WEBVTT NOTE Production: General Pricing of the Factors 1 00:00:00.000 --> 00:00:11.000 Thank you. I'm going to try and experiment here and go without the podium to have a little bit of a less formal environment. 2 00:00:11.000 --> 00:00:19.000 Although I did bring my powdered wig and my black gown that I used to teach back at home just in case it becomes appropriate to use it. 3 00:00:19.000 --> 00:00:24.000 I do feel a little bit odd. Chad told me because of the camera I had to sit in the high chair. 4 00:00:24.000 --> 00:00:29.000 And I've been told on many occasions that I belong in a high chair, but I don't know if this is exactly what they had in mind. 5 00:00:29.000 --> 00:00:33.040 what they had in mind but I do feel a little bit like I'm on like I'm on MTV 6 00:00:33.040 --> 00:00:38.600 unplugged like I should have an acoustic guitar so I feel like breaking out into 7 00:00:38.600 --> 00:00:47.440 song you'll know why it's interesting to begin by thinking about you know where 8 00:00:47.440 --> 00:00:51.640 this material fits in with the overall structure of the book and just to remind 9 00:00:51.640 --> 00:00:57.760 you that there's a five chapter section on production theory of which this is 10 00:00:57.760 --> 00:01:00.760 is the middle, right? Two chapters we've done already today. 11 00:01:00.760 --> 00:01:07.760 We'll talk about Chapter 7 just now on general principles of factor pricing. 12 00:01:07.760 --> 00:01:10.760 It's a chapter on entrepreneurship that we'll do this afternoon 13 00:01:10.760 --> 00:01:15.760 and then tomorrow morning another chapter on some more specific details about factor pricing. 14 00:01:15.760 --> 00:01:22.760 But apparently from what we know from Rothbard's correspondence when he was working on the book, 15 00:01:22.760 --> 00:01:26.760 originally he planned just a single chapter on production theory. 16 00:01:26.760 --> 00:01:32.760 And if you think about the typical undergraduate level or even graduate level textbook in economics, 17 00:01:32.760 --> 00:01:36.760 often one or maybe two chapters on production theory is about all you get. 18 00:01:36.760 --> 00:01:40.760 But the more he got into the material, it began to expand. 19 00:01:40.760 --> 00:01:45.760 He ended up with five chapters on production theory, which is unusual. 20 00:01:45.760 --> 00:01:52.760 It's also unusual compared to other treatises in Austrian economics. 21 00:01:52.760 --> 00:01:57.680 Rothbard goes into far more detail, for example, on factor pricing, even than Mises does in 22 00:01:57.680 --> 00:01:58.960 Human Action. 23 00:01:58.960 --> 00:02:03.400 And if you look at some of the contemporary works in Austrian economics, particularly 24 00:02:03.400 --> 00:02:09.560 works that came out in the 80s, the early 90s, where lots of attention was placed on 25 00:02:09.560 --> 00:02:14.160 the role of the equilibrium construct and expectations and uncertainty and the market 26 00:02:14.160 --> 00:02:20.440 process in spontaneous order and so on, there's relatively little discussion of, you know, 27 00:02:20.440 --> 00:02:26.880 What you might consider the mundane details of economic analysis such as production theory 28 00:02:26.880 --> 00:02:27.880 and factor pricing. 29 00:02:27.880 --> 00:02:30.040 So it's interesting that he gives so much attention to it. 30 00:02:30.040 --> 00:02:36.480 I mean also the fact that there's an entrepreneurship chapter in here is quite unusual, right? 31 00:02:36.480 --> 00:02:42.680 We noted yesterday that Rothbard's inclusion of a chapter on money right at the very beginning 32 00:02:42.680 --> 00:02:49.100 of an economic principles textbook is highly unusual. 33 00:02:49.100 --> 00:02:53.240 It's also unusual to have a chapter on entrepreneurship right in the middle of production theory. 34 00:02:53.240 --> 00:02:57.280 You don't get that in any of the contemporary textbooks and you really don't get this kind 35 00:02:57.280 --> 00:03:02.260 of integration between entrepreneurship and the rest of micro theory or price theory even 36 00:03:02.260 --> 00:03:04.520 in some contemporary Austrian works. 37 00:03:04.520 --> 00:03:10.580 So just as money for Rothbard is not a peripheral topic that you sort of stick on at the end 38 00:03:10.580 --> 00:03:15.780 after you've done basic economics, likewise entrepreneurship is not a self-contained topic 39 00:03:15.780 --> 00:03:24.780 but rather it's an integrated, an integral part of the basic analysis of market exchange, production and so on. 40 00:03:24.780 --> 00:03:29.780 Now you guys have, you've read the chapter. 41 00:03:29.780 --> 00:03:34.780 Hopefully you've read the study guide and read through the text of the chapter at least once. 42 00:03:34.780 --> 00:03:44.780 You know, one of the things that's significant about the chapter, again, is not simply the volume of material 43 00:03:44.780 --> 00:03:52.780 The volume of material, but the way in which Rothbard develops this gradual incremental step-by-step treatment 44 00:03:52.780 --> 00:03:56.780 of all the relevant aspects of production theory in great detail. 45 00:03:56.780 --> 00:04:01.780 His predecessors from Menger to Boehm-Bawerk to Mises did not do it exactly in the same way, 46 00:04:01.780 --> 00:04:05.780 did not provide as much detail, and were not as systematic in how they did it. 47 00:04:05.780 --> 00:04:13.780 The general principles of imputation are present in Menger's 1871 book, Principles, 48 00:04:13.780 --> 00:04:17.880 The Principles, but only in a very sketchy way, in a very sort of preliminary treatment. 49 00:04:17.880 --> 00:04:22.840 And perhaps he would have gone into more detail if he had ever written the rest of his Grand 50 00:04:22.840 --> 00:04:23.840 Treatise. 51 00:04:23.840 --> 00:04:28.880 The Principles was supposed to be an introduction to a large, multi-volume work on economic theory 52 00:04:28.880 --> 00:04:30.480 that never got written. 53 00:04:30.480 --> 00:04:36.680 Boehm-Bawerk has lots of material about factor pricing, but it's not very systematic. 54 00:04:36.680 --> 00:04:40.800 It isn't given the same kind of treatment as Rothbard. 55 00:04:40.800 --> 00:04:45.720 And again, Mises brings up particular topics here and there but doesn't provide this kind 56 00:04:45.720 --> 00:04:47.920 of treatment. 57 00:04:47.920 --> 00:04:52.880 How many of you have had, raise your hand if you've had either an advanced undergraduate 58 00:04:52.880 --> 00:04:57.120 or a graduate level course in microeconomics? 59 00:04:57.120 --> 00:05:02.120 So most people have, right, not you guys. 60 00:05:02.120 --> 00:05:07.520 So you have some exposure to, let's call it the standard approach, the mainstream approach, 61 00:05:07.520 --> 00:05:13.640 to the neoclassical approach, whatever is the appropriate term, to the production function, 62 00:05:13.640 --> 00:05:18.760 and if you're really fancy, maybe isoquants and iso-costs and average cost curves and 63 00:05:18.760 --> 00:05:23.440 marginal cost curves and profit maximization, etc. 64 00:05:23.440 --> 00:05:27.560 This is different. 65 00:05:27.560 --> 00:05:33.800 As you read it, what were some things that struck you about how Rothbard's treatment 66 00:05:33.800 --> 00:05:42.560 of these issues is different from the treatment that you get in the standard textbooks. 67 00:05:42.560 --> 00:05:49.980 Just it could be anything from technical matters to general style and sort of look and feel. 68 00:05:49.980 --> 00:05:53.280 What are some things that strike you as you look at it? 69 00:05:53.280 --> 00:06:03.280 I think for me, it goes through the entire book, but it's structure as a whole, so it's gradually built up. 70 00:06:03.280 --> 00:06:10.280 Whereas in my economic course, they have basically one model, which they apply to different studies, and that's pretty much it. 71 00:06:10.280 --> 00:06:14.280 And if you don't get a sense of the bigger picture, or how they're interrelated, 72 00:06:14.280 --> 00:06:20.280 then you seem like arbitrary and show some scenarios that explain it somehow. 73 00:06:20.280 --> 00:06:27.080 Okay, good, so you get a sense that not only is it sort of very comprehensive, 74 00:06:27.080 --> 00:06:31.280 covers all the relevant topics step-by-step, but it's not just an isolated, 75 00:06:31.280 --> 00:06:34.680 it's not there's a consumer theory part and a producer theory part, 76 00:06:34.680 --> 00:06:38.080 and then you stick them together in another part, and these don't really fit. 77 00:06:38.080 --> 00:06:42.280 It seems like it's part of an overall, a structure, an edifice, right, 78 00:06:42.280 --> 00:06:46.180 was the term that he used in his, in his preface. 79 00:06:46.180 --> 00:06:49.180 Okay, what are some other things? What's different about it? 80 00:06:49.180 --> 00:06:54.180 Say, his emphasis on the time factor. 81 00:06:54.180 --> 00:06:55.180 Okay. 82 00:06:55.180 --> 00:07:10.180 I think that's an extremely important point. 83 00:07:10.180 --> 00:07:13.180 Like with money, as we discussed yesterday, 84 00:07:13.180 --> 00:07:18.780 Just yesterday, the typical mainstream treatment of value theory and exchange and pricing is 85 00:07:18.780 --> 00:07:20.460 all in barter terms. 86 00:07:20.460 --> 00:07:24.380 And then, you know, Chapter 23 of the textbook talks about money. 87 00:07:24.380 --> 00:07:27.180 And it really doesn't have anything to do with the rest of the analysis. 88 00:07:27.180 --> 00:07:32.900 It's neutral, but it doesn't have any effect on sort of the substantive conclusions. 