 So, our final speaker this morning is also affiliated with Mises Institute, Dr. Peter Klein. He is a professor at the University of Missouri, so SEC at least. His wife, however, I believe, is an Auburn grad, and Peter did used to teach at UGA, so he's got that going for him. He's also an author and an expert in the area of applied economics in the sense of business and entrepreneurs, especially small business. So, he's an excellent resource in that sense, and so now I introduce Peter Klein. Well, hi there. Danny did a great job setting me up by talking about some of the harms caused by inflation to consumers, to savers, also to investors, and to businesses. And I want to play on that theme a little bit more by talking specifically about some costs of inflation on businesses and on entrepreneurs. Let's start by talking about what entrepreneurs are and what entrepreneurs do. Entrepreneurs are the people who produce things, right? The stuff that we have around us just looking out in the room. I see lots of electronic gizmos and gadgets and notebooks and water bottles. Of course, we have this great facility here at the Institute. We have the technology that allows us to record these lectures and broadcast them all over the world. All that great stuff that we use, all those great things that we consume, they don't just appear by magic, right? They don't just appear out of nowhere. And in a modern advanced industrial economy, it's not like Tom Hanks stranded on an island in the movie Castaway where he could just reach up and grab a coconut and start drinking it. Or catch a fish with his bare hands and start eating it, right? Producing these complicated things is itself complicated. It takes a lot of time. It takes a lot of foresight. It takes planning. It takes effort, right? Entrepreneurs are the people who coordinate those processes of producing stuff. In doing so, entrepreneurs bear a lot of uncertainty, right? It takes time to produce stuff and you got to get started and make some commitments early on before you know for sure how things are going to turn out, right? Whether the end result of your productive activities is exactly what you hoped it would be and if you're trying to sell it on the market, whether or not people will like it, whether people will buy it, whether you'll make money like you hope to make, right? So entrepreneurs earn profits, but they also bear losses, right? In the popular culture, in the media, among government officials, people think of entrepreneurs as these high-flying, wealthy people. They're making lots of money. They're flying the private jets that Danny was talking about. If you've seen that movie, hopefully you guys haven't seen it because I think it's rated R, but The Wolf of Wall Street. That's kind of what people think entrepreneurs are like and what entrepreneurs do. And some entrepreneurs, of course, do make lots of money. The average entrepreneur doesn't make much money at all and lots of entrepreneurs lose large amounts of money. Because as I said, when you start a lengthy, difficult, time-consuming, intensive process, you don't always know when you start, whether it's going to work out the way you hoped. Some of you students maybe have decided to write a term paper on a particular topic and you spent many hours, well, I was about to say in the library, but I should say on Wikipedia, doing background research and you put a lot of effort into writing the thing and maybe you weren't happy with it when you were done. Or maybe you were happy with it, but your teachers or parents were not quite so happy with it and you didn't get the grade that you anticipated. Any activity that involves long-term planning and upfront investment of time and energy brings uncertainty with it, right? You don't know for sure that you're going to get the result that you desired. And that's a large part of what entrepreneurs do. They bear these uncertainties in the economy. Let me go through an example to illustrate this in a little bit more detail. Here's a beautiful iPhone 5, I think it's an iPhone 5C. And some of you, if you're a technology nerd, you might know that when a new gadget or gizmo comes out, a lot of techies like to kind of take it apart and break it down. They do what's called a tear down and you can find websites. I mean, I guess they're actually ripping somebody's iPhone apart. But where you can read about this, you can find out what's inside your iPhone. And more interestingly, how much does all that stuff cost? How much does it cost Apple to get all this stuff, right? So you've got the iPhone itself. You can take it apart and you can get the screen and there's the battery and here's the circuit boards and some of the equipment that goes inside it. But of course, iPhone batteries don't grow on trees either. They have to be produced. And so you could trace the inputs or the components to an iPhone back to other products that are used to make them, right? I mean, there's plastic and some sheets of rubber and the top left. Those are crystals of silicon, right? So silicon and plastic and rubber and other metals and other components and human labor and assembly machines and so forth are combined to make iPhones. But even those inputs themselves can be traced even farther back, right? I mean, plastic, most plastic that we use is ultimately made from petroleum, right? So it's petroleum that's dug out of the ground and that's used to make the plastic. And of course, there are machines and technology and labor and effort that goes into digging, extracting petroleum from the ground and so forth. But you can see that production is a complicated multi-stage process involving lots of people, lots of intermediate components until you get to the final thing that people want to consume, right? People don't want to consume sheets of rubber. I mean, maybe a few weirdos do. But in general, people don't want to consume sheets of rubber. They want to consume iPhones and iPhone cases and so forth. So it's how we get