One of the fascinating things about life on this planet is that whoever designed it didn't
arrange for equal distribution of anything. We have natural resources of certain types
in certain parts of the world and a complete lack of them in other parts. Human abilities
also are not equally distributed. Some men have a great deal of ability, a great deal
A few men have very little and I guess there would be some who have none. We have almost
infinite variation in this planet, and so it works out that for us all to survive and
to maximize our chances of survival, we have to serve each other. Now this is a concept
that probably is going to take a little bit of explaining because in talking with businessmen
Man, and I have talked to a great many of them, they take a sort of a pride in saying
they are in business for their own profit. And I have a tough time explaining to them
sometimes that they are the softest-hearted and sometimes the softest-headed people around.
Because in point of fact, even though it is true, they are certainly engaged in trying
to make profits for themselves, there is only one way they can do it. And that is by keeping
in mind constantly that if they're going to make any money, they're going to do it by
serving other people.
The people who have the money they want are the people they want to serve.
And so they've got to constantly concentrate on figuring out a way of providing a good
or a service or both that other people will voluntarily pay for.
And they've got to be so good at it that they can provide a good or a service cheaper or
more better or faster or more conveniently or a combination of these things than the
person can do it himself.
Because if they can't do that, well then the person can take care of himself.
The only way that it would be possible for me to serve you would be for me to get you
something in a superior way better than you could get it for yourself.
Otherwise, what good am I?
So if we are going to serve each other, then we have to understand each other.
And if we are going to make profits, the only possible way of making a profit is to figure
out how to help the other fellow better than he can help himself.
So that's what we try to do in this world if we expect to succeed.
The person who succeeds and rings up the highest level of profits for himself is simply going
to be the person who has had the best vision and executed it with the greatest skill relating
to his service to others. Now, that's a fascinating thing, but that's the way it works. Curiously,
and I suppose it was Adam Smith that first caught on to this and he used the phrase an
and Invisible Hand, and talked about it in discussing how marketplace transactions occurred.
You see, the more the man in business concentrates on making a profit, the more it works out
that it's almost as though there's an invisible hand that benefits everybody else at the same
time it benefits the fellow looking for profit. So even if the man is greedy, grasping, selfish,
and narrow. It doesn't really matter because if he lets those traits dominate his thinking
then he will not think about other people and if he doesn't he goes broke and it couldn't
happen to a nicer fellow. If he wants to stay operative then he has to concentrate on what
the other people want and thus in serving them and serving them with fantastic success
and Effectiveness then he accumulates a level of success for himself. Now I'd like to give
you a model to keep in mind at the present time as to how this works. You see, having
made something in the way of a good or service by virtue of the fact that abilities are not
equally distributed and raw materials are not equally distributed, nothing is equally
When we get down to cases, we are going to find stockpiles of goods or services appearing
in certain places and, in other places, great lacks or great dirts of those same goods or
services. It is almost as though the whole world could be viewed as a giant ocean with
with swells and waves and tides and ripples and currents and little rivulets and so on.
Because in effect that's what happens. Where there are stockpiles of goods or services,
it's as though you build up a giant wave. And of course, where there isn't such a good
or service, then you have what appears to be a trough or a depression.
Now the natural tendency of a free market would be for, well it would be the same tendency
that you would detect in an ocean. That is, the waves that are high would tend to topple
over and fill in the troughs that are low. And so in the end the effect would be a completely
smooth ocean. But if any of you have ever paid any attention to the ocean and watched
it or seen it even, you are well aware of the fact that the ocean doesn't smooth over
in the World of Money and Credit in the World of Money and Credit in the World of Money
the things that have been produced and other people are trying to produce them. It never
comes out even. The market is always seeking equilibrium, but it never becomes static any
more than the ocean does. Just as the waves tend to topple into the troughs, so you find
this action occurring in the market. Where there is a stockpile of goods or services,
What we could call negative value factors begin to manifest.
The more we have of a given good or service, the less we value it in each of its units.
And the less we have of a given good or service, the more we value it.
Consequently, the people who don't have much begin to clamor for the things they don't
have.
And the people who have a lot of it say, well, we'd just soon get rid of some of this.
We've got too much.