89 00:07:32.900 --> 00:07:34.980 Same thing with time, right? 90 00:07:34.980 --> 00:07:40.460 Most microeconomics textbooks don't, I mean, maybe if they're really advanced, they might 91 00:07:40.460 --> 00:07:46.780 might have a production function with a two-period model, but you could go through the entire 92 00:07:46.780 --> 00:07:53.260 microeconomics course without having any notion of the passage of time, calendar time as we 93 00:07:53.260 --> 00:07:56.100 experience it. 94 00:07:56.100 --> 00:08:00.500 Time is covered in some parts of macro theory and maybe some parts of growth theory, but 95 00:08:00.500 --> 00:08:04.940 it isn't integrated in any way with basic micro or price theory. 96 00:08:04.940 --> 00:08:09.940 So his treatment of time and discounting is extremely important as well, and is unique. 97 00:08:09.940 --> 00:08:16.940 It's not based on math, it seems you're not supposed to plug in numbers to a bunch of other equations and solve for the edge worth of class or something. 98 00:08:16.940 --> 00:08:24.940 Yeah, I mean, there's, I won't say no, there's little math, few diagrams. 99 00:08:24.940 --> 00:08:33.940 I mean, come on, if you take an intermediate or advanced micro theory course in a typical university, what is it? 100 00:08:33.940 --> 00:08:38.940 What is it? It's all equations and graphs, right? 101 00:08:38.940 --> 00:08:41.940 I mean, Ruppert does have a little bit of algebra. 102 00:08:41.940 --> 00:08:43.940 He has some arithmetic and occasional algebra. 103 00:08:43.940 --> 00:08:48.940 He does have some diagrams, but, you know, the arithmetic content, 104 00:08:48.940 --> 00:08:54.940 the mathematical content is pretty low compared to the typical treatment. 105 00:08:54.940 --> 00:08:56.940 What – I mean, there's one diagram in particular 106 00:08:56.940 --> 00:08:59.940 that dominates sort of the mainstream treatment of production cost. 107 00:08:59.940 --> 00:09:17.940 What particular diagram or family of curves do you see over and over and over again in the standard treatment? 108 00:09:17.940 --> 00:09:27.940 You have one set, if you're advanced, you have these isoquants with marginal rates of substitution 109 00:09:27.940 --> 00:09:34.400 Institution, and in a more basic course you have, what other curves? Cost curves, yeah. 110 00:09:34.400 --> 00:09:38.000 You know, the marginal cost curve and the average cost curve and the long run average 111 00:09:38.000 --> 00:09:41.100 cost curve and the short run average cost curve and average variable cost and average 112 00:09:41.100 --> 00:09:49.220 fixed cost and lots and lots of these diagrams. That's absent from this chapter. Okay? So 113 00:09:49.220 --> 00:09:53.420 we don't see all the cost curve diagrams that are normally included in these treatments. 114 00:09:53.420 --> 00:09:57.420 and that's something that should strike us as interesting or unusual. 115 00:09:57.420 --> 00:10:01.420 He doesn't elaborate on that. You read that pretty straightforward. 116 00:10:01.420 --> 00:10:06.420 Yeah, I mean, the fact that the standard treatment is basically about that and nothing else 117 00:10:06.420 --> 00:10:11.420 and plays a much, much, a very different role in Rothbard's analysis. 118 00:10:11.420 --> 00:10:32.420 Okay, say that again. I think I know what you're getting at, but in the mainstream analysis. 119 00:10:32.420 --> 00:10:37.780 Right, that is a good point. When Rothbard talks about capital, right, he doesn't use 120 00:10:37.780 --> 00:11:07.780 Well, and labor and land, right, he's not, this chapter is not about some aggregate notion of capital in the abstract, or labor in the abstract, but he's, right, when we talk about prices, factor prices, he's talking about the prices of specific factors of production, right, actual capital goods, or actual units of labor, okay, so maybe we could call this, you know, an emphasis on discrete factors 121 00:11:07.780 --> 00:11:22.060 In the typical mainstream analysis, a firm produces output with two inputs, K and L. 122 00:11:22.060 --> 00:11:28.140 What exactly is the K, what exactly is the L, well, Rothbard is explicitly allowing for 123 00:11:28.140 --> 00:11:34.600 heterogeneous capital goods, units of labor, units of land that are used in discrete quantities. 124 00:11:34.600 --> 00:11:40.880 Remember the term that Professor Salerno used in his opening lecture about, you know, the 125 00:11:40.880 --> 00:11:46.120 way that we characterize Rothbard's analysis as part of this grander tradition that goes 126 00:11:46.120 --> 00:11:47.120 back to Menger. 127 00:11:47.120 --> 00:11:54.400 Remember he used the term causal realist. 128 00:11:54.400 --> 00:11:55.400 Spell that right. 129 00:11:55.400 --> 00:12:02.320 Causal realist, like this is – Rothbard is presenting an analysis, in this case, of 130 00:12:02.320 --> 00:12:08.120 The Pricing of Factors of Production, the Use of Factors of Production, that is causal, 131 00:12:08.120 --> 00:12:15.920 based on principles of cause and effect, as opposed to what would be, I mean, what does 132 00:12:15.920 --> 00:12:19.040 causal mean in contrast to what? What's non-causal? 133 00:12:19.040 --> 00:12:28.120 Yeah, exactly, simultaneous determination, right? This standard micro theory, mainstream 134 00:12:28.120 --> 00:12:32.200 and Micro-Theory doesn't have any notion of causality, right? 135 00:12:32.200 --> 00:12:37.120 That's considered unscientific, right? 136 00:12:37.120 --> 00:12:38.120 How would you describe it? 137 00:12:38.120 --> 00:12:43.680 That's, you know, Aristotelian, that's pre-scientific, scholastic, right? 138 00:12:43.680 --> 00:12:48.240 Real science, hard science has dispensed the notion of causality, we're told, 139 00:12:48.240 --> 00:12:51.920 and instead uses the principle of simultaneous determination, right? 140 00:12:51.920 --> 00:12:56.640 All these different variables in the economic system are equally determinate, right? 141 00:12:56.640 --> 00:13:01.840 One can be described as the cause of another, that's too sort of humanistic. 142 00:13:01.840 --> 00:13:07.880 So here we have an explicitly causal treatment, and it's also a realistic treatment, meaning 143 00:13:07.880 --> 00:13:12.060 it's designed to explain actual prices. 144 00:13:12.060 --> 00:13:16.740 The actual prices that are paid for factors of production, not some kind of abstract or 145 00:13:16.740 --> 00:13:20.160 long run equilibrium prices. 146 00:13:20.160 --> 00:13:25.380 Joe talked about going to Wal-Mart and buying his Def Leppard CD for $12.95 or whatever 147 00:13:25.380 --> 00:13:38.380 Rothbard's analysis is meant to explain why this local construction company paid so many dollars for a particular quantity of steel at a particular moment in historical time. 148 00:13:38.380 --> 00:13:42.380 You're trying to explain the real world using causal analysis. 149 00:13:42.380 --> 00:13:51.380 Anything else strike you as being unusual or different about your reading in this chapter? 150 00:13:51.380 --> 00:14:13.540 Chapter, right, absolutely, so the role that entrepreneurship plays is central and I think 151 00:14:13.540 --> 00:14:19.540 Bob Murphy I think has the section on entrepreneurship after this one, so I'll leave the details 152 00:14:19.540 --> 00:14:25.540 to him but also notice that I like to use the word mundane as a sort of a mundane treatment 153 00:14:25.540 --> 00:14:32.680 of the entrepreneur. Mundane not meaning unimportant but meaning kind of everyday, right? That the 154 00:14:32.680 --> 00:14:39.900 entrepreneur is portrayed in Rothbard's chapter 8 is not, you know, this sort of heroic romantic 155 00:14:39.900 --> 00:14:44.540 you know, sort of dashing figure which is the notion that you get in Joseph Schimpfhater's 156 00:14:44.540 --> 00:14:48.500 treatment of the entrepreneur but is, you know, an everyday business person who you 157 00:14:48.500 --> 00:14:53.500 that you don't see, isn't necessarily in front of the cameras, but is out there doing his or her thing, 158 00:14:53.500 --> 00:14:56.500 adjusting the structure of production to satisfy consumer wants. 159 00:14:56.500 --> 00:15:00.500 Okay, so we'll get into more details later this afternoon, 160 00:15:00.500 --> 00:15:04.500 but the role that the entrepreneur plays in this section is certainly extremely important. 161 00:15:04.500 --> 00:15:33.060 Okay, I'll say the analytical tools here are not arbitrary. 162 00:15:33.060 --> 00:15:45.060 I mean, I think Joe said in his last lecture, you know, this idea of the proof of the pudding 163 00:15:45.060 --> 00:15:51.220 is in the eating, and you don't get that strong sense in a lot of the standard treatments 164 00:15:51.220 --> 00:15:56.140 that well, here's a convenient way to represent production, we use a production function and 165 00:15:56.140 --> 00:16:03.080 and off we go, you know, how, what insight do you get out of that that you wouldn't get 166 00:16:03.080 --> 00:16:06.660 out of an alternative means or how do you compare those insights to what you would get 167 00:16:06.660 --> 00:16:12.340 from some other method of analysis, you don't really get that, that's too philosophical, 168 00:16:12.340 --> 00:16:18.120 too meta for the typical treatment, typical textbook. 169 00:16:18.120 --> 00:16:20.120 Anything else strike you as interesting or unusual? 