 All right, well, welcome, everyone. 11 o'clock in the morning is about the perfect time to talk about Austrian capital theory. So here we are. I don't have a quote on, unfortunately, up on the slide. I don't know what happened. I was a little entrepreneurial heir, I guess. But I do want to read this from Ludwig von Mises' essay, Planning for Freedom. He says, quote, there are no means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population. And his main point there is, if we want to increase our standard of living, if we want to contribute materially to human flourishing, we need to stop thinking of capital as a dirty word and, in some sense, put the capital back in capitalism. And so that's kind of what we want to do a little bit today. Now, I am going to draw upon, Austrian capital theory draws upon a large literature, even broader than this. But some important works is Karl Manger's Principles of Economics, Eugen von Bumbauwerk's Positive Theory of Capital, Ludwig von Mises' Human Action, of course. F.A. Hayek's Prices and Production, Marie Rothbard's Manneconomy and State, Roger Garrison's Time and Money, and Hayes' Quarter to Soto's Money, Bank, Credit and Economic Cycles. The last three there are sort of, in some sense, periodic culminations of received wisdom about Austrian capital theory. I know that there is other literature out there, but this is a good starting point that will give you hours of reading pleasure if you start here. Now, if we're going to talk about capital theory, it is helpful and I think really important to understand what we mean by capital. What is capital? Is capital a stock of capital goods? Is it a pot of money available for investment? Is it a set of homogenous, non-human factors of production we represent with K as in das Kapital? The short answer to those is no, actually. Mises provides the answer to what is capital in human action. He refers to it as the sum of the whole complex of goods destined for acquisition evaluated in money terms. So it is sort of a stock of capital goods, but it is also not just a stock of capital goods because it's the set of capital goods, the goods destined for acquisition evaluated in monetary terms. So that phrase destined for acquisition means production goods, goods that are used for production and sale of products, goods that are factors of production, produced means of production. The phrase evaluated in money terms indicates that it is a capital, as we understand it, is a monetary accounting fund. A monetary accounting fund embodied in capital goods. And so as Mises says, as such, capital, this sum, is the starting point of economic calculation. If an entrepreneur wants to know, have they done good? This past year, can they be like Little Jack Corner? He says, oh, what a good boy am I at the end of the year. You compare the capital value of the firm. Has the firm's capital value increased or decreased? And if they've made profits and they've invested wisely, the capital value is going to increase. And if they either make foolish decisions and blow all their well, maybe not foolish, but they make the decision to blow all of their income on bubblegum, cotton candy, and ticky talk, or they just make unwise investments, their capital is going to shrink. And so capital is a key tool of economic calculation. Now, as I mentioned already before, it is not merely an amount of money. Mises later on in human action says this, quote, there is no such thing as an abstract or ideal, quote, unquote, capital that exists apart from concrete capital goods. Capital is always embodied in definite capital goods and is affected by everything that happens with regard to them. The value of an amount of capital is a derivative of the value of capital goods in which it is embodied. So as the value of capital goods go, so goes an entrepreneur's capital. And so we don't want to fall, if we don't understand this, we will fall into two perhaps different areas. We could see that capital is just a bunch of physical goods, apart from economic calculation. Or we see that capital is just a pot of money, apart from the actual capital goods. And so we need to remember that it is essentially the sum of complex of capital goods evaluated in monetary terms, according to appraisment by the entrepreneur. So what I want to do with this lecture, I want to start by looking at capital value. I'm just going to talk through it. I'm not going to get very numbers heavy here. But the capital value of an enterprise, if we want to talk about Dr. Herbner mentioned yesterday in his lecture on subjective value and price, he's talked about how prices of goods for both consumer goods or the prices of products, shall we say, the prices of products compared to the sum of the prices of the factors of production both contribute to allowing producers to calculate the capital value of the firm and hence help investors know, capital should I invest in buying shares or buying the assets of this firm or that firm. To understand the capital value of the enterprise, we have to recognize that the capital value of the enterprise is the sum of the monetary value of the assets minus its liabilities. And so the basis for capital, the capital value of an enterprise, is the capital value of the assets owned by the enterprise. That's like the business, not the Starship Enterprise. It's not