 Our topic this afternoon is the Austrian theory of the business cycle, and this is one of those things that sometimes Austrians are accused of being broken records or broken clocks. The punchline has already been given away to you that this is started by artificial credit expansion. And so like these people say like you Austrians you're always saying that there's a recession around the corner. It's always coming up. And of course our response is well yeah you keep on inflating. You keep on artificially increasing credit. So it's the sort of thing that it's always in the news. It's always relevant. And I've got some more examples here of that. There's Janet Yellen is being very squishy about the definition of recession. I always want to avoid the bad press that's associated with that. So Yellen is saying a common definition of recession is two negative quarters of GDP growth and then less than a minute later she's saying, but even if we have that, even if we have two quarters of negative GDP growth, that's not a recession. So it seems very squishy. And then of course our current Fed Chair Jerome Powell is saying that or at least hoping to achieve this immaculate disinflation, trying to achieve the soft landing with the increase in interest rates. And of course while these things are being put out there in the media, we had the New York Fed posting graphs that look like this that based on the changes in the yield curve, they have a higher probability of recession based on this measure than compared to in 2008 and 2007. So there's a lot of conflicting stories being told and so that's one reason why it's good to get a good understanding of what causes business cycles, where they come from. So I hope you noticed that the week is structured in a very intentional sort of way. So we've got the basics down. We've already heard lectures from professors Herbner and Solerino and Patrick Newman and others about the operation of the market economy, about how we can economize our use of resources through the use of market prices and economic calculation. So we can arrange production in such a way that we anticipate to attain our most urgent desires in the future in the form of our with consumer goods. And we've talked through the operations of this and how it works and it's very harmonious. In fact, Professor Rittenauer said that it's beautiful and indeed it is. So it's important to note here when we talk about business cycles, we're not talking about something that is inherent in the market economy. This is not something that is built in. This is something that happens as a result of an intervention. And so Austrians have a very deep and rich theory of interventionism, namely what happens when the government sticks its finger in the market economy and messes things up. So interventionism is all about what happens when voluntary actions and exchanges are prohibited or distorted or inhibited by the state. And so the business cycle theory fits in that category. It's worth noting here that business cycle theory is in that section of man economy and state. So Murray Rothbard, first he set up the workings of the market economy and then he talked about all the different types of ways that the government can intervene. And the business cycles are in that section. So Mises has this analogy that I find very fruitful, very helpful to understand what is happening in a business cycle. And it's based on this master builder. It's based on this guy who's building a house. And I've taken the opportunity to illustrate this very short story that Mises, I didn't illustrate it myself, but I wrote a story that goes along with it and hired somebody to illustrate with beautiful illustrations. But Mises' analogy goes like this. The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He over-sizes the groundwork in the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder's fault is not over-investment but an inappropriate employment of the means at his disposal. So this is not some hydraulic theory. This is not all of a sudden there's too much consumption, there's too much investment. All of a sudden there's these misallocations of funds going in one direction versus another direction that needs to be corrected if we just tweak the right policy variables. In the Austrian understanding of business cycles, it's real. It's based on specific capital goods being made that apply to certain lines of production that don't apply to different lines of production. And that mistakes are made. It's not just too much of something. It's not just over-investment. In fact, there is no over-investment. It's mal-investment. It's creating the wrong sorts of things. A similar analogy that I sometimes use is with Crusoe. Obviously, Austrians always go back to Crusoe. So Crusoe is alone on his island and he wakes up one morning and he notices some mushrooms growing outside of his little dwelling. And he consumes some of these mushrooms. And the effect of these mushrooms is that it causes him to hallucinate. It causes him to look at his supply of resources, maybe the supply of his consumption goods, berries and coconuts that he's picked over time. And the nature of the hallucination is such that it causes him to perceive that they are 10 or 100 times more than actually exists. So there's way more saved resources than he actually has. And you can imagine that this observation, it's a hallucination, but this observation would cause Crusoe to undertake different sorts of production projects. He would change the sorts of things that he produces. He would not be building a rudimentary net for fishing, for example. He might see this huge stock of consumption goods and think, since I had this large stock of consumption goods, I can embark on a very long production project. I can start building myself a mansion and get rid of the shack