatively more scarce than land, and relatively non-specific, there will 43 00:04:41.100 --> 00:04:45.500 always be idle and zero-rent land. 44 00:04:45.500 --> 00:04:53.400 While there will never be involuntarily idle or zero-wage labor, an increase or decrease 45 00:04:53.400 --> 00:05:01.180 in the supply of sub-marginal land will have no effect on production, an increase in super-marginal 46 00:05:01.180 --> 00:05:08.940 land will increase production and render hitherto marginal land sub-marginal. 47 00:05:08.940 --> 00:05:14.660 Lower time preferences will increase capital investment and thereby lengthen the structure 48 00:05:14.660 --> 00:05:16.480 of Production. 49 00:05:16.480 --> 00:05:22.020 Such lengthening of the production structure, increasing the supply of capital goods, is 50 00:05:22.020 --> 00:05:29.180 the only way for man to advance from his bare hands and empty acres of land to more and 51 00:05:29.180 --> 00:05:32.300 more civilized standards of living. 52 00:05:32.300 --> 00:05:38.320 These capital goods are the necessary waystations on the road to higher total production, but 53 00:05:38.320 --> 00:05:44.640 they must be maintained and replaced as well as initially produced if people wish to keep 54 00:05:44.640 --> 00:05:48.640 to keep their higher standard over any length of time. 55 00:05:48.640 --> 00:05:58.640 To expand production, the important consideration is not so much technological improvement as greater capital investment. 56 00:05:58.640 --> 00:06:06.640 At no time has invested capital exhausted the best technological opportunities available. 57 00:06:06.640 --> 00:06:13.280 Many firms still use old, unimproved processes and techniques simply because they do not 58 00:06:13.280 --> 00:06:16.760 have the capital to invest in new ones. 59 00:06:16.760 --> 00:06:21.440 They would know how to improve their plant if capital were available. 60 00:06:21.440 --> 00:06:28.520 Thus, while the state of technology is ultimately a very important consideration, at no given 61 00:06:28.520 --> 00:06:35.880 time does it play a direct role, since the narrower limit on production is always the 62 00:06:35.880 --> 00:06:53.880 In a progressing economy, given a constant supply of money, increased investment and a longer capital structure bring about lower money prices for factors, and still lower prices for consumers' goods. 63 00:06:53.880 --> 00:07:01.880 Real factor prices, corrected for changes in the purchasing power of the monetary unit, increase. 64 00:07:01.880 --> 00:07:10.880 In net terms, this means that real land rents and real wage rates will increase in the progressing economy. 65 00:07:10.880 --> 00:07:20.880 Interest rates will fall as time preference rates drop and the proportion of gross investment to consumption increases. 66 00:07:20.880 --> 00:07:27.880 If rents are earned by a durable factor, they can be and are capitalized on the market. 67 00:07:27.880 --> 00:07:35.880 That is, they have a capital value equivalent to the discounted sum of their expected future rents. 68 00:07:35.880 --> 00:07:41.880 Since land is a form of investment on the market, just as our shares of a firm, 69 00:07:41.880 --> 00:07:44.880 its future rents will be capitalized, 70 00:07:44.880 --> 00:07:50.880 so that land will tend to earn the same uniform interest rate as any other investment. 71 00:07:50.880 --> 00:07:56.880 In a progressing economy, the real capital value of land will increase, 72 00:07:56.880 --> 00:08:26.880 of Money, The Theory of Money and Credit, The Theory of Money and Credit, The Theory 73 00:08:26.880 --> 00:08:38.380 The course of change in a retrogressing economy will be the opposite. 74 00:08:38.380 --> 00:08:51.880 In a stationary economy, total production, the capital structure, real wages per capita, real capital values of land, and the rate of interest will remain the same, 75 00:08:51.880 --> 00:08:59.880 While the allocation of factors of production and the relative prices of various products will vary.