related to Star Trek. And so the current value of the asset is the sum of an asset's discounted marginal revenue product over the course of the duration of serviceability of the capital good. Now, the discounted marginal revenue product, as you may know, is the marginal revenue product generated by an asset discounted by the interest rate. Because this was discussed earlier today, when somebody invests in the present, they invest in, say, buying a machine that they're going to use to produce a product they're going to sell for revenue. That revenue is going to be reaped in the future, but they have to invest now. But because that revenue is going to be reaped in the future, because of time preference, the present value of that future revenue is not going to be equal to the amount of the revenue brought in in the future. So it's going to be discounted. And so that's why what matters is the discounted marginal revenue product, not merely the marginal revenue product. So the discounted marginal revenue product is the marginal revenue product of the factor, the amount of additional revenue attributed to using this unit of a factor of production, in this case, a capital good, discounted by the interest rate. And so in some sense, you can say, well, then the route of the discounted marginal revenue product is the marginal revenue product in the interest rate. The marginal revenue product is determined by the productivity of that factor, the marginal physical product of the factor. How many units, more units can be produced by using this factor than not, times the price of the product. And so for instance, let's suppose that we are thinking about buying a computer, a computer that we're going to use for five years before it either wears out or it becomes obsolete. It gives up the ghost of the machine. So we try to figure out how much should we, are we willing to pay for this computer? Well, it's going to be dependent partly upon how many extra units of sales can we get, how much more spam can we sell for a particular period of time, for say a year from now, by using this computer for one year. And then we multiply the number of additional sales by the price of the spam, if you will, which runs right around $3.98 at Walmart if you're concerned about these things. And so you calculate these things and you find out, let's suppose that the marginal revenue product is $990. Well, if the interest rate, let's say, is 10%, so the social time preference is approximately 10%, then you will discount that $999 according to the interest rate. And so the present value of the $990 you'll get a year from now, the present value is going to be $900. But that's just for one year. Now, this computer has five years of service. You would get five different discounted marginal revenue products, but the discounted marginal revenue product is not going to be identical for every year because the second and the third and the fourth and the fifth year of this revenue is going to be two and three and four and five years farther down the road. And so the discounted marginal revenue product will be discounted by the interest rate over a longer period of time. But each year's worth of revenue will be discounted. And so if we sum up, then, the sum of the five discounted marginal revenue products over the five-year time, it turns out that maybe this computer, then, if we assume sales and prices to be constant, would be close to $3,753, which would tell the entrepreneur, that's what this computer will generate for us in terms of present value. So we don't want to pay, say, $4,000 for a computer that's going to generate a present value of $3,753. If we did that, we would be a loser. And that's not the goal of a producer. We want to be a winner, a profiteer, one might say. So the moral of the story is capital value is affected by many things. It's affected by the productivity of the capital good. The more productive, physically productive, the capital good is, the more output you're going to get by using this, and so the more revenue you're going to get by using this, so the greater the discounted marginal value product that you're going to get from this, and therefore, the more this factor will contribute to the capital value of the firm. Secondly, the price of the product being produced. If you're producing a good and the price of the good that you're producing increases, that increases the value of all the capital goods used to produce that good. Because all of these capital goods are going to be bringing in more revenue, not because they're more productive, but simply because the demand for the product is increased, which has increased the price of the product. Capital value will also be affected by the interest rate. If people's time preferences increase and become more present oriented, the social rate of time preferences will increase, the interest rate will increase, and therefore, these future marginal revenue products will be discounted at a higher rate, so the discounted marginal revenue products will be lower, so the capital value of the firm will be lower. That's why it's one reason why when the monetary authority, our friends at the Federal Reserve, work to increase the money supply and lower interest rates, that's one reason why stock prices increase, because the perception of capital values increase because these future