that I have. So I can perhaps start building a cruise ship depending on how erroneous the hallucinations are. And so obviously over time the effect of the mushrooms wears off and he realizes that his stock of saved resources has actually dwindled. It's gotten smaller because he's been consuming the coconuts and berries. He's been using the tools that he has. While he's been pursuing these wrong lines of production, the lines of production that were started based on the hallucinations. So he realizes this mistake and so he has to undo it. He has to fix the mistakes that he made during this boom period, this artificial boom. Nevertheless, if you asked Crusoe while he was hallucinating, he would say, yeah, my economy is doing great. Yeah, there's lots of consumption. I've got lots of projects going on. It seems like everything is on the up and up. But of course, once he realizes the mistakes, he realizes he's in a worse position than before. And so this is just sort of a silly way of describing what happens to the macroeconomy when credit is artificially expanded. Okay, let's get some definitions out of the way. A lot of discussion with students about business cycles will get into, will this cause a business cycle? Will this cause a business cycle? And so it's important to distinguish what we actually mean by a business cycle. And so one thing that we can rule out is we don't mean regular business fluctuations. We don't mean the way that the economy is constantly changing due to new data or entrepreneurs are changing their anticipations of the future. Or consumers have changed their preferences or a new fad comes by. So we can see sectoral shifts. We can see differences between markets as these conditions change. But those are just regular, everyday business fluctuations. Austrians have a theory for this is the theory of entrepreneurship. So entrepreneurs have this function of anticipating future market conditions and consumer demands so they can arrange the factors of production today so that those consumer demands are met so that they can profit as a result of that. So we have a theory for that when we talk about business cycle theory, we're talking about something different and bigger. Okay, so those are business fluctuations and entrepreneurs have the task of dealing with and anticipating these changes. What we mean by a business cycle, on the other hand, is a general boom and a general bust. And you can see the contours of this and the data. So you don't really need to know exactly what this is, but this is the unemployment rate. My point is that you can see over a long enough time span, you can see the general trends, the ups and downs. You can see the stock market go up and down. You can see home price indices go up and down. You can see employment figures, income figures, consumption, investment figures, all these things. They have this wave-like feature to them and that's what we're trying to explain. It's that observation of the general boom, so economy-wide, the price of the entire economy, and economy-wide bust as well. That's what we're talking about. One thing that we notice in the data, speaking of data, is that in the bust phase, when things are going down, it appears that capital-good industries have wider, bigger fluctuations than consumer-good industries. And you can see this with the 2008 crisis and ensuing recession. You can see on the left, there's the consumer price index versus the producer price index on the right-hand side. And you can just sort of see this. You can use one of my professors used to call eyeball metrics. You can just sort of see that, yeah, there's greater variation. There's more fluctuation in the capital-goods industries. So this is one thing that Rothbard points out is something that our business cycle theory would have to explain, as well as the fact that it's a general boom and a general bust. Another thing that we have to explain is the cluster of entrepreneurial errors. So at the beginning, when I was talking about the fact that we're not talking about business fluctuations, we already have a theory for that. It's just entrepreneurship, or we talk about how entrepreneurs anticipate the future. One thing that we notice in a business cycle, however, is that it appears that the mass of entrepreneurs, all of them, were making the same kind of mistake. So it seems like they were all making mistakes at the same time, and there's not really, at least it's not immediately apparent that there was something causing that. Like there was some sort of mass psychosis, something exogenous that was changed. It turns out that there is, but we'll get to that in a second. So it appears that they're all making the same sorts of mistakes in the past, and we don't really have a reason apart from business cycle theory for what would be generating all of those errors, the cluster of errors to happen at the same time. So our business cycle theory has to take into account all of these things. So we had to have the stages or the boom followed by the bust. We had to have some sort of explanation of the cluster of entrepreneurial errors, and we also need to explain the more dramatic fluctuations in the capital goods industries as opposed to the consumer goods industries. Rothbard points out, by the way, when I reference Rothbard here, I'm referring to what I think is the most excellent overview of business cycle theory, which is in Chapter 1 of America's Great Depression. So Rothbard says that we should look at money and credit as suspect areas. It seems like these areas have far-reaching influences throughout the economy, and they have the potential for causing these sorts of observations. It seems like they might help us explain a cluster of errors if entrepreneurs are looking at interest rates, for example, or why there might be big changes in