170 00:16:20.120 --> 00:16:29.120 I was just going to say that a lot of times, like in the classical, he made it really important to say that they just focus on a firm, 171 00:16:29.120 --> 00:16:35.120 where it doesn't have an effect, it's too small to have an effect on it overall, so the price they just treat it as giving, 172 00:16:35.120 --> 00:16:38.120 so they kind of give up on it, they're not explaining the prices, 173 00:16:38.120 --> 00:16:42.120 what he's trying to figure out on the whole of the economy, on the finances. 174 00:16:42.120 --> 00:16:45.120 Yeah, that's an extremely important point. 175 00:16:45.120 --> 00:17:01.000 There's no assumption of price-taking behavior, so absence of perfect competition. 176 00:17:01.000 --> 00:17:06.480 So we don't assume that every firm, every producer is sufficiently small, that their 177 00:17:06.480 --> 00:17:09.040 actions have no effect on the market and so on. 178 00:17:09.040 --> 00:17:13.560 Again, this goes back to the notion of causal realism, that we're not trying to explain 179 00:17:13.560 --> 00:17:21.400 explain the behavior and characteristics of a hypothetical infinitesimally small firms 180 00:17:21.400 --> 00:17:25.840 because they don't exist, right, but rather we're trying to explain the behavior of actual 181 00:17:25.840 --> 00:17:30.720 firms in the real world which are not price takers in those sort of Volrasian sense of 182 00:17:30.720 --> 00:17:32.560 price taking behavior. 183 00:17:32.560 --> 00:17:35.280 He mentions that explicitly in one or two places, I think it's towards the end where 184 00:17:35.280 --> 00:17:40.320 he is talking about the relationship, it's in the appendix actually where he talks about 185 00:17:40.320 --> 00:17:45.840 about the relationship between the, talks about the shape of the marginal product curve 186 00:17:45.840 --> 00:17:49.520 compared to the marginal value product or marginal revenue product curves. 187 00:17:49.520 --> 00:17:56.600 And he notes that as the firm expands production, sorry, as the firm, as the entrepreneur begins 188 00:17:56.600 --> 00:18:01.960 to use more and more units of a factor, not only does the marginal physical product of 189 00:18:01.960 --> 00:18:08.080 that factor fall, but the price of that factor will be bid up as the entrepreneur seeks additional 190 00:18:08.080 --> 00:18:10.120 units in the market for the factor. 191 00:18:10.120 --> 00:18:15.040 So there's an explicit assumption that the entrepreneur is not a so-called price taker, 192 00:18:15.040 --> 00:18:16.040 right? 193 00:18:16.040 --> 00:18:23.800 But rather that the demand curves or factors are downward sloping, that the entrepreneur's 194 00:18:23.800 --> 00:18:26.680 actions in the factor market have an effect on the factor price. 195 00:18:26.680 --> 00:18:32.360 We'll come back to this point about mutual determination and circularity a little bit 196 00:18:32.360 --> 00:18:33.360 later. 197 00:18:33.360 --> 00:18:34.360 Right? 198 00:18:34.360 --> 00:18:41.960 And through the standard mainstream approach, all that the standard model does is kind of 199 00:18:41.960 --> 00:18:47.400 describe a state of affairs in which variables have particular relationships to each other, 200 00:18:47.400 --> 00:18:48.400 right? 201 00:18:48.400 --> 00:18:55.400 But it seems very odd if you start with the assumption that firms are price takers and 202 00:18:55.400 --> 00:19:01.120 then try to derive factor demand curves from them and use them to explain factor prices. 203 00:19:01.120 --> 00:19:06.280 But we started with the assumption that firms are price takers in the factor market. 204 00:19:06.280 --> 00:19:08.960 So where do factor prices actually come from? 205 00:19:08.960 --> 00:19:12.080 If everyone's a price taker, where do the prices come from? 206 00:19:12.080 --> 00:19:16.580 Okay, there's some circularity involved in the way – in sort of the standard treatment 207 00:19:16.580 --> 00:19:20.480 of marginal productivity, but we'll come back to that point a little bit later. 208 00:19:20.480 --> 00:19:25.440 You know, important term – one of the most important terms to get out of the chapter 209 00:19:25.440 --> 00:19:32.840 Manger is this word imputation, imputation. 210 00:19:32.840 --> 00:19:38.360 The concept is in Menger's treatment and the principles, though not the term. 211 00:19:38.360 --> 00:19:45.640 The term of the German equivalent of this term was introduced by Wieser, but has become, 212 00:19:45.640 --> 00:19:52.480 became a standard part of the Austrian literature, the pre-war Austrian literature. 213 00:19:52.480 --> 00:20:03.240 What is imputation? 214 00:20:03.240 --> 00:20:08.800 The value of the factors, or the prices that people are willing to pay for factors. 215 00:20:08.800 --> 00:20:17.240 The value of the factors is imputed from or determined by the value of the final goods 216 00:20:17.240 --> 00:20:18.480 that they're used to produce. 217 00:20:18.480 --> 00:20:25.080 Right, this is just an extension of Menger's analysis of the value of consumer goods, right? 218 00:20:25.080 --> 00:20:29.840 The demand for consumer goods, and hence the prices of consumer goods, the final goods 219 00:20:29.840 --> 00:20:36.760 and services in the market are determined by their ability to satisfy human wants. 220 00:20:36.760 --> 00:20:42.740 The theory of imputation is an extension of that principle, right, to explain the values 221 00:20:42.740 --> 00:20:47.940 and prices of intermediate goods, the factors of production, the goods that are used to 222 00:20:47.940 --> 00:20:52.740 to Produce the Consumer Goods, okay? 223 00:20:52.740 --> 00:20:56.700 And Menger introduces this concept in a general way. 224 00:20:56.700 --> 00:20:59.220 This quotation, I don't know if you can read it. 225 00:20:59.220 --> 00:21:02.460 This is in The Principles, this example of tobacco. 226 00:21:02.460 --> 00:21:08.780 He says, Menger says, he says, if as the result of a change in tastes, the need for tobacco 227 00:21:08.780 --> 00:21:15.180 should disappear completely, so you can say change in taste or change in fascist regulation, 228 00:21:15.180 --> 00:21:21.900 As Menger writing in 1871, if the need for tobacco should disappear completely, the first 229 00:21:21.900 --> 00:21:26.820 consequence would be that all stocks of finished tobacco products on hand would be deprived 230 00:21:26.820 --> 00:21:28.260 of their goods character. 231 00:21:28.260 --> 00:21:34.700 Okay, so the cigarettes, cigars, chewing tobacco, pipe tobacco, whatever, would no longer have 232 00:21:34.700 --> 00:21:39.900 the characteristic of an economic good because it is not available as a means to satisfy 233 00:21:39.900 --> 00:21:40.900 a human want. 234 00:21:40.900 --> 00:21:43.900 Okay, so tobacco would no longer be an economic good. 235 00:21:43.900 --> 00:21:47.260 And here's the point about imputation. 236 00:21:47.260 --> 00:21:52.860 A further consequence would be that the raw tobacco leaves, the machines, tools and implements 237 00:21:52.860 --> 00:21:57.340 applicable exclusively to the processing of tobacco products. 238 00:21:57.340 --> 00:22:03.020 So specific factors of production, the use of which, whose use can only be used to produce 239 00:22:03.020 --> 00:22:10.220 tobacco products, all of these would lose their goods character as well. 240 00:22:10.220 --> 00:22:13.940 In the case of the factors of production, the specific factors used to make tobacco 241 00:22:13.940 --> 00:22:18.280 would also no longer have the characteristics of economic goods because they can no longer 242 00:22:18.280 --> 00:22:22.840 be used indirectly as a means to satisfy human wants. 243 00:22:22.840 --> 00:22:27.500 The services presently so well paid of the agents who have so much skill in the grading 244 00:22:27.500 --> 00:22:32.100 and merchandising of tobaccos in such places as Cuba, Manila, Puerto Rico and Havana, as 245 00:22:32.100 --> 00:22:36.260 well as the specialized labor services of the many people both in Europe and in those 246 00:22:36.260 --> 00:22:41.380 Most distant countries, uncivilized countries like the US, who are employed in the manufacture 247 00:22:41.380 --> 00:22:43.780 of cigars, would cease to be goods. 248 00:22:43.780 --> 00:22:48.740 Even tobacco boxes, humidors, all kinds of tobacco pipes, pipe stems, Menger was obviously 249 00:22:48.740 --> 00:22:53.620 a tobacco enthusiast, would lose their goods character, and here's the point. 250 00:22:53.620 --> 00:22:58.100 This apparently very complex phenomenon is explained by the fact that all of the goods 251 00:22:58.100 --> 00:23:03.820 enumerated above, all these factors, right, derive their goods character from their causal 252 00:23:03.820 --> 00:23:07.940 All connection with the satisfaction of the human need for tobacco. 253 00:23:07.940 --> 00:23:11.820 With the disappearance of this need, one of the foundations underlying their goods character 254 00:23:11.820 --> 00:23:12.820 is destroyed. 255 00:23:12.820 --> 00:23:13.820 Okay? 256 00:23:13.820 --> 00:23:20.500 So one is you can imagine some kind of tobacco cigarette rolling machine that's an extremely 257 00:23:20.500 --> 00:23:25.820 impressive and technologically advanced piece of machinery, right, and we think, wow, this 258 00:23:25.820 --> 00:23:29.940 thing must be really expensive, must be really valuable in the market, right? 259 00:23:29.940 --> 00:23:37.740 Right? Well, it's valuable solely in its ability to produce tobacco that satisfies human desires. 260 00:23:37.740 --> 00:23:42.340 Okay? So if tobacco were overnight to become, you know, completely unpopular, 261 00:23:42.340 --> 00:23:48.380 were to lose its goods character in Menger's term, then this elaborate tobacco machine would be almost useless. 