streams of income are discounted at a lower interest rate. That's also why producers can be led astray by our friends at the Federal Reserve. Fourthly, the capital value is affected by the duration of serviceability of the capital good. The longer period of time that the capital good is useful, the more marginal revenue products will be generated by this capital good. So if instead of the computer being able to be used five years is actually able to use eight years, that will make the capital good even more valuable, assuming the demand for the product stays constant and the productivity of the capital good itself doesn't decline noticeably. And so the capital value of a good, I forgot to move along, the capital value of a good and hence the capital value of the firm is affected by the productivity of the capital goods that are owned by the entrepreneur, the price of the product being produced and sold by the enterprise, the rate of time preference, and the duration of serviceability. So all these things impact the capital value of an individual capital good and hence the capital value of a enterprise, a firm. Now note that the top factor there that affects the capital value is the productivity of the capital good. The productivity of the capital good is determined by at least two things. One is the complementary factors with which they are used. Like if I want to make spam and I don't have any, and I have lots of pork, but I don't have any machinery that I can use to process the pork and making the spam, that the pork itself is not going to be very productive. It's not going to help me make spam because I need these other complementary factors. I need other factors to work together with my pork to make spam. And so the complementary factors with which they are used impacts the productivity of any given factor production, any given capital good. Secondly, technology. Technology is important. Every capital good embodies a particular technology. I mentioned a machinery. I love watching. I don't watch it a lot, but every time I do watch it, I am fascinated this program, How's It Made? Have you ever seen How's It Made? I find that fascinating. And I sometimes show a video of How's It Made to my students showing the process of a potato chip being made and how automated the potato chip manufacturing process is. From the moment the potato goes into the machine, it gets washed, it gets peeled, it gets sliced, it gets fried, it gets cooked, it gets packaged almost without being touched by human hands. It's an amazing process. I think that they call that machine the Nimbus 3000. I think it's the machine that they use to do all of this. It's fantastic. They even have a machine with sensors on them. So when the potato chips go down the chute, they can identify if there's a bad chip, like this chip is excessively dark, except it may be a little burnt or something. And then the laser will sense it and immediately trigger an air blast to blow the chip off of the main drag. And on the one hand, what this does is it supposedly increases the uniformity, uniform quality of the chips. It also makes it less likely that you're going to get a little door prize. When I was a little kid, it's like a little door prize. Oh, I got the dark chip this time. I got the super burnt chip. And it was a little bit different. It was kind of a fun little thing. Those days are gone because we've reached uniformity in our chip production. And so it was a pretty amazing thing. So all capital goods embody certain technology. It's way different. Making those potato chips that way is way different than the capital goods used by, say, Julia Childe when she made potato chips in her own kitchen. It's a whole different production process using a whole different set of capital goods. Technology also is embodied in what we call the production function. In other words, the process or recipe regarding how the different goods, the capital goods, the labor, the land is organized and put together to produce a product. All of these things, the production structure, how the process, the recipe for how goods are produced, and the technology embodied in the capital goods themselves, all of these things affect the productivity of the capital good. So in other words, in order to understand and to get Austrian capital theory right, we must see that Austrian capital theory incorporates both the production structure and how the physical capital goods work together in an economic order, as well as the entrepreneurial appraisement process. The entrepreneurial appraisement process that imputes monetary values to all of these things. If we fail to recognize either of these, the importance of the physical capital goods and the production structure, or the entrepreneurial appraisement process, if we fail to recognize either of these two things, it'll lead us to error. Some errors worse than others, but in any event we'll be left wanting. So let's talk about the production structure. The production structure is rooted in Manger's exposition of the interrelationship of economic goods. Manger and Principles of Economics sets out an excellent discussion of what makes something in economic good, and then talks about how economic goods aren't just a hodgepodge. Economic goods that are used in the economic order are not just sort of autonomous atomistic goods just thrown