capital goods industries, if there's big changes in how production is being undertaken as a result of a change in interest rates. So we'll look at those areas as suspect areas. Okay, so now we're getting closer to being able to explain the business cycle, but as Hayek mentioned, we should first figure out how things work correctly. So how is it that we get sustainable economic growth, and then we can contrast it with unsustainable economic growth or the boom-bust cycle. And so to get there, first we'll recap the last lecture very briefly, the structure of production, because that plays a major role here, and also a time preference and interest from this morning. Then we'll be able to explain where sustainable growth comes from, and then we can contrast it with unsustainable growth, as I said. And what we'll notice is that during the boom, what explains the necessity of the correction, the necessity of the recession is the fact that factors are mal-invested. We have mal-investment, and also we have over-consumption. We have capital consumption going on during the boom phase, and then we'll conclude after that. So instead of flourless chocolate cake, I use ham sandwiches. And I like flourless chocolate cake, but the example that I've chosen to use is a ham sandwich. So I want you to imagine with me the case of a deli producing a ham sandwich, and we'll have to think through all of the prerequisites. What are the things that have to happen before the ham sandwich can appear? And in class, I'll usually go through this very slowly and ask them to offer these sorts of things, but since we're crunched for time and you just had this lecture, we can do it pretty quickly. But the first few things that we need to make a ham sandwich are ham, bread, lettuce, tomato, some condiments like mayo, a plate, tables and chairs, but you also need the natural resources and space. You need some labor to put it all together. And of course, this does not exhaust the explanation of where ham sandwiches come from, because now we have to explain where these intermediate factors came from. The land and labor are originary factors, so we'll leave those as dead ends. But for the ham that comes from a butcher, the bread comes from a bakery, and all of these things have structures of production behind them. And as you'll see, this gets very complex. A lot of things go into the construction of the capital goods that end up making other capital goods, that end up making other capital goods that make the ham sandwich. And as we get bigger and broader, you'll notice it sort of looks like a conspiracy theorist chart. Something that looks like this. And so Austrians have taken this very chaotic looking sort of mess, and we've decided that it's not tractable. It's not something that we can work with. And so instead of leaving it as this big network, this big mess, we've tried to make sense of it. And the way that we make sense of it is by considering two different dimensions. So we think about time, production time. So it takes time for us to start with natural resources and our own labor to make capital goods and then other capital goods, intermediate products along the way to making the consumption good. And another dimension is spending. So we can think about the prices and the quantities of these factors that have been purchased. And so if we go back to our original ham sandwich network here, we can rearrange all of this according to when it happens. So from left to right, because we're in western civilization, we've got stuff that was first, stuff that has to happen first with the mining of the raw materials, the metals and everything, the trees that are cut down. And then we get the intermediate capital goods, like the furniture manufacturers, the tools that are there, the refrigerator and the oven. And then finally on the right-hand side, we have the consumer goods sandwich. You might realize if you turn your head sideways that this looks a lot like figure 32 in man economy and state. So here we, it's just a description of how capital goods, land and labor are combined through a process of production to make the final consumption good. Okay, so this shows the time dimension, but what about the spending dimension? Well, it turns out if you just stack up the dollars that are spent in each one of these stages, conceptually we can think about it happening in stages, then we get a triangle-shaped figure that looks like this. And so this is your very typical, well-known Hayekian triangle, for example, where the spending in the first stage is counted on the very left-hand side and the spending in the second stage. And one thing that we know that as our economy approaches the evenly rotating economy or the ERE for short, we know that the only remaining price spread between the factors in the stages is interest. So all profit goes to zero, there's no more uncertainty. All we have is time and time preference. So, and in that case, there would still be this this utility of waiting and therefore there would be the discounting of the factors earlier in the stages of production compared to the future good, the consumer good at the very end. Okay, so what's the point of all this? How is this going to tie in? Well, it means that production and entrepreneurship, the decisions that entrepreneurs make, is interest rate sensitive, or actually probably a better way of saying is that this is the primary time market. This is where entrepreneurs are making their inter-temporal decisions. They're deciding to forego present consumption so that they can purchase these factors of production in anticipation of selling some product at a profit and reap the difference so they get the difference. So speaking of time preference, we'll need to get a quick conception of loan markets before we proceed. So although production is the main