And the consequence is that this stockpile of surplus tends to move in the direction
where the demand is highest. The squeaking wheel gets the grease, you see. And the more
we scream about the things we want, the more those things tend to move toward us because
when our screams are loud enough they become practical screams. That is, we put money in
our hands and we say, I'll buy that. Now that's of course an extreme position to think you
You have to pay for something, but when you really want something bad enough, you'll pay
for it. And when you're willing to pay for it, then the man who's made it is willing
to let go of it. And so you find a motion from supply points to demand points. But these
motions are never constant because as a demand is satisfied, then the supplies on the one
on the one hand tend to go down and the satisfaction tends to go up and so the demand tapers off
and the willingness to supply tapers off and it appears to be an equilibrium situation
except that it never is because other demand factors now appear and so you find that's
the way the world works. It is always, that is, the entire marketplace is trying to arrive
live at equilibrium, and it never can and never will because of the various factors
at work.
Now, I'd like to give you a model that explains this a little better than I've just done,
and again, if you've got a pencil and paper, this will help. Draw a fairly good-sized circle
about, oh, possibly three inches in circumference if you've got that much room on your paper.
And mark, pretend that it's a world for the moment, and mark a little point for the north
pole and another one for the south pole, and then put in another point indicating complete
east and complete west. You can imagine it's a sort of a compass.
Now I'm going to use those cardinal points on this circle to illustrate the various factors
that occurs in the process of moving goods and services from a state of non-existence
first into existence and then ultimately into the hands of the individual who has the highest
demand for it. So let's take the North Pole there on your drawing and we're going to call
that the point of investment. Now that's the place where the tools appear.
In other words, in order to produce anything, whether it's a good or a service, we have
to begin by coming up with some kind of a tool that will provide the good or service.
Now whether the tool is intellectual or physical doesn't matter. It always takes an investment.
And what do we mean by an investment? An investment is simply the taking of the available resources,
Whatever they may be and concentrating them in the area where you wish to get something done.
In other words, you could have an investment even under primitive conditions.
Take a man in a state of nature.
Just one man.
He has no clothing, he has no food, he has no tools, he has nothing.
First, one homo sapien, and he's in a state of nature. And let's suppose that he would
like to catch a rabbit. Now what does he do? Before he can catch the rabbit, he has to
make an investment. How does he make an investment? Well, he takes his available resources. Well,
you say, well, what are they? He apparently doesn't have any. Yes, he does. He has time,
he has energy, and he has brain power. And if he has enough brain power to figure this
This out, the first thing he's going to realize is that the rabbit has an advantage over him.
The rabbit has four legs and he has two, and if he starts out in a direct chase after the
rabbit, the rabbit's probably going to get away. And he's going to get hungrier and hungrier
and have less and less energy, and the rabbits will have to move only slower and slower to
escape him, and he's on the wrong end of the production line. He's not doing it right because
he isn't making the right kind of an investment. Now if he's smart enough to see this, what
What he'll do first is he'll try to contrive a tool that will multiply his effectiveness
in getting the rabbit.
He'll get a bunch of rocks together so that he can throw stones at the rabbit.
The flying stone will go faster than he can run, and that way he has a better chance of
getting rabbits.
Or he'll devise a sling or a bolo or a spear or a deadfall or possibly a bow and arrow
or something.
come up with some better way of trying to catch rabbits. And the better his tool, the
more his chances are multiplied of getting that rabbit. So the very first action, whether
we're talking in terms of primitive conditions or whether we're talking in terms of advanced
conditions such as you would find in our own economy today, the first act is an act of
investment. You take the available resources, whether they appear in terms of energy or
Now, moving in a clockwise direction, you go over to the east side of your circle, and
there at that point, put down the word production. That's where production occurs. This is where
The great equation mmw equals nr plus he times t has application. Here is where the entrepreneur,
and that's the fellow that enters the market in an enterprising way, where he puts the factors
of production together. And the factors of production are always three in number, natural
resources, human energy and tools. Now the natural resources and the human energy come
Come in there. But the tools have been created at the prior point on the north side of your
diagram. Now the tools come down to join the entrepreneur at the point of production. And
the entrepreneur puts these pieces together in their proper amounts and in their proper
framework in order to create production of whatever it is he's trying to produce. So
he is the fellow that puts the N, R and the H, E and the T together the right way at that
that point. Now the movement goes from the east point of your diagram down to the south.