together in a pot, and you do the hokey pokey and that's what it's all about. No, they are related to one another. There are consumer goods, for instance. Consumer goods are the goods that are directly serviceable. They are goods that give us direct utility, but just by using them we don't have to produce them anymore. We don't have to mix anything with them. We just consume them, and we get direct satisfaction. And these goods are goods that Manger calls goods of the first order. The goods that are used to produce these consumer goods are called higher order goods. They're also called producer goods. Goods that producers use to produce other goods, eventually culminating in the production of consumer goods. And these producer goods are indirectly serviceable. They're serviceable, or they wouldn't be economic goods, but they don't satisfy our utility directly. The pork used to make spam is not utilized directly. The pork is a capital good that's used to make spam. So the pork is transformed into directly serviceable goods only at one point in the future. And so from that, we get this sort of standard categorization of different economic goods. Producer goods, we have land, large tracts of land. And we have labor, which is human effort. And we have capital goods. The produce means of production. So the capital structure is about how different produce means of production, different tools, different machines, different intermediate products fit together and work together in this process culminating in a consumer good. Now each consumer good is made possible by its structure of production. And if you've seen me before, you know that one of my favorite consumer goods of all time is a flowerless chocolate cake. It is the greatest dessert in the history of the world. It's one of the culminating consumer goods of civilization. I would suspect, I would suspect that as our culture declines, less flowerless chocolate cake will be consumed. They do not, I have this on fairly good authority, I think, they don't serve a lot of flowerless chocolate cake in the White House, for instance, or in the halls of Congress. That's just an expectation. I don't know anything about that. I would be shocked if they did. In fact, I would find it almost not right if they serve flowerless chocolate cake in the White House. But anyway, that's neither here nor there. So each consumer good is made possible because of its structure of production. To make a consumer good, a producer must obtain the services of the necessary land labor capital goods. So what is necessary for making a flowerless chocolate cake? We need chocolate, semi-sweet chocolate. We need butter. We need a pound of semi-sweet chocolate. We need a half pound of butter, two sticks. And we need eight eggs. And that is it. That is all the ingredients you need. I told you it's the greatest dessert in the history of the world. I am not kidding. Dr. Rittenauer does not lie to his students. Now, of course, if you just throw these things into this bowl here, they're not just going to spontaneously generate. You can't just click your heels and say there's no place like flowerless chocolate cake. There's no place like flowerless chocolate cake. You've got to do so. There has to be other complementary factors, such as the spring form pan. That's the pan that the thing gets baked in. And it gets baked in an oven. There's a stand-up mixer, which is it's important that you have to be able to mix the eggs at a fairly high rate to get the kind of flowerless chocolate cake that you want. And there's even more factors than this. There is, of course, labor there, which is clear on the left-hand side of the screen, as a photo from an excellent photojournalistic book by August Sander. I can't remember the name of the book, but he was a German photographer that went through, in the 1920s into Germany, just photograph different people in their work outfit, in their place of business. And this is a pastry chef. And I always sort of liked him. But any event, he's engaged in labor, probably getting ready to whip up a flowerless chocolate cake. And so before we can eat the flowerless chocolate cake, the chocolate, the butter, the eggs, the mixer, the spring form pan, the oven, the spatulas, the mixing bowl, the microwave oven, if you're going to use it, they all need to be produced first. So we need those factors of production first. So the producer obtained services of factors of production by purchasing them in exchange for money. Now, this, unfortunately, can't probably see this a lot. This is, on the one hand, a fairly extensive production structure, the structure of production for a flowerless chocolate cake. The flowerless chocolate cake is clear at the bottom. That's why it's called the first order. And everything is above the other factors of production or above the flowerless chocolate cake. That's what they call their higher goods of higher order, or higher order goods. But this is fairly extensive. For instance, if you're going to make a flowerless chocolate cake, you now have to have semi-sweet chocolate, of course. You have to have semi-sweet chocolate. But the semi-sweet chocolate doesn't come out of nowhere. The semi-sweet chocolate must be produced. The semi-sweet chocolate must be produced using cocoa solids, and cocoa butter, and sugar, and a factory, and transportation, as