time market that pervades the entire economy, we can see a subsidiary or secondary time market in the form of people trading present and future money or present money for the promise of future payments. So we have the law of time preference, which is that we prefer a given satisfaction sooner as opposed to later. As Professor Herbiner said, we like to shorten the period of production, all else hold equal. And even though we are all subject to this law, like we all have this preference for the present over the future, we have this preference to varying degrees. So we prefer the present to different degrees than other people. And so here I have an example of David and Jeff. They have, these are preference rankings that they have for different amounts of money. The F stands for future and the P stands for present. And in this case, David can give a promise to Jeff. Say I'll give you $110, excuse me, $1,100 in the future in exchange for $1,000 in the present. And so they agree to this. And what emerges as a result is this loan rate, this price between the borrower and the lender. So we have a supply of loans here and a demand for loans. And we get a market clearing interest rate. We get a certain quantity of loans that are transacted. Importantly, one important element of this, part of the demand for loans is going to be entrepreneurs who have these different ideas of production projects that they could embark on to provide consumer goods. So you can imagine that there are producers who want to start this line of production, but they can't because they don't have all the capital. They don't have all of the money that they need now to start the production project and so they can borrow. And so suppose they anticipate that by producing some, by producing a ham sandwich, they would have a 10% return and they see on loan markets that people are willing to give these business loans at 5%. And so the person could say, well, there's a chance for me to borrow. I think I said that, no, I said they're right. So I could borrow at 5% and then combine these factors to produce a ham sandwich, sell it, and I get, although I had to pay down the loan, I had to pay the 5%, I anticipate getting the 10% and so I get the spread, I get that 5% difference. So on that demand curve there, we can imagine that there are businesses, there are entrepreneurs who want to acquire the funds so that they can purchase factors of production. So as we've seen, there's good intertemporal coordination in the market. And we noticed that entrepreneurs' plans are limited by real saving. So in order for that entrepreneur to acquire that loan, somebody has to be willing to part with the money in the first place. And by parting with the money, they're parting with the ability to spend the money on consumption goods, for example. So when the saver slash lender has decided, I'm not going to consume today, they are making available funds and resources for the entrepreneur to pursue different production projects. So just like Caruso is limited by his own stock of saved resources, entrepreneurs in the market economy are also constrained. They're constrained by the set of resources that have been set aside, by people's own saving and consumption decisions. The only projects that are deemed profitable are the ones in which the discounted revenues exceed the cost of production. So entrepreneurs have to do this calculation. They have to compare the factors and the product, the consumer good that they'll produce, and not only that, but the revenue that they will achieve by producing that consumer good. But then since there's this time separation, they have to discount it. And so they're going to discount it by the interest rate. So the social rate of time preference that emerges in the market, they will use that as an aid in their calculation of deciding, well, I'm going to discount this factor good by that same amount so that I can appropriately align and spend the right amount on the factors of production. So they'll only do that if those discounted revenues exceed the cost of production. So you can start to see how what might happen if that discount changes from some other source. Entrepreneurs do not undertake projects that would take too long. And the too long would mean that there are insufficient resources to complete them or there are more urgently desired projects. And one other point here is that the rate of interest tends to be uniform between different lines of production. And this, you can see this, it's pretty clear it's obvious because if there were some excessive rate of return in one line of production, then entrepreneurs would flock to that. They would bid up the prices of the factors in that line where there are higher rates of return and in so doing diminish the revenues. So costs and revenues would come closer together in that higher rate of return line. And in so doing, they would actually cause the rate of return in the lines of production they left to increase. So because of this, the interest rate between the different lines of production and between production and credit markets will tend to equalize because of this. So what's the... What's the... What do we get as a result of this? What do we get as a result of the intertemporal coordination here? Well, because saving and increase in saving frees up resources for production, it means that we can increase our production. It means that we can produce more. And this happens through the work of credit markets. Saved funds are made available to entrepreneurs to purchase additional factors of production. And the entrepreneurs see the increased availability of funds and they are able to take that and appropriately purchase additional resources since the act of saving meant a foregoing of consumption. So now there actually are more resources available for