262 00:23:48.380 --> 00:23:52.140 But it might have some salvage value. You can melt it down for scrap. 263 00:23:52.140 --> 00:23:55.020 You can use it as a doorstopper or something like that. 264 00:23:55.020 --> 00:23:58.820 Right? But most of its value would be lost because its value is imputed 265 00:23:58.820 --> 00:24:02.660 from the value of the goods and services that it is able to produce. 266 00:24:02.660 --> 00:24:10.000 I mean, it's an important distinction when we think about the demand for consumer goods 267 00:24:10.000 --> 00:24:12.760 and the demand for producer's goods, right? 268 00:24:12.760 --> 00:24:16.980 Consumer's goods are demanded directly because of the satisfaction that they provide, whereas 269 00:24:16.980 --> 00:24:22.060 producer's goods are demanded, in a sense, indirectly, right? 270 00:24:22.060 --> 00:24:26.700 Entrepreneurs have a demand for producer goods or intermediate goods or factors, not because 271 00:24:26.700 --> 00:24:31.140 Because they get utility out of employing those factors, but because they can use those 272 00:24:31.140 --> 00:24:37.740 factors to produce consumer goods and services that they can then sell for money. 273 00:24:37.740 --> 00:24:43.120 So it's indirect step that we sometimes use the term that the demand for factors of production 274 00:24:43.120 --> 00:24:49.080 is derived, to derive demand curve, it's derived from the demand for the consumer goods 275 00:24:49.080 --> 00:24:50.760 that they're used to produce. 276 00:24:50.760 --> 00:24:55.820 Like if I own a restaurant and I hire Professor Salerno as one of my, you know, as my head 277 00:24:55.820 --> 00:25:04.820 I'm a waiter. I may demand bananas because I like to eat bananas and I get a lot of satisfaction out of them. 278 00:25:04.820 --> 00:25:10.820 I wouldn't demand his labor because I get a warm fuzzy feeling every time he's in the room. 279 00:25:10.820 --> 00:25:20.820 Quite the contrary. I would demand his services only to the extent that they're valuable to me in producing meals that I can then sell to people for money. 280 00:25:20.820 --> 00:25:27.820 There's another quote too. 281 00:25:27.820 --> 00:25:31.820 Menger also hints at, so here's the general idea, right, 282 00:25:31.820 --> 00:25:36.820 that the value of factors is imputed from the value of the consumer goods they produce. 283 00:25:36.820 --> 00:25:41.820 Menger goes into a little bit more detail about how one might come up with an actual unit, 284 00:25:41.820 --> 00:25:46.820 a specific valuation on a particular unit of a factor. 285 00:25:46.820 --> 00:25:54.820 And he does it this way, it's analogous to Menger's concept of marginal utility for consumer goods. 286 00:25:54.820 --> 00:26:02.820 So when, as we discussed yesterday, the marginal utility of a particular consumer good, of a discrete unit of a consumer good, 287 00:26:02.820 --> 00:26:11.820 is given by the ability of that marginal unit to satisfy a particular incremental use or want. 288 00:26:11.820 --> 00:26:18.220 Right, so we think, what need or want or satisfaction would the consumer be unable to achieve 289 00:26:18.220 --> 00:26:22.020 if a marginal unit of that good or service were taken away? 290 00:26:22.020 --> 00:26:24.220 Well, it's the same sort of principle here. 291 00:26:24.220 --> 00:26:29.820 Right, Menger says, this, what he's talking about in this section, 292 00:26:29.820 --> 00:26:38.620 general law, this is a general law of the determination of the value of a concrete quantity of a good of higher order. 293 00:26:38.620 --> 00:26:43.620 Assuming in each instance that all available goods of higher order are employed in the most economic fashion, 294 00:26:43.620 --> 00:26:49.620 the value of a concrete quantity of a good of higher order is equal to the difference in importance 295 00:26:49.620 --> 00:26:55.620 between the satisfactions that can be attained when we have command of the given quantity of the good of higher order, 296 00:26:55.620 --> 00:26:57.620 whose value we wish to determine, 297 00:26:57.620 --> 00:27:02.620 and the satisfactions that would be attained if we did not have this quantity at our command. 298 00:27:02.620 --> 00:27:07.620 This law corresponds exactly to the general law of value determination. 299 00:27:07.620 --> 00:27:13.980 So the value of a specific unit of a factor of production is determined by the amount 300 00:27:13.980 --> 00:27:18.940 of consumer want satisfaction we would not be able to achieve if that particular unit 301 00:27:18.940 --> 00:27:20.620 of the factor were taken away. 302 00:27:20.620 --> 00:27:21.620 Right? 303 00:27:21.620 --> 00:27:25.900 We're abstracting in this discussion from the element of discounting, the time discounting, 304 00:27:25.900 --> 00:27:28.900 which we'll get to in just a moment. 305 00:27:28.900 --> 00:27:29.900 Okay? 306 00:27:29.900 --> 00:27:38.700 An important thing to keep in mind here is, you know, there's a subjectivity. 307 00:27:38.700 --> 00:27:41.340 There's an important kind of subjectivity here. 308 00:27:41.340 --> 00:27:47.020 Let me try again. 309 00:27:47.020 --> 00:27:50.540 Here we go. 310 00:27:50.540 --> 00:27:52.100 Red works. 311 00:27:52.100 --> 00:27:55.780 Better red than the dead pen, better red than dead. 312 00:27:55.780 --> 00:28:06.280 is an important subjectivity in the sense that, you know, what makes something a producer's good, a higher-order good, or a consumer good, a lower-order good, 313 00:28:06.280 --> 00:28:17.280 is it's not determined by the intrinsic characteristics of the good, not determined by its technological properties or its chemical properties or whatever, 314 00:28:17.280 --> 00:28:23.280 but, right, it depends on the intentions of the human actors who are involved in the process. 315 00:28:23.280 --> 00:28:28.280 Right? So, I mean, Joe Salerno's company could be a consumer good, hypothetically. 316 00:28:28.280 --> 00:28:35.280 You know, he could be employed by a mail escort service, let's say. 317 00:28:35.280 --> 00:28:36.280 No, it's not an example. 318 00:28:36.280 --> 00:28:40.280 I mean, in principle, people could get utility out of Joe, right? 319 00:28:40.280 --> 00:28:45.280 Or, he could be a laborer and people get utility out of the things that he produces. 320 00:28:45.280 --> 00:28:48.280 It's the exact same Joe, right? 321 00:28:48.280 --> 00:28:54.760 I like to, it's one of my strange quirks, I like to make my own croutons. 322 00:28:54.760 --> 00:28:59.080 Some people think that's weird, but, right, I mean, so, if I'm making my own croutons, 323 00:28:59.080 --> 00:29:03.520 then bread is not a consumer good for me, but it's a factory production, right, because 324 00:29:03.520 --> 00:29:06.840 you take bread and you leave it out and let it get a little stale and you cut it into 325 00:29:06.840 --> 00:29:13.040 croutons and you toast them in the oven, you put some herbs on them, very good. 326 00:29:13.040 --> 00:29:16.460 The exact same loaf of bread can be a consumer good or a factory production, depending on 327 00:29:16.460 --> 00:29:18.540 and How I Intend to Use it, okay? 328 00:29:18.540 --> 00:29:19.540 So this is important. 329 00:29:19.540 --> 00:29:24.660 Something else that's critical to Rothbard's presentation in this chapter is that he's 330 00:29:24.660 --> 00:29:35.860 interested in the economic aspects of production, not the purely technological aspects of production. 331 00:29:35.860 --> 00:29:42.620 I mean, some standard treatments of production theory are all about the physical technology 332 00:29:42.620 --> 00:29:44.420 of production, right? 333 00:29:44.420 --> 00:29:50.620 I mean, how many kilowatt hours of electricity compared to how many man hours of labor, compared 334 00:29:50.620 --> 00:29:55.360 to how many units of steel do you have to stick into this process to get certain quantities 335 00:29:55.360 --> 00:29:58.380 of automobiles or whatever? 336 00:29:58.380 --> 00:30:03.140 The purely economic aspect, the valuation aspect is either absent or sort of brought 337 00:30:03.140 --> 00:30:05.540 in later. 338 00:30:05.540 --> 00:30:08.620 All the technical aspects of production are treated first and then, oh yeah, by the way, 339 00:30:08.620 --> 00:30:11.260 we need to introduce prices somehow. 340 00:30:11.260 --> 00:30:17.260 Rothbard is a very integrative treatment, as someone pointed out earlier. 341 00:30:17.260 --> 00:30:27.700 Okay, this sort of basic Mengerian insight, as elaborated by the later Austrians, von 342 00:30:27.700 --> 00:30:37.820 Boehm-Bawerk, Mises, Rothbard, it seems pretty obvious, right, that my example of the cigarette 343 00:30:37.820 --> 00:30:43.320 The early machine, you know, in a world where tobacco is forbidden or is unpopular, right? 344 00:30:43.320 --> 00:30:46.320 It's pretty obvious that machine wouldn't be all that valuable. 345 00:30:46.320 --> 00:30:50.820 But of course, when the theory of imputation was introduced, 346 00:30:50.820 --> 00:30:55.820 it was a radical departure from some of the theories of the day, right? 347 00:30:55.820 --> 00:31:00.820 You know, the idea of the classical economists, which was mentioned earlier today, 348 00:31:00.820 --> 00:31:04.820 that cost is the determinant of price. 349 00:31:04.820 --> 00:31:12.020 In other words, the costs of factors of production determine the prices of consumer goods, right? 