well as land and labor. Those are factors that are necessary to produce the flowerless chocolate cake, because you have to have them to produce the chocolate. What about the butter? You need raw milk, salt, a separator, tanks, a churner, packaging, a dairy plant, land and labor, transportation to get the butter from the plant to wherever the kitchen is. What about eggs? What do we need to produce eggs, right? Well, I'm just going to tell you. I'm going to solve that age-old question. The chicken comes first. You need a chicken to give birth to the eggs, or to let the eggs fly, so to speak. And so you have to have a chicken, a chicken feed, a chicken coop, which you know why they call, well, never mind. I don't want to get into that. I was going to say, I've heard this said that you know why all chicken coops only have two doors, right? Because if they had four doors, they'd be chicken sedans. Sorry. I'm doing that for my daughter's sake. She doesn't get at least one groan per hour. She thinks something's wrong with me. But you need a chicken, chicken coop. You need water, automated equipment if you want to produce eggs on a pretty large scale. Electricity, you need a chicken egg processing factory or plant, you need transportation, land and labor. So you need all of these things to produce the eggs that are necessary to produce the flowerless chocolate cake. So the producer obtains the services of all of these factors by purchasing them in exchange for money, which has already been discussed earlier today and the day before. And when the production of the lower goods is completed, the producer sells them for money, right? So the egg producer buys the chickens, the feed, the electricity for the chicken coop, the chicken coop material, et cetera, et cetera. They buy that all for money. And they produce the eggs. And then they sell the eggs for money to either the grocery store or maybe if you want to buy them direct to the dessert maker. And then the dessert maker spends money on semi-sweet chocolate eggs and butter and springform pans and spatulas and everything else. And then they use that to make flowerless chocolate cake and then sell the cake for money in their dessert shop. Desserts are us. So this process then, this process is a process, the production process is a process by which producer goods at different stages, at each subsequent stage, is used to produce a product that is then used for other products to produce another product, which is then used by products at another stage to produce another product, ultimately culminating in the production of the consumer goods at the lowest stage of production. Now this understanding of the production structure is helpful for a number of reasons. One, it helps us to understand how complex the economic order is. I mean, this is just, one, a rudimentary. This isn't even exhaustive. An exhaustive production structure for flowerless chocolate cake, you couldn't fit on one slide. This barely fits. You can hardly read it. So this is just, but it's simple. It's simplistic. So ask yourself, how easy is it for what it be for a central planning board to centrally plan the production of all of these goods that are necessary to produce just a flowerless chocolate cake? And a flowerless chocolate cake is just one little consumer good for people with refined tastes. So think of all the different consumer goods that are available. And then multiply all of this by the number of consumer goods that are available. It's very quickly would understand that trying to centrally plan effectively and efficiently an economic order is impossible. It's impossible. And I think every person in the social sciences that are drawn to this idea sentimentally or otherwise to the idea of central planning should at the very least first pick your favorite consumer good and try to trace out as detailed as possible the production structure that is required to produce that thing. That is not just an academic exercise. The more you do it, the more you will be amazed at the beauty of the free market price system, the beauty, dare I say, of capitalism. Now, if we look at another helpful thing about the production structure is that it teaches a couple of important principles. For instance, it tells us that production effort moves down the structure of production. Production effort moves down the structure of production. Let me see that on the right-hand side. Now, when I say production effort moves down, I'm not talking about the magnitude of effort. It's not like, oh, we have to work really hard at the higher stages and the lower stages. We don't have to do anything. We just kick back and drink our little lemonade and say, give me the flourless chocolate cake. No, that's not what we're talking about. We're talking about simply the direction of movement. The point is, before we can produce the flourless chocolate cake, we have to have the milk. So we have to produce the milk first before we produce the butter before we produce the flourless chocolate cake. Well, before we produce the butter, we have to produce the Holstein. We have to produce the cow. And so we begin with production at the top highest stages of production, and then production successfully moves down different stages to the consumer good. And so it turns out that the economic order does not depend on stimulating consumption