production. And entrepreneurs can take that and they can start the new and longer lines of production. One reason why it would be longer is because they're going to be creating new capital goods. So in the case of Crusoe, an additional stock of consumption goods would allow him to produce new capital goods that would allow him to increase his productivity later. So over the course of time, saves up enough coconuts and berries to last him through. The number of days it would take him to make a fishing net. And so this isn't a lengthening of the structure of production because he now has to, it's more round about. He has to make the capital good first and then he can use the net for production for fishing. So those new longer lines of production are started. And importantly, this is in line with consumer's time preferences. The additional investment can go toward increased productivity and this is in excess of what's required for just maintaining or replacing the existing capital stock. And this gives us an expanded set of resources. That is, we have economic growth. So this is the Austrian theory of economic growth. Where does economic growth come from? Well, you have to save first, invest in production, create new capital goods. You have to first set aside the resources to do so. And then you have increased productivity. And that increased productivity in the future can go towards additional consumption and additional production. So productivity in a sense begets more productivity or at least the opportunity to be more productive. It's a nice story, right? But what happens when things go wrong? What happens when we have the government sticking its finger into the workings of the market economy? What happens when we have a central bank that's expanding the money supply or very importantly, from Mises' original telling of the business cycle story, what happens when through the operations of fractional reserve banks we have an increase in the supply of credit beyond real savings? So this is what we call an artificial credit expansion. It's artificial because it doesn't originate from a change in social time preferences. It doesn't originate from consumers deciding to save more. So nobody has decided that they're going to part with present consumption and set aside resources. What happens is they just have this increase in the supply of loanable funds, the increase in credit that is not associated with people deciding to save more. So that's why we call it artificial. It's like fake savings, fake credit. So new money, newly created money, enters the economy through credit markets. And this can happen as Dr. Patrick Newman noted. This can happen through the central banks' open market operations and then through the extra peer meeting with the fractional reserve banks. And it can also just occur within the fractional reserve banking system independent of any action by the central bank. So the new money enters the economy through credit markets and represents an increased supply of loanable funds. So very important, this is a special application of Cantillon effects, which have been mentioned this week. So Cantillon effects refer to the unevenness of an increase in the money supply, how relative prices change and it depends on where the new money originates. Where does it enter the economy? And so since the money is entering the economy through credit markets it means that it's going to have distorted effects. It means that there are going to be changes in relative prices. There are going to be all sorts of changes as the money ripples away from the origin, from the part of the economy where it enters. So the interest rate falls. This represents an increase in the supply of loanable funds. But once again it's important to remember that it's an increase in the supply of loanable funds that's not based on a real increase in savings. So this is not people deciding to save more. This is an increase in the supply of loanable funds that's just based on the whims of central bankers or a change in the operations of banks. So the interest rate falls. It's not changed in time preference. And at the lower interest rate saving actually decreases. So at the lower interest rate it encourages people to go out and spend more on consumption goods. Consumption and borrowing increase. Firms take the new funds and invest in new longer lines of production. So entrepreneurs respond as if the increased supply of loanable funds is real. As if it's based on real savings. So from their perspective they see the new funds available in credit markets. They see the lower interest rate and they respond as if there had been this increase in savings like we saw in the sustainable growth slide. So, but this is not sustainable. This is not something that can persist. Entrepreneurs take the money and they use it to bid up the prices of factors of production and also change which lines of production they choose. So, despite this language that I'm using of dislocations and things are off, this actually feels great. And in fact if you ask any journalist they would say that the economy is booming. We're doing great wages are increasing, employment increases, consumption increases, investment spending increases, stock prices are up, incomes are up. It's a general boom and everybody's happy. Unfortunately during this boom phase the consumption and investment that's happening is counter to what would have happened in the unhampered market. It's different and it's in a way that actually hampers our future growth potential. So two things in general happen. We have overconsumption and malinvestment. Overconsumption happens when new profits and incomes and the higher net worth calculations of individuals encourage increased consumption. So people see that their wages are up, their incomes are up. They also see the lower