350 00:31:12.020 --> 00:31:18.420 You see that, for example, in the labor theory of value in the classical economists and picked up by Karl Marx, right? 351 00:31:18.420 --> 00:31:24.320 That the value of particular goods and services, not all, but some goods and services, reproducible goods and services, 352 00:31:24.320 --> 00:31:28.420 is determined by the quantity of labor that went into their production, okay? 353 00:31:28.420 --> 00:31:32.520 Mises uses the example of champagne, right? 354 00:31:32.520 --> 00:31:39.400 Right, he says the classical economist believed that champagne that we drink, right, sparkling 355 00:31:39.400 --> 00:31:47.000 wine, whatever, the reason it's so expensive is because the land used to grow champagne 356 00:31:47.000 --> 00:31:51.360 grapes in France, the land in the Champagne region of France, is very, very expensive 357 00:31:51.360 --> 00:31:52.360 land. 358 00:31:52.360 --> 00:31:59.240 Right, Mises pointed out, no, that's the, that explanation has the cause and effect 359 00:31:59.240 --> 00:32:00.240 reversed. 360 00:32:00.240 --> 00:32:12.240 The reason the land in champagne is so valuable is precisely because people have a very high willingness to pay for the drink that you make out of the champagne, okay? 361 00:32:12.240 --> 00:32:19.740 So it's the valuation for the champagne beverage that gives the land in champagne its value, not the other way around, okay? 362 00:32:19.740 --> 00:32:26.460 I mean, now, this is not to deny that entrepreneurs, in making their, Joe, you call it, their 363 00:32:26.460 --> 00:32:32.220 sticker pricing decisions, that they deny that they may use rules of thumb, right, based 364 00:32:32.220 --> 00:32:35.980 on market prices of particular inputs that they purchase. 365 00:32:35.980 --> 00:32:41.700 You go to business school and you learn about these, you know, sort of optimal markup rules, 366 00:32:41.700 --> 00:32:47.580 and a lot of people believe that that's the way entrepreneurs operate, right, that you 367 00:32:47.580 --> 00:32:52.200 You go out and you buy the factors that you need and you add 20% and you sell it, right? 368 00:32:52.200 --> 00:32:55.240 So if factors get more expensive, well of course, final goods prices are going to get 369 00:32:55.240 --> 00:32:56.240 more expensive. 370 00:32:56.240 --> 00:33:01.800 Okay, but the prices that consumers pay for goods in the marketplace, right, is constrained 371 00:33:01.800 --> 00:33:06.920 by the demand, their willingness to pay for the services of those consumer goods, right? 372 00:33:06.920 --> 00:33:10.640 Doesn't matter what the factor prices were, it doesn't matter how expensive, doesn't matter 373 00:33:10.640 --> 00:33:12.640 how much the entrepreneur had to pay, right? 374 00:33:12.640 --> 00:33:15.360 That doesn't mean that consumers are going to be willing to pay that much for the final 375 00:33:15.360 --> 00:33:25.920 We'll talk a little bit about differences between Rothbard's approach and the neoclassical 376 00:33:25.920 --> 00:33:27.360 approach in just a moment. 377 00:33:27.360 --> 00:33:32.480 I've already mentioned this inherent circularity in the mainstream approach, but I actually 378 00:33:32.480 --> 00:33:44.320 added some diagrams to this, we'll come talk about that a little bit later. 379 00:33:44.320 --> 00:33:49.680 A couple more things to sort of walk us through, the way Rothbard goes about it, right, his 380 00:33:49.680 --> 00:33:53.560 presentation of the imputation theory, and I think this is all nicely explained in the 381 00:33:53.560 --> 00:33:54.560 study guide. 382 00:33:54.560 --> 00:34:03.520 I mean, everything in the study guide, it's wonderful of course, but let me clarify. 383 00:34:03.520 --> 00:34:09.960 So Rothbard uses the term DMVP, discounted marginal value product, you may be more used 384 00:34:09.960 --> 00:34:16.320 to the term discounted marginal revenue product or just marginal revenue product and as far 385 00:34:16.320 --> 00:34:26.120 as I'm concerned those are synonymous. You can use MVP or MRP if you like. So what was 386 00:34:26.120 --> 00:34:32.080 the definition? The discounted marginal value product or marginal revenue product is the 387 00:34:32.080 --> 00:34:38.560 monetary revenue attributed or imputed to one service unit of a factor, right? One discreet 388 00:34:38.560 --> 00:34:44.360 Unit however that's perceived by the entrepreneur discounted by the social rate of time preference 389 00:34:44.360 --> 00:34:53.120 or the pure rate of interest that we were talking about before. That DMVP or DMRP establishes 390 00:34:53.120 --> 00:34:57.800 the most that an entrepreneur would pay for one service unit of that factor. An entrepreneur 391 00:34:57.800 --> 00:35:06.360 would never pay more than in the ERE and long run equilibrium, no one would pay more than 392 00:35:06.360 --> 00:35:13.720 and the DMVP or DMRP of the factor because then you'd be paying, your outlays would 393 00:35:13.720 --> 00:35:18.160 be greater than your receipts from employing that factor in production. 394 00:35:18.160 --> 00:35:22.960 How do we know what the DMVP or the DMRP is? 395 00:35:22.960 --> 00:35:27.940 Well we have to be able to discount of course. 396 00:35:27.940 --> 00:35:36.180 But Rothbard adds some clarification or qualification describing specific cases in which the 397 00:35:36.180 --> 00:35:43.180 The MVP or MRP can be calculated in a way that is useful for explaining factor prices. 398 00:35:43.780 --> 00:35:47.380 And here's where he's a little bit different from the standard sort of mainstream treatment 399 00:35:47.380 --> 00:35:52.060 that talks about fixed proportions and variable proportions, perfectly substitutable inputs 400 00:35:52.060 --> 00:35:59.060 versus imperfectly substitutable inputs. Rothbard emphasizes that what's critical here is not 401 00:35:59.060 --> 00:36:12.560 Not variable proportions, per se, but the fact, what's necessary to use the marginal productivity account explanation for factor prices is that the factor be what he calls isolable. 402 00:36:12.560 --> 00:36:24.560 That the value of that factor be isolable, meaning you can independently identify the contribution of that factor from the other factors that are also used in the same production process. 403 00:36:24.560 --> 00:36:30.960 Okay, to be isolable, there are two conditions that have to be met, right? 404 00:36:30.960 --> 00:36:33.960 The factor must be used in variable proportions, right? 405 00:36:33.960 --> 00:36:36.960 What does variable proportions mean, as opposed to fixed proportions? 406 00:36:36.960 --> 00:36:44.960 We could change it by a little bit, it's going to be awkward. 407 00:36:44.960 --> 00:36:52.960 Yeah, like, that's right, I mean, you can, if there's more than one way to skin a cat, 408 00:36:52.960 --> 00:37:04.960 Right, you can add a little bit more labor, a little bit more of this factor and still get a cat, right, then you have variable proportions, then the inputs can be used in variable proportions. 409 00:37:04.960 --> 00:37:21.960 If you think of an automobile and you just define the inputs as, you know, steering wheels, you know, brakes and engines, right, it isn't the case that you can say, well, we just won't have brakes but we'll have two steering wheels and the car will be just as good. 410 00:37:21.960 --> 00:37:26.920 But that's a case where the factors have to be used in particular combinations, right? 411 00:37:26.920 --> 00:37:30.920 Adding it, you've got one engine, one set of brakes and one steering wheel, adding another 412 00:37:30.920 --> 00:37:35.000 steering wheel doesn't give you anything that's any more valuable than what you had before. 413 00:37:35.000 --> 00:37:37.440 It doesn't give you any more car, okay? 414 00:37:37.440 --> 00:37:42.580 So that's a case where the inputs have to be used in particular fixed proportions, right? 415 00:37:42.580 --> 00:37:47.520 And as we'll see with some examples, we cannot use the marginal productivity theory in the 416 00:37:47.520 --> 00:37:52.520 and the same way to explain factor prices when you have fixed proportions. 417 00:37:52.520 --> 00:37:58.520 But Rothbard points out also that the specificity of the factor as used in production matters, right? 418 00:37:58.520 --> 00:38:04.520 So a specific factor is a factor that can only be used to do one thing, okay? 419 00:38:04.520 --> 00:38:15.520 This, you know, cigarette rolling machine that I described, let's assume it can only be used to make cigarettes and, you know, as a door stopper, okay? 420 00:38:15.520 --> 00:38:21.600 A nonspecific factor would be something that can be used in multiple production processes. 421 00:38:21.600 --> 00:38:26.400 A truck, for example, is a nonspecific factor of production in that, you know, it can be 422 00:38:26.400 --> 00:38:31.760 used to transport different kinds of goods and services to different kinds of end users. 423 00:38:31.760 --> 00:38:38.200 Labor is a fairly nonspecific factor of production, though, again, that, you know, depends on 424 00:38:38.200 --> 00:38:39.200 the case. 425 00:38:39.200 --> 00:38:44.880 Maybe, you know, Mozart may have been completely useless at doing anything other than composing 426 00:38:44.880 --> 00:38:48.080 and Music, in which case his labor would be fairly specific. 427 00:38:48.080 --> 00:38:53.580 You couldn't employ him as a weaver or a horseman or whatever. 