enough. The economic order depends upon investment in production. So we have to have producer goods first before we can, including capital goods, before we can enjoy consumer goods. So production effort must start at the higher stages and moves down successfully to the lower stages. On the other hand, the other important principle is that income moves up the structure of production. Producers use money that they own to purchase the services of the factories of production and then use them to produce lower order goods. And so, for instance, what we mean by there is that desserts are us, wants to make a flourless chocolate cake. They must purchase somewhat sweet chocolate, eggs and butter in the springform pan, et cetera, et cetera, from the producers of these goods at the higher stages. And so their investment is income for the higher stage capital goods owners and the owners of the higher stage factor owners. The producer of the eggs, in hopes of attaining this revenue, must first invest and spend money on chickens and chicken feed. And so the income flows directionally, flows from the consumer to the producer of the flourless chocolate cake, to the producer of the egg, to the producer of the chicken feed. It flows up the structure of production. And value is also imputed up the structure of production. And what do we mean by this? We mean that we don't value flourless chocolate cake because we value somewhat sweet chocolate and butter and eggs, right? We can, you know, have a certain affection for somebody sweet chocolate and butter and eggs. I think they're great pals to have around. And not really care about flourless chocolate cake. But we value them more intensely because they can be used to produce flourless chocolate cake. We value the eggs because we value the product that they are used to produce. We value the semi-sweet chocolate because they're used to produce flourless chocolate cake. And so value is imputed from the consumer good up to the next stage factors of production. The semi-sweet chocolate, the eggs and the butter. But then the butter manufacturer because he can get revenue from producing butter, he then imputes value to the raw milk, to the separator, to the machinery used to make the butter, et cetera, et cetera. And so the butter is valuable because the flourless chocolate cake is valuable. The eggs are valuable because the flourless chocolate cake is valuable. And then, of course, obviously other things that you can use to make or valuable too. And then eggs, of course, it makes it a little bit dicey or shall we say scrambled. Things that complicates matters, of course, eggs can be eaten just as consumer goods as well. Ask people or friends at the Waffle House. So value and income directionally move up the structure of production. Now those producers who use their money to invest in the purchase of factors of production, we call the capitalists. Those producers who use their money, their savings, and they invest in the purchase of capital goods, they're called the capitalists. So the capitalists are the ones that own various stages of capital goods. Now, as was pointed out earlier today, any act of production takes time. You may have heard this. And hence, any action is based on a speculation about the future state of the market. And so the fact that someone produces a flowerless chocolate cake is no guarantee it's a profitable venture. We don't live in the field of dreams, right? If you build it, they will come. If you produce it, they will buy it, right? It is not supplied, it does not create its own demand. People supply to satisfy the demand that they think will be there. That's what the entrepreneur does. Now, it's also important to understand, as Suda Shanoi liked to point out in her work, the structure of production is basically the other side of the division of labor coin. We talked about the fact that the division of labor must be coordinated by entrepreneurs. Just building a, producing a good doesn't mean that it's a wise activity. It's only a wise activity if the value of the consumer good is valued more than the sum of the value of the factors of production. So that means that the entire structure of production must be coordinated by somebody, and that somebody of course is the entrepreneurs, the ones who undertake production. Each producer must produce an anticipation of the sale of his product or her product. And any investment in the production is made in anticipation of a later sale to lower order producers and finally to consumers. And so entrepreneurs are important at every step of production, every stage in the production process. So we don't, we can't, again, we can't analytically, analytically it makes sense to talk about the production structure and how the higher order goods and lower goods are related to one another, but we do not want to forget that all of this activity in the actual real economy must be coordinated by entrepreneurs. Now, this entire complex structure of production is only made possible by the use of capital goods. If we did not use capital goods in the, in any production process, the production process would be very, very simple. It used to be land and labor and that's it. There would be no complex structure production. And so, and hence no flourless chocolate cake, which would be a very sad thing. And so the complex structures