interest rate and they see the borrowing is for consumer credit is easier. And so there's an increase in consumption and so real consumption increases during the boom. Resources move from early to late stages due to the increased consumption. So we have capital consumption. This is not overinvestment. What we actually have is overconsumption, not overinvestment. I'm citing Professor Salerno's great article, a reformulation of Austrian business cycle theory in light of the financial crisis published in 2012. In that article it's great because he really does single out and emphasize the importance of the overconsumption aspect of the boom. During the boom we also have malinvestment. So malinvestment is when resources are misallocated due to inflation and falsified interest rates. Very importantly, specific capital goods, meaning capital goods that are intended and designed to go along with particular lines of production and aren't as applicable in other lines of production are created for those new lines that are chosen. So it's not the case where we just create too much capital. It's not the case where we spin out capital goods that are helpful for us in producing, but then when the bust comes we just got to quickly move them over to different lines of production. The fact that specific capital goods are created during the boom means that there's going to be some pain. It means that there's going to be some struggle in finding new productive and profitable ways to use those capital goods. And here if you remember at the beginning we were listing out the things that we had to explain with our business cycle theory. This is one reason why we have more dramatic fluctuations in capital goods industries as opposed to consumer goods industries. It's because labor is relatively nonspecific. So there is some specificity with labor, especially as skills are learned, but humans are relatively shaped similar, and we can all press buttons, we can all pick things up, that sort of thing. And so in terms of the way labor is applied in production, it's much less specific compared to the capital goods that we build. So think about a hammer. A hammer is really only good at one sort of action, one sort of thing, but human beings in the effort that we apply in production is generally applicable. Okay, so we have malinvestment. The credit expansion does not represent an increase in real resources. We can't fake our way, we can't inflate our way to making it feel like we have more stuff. Not an increase in real resources, so factors of production become increasingly scarce. Once the errors are realized, and usually the way this happens is the price inflation that happens as a result of the increase in money is politically unpopular, pressures the Fed to cause interest rates to come up or allow interest rates to come up is a better way to say it. And this causes everybody to, you know, to pause what they're doing and reevaluate the production projects that they've started and reevaluate the profitability and productivity of everything that they're doing. So the profits, what they expected to be profits turn into realized losses as now they don't have this stream of funds coming from either the banking system or the central bank to keep the bad projects, the malinvestments alive. So projects are abandoned, and that's what happens during the bust. So here in this case I've got Ludwig the builder over here. He's realized that he's run out of resources and he's just sort of sitting, he's looking at his blueprints and they haven't completed the house. Notice the size of the house. That'll become important on the next slide. But during the bust firms liquidate malinvested capital. So they have to sell the assets that they have for the price that they can get. And much of the time it's for a much lower price than they would like. So wages decrease as the demand for labor decreases. Workers are laid off, but due to the relative non-specificity of labor, wages don't fall as much as capital goods. So like I said, the specificity of capital goods explains that feature of the boom bust cycle. So notice here Ludwig the builder has decided to rearrange the goods that he has, rearrange the resources that he does have. He has to dismantle what he put together, but he comes up with a new plan and builds a smaller house. And this is what happens during the healthy correction phase. This is what happens during the recession. So during the bust, during the recession, prices readjust to reflect consumer demands, interest rates go back to what the market would have by their time preferences. And it's very important to remember that the bust is a correction phase as people try to find profitable uses for factors of production. This is a very common error that we see broadly, especially among politicians, that the recession is something that has to be fixed. The recession is something that has to be inhibited, that we have to keep all the economic activity that existed during the boom afloat. We have to keep it alive with more credit expansion, with more government spending. But if you have a proper view of what's happening during the bust, which is we're fixing the mistakes that were made in the past, then you realize, well, this is a healthy, painful, but still healthy process for us to go through. Anything that we do to try to inhibit that or say the recession is a bad thing that needs to be fixed means that we're going to inhibit that healthy correction. Okay, so let's contrast this theory to other theories very quickly. In the Keynesian view, the bust comes from nowhere. There's all of a sudden collapse in investment spending that's viewed as very unstable. And because the total amount of spending is correlated with the full employment of resources, it means that if we have this collapse in spending, this collapse