This is at the base. And right there put down the word distribution. That's where the effort
is made by those who have produced to find out where the troughs are so that their surpluses
will flow into those troughs. And, of course, the deeper the trough, the more the people
in that area will probably be clamoring for whatever it is that's available in the way
of a good and service. So that's what you look for there at the distribution point.
That's at the bottom of your circle. Now, at the west side, you have the point of the
The retailer and the customer, that's where they come in.
So here's the way your diagram would look.
You begin at the top, at the north pole, and that's where investment occurs.
Then you could draw an arrow, a circular arrow over to the east side and that's where production
occurs.
And then there's a circular arrow going down to the south side and that's where distribution
occurs and then going from there back up to the west side and that's where the customer
comes in.
Now, here's what happens.
In a modern economy, the customer comes in with money and the money comes into the circle
and it moves exactly the opposite direction from the flow of goods and services.
So you could put a curved arrow on the inside of your circle indicating that as the customer
buys the good or service at the retail outlet, he puts in money, some of it is retained by
the retailer and then the rest of it flows back and then some of it stops off to take
care of the distributor and the rest of it flows back up and some of it stops off to
take care of production and then the rest of it flows back up so that the investor can
get a payment for having made the investment that has made the whole thing possible in
the first place.
Now that's the way it works. In other words, you have a three-quarter turn on the outside
of your circle and then you have a three-quarter return turn on the inside. Goods and services
flowing in the one direction and money flowing in the other direction. You'll notice that
in the diagram I've explained there isn't anything, any arrow or any explanation relating
When a man decides to invest, the reason that he is going to invest is to make a tool that
will produce something. So there's a logical flow from investment to production. That's
why you invest. You invest so that you can produce. So, once you've produced, there's
a logical flow to distribution. The reason you produced was so you could distribute.
Well, once you get to the distribution point, there's a logical flow to the retail outlet.
The reason you're distributing is to get it into the hands of customers and the retailer
is the one that can do that best. Now, once the customer has it, how do you get back to
of the Investor. That takes a whole new action. You see, the whole economic cycle begins with
the act of investment and there isn't anything in nature that demands the investment except
your understanding. The problem is that many people suppose that there is just a natural
tendency for people to invest. There isn't. There's a natural tendency for people to
Consume. But why would they want to invest? Actually, they probably wouldn't. Most of
us don't want to invest. We would like the other fellow to invest. We want to consume.
We want to use up more and more of what exists. We don't like to put anything back. Isn't
that, in a sense, what's the matter with our ecology today? Isn't that what's puzzling
We're cluttering the whole landscape because we're not putting things back.
We're taking things out because we love to consume.
But what are we putting back?
Well, I don't know.
Unless you have special knowledge in this area, the chances are rather good that you
We won't have any particular motivation to put anything back. And that's why it's so important, and I know this runs counter to popular belief but I can't help it, the fact is that what is really important is that investors make lots of profits because that's the one thing that might motivate them.
You see, there is a supposition that actually it is the increase in population that tends
to make people prosperous. And therefore the more demand you have, which would occur the
more people you have, the more prosperous you are going to be. But now something's
got to be wrong with that because if that's really true and if that's all that matters,
then the most prosperous places in the world today would be those places with the most
and the highest standard of living because they've got the most people. Is that true?
Obviously it is not true. So it isn't the numbers of people and the increase in the
amount of demand that makes for prosperity and a good life. The thing that makes the
difference is the amount of investment that we have, the amount of capital investment
that has been made that tends to move into production, that tends to move into distribution,
that tends to move into the hands of the customers. And that's how it works. So if we're going
to have a high-level productive economy, what is really important is that nobody interferes
with the investors. Now of course actually anybody can be an investor. A customer could
be an investor, a retailer, a distributor, a producer, or a former investor can reinvest.
There isn't anything to prevent anybody from investing who wishes to.