only made possible by the use of capital goods. Using capital goods, therefore, is very good. It's very productive. It's very helpful, but using capital goods require longer what Bombaver calls more roundabout production processes, right? In other words, if we're gonna make a flourless chocolate cake, we don't just set out and start doing it. We first have to produce the somebody sweet chocolate, the butter and the eggs. So we have to do these things first. For instance, if I want to make a flourless chocolate cake, if Groucho wants to make a flourless chocolate cake, he has to buy a mixer of some sort. He probably will deem it wise to have a mixer. And he can think, well, maybe I want to buy the standing mixer. Well, standing mixer's gonna cost approximately $500. And if he spends $500 on a mixer, he cannot spend that same $500 on something else, like a ping pong table, right? And so, if he wants to buy the standup mixer, the capital good that's gonna be useful in producing flourless chocolate cake, he has to forego the spending of $500 on the ping pong table. So we can use the mixer to aid in this future production of flourless chocolate cake only by being willing to forego consumption now, right? The fund from playing ping pong. So you have to make the age old choice, flourless chocolate cake or ping pong. And then Groucho says flourless chocolate cake. Now, you probably know by now that there's restriction of present consumption is called saving, right? So the restriction of consumption is saving. And then we take those savings and we direct saved resources to the formation and accumulation of capital good, that act is called investment, right? So saving and investment go together, right? They go together. People save, not just to not spend, they save to direct those savings to investment, to the accumulation of capital goods. And thereby increasing the capital value of their enterprise. Now, why do they do this? If accumulating capital goods requires saving, requires restriction of present consumption, that means, I mean, we're gonna put it off. I can't have it all now. Really, why would I wanna do this? Well, I do this because capital goods increase the productivity of land and labor. And it does so in two ways. The first way is that capital goods increase the productivity of goods we can produce without capital goods, right? We could, if we wanted to, try to whip all eight eggs with just our fingers, right? And we can move them really, really fast and we can even not just move our hands fast, but move our fingers as we're doing it to try to mimic and we could even do this, right? Now, this looks very silly and it is. But the point is, you could try to do it. Now, you can't, I've tried it. You can mix eggs up this way a little bit. But it's a lot better to use a stand mixer. A KitchenAid stand mixer is much more productive. One, you put the eight eggs in there and you hit the button and it just goes by itself. Think, well, that's, and it whips it a lot faster and you get it to the, sort of the mild frothyness that you need to have a really good fly with chocolate cake a lot quicker than if you used your hands. But on top of this, on top of this, since it's standing there and it's doing its thing, that frees you up to melt the semi-sweet chocolate and the butter together. And it's like, it basically increases, like doubles your productivity. So instead of having to whip the eggs first and then melt the chocolate and the butter together, you can start whipping the eggs and while you're whipping the eggs, you can at the same time melt the butter and the chocolate together. Doubling your productivity. So that's, this shows us that capital goods increases our productivity beyond what it would be without capital goods. There are certain goods we can produce without capital goods, but by having capital goods we're more productive. But secondly, and more importantly, capital goods allow people to produce goods that they otherwise would not be obtainable at all. Some goods can simply not be produced without capital goods. This is one of my favorite cartoons, right? Talking about the golden age, the age that the fish called the golden age before the hook, the pole, and the worm were even thought of. So before any fishing capital goods, all they could do was try to catch fish with their hands and people were relatively slow and they couldn't do that. And so the fish called it the golden age, right? Before capital goods existed for the fishermen. So Groucho could not catch fish or game at all by himself with just his labor in the land. He needs a pole, a hook, a bow, and an arrow, even just maybe like a lean-to that would allow him somehow to, and a trap to catch a little rabbit that he could take care of later. A little Haasenfeffer. And so capital goods increased the productivity by significantly allowing us to produce a veritable plethora of goods we simply could not produce at all without capital goods. Now, so the role of the capital good is to advance people in time towards their objective. If we want to make a fly with chocolate cake, utilizing capital goods allows us to do this more quickly. What keeps then people from investing more and more resources in capital goods, time preference. The fact that we prefer present ends to future ends. At some point people will value present good more