in aggregate demand, it means that now we don't have the right amount of spending to employ all the resources. So we get these idle resources. And one reason why we have the idle resources is that prices don't change. So we have so-called sticky wages. We have prices not adjusting to the change in total spending. And so the only hope, since this is something that's inherent to the market economy, it's just inherent to investment spending, our only hope is government. So we have to have the government step in and increase this G. So I falls or C falls. And so we have to offset it with a big increase in G. Or alternatively, we could use the monetary authority. We could look to the central bank and say, please increase the money supply, lower interest rates so that now consumption and investment will get kickstarted again. So now we can use monetary policy to generate the consumption and investment spending that we've noticed has fallen. So their only hope is government. Only an institution outside the market can boost spending and demand back up to the point where we have full employment. You'll notice that the monetarists have a similar story, very similar. So a lot of times they pretend that they're enemies, but when you look closely at the stories that they're telling, it's very similar. So in the monetarist case, like if you listen to Milton Friedman talk about the Great Depression, there's this sudden decrease in M's. There's like a banking crisis that causes a bunch of banks to fail. And so the money supply contracts. And due to sticky prices, sticky wages, we have underemployed resources or idle resources. And what we need to stabilize the economy, what we need to either stabilize prices or nominal expenditures, is we need the monetary authority to step in and increase and prevent money supply from collapsing so that we can stabilize these aspects of the economy. And depending on the monitors do you ask, they'll say either the price level or the inflation rate and nominal expenditures. So like I said, they're telling very similar stories. Okay, so what are the lessons learned here? One lesson is that if you look at highly aggregated data, you're going to misdiagnose the problem and you're going to give bad solutions. So one difference as you saw between the Keynesian view and the Austrian view is the way we understand production. So Austrian's view production is happening in time. It's very complex. We make specific capital goods. So capital is heterogeneous. And so if you lump it all together in the form of I or in the form of the K and neoclassical production functions, it means that you're missing out on the essential problems. You're missing out on seeing what's actually happening during the artificial boom. And so you misdiagnose the problem. And then you also give bad solutions. So like in the case of the monitorists, their solution is an increase in the money supply. But as we know as Austrians, this actually just paves the way for another boom bus cycle. This actually triggers another boom bus cycle or would at least delay the correction phase that's currently underway if that increase in the money supply happens during the bus. Or in the case of Keynesians, you just say, well, there's less spending. Therefore, we need more spending. So that's another misdiagnosis and bad solution. Another thing that we notice is that in order to understand what's going on, it's good to see how the economy can work. So you must first understand how things could ever go right before you can ask what might go wrong. I flipped the quote around accidentally, but you get the picture. So we looked at where sustainable growth comes from. It comes from real savings. It comes from the setting aside of real resources for production and lengthening production with more productive capital goods. So sustainable production is based on a real allocation of resources away from consumption. It comes from real savings and unsustainable booms are caused by artificial increases in credit. Recessions are the time when we fix the mistakes of the past. And I have just a couple of minutes left here to review some recommended readings. So this is an order of maybe beginner to advanced. I say that, but I mean Meltdown is a great book. Even like an advanced scholar, a PhD should or could read Meltdown and gain from it. So Meltdown by Tom Woods was one of the first books that I ever read. I think I read it after economics in one lesson. Not one of the first books I ever read, but, you know. Seespot run. Hey, here's Meltdown. So it's a great introduction to business cycle theory and he applies it to the great recession and financial crisis that we saw in 2008. A lot of this presentation is based on Rothbard's presentation of business cycles in America's Great Depression. To this day, I think that's the best, clearest, simplest exposition of business cycle theory. So you should definitely check out chapter one and then after you read chapter one, read the rest of the book as well. Mises has the causes of the economic crisis. I mentioned Salerno's article, the reformulation of Austrian business cycle theory. Dr. Roger Garrison has a famous book called Time and Money, which I think was recommended by a previous presenter. And here he has a graphical exposition. So he uses the production possibilities frontier in the loanable funds market and the structure of production, all working together. And it's pedagogically, it's beautiful. You see all the graphs working together and it was actually his presentation of this that first interested me in studying economics. So it was actually upstairs where he presented that. And then finally, for advanced readers, I would definitely recommend seeing Mises's original presentation of business cycle theory in the theory of money and credit. So thank you very much.