Now another factor here that is so kind of cute, I've talked to a lot of young people
on this point and I suggested to them that investment is very important and they say
well I'll be glad to invest, in fact I agree, you know, I'd like to invest some of my money
when the time comes. But of course I can't really do it until my income has increased
up to such and such a level, and then I take the surplus beyond that and make the investment.
And you know, I'd like to suggest that that's exactly the wrong way of looking at it. The
first thing you want to do is invest. The very first. I hear some people saying, you
ought to pay yourself first. And that's not bad. But I'd like to suggest that even before
you pay yourself, you pay your environment. The very first expenditure you should have
out of whatever your income is, is something that you take out of the normal consumptive
channels and you plow it back in to pay back for some of what you've already gotten.
Now that would tend to balance both the economy and the ecology, and you might think about
that. I think it would be extremely helpful. I know of some people who are alive right
now who began work with as little as $3 a week. And you know something? Out of the $3
a week wage, they saved a quarter every week and invested it. That's smart. That's smart.
So it doesn't really make any difference how much you're earning, providing you get the
regular habit not just of saving, but of investing, because that's where you make your profits.
I don't know, well, I guess there would be a few. There would perhaps be a few people
People around who are very well fixed, inordinately wealthy, who have done it only on their wage.
But I would say there would be very few. In fact, the people who make fabulous wages such
as sports, athletic people who are in the major sports and get big pay, and movie stars
and people of this sort who draw down fabulous wages when they work. I can tell you that
the woods are full of the story of the rags to riches to rags in their own lifetimes.
Many people who have made hundreds of thousands of dollars for a few years while they were
at their prime end up broke because they haven't learned how to invest. And other people who
who haven't had any opportunity like that at all, and never would have, never be in
a position where they can make $1,000 or $2,000 a week or something like that. That type of
wage at the present time is probably limited to a few people because of especially rare
skills that they have. But it doesn't matter because the person who is making a relatively
few dollars per week, but we'll get into the habit of thinking correctly in this area,
and we'll think in terms of making investments of plowing some of that back in to balance
the ecology and the economy, you see, then that investment will tend to support him and
to make him wealthy.
So far as I know, all of the major fortunes in the world are based on investment, not
on salary. I don't know of anybody. I do know of some people that are making fabulous
salaries. But they end up, as I say, not being wealthy. Sometimes they end up as paupers
unless they have learned not only thrift, which is only a part of the story. It is the
investment, the plowing something back at the beginning of this cycle, right at the
Now, I'd like to show you something else while we've got this little circle in front of us.
Again, there is no G in this diagram. There isn't any part in the whole process of making things and getting these things into the hands of customers that requires government.
Government does not have a part to play here.
However, government does come in, through processes of taxation, with the ultimate idea
that what it's there for is to protect everybody so that the flow of goods and services can
be unimpaired, and we would maximize the flow that way.
Whether that works out, in fact or not, is going to be the subject of a later lecture.
But at least that is the justification for the emergence of the state and its intrusion
at various points.
The argument given is that this is necessary in order that these exchanges and these investments
and so on will occur without interruption, without intervention.
So the curious thing is that now the government intervenes in order to prevent intervention
from occurring, and so that theft will not take place or other actions of molestation,
the government now moves in and extracts funds from the flow of money out of this cycle.
Now I showed you that the money comes into the cycle at the west side, flows south and
and then East and then ultimately North.
Now what happens when taxation occurs would be the same type of action that you would
get if you had, say, a pipe with water flowing through it and then you put a branch from
that pipe.
Say you had a three-inch pipe with a full head of water and you put a one-inch pipe
as a branch on it, below the place where that joint occurred there would be less water
are in the main pipe, right? Because you're draining some of it off. Now the same thing
happens in the economy. When the government inserts its tax funnel, it drains money out
of the economy and so there would be less in the economy below the joint where the draining
occurs. That's the way it works. Now the major drain today occurs through an income
Tax, which is paid at the point of production.
And the interesting thing is, that doesn't hurt producers.
It just means that there's less money in the channel to reach the investor.
Because that's where the drain comes out, so it injures the next fellow down the line.
If we're going to have a viable, productive, dynamic economy, we're going to have to see
See to it that these drains don't completely destroy the operation so that we do have a
viable market that will supply more goods and services for more people at less money.
Thanks very much.