428 00:38:53.580 --> 00:38:57.880 But for most people, there's at least some specific, some, there's more than one use 429 00:38:57.880 --> 00:39:01.560 to which their labor can be put, okay? 430 00:39:01.560 --> 00:39:05.360 Let's look at some examples, get you to crank through these. 431 00:39:05.360 --> 00:39:07.560 These are not hard, okay? 432 00:39:07.560 --> 00:39:15.360 So, what's the DMRP and what's the ERE price in these particular cases? 433 00:39:15.360 --> 00:39:19.280 Well, just to keep things simple, let's ignore the D. 434 00:39:19.280 --> 00:39:22.960 Okay, so ignore discounting for a moment. 435 00:39:22.960 --> 00:39:26.740 If we include the discounting, it just means we have to do another algebraic step, it doesn't 436 00:39:26.740 --> 00:39:27.880 change anything. 437 00:39:27.880 --> 00:39:30.840 So forget about discounting for a moment. 438 00:39:30.840 --> 00:39:35.520 Suppose you have a production process with three factors of production, column A, B and 439 00:39:35.520 --> 00:39:43.600 C. And if you use four units of factor A, ten units of factor B, and two units of factor 440 00:39:43.600 --> 00:39:49.240 C, you can produce output that you can sell on the market for 100 bucks. And suppose it 441 00:39:49.240 --> 00:39:52.840 takes place instantaneously, no passage of time, so we don't have to worry about discounting. 442 00:39:52.840 --> 00:39:59.440 However, if you took away a unit of factor A, so you only have three units of A, ten 443 00:39:59.440 --> 00:40:04.580 units of B, and two units of C, you can sort of produce something. It's not like the car 444 00:40:04.580 --> 00:40:11.580 In the car case with the brakes and the engine, right, you still have something, it's just not quite as valuable, the output is only worth $80, okay? 445 00:40:11.580 --> 00:40:21.580 What's the marginal value product or marginal revenue product of a unit of factor A, you know, with these levels of use? 446 00:40:21.580 --> 00:40:25.580 $20, yeah, I mean, easy, right? 447 00:40:25.580 --> 00:40:30.580 In other words, if I took away a unit of A, I would lose $20 worth of final output. 448 00:40:30.580 --> 00:40:37.080 So the marginal value product or marginal revenue product of A in this case is 20 bucks, right? 449 00:40:37.080 --> 00:40:42.880 So entrepreneurs are out there bidding for the use of units of factor A, right? 450 00:40:42.880 --> 00:40:49.880 And competitive bidding among entrepreneurs will tend to push that price up towards its DMVP or DMRP. 451 00:40:49.880 --> 00:40:56.280 And so in the long-run equilibrium construct we talked about this morning and the evenly rotating economy, 452 00:40:56.280 --> 00:41:01.280 No uncertainty, the price of a unit of factor A would be 20 bucks. 453 00:41:01.280 --> 00:41:16.280 Okay? Suppose, oh, so again, and remember that A has to be nonspecific, meaning it's not just variable proportions that we need. 454 00:41:16.280 --> 00:41:20.280 We also need to assume that A couldn't be used in some other production process. 455 00:41:20.280 --> 00:41:25.280 Okay? It's not specific to producing this particular output. 456 00:41:25.280 --> 00:41:29.480 Okay, suppose you have a case of fixed proportions, right? 457 00:41:29.480 --> 00:41:32.380 And maybe the units can be divided in various ways. 458 00:41:32.380 --> 00:41:34.880 Can you guys see this in the back? 459 00:41:34.880 --> 00:41:36.480 Okay. 460 00:41:36.480 --> 00:41:39.880 Right, so if you have 4A, 10B and 2C, same thing we started with before, 461 00:41:39.880 --> 00:41:41.880 you get a hundred bucks worth of output. 462 00:41:41.880 --> 00:41:49.980 If we take away a unit of factor A, we also have to take away in proportion, 463 00:41:49.980 --> 00:41:55.080 you know, 25% of factor B and 25% of factor C. 464 00:41:55.080 --> 00:41:57.680 We get something that's worth 75 bucks. 465 00:41:57.680 --> 00:42:01.880 Right, in other words, suppose it's the case that if you only have three units of A, 466 00:42:01.880 --> 00:42:06.880 having anything more than 7.5 units of B does you no good. 467 00:42:06.880 --> 00:42:12.980 Okay, and having anything more than one and a half units of C adds no additional product. 468 00:42:12.980 --> 00:42:18.480 So this is a case where the factors have to be used in the same, in a constant proportion. 469 00:42:18.480 --> 00:42:20.180 Okay? 470 00:42:20.180 --> 00:42:27.180 Well, what's the marginal revenue product or marginal value product of factor A in this case? 471 00:42:34.000 --> 00:42:35.440 Okay. 472 00:42:35.440 --> 00:42:41.700 Well, what's the definition of marginal value product, marginal revenue product? 473 00:42:41.700 --> 00:42:43.580 How much what? 474 00:42:43.580 --> 00:42:49.900 Help them out. 475 00:42:49.900 --> 00:42:55.900 Or in reverse, how much revenue do you lose when you take away a unit of the factor? 476 00:42:55.900 --> 00:42:59.900 We take away a unit of factor A, how much revenue did we lose? 477 00:42:59.900 --> 00:43:02.900 Twenty-five bucks. 478 00:43:02.900 --> 00:43:06.900 The fact that the other factors can only be used in fixed proportions 479 00:43:06.900 --> 00:43:11.900 doesn't change the fact that, lo and behold, when we took away a unit of factor A, 480 00:43:11.900 --> 00:43:15.900 we ended up with something that was worth twenty-five dollars less. 481 00:43:15.900 --> 00:43:26.900 Well, wait a minute. But then, isn't it also the case that the marginal revenue product of, you know, 2.5 units of B is also 25 bucks? 482 00:43:26.900 --> 00:43:34.900 And the MRP of, you know, a half unit of C is also 25 bucks? The answer is yes. That's exactly right. 483 00:43:34.900 --> 00:43:49.900 Okay, notice there's no requirement that if we take the MRP of factor A and add it to the MRP of factor B and add it to the MRP of factor C that we have to get the total change in output or something like that. 484 00:43:49.900 --> 00:43:58.900 Okay? There's no requirement that the value of the marginal products has to sum up to the value of the total product. 485 00:43:58.900 --> 00:44:03.900 Okay? Not in a case where we have factors that are not isolable. 486 00:44:03.900 --> 00:44:11.900 What's meant by not isolable here, right, is that it's impossible to isolate the contribution of factor A 487 00:44:11.900 --> 00:44:14.900 from the contributions of the other factors. 488 00:44:14.900 --> 00:44:17.900 Because you can only use them in particular combinations. 489 00:44:17.900 --> 00:44:23.900 Okay, so we can attribute an increase, a change in value of 25 bucks 490 00:44:23.900 --> 00:44:27.900 to this change in the use of A, B and C combined in a certain way. 491 00:44:27.900 --> 00:44:35.400 But we can't attribute that individually to it, to, we can attribute it only to the bundle, not to the factors themselves. 492 00:44:35.400 --> 00:44:42.400 What does this mean? Well, it means no entrepreneur would pay more than 25 bucks for a unit of A, okay? 493 00:44:42.400 --> 00:44:46.900 But an entrepreneur might pay, might only have to pay, you know, five bucks or ten bucks. 494 00:44:46.900 --> 00:44:53.900 I think somebody said this earlier, right? The price, price of factor A would be no more than 25 bucks, but it's an indeterminate, 495 00:44:53.900 --> 00:44:59.740 And it would be somewhere in an indeterminate range, right bounded by 0 and by 25, depends 496 00:44:59.740 --> 00:45:06.180 on the bargaining position of the whoever owns units of factor A, and the bargaining 497 00:45:06.180 --> 00:45:11.460 strength of the potential users of factor A, competitive conditions and so on, okay? 498 00:45:11.460 --> 00:45:20.460 But even a more interesting case is if you have an indispensable factor, okay, so indispensable 499 00:45:20.460 --> 00:45:49.460 The definition of a car, suppose you have a unit of A, two units of B, three units of C, you get something worth 200 bucks, if you take away A, but you still have two units of B and three units of C, you get something worth zero. 500 00:45:49.460 --> 00:45:55.460 Okay, so this factor is indispensable to the production of this final good. 501 00:45:55.460 --> 00:46:01.580 Well, again, it's, this factor is not isolable, okay, you can't evaluate its contribution 502 00:46:01.580 --> 00:46:05.420 independent of the contributions of the other factors. 503 00:46:05.420 --> 00:46:09.020 According to our definition of marginal revenue product or marginal value product, what's 504 00:46:09.020 --> 00:46:14.020 the MRP of factor A in this case? 505 00:46:14.020 --> 00:46:27.780 $200. Okay. Does that mean that factor A will trade at a price of $200 in the market? Not 506 00:46:27.780 --> 00:46:33.620 necessarily. Nobody would pay more than $200 for it, but they might pay substantially less 507 00:46:33.620 --> 00:46:40.740 than $200. Depending on the specificity of the factor, what other uses in the production 508 00:46:40.740 --> 00:46:43.060 What kind of process can that factor be put? 509 00:46:43.060 --> 00:46:45.540 What quantity of that factor is available and so on? 510 00:46:45.540 --> 00:46:46.540 Right? 511 00:46:46.540 --> 00:46:49.540 So, we talked about the adding up, what they call the adding up problem. 512 00:46:49.540 --> 00:46:55.100 It bothered Wieser, but did not bother von Boehm-Bawerk, and it doesn't bother Rothbard. 513 00:46:55.100 --> 00:46:56.100 Right? 514 00:46:56.100 --> 00:47:00.780 People object, and I think somebody mentioned this, maybe it's in the study guide, Bob mentioned 515 00:47:00.780 --> 00:47:04.780 it that, you know, some people object and say, well, but how can you say that the marginal 516 00:47:04.780 --> 00:47:08.540 revenue product of the factor is equal to the value of the whole output? 