than some amount of fly with chocolate cake in the future. We do have to consume something in order to survive after all. So time preference determines how willing people are to put off present consumption to save and invest. And the lower a person's time preference, the more saving and investment in capital they're willing to engage in. As a society, the lower the social rate of time preferences, the more willing people in that society will be to restrict consumption, save and invest. Now within the structure of production, there are a lot of choices that have to be made about capital goods. We can arrange capital goods and production in a more or less capital intensive process. Different combinations of factors can occur. We can make a fly with chocolate cake. For instance, using a fork, a whisk, a hand mixer, a stand mixer or this industrial strength mixer if you wanna make a lot of fly with chocolate cake. I've never really, I've used one of those once but not to make a fly with chocolate cake. What capital that the producer decides to use depends upon his preferences, depends upon his subjective understanding of the production process and what he's trying to engage in. And hence this becomes a choice variable. The producer makes a choice. Do I want to rely on a whisk or do I wanna use a stand mixer? Additionally, each factor, each capital good has a different degree of specificity. Springform pans I would say are more specific than eggs. There's a whole lot more uses for eggs versus a springform pan. And so those are decisions that the producer has to think about when he decides am I gonna commit money to investing in particular factors of production. Milk chocolate versus dark chocolate, right? There's a variety of chocolates. Which chocolate is the best to use for a fly with chocolate cake? The short answer is special dark. But milk chocolate has its own uses as well. That becomes a choice variable by the producer. The durability of the capital good also needs to be taken into account. So the durability of the capital good also has to be chosen. All capital goods are perishable, right? No capital goods last forever. And you know that the rate at which capital goods are used up, you probably know that we call that depreciation. And each particular capital good has a different rate of depreciation. The eggs used to make the fly with chocolate cake are used up just like that. The minute they go into the bowl, they get mixed up. You can't extract them, right? You can't make the fly with chocolate cake Oh, let's extract the eggs and use them again. No, they're used up, right? The oven, however, in which the fly with chocolate cake is baked can last maybe for 15, 20, 25 years. Who knows? Here we have two choices of spatula. A flimsy spatula on the left and more sturdy silicone spatula on the right. Which capital good we use depends upon the choices and the desires of the producer. It's also a choice variable. Now after a capital good is wears out, we'd be back where we started if we did not save and invest further in maintaining our stock of capital goods over time. So each producer in the production process that has the option of either adding to his capital, maintaining his capital or just consuming his capital and maintaining his capital, keeping his capital available at the same level or accumulating capital requires a certain threshold of saving. If we want to consume capital, we have to save it all. Once we accumulate a certain amount of capital we start using to make fly with chocolate cake but if we don't save anymore after that fact, little by little our capital goods start to wear out and we don't replace them and then we'll be back to perdition. Now the entire economic order consists of one integrated production structure and this understanding has implications for macroeconomics and this is where I'm gonna have to leave with this slide. The understanding of capital and capital structure is what allows us to see major differences between an Austrian understanding of macroeconomics and the approach of so-called modern macroeconomics. Both the Keynesian macroeconomics and neoclassical and monetarist macroeconomics involves massive aggregation which obscures all of the insights of the structure production about the specificity and the heterogeneous nature of the capital goods. The capital goods are heterogeneous with different uses, specificity and durability and they must be used in the right place at the right time in the right combination of other complementary factors to be productive. All of that is abstracted if we take the Keynesian approach where all investment is just the big eye or the neoclassical approach where capital is just the K. All of the insights of Austrian capital theory are lost in these type of homogenous aggregates and the homogenous aggregate approach fools people into thinking well if this is the case you just need to stimulate spending on these things. If we just stimulate spending if we just increase the amount of money that we call investment or capital then we're all better off. We're all better off and so we can do that. We can do that but if we do that by simply inflating the money supply so we can stimulate more investment without actually voluntary saving let's say bad things will happen and you will hear about that in the lecture on the business cycle.