517 00:47:08.540 --> 00:47:16.540 Well, I mean, in this sort of unusual case where you have an indispensable factor, that's exactly the case. 518 00:47:16.540 --> 00:47:24.540 This is a case where the marginal productivity theory of distribution does not help you very much in explaining the price of the factor. 519 00:47:24.540 --> 00:47:28.540 For this is Riesman's carburetor problem. 520 00:47:28.540 --> 00:47:32.540 Some of you know the economist George Riesman, who's a student of Mises, 521 00:47:32.540 --> 00:47:36.540 highly influenced by Mises but also by Ricardo and the classical economists, 522 00:47:36.540 --> 00:47:49.540 Rejects entirely the Austrian account of factor pricing, the Mangerian account in which the prices of factors are explained in terms of the marginal utilities of the final goods they produce. 523 00:47:49.540 --> 00:47:54.540 And one of his reasons for rejection is to use this sort of counter example. 524 00:47:54.540 --> 00:47:56.540 I don't know if you guys know what a carburetor is. 525 00:47:56.540 --> 00:48:03.540 The young people may not know, but it's the thing that you used to have to have in your car before fuel injection to make it run. 526 00:48:03.540 --> 00:48:12.040 And he says, well, you know, suppose you have a car that's worth $10,000, but without the carburetor, it doesn't run, and it's worth zero. 527 00:48:12.040 --> 00:48:19.040 So, according to Riesman, marginal productivity theory implies that the price of a carburetor should be $10,000. 528 00:48:19.040 --> 00:48:26.140 And that's absurd. Therefore, the marginal productivity theory must not be able to explain factor pricing. 529 00:48:26.140 --> 00:48:38.140 My response to that is that no, this is just an unusual case in which the price of the factor is not explained by the marginal revenue product of the factor. 530 00:48:38.140 --> 00:48:44.140 The marginal revenue product of the carburetor in that case is 10,000 bucks or whatever the value of the car is. 531 00:48:44.140 --> 00:48:48.140 That doesn't mean that carburetors trade for 10,000 bucks apiece, right? 532 00:48:48.140 --> 00:48:55.140 We need to include other factors to explain the price of carburetors. 533 00:48:55.140 --> 00:49:03.740 Namely, what are the alternative uses to which the things that go into a carburetor can be put elsewhere in the economy and so on. 534 00:49:03.740 --> 00:49:07.740 Okay, so this is not a problem for marginal productivity theory, it's just a case where it doesn't apply. 535 00:49:07.740 --> 00:49:16.840 I have some diagrams about the neoclassical approach, but we'll skip it unless you guys want to talk about it later. 536 00:49:16.840 --> 00:49:24.040 And just to point out that, as I said before, in the standard approach, you start with price-taking firms, 537 00:49:24.040 --> 00:49:29.900 Right? Prices are given exogenously and then you move the prices around and show 538 00:49:29.900 --> 00:49:33.560 how firms would use different combinations of factors, use that to 539 00:49:33.560 --> 00:49:37.420 derive factor demand curves, which you then use to explain the prices of the 540 00:49:37.420 --> 00:49:41.660 factors, which is what you started with, which you initially assumed to be 541 00:49:41.660 --> 00:49:49.220 exogenous, assumed to be exogenous. So it's circular. Okay, there's some 542 00:49:49.220 --> 00:49:53.660 discussion in the end of the chapter about differences between land, labor and 543 00:49:53.660 --> 00:49:54.660 and Capital. 544 00:49:54.660 --> 00:49:55.660 Okay, what are they? 545 00:49:55.660 --> 00:50:00.660 What's the difference between land, labor, and capital, according to Rothbard? 546 00:50:00.660 --> 00:50:09.660 I'm sorry? 547 00:50:09.660 --> 00:50:10.660 What do you mean? 548 00:50:10.660 --> 00:50:11.660 Explain. 549 00:50:11.660 --> 00:50:21.660 Well, I mean, look, can you purchase units of labor in the market? 550 00:50:21.660 --> 00:50:29.660 Yeah, you can purchase labor services, right, not laborers, unless you have slavery, right? 551 00:50:29.660 --> 00:50:34.660 So in the absence of slavery, you can buy labor services. 552 00:50:34.660 --> 00:50:40.660 Can you buy the services of land? 553 00:50:40.660 --> 00:50:42.660 Yeah, sure. 554 00:50:42.660 --> 00:50:50.660 Right, I mean you can, a farmer can rent land to grow crops, you can rent an apartment, 555 00:50:50.660 --> 00:50:54.660 You can rent the services of the land on which an apartment house is built. 556 00:50:54.660 --> 00:50:59.660 So can you rent the use of a machine? 557 00:50:59.660 --> 00:51:07.660 Well, I mean, can you rent a car? 558 00:51:07.660 --> 00:51:13.660 One, I thought that the only one on our points was that it's imputed back to just land and labor. 559 00:51:13.660 --> 00:51:15.660 Ah, okay. 560 00:51:15.660 --> 00:51:18.660 No, that's a good point. You're one step ahead of the game. 561 00:51:18.660 --> 00:51:23.960 And you're distinguishing between, you're referring to the distinction between gross and net rents, right? 562 00:51:23.960 --> 00:51:28.660 So what I'm talking here about just gross rents, I mean, can you go to a store, 563 00:51:28.660 --> 00:51:35.260 can you find somebody who owns a capital good and say, hey, can I use this capital good for three hours and here's $25? 564 00:51:35.260 --> 00:51:39.360 Yeah, sure you can. You can go to the rental center and you can rent a weed whacker or something. 565 00:51:39.360 --> 00:51:45.460 If you don't have a weed whacker, you can rent a car, you can rent the services of the building and so on. 566 00:51:45.460 --> 00:51:50.460 Obviously you can rent labor services, that's what we do when we hire labor, right? 567 00:51:50.460 --> 00:52:00.460 So one difference between land, labor and capital that we just alluded to is that you can not only rent a car, but you can buy a car outright, okay? 568 00:52:00.460 --> 00:52:06.460 You can rent a weed whacker by the hour, or you can buy your own weed whacker, okay? 569 00:52:06.460 --> 00:52:11.460 This is on my mind because I don't actually own a weed whacker, but I have some need of a weed whacker in my backyard. 570 00:52:11.460 --> 00:52:14.460 I'm trying to borrow my neighbor's weed whacker, but he doesn't want me to have it. 571 00:52:19.460 --> 00:52:24.460 Unless we have a slave economy, you can't buy a laborer. 572 00:52:24.460 --> 00:52:27.460 Now Walter Block probably has some ideas about indentured servitude 573 00:52:27.460 --> 00:52:29.460 and whether you can sell yourself into slavery and all that, 574 00:52:29.460 --> 00:52:32.460 but let's leave that for discussion over dinner. 575 00:52:33.460 --> 00:52:37.460 What determines, according to Rothbard, the purchase prices 576 00:52:37.460 --> 00:52:43.380 of the things that you can buy, of capital goods, of pieces of land, and so on. 577 00:52:43.380 --> 00:52:48.380 How are those purchase prices related to the rental prices? 578 00:52:48.380 --> 00:53:04.260 Yeah, the price of the weed whacker in the ERE is equal to the present discounted value 579 00:53:04.260 --> 00:53:08.560 of these, you know, the stream of future rental prices. 580 00:53:08.560 --> 00:53:10.660 Okay, where do those come from? 581 00:53:10.660 --> 00:53:16.460 Well, with the exception of the cases we discussed earlier, from the DMRP. 582 00:53:16.460 --> 00:53:23.760 Okay, so I have the DMRP or DMVP of weed whacker services 583 00:53:23.760 --> 00:53:26.760 that I could use over the life of the weed whacker. 584 00:53:26.760 --> 00:53:30.060 Okay, and I add those up and that gives me the price of the weed whacker. 585 00:53:30.060 --> 00:53:37.560 So either I can add up the MRPs and discount them back to the present or I can add up the discounted MRPs and take that sum. 586 00:53:37.560 --> 00:53:41.860 That tells me how much I would be willing to pay for a weed whacker if it lasts 10 years. 587 00:53:41.860 --> 00:53:46.360 Well, then that's 10 years. I don't have to rent it by the hour or borrow it from my neighbor or whatever. 588 00:53:46.360 --> 00:53:53.860 Okay. So that's the difference between labor and the other two factors, right, that labor can't be bought and sold. 589 00:53:53.860 --> 00:53:57.700 But now, this, I can't see your name tag. 590 00:53:57.700 --> 00:53:59.660 Yeah, Ed, we've heard this assumption, 591 00:53:59.660 --> 00:54:02.060 gross and net rent, okay? 592 00:54:03.740 --> 00:54:06.180 How does, how do capital goods, 593 00:54:06.180 --> 00:54:08.540 let's get there step by step. 594 00:54:08.540 --> 00:54:11.860 How do capital goods differ from land and labor? 595 00:54:13.000 --> 00:54:14.980 There's sort of a standard mainstream answer 596 00:54:14.980 --> 00:54:15.980 to that question. 597 00:54:18.240 --> 00:54:20.740 And then Rothbard gives a slightly different answer. 598 00:54:20.740 --> 00:54:28.740 It's highlighted by our distinguished study guide, author, you might recall. 599 00:54:31.740 --> 00:54:34.740 Let me just think about it. 600 00:54:41.740 --> 00:54:42.740 Why? 601 00:54:43.740 --> 00:54:45.740 Yes, that's right, but why? 602 00:54:50.740 --> 00:54:59.140 Yeah, that's nearly right. I mean machines are produced by something else, right? 603 00:54:59.140 --> 00:55:05.380 So the kind of a standard way that economists think about this is a mainstream way is to 604 00:55:05.380 --> 00:55:11.540 distinguish between sort of, you know, nature-given and man-made factors, right? 605 00:55:11.540 --> 00:55:17.700 That land and labor are given by nature, whereas capital goods have to be manufactured, have 606 00:55:17.700 --> 00:55:26.180 to be made, okay? So right away that tells us that well, I mean, you know, I don't have 607 00:55:26.180 --> 00:55:32.380 to pay to create labor services, right? I mean, I have labor services. They're given 608 00:55:32.380 --> 00:55:37.960 to my, my labor is a free gift that I've received. Likewise, if I discover an unused piece of 609 00:55:37.960 --> 00:55:44.060 land, right, I don't have to use factors of production to produce the land, whereas to 610 00:55:44.060 --> 00:55:48.980 To make a machine, to make a capital good, I do have to employ land and labor, right? 611 00:55:48.980 --> 00:55:59.020 So Ed's point is, you know, in the ERE, right, you can buy capital goods, you can buy machines 612 00:55:59.020 --> 00:56:06.520 in the ERE, right, but to produce a machine, you have to buy land and labor, right? 613 00:56:06.520 --> 00:56:11.640 And leaving discounting aside for the moment, right, the price of the factors that are used 614 00:56:11.640 --> 00:56:25.640 is to produce the machine will be bid up to the point where they equal the value of the machine which is determined by the prices of the final goods and services that machine can be used to produce, right? 615 00:56:25.640 --> 00:56:32.640 So just as the value of tobacco is imputed back to the value of the cigarette rolling machine, right? 616 00:56:32.640 --> 00:56:40.640 The value of the cigarette rolling machine is imputed back to the machine that made it and then back to the machine that made it and then back eventually to land and labor. 617 00:56:40.640 --> 00:56:47.640 In the ERE, in the absence of uncertainty, those prices will be bid up to the point 618 00:56:47.640 --> 00:56:51.640 where there's nothing left over for the owner of the machine. 619 00:56:51.640 --> 00:56:57.640 In other words, in the ERE, capital goods do not get what Rothbard calls a rent. 620 00:56:57.640 --> 00:57:01.640 They don't earn a rent the way land and labor do. 621 00:57:01.640 --> 00:57:08.640 In the ERE, capital gets an interest return based on time preference and discounting, 622 00:57:08.640 --> 00:57:11.640 and Accounting, but does not earn a rent. 623 00:57:11.640 --> 00:57:20.640 Again, it's important here to notice that Rothbard uses the term rent in a different way than it's often used. 624 00:57:20.640 --> 00:57:22.640 What are some ways in which the term... 625 00:57:22.640 --> 00:57:26.640 I mean, we all know a common sense use of the term rent, right? 626 00:57:26.640 --> 00:57:31.640 Because a lot of you have rented a car before, okay? 627 00:57:31.640 --> 00:57:34.640 Most of you have probably rented an apartment. 628 00:57:34.640 --> 00:57:38.640 I should probably go out to the video store and rent a DVD. 629 00:57:38.640 --> 00:57:43.640 What does the word rent mean in that common sense everyday context? 630 00:57:49.640 --> 00:57:53.640 That's how much you pay per unit of time to use something. 631 00:57:53.640 --> 00:58:00.640 So many dollars an hour, or so many dollars per week to rent an apartment. 632 00:58:00.640 --> 00:58:10.640 That's the way in which the term rent is used by Frank Fetter, and that's the terminology that Rothbard adopts. 633 00:58:10.640 --> 00:58:17.640 The term rent is used a different way by Marshall, a different way by Ricardo. 634 00:58:17.640 --> 00:58:21.640 If you read the modern textbooks, there's all sorts of different notions of a rent. 635 00:58:21.640 --> 00:58:28.640 For Ricardo, rent is a payment to a factor of production over and beyond 636 00:58:28.640 --> 00:58:40.640 So a rent is like an extra payment that you get above and beyond the payment that would be required to get you to do the thing. 637 00:58:40.640 --> 00:58:50.640 But in the Federal terminology, no, the entire payment per period of time that a factor receives is the rent going to that factor. 638 00:58:50.640 --> 00:58:56.960 So if you don't like, you know, use, instead of rent, use rental price, okay? 639 00:58:56.960 --> 00:59:00.160 A wage is the rental price of labor. 640 00:59:00.160 --> 00:59:06.840 The money you pay at Blockbuster is the rental price of a DVD, okay? 641 00:59:06.840 --> 00:59:12.840 So the point is that the rental prices of capital goods in the ERE would be bid up to 642 00:59:12.840 --> 00:59:19.200 the point where, you know, you, sorry, the rental prices of the factors that are used 643 00:59:19.200 --> 00:59:23.160 to produce capital goods will bid up to the point where there's nothing left over for 644 00:59:23.160 --> 00:59:26.200 you once you buy the capital good. 645 00:59:26.200 --> 00:59:30.800 So the owners of the capital goods will get an interest return as a reward for deferred 646 00:59:30.800 --> 00:59:31.800 consumption. 647 00:59:31.800 --> 00:59:36.320 Okay, but they don't earn a rent because the rent going to those capital goods is imputed 648 00:59:36.320 --> 00:59:40.400 back to the original factors of production they're used to produce it. 649 00:59:40.400 --> 00:59:48.400 Okay, what are some other issues and questions that you have that we haven't covered yet? 650 00:59:48.400 --> 01:00:09.400 Yes? I'm sorry? Mr. Moderator, is that permitted? Okay. 651 01:00:18.400 --> 01:00:43.400 Q. Doesn't this only come for situations in which the other factors that you hold constant are still advisable? 652 01:00:48.400 --> 01:00:58.400 Is it the case that diminishing marginal value product applies only in cases where, I'm sorry, could you repeat the second part? 653 01:01:18.400 --> 01:01:33.400 You never use it in a region where it is decreasing, because the other factors that you are holding constant would then have a negative marginal value part. 654 01:01:33.400 --> 01:01:44.400 And I understand that. Isn't that only the case if those other factors that you hold constant are still divisible? 655 01:01:44.400 --> 01:01:48.400 are still divisible. 656 01:02:14.400 --> 01:02:24.400 I want to hold off on answering that and maybe come back to it later. 657 01:02:24.400 --> 01:02:33.400 I think that is already incorporated in the marginal value product of the factor that you're talking about. 658 01:02:33.400 --> 01:02:38.400 We don't need to add additional restrictions on the divisibility of the other factors, 659 01:02:38.400 --> 01:02:42.400 because that affects the marginal value product of the factor that you're talking about. 660 01:02:42.400 --> 01:03:11.360 I think that would already be folded in, but, yeah, let's, yeah, this one, right, that's 661 01:03:11.360 --> 01:03:16.080 That's the assumption of fixed proportions. 662 01:03:16.080 --> 01:03:17.080 Did you want to add something on that point specifically? 663 01:03:17.080 --> 01:03:27.080 In the second example, in which the facts are in fixed proportion, Mises gives an example of a purple shirt with a certain sherry shape. 664 01:03:27.080 --> 01:03:29.080 Oh yeah, yeah. 665 01:03:29.080 --> 01:03:34.080 But what he says is, that's fixed. 666 01:03:34.080 --> 01:03:42.080 The question is, is there a price, a warrant, sure, let's say, a certain amount of law and a certain amount of dine, right? 667 01:03:42.080 --> 01:03:52.080 But if they're not specific, even if it's a fixed proportion, then they both can be priced according to one or more activities, right? 668 01:03:52.080 --> 01:03:53.080 That's right. 669 01:03:53.080 --> 01:03:57.080 Or a fixed proportion and specifically two different influences. 670 01:03:57.080 --> 01:04:02.380 And then the third one is, I think the way we illustrate that is the diamond mining, right? 671 01:04:02.380 --> 01:04:05.380 So the diamond mining is indispensable to the production of mines. 672 01:04:05.380 --> 01:04:10.880 You might think, wow, the owner of the mine is going to get a lion's share of revenue. 673 01:04:10.880 --> 01:04:16.880 That's not true, of course. Because if the equipment and the laborers are not specific, 674 01:04:16.880 --> 01:04:19.380 all the diamond miners is a residual. 675 01:04:19.380 --> 01:04:23.380 And if it's sort of a diamond miner on the market, it may be very, very little. 676 01:04:23.380 --> 01:04:26.380 It's very hard to work and it's, you know, very productive. 677 01:04:26.380 --> 01:04:34.380 Right, so again, the question is specificity as well as different orders or inspecibility. 678 01:04:34.380 --> 01:04:40.380 That's right, and you're right, and the emphasis, I was trying to say earlier this, 679 01:04:40.380 --> 01:04:46.380 the emphasis on specificity as a separate set of conditions is something that's quite different from the standard treatment 680 01:04:46.380 --> 01:04:53.380 in which variability is the only thing that matters. 681 01:04:53.380 --> 01:04:54.380 Mark? 682 01:04:54.380 --> 01:05:10.380 All you've got that in an umpire is a good example of the indispensable factor would be an example of a professional baseball team where you have one umpire in the group, two baseball teams, and three work crews, a ground crew, a concession crew, and a ticket crew. 683 01:05:10.380 --> 01:05:22.380 If you take the umpires, they don't show up for a game. You can't have a game. Basically, there's no way to hold a professional baseball team. And so you lose all 200 whatever. 684 01:05:22.380 --> 01:05:33.380 And obviously the price of a product on higher fees is not going to be related to that, but the marginal revenue product is related to that. 685 01:05:43.380 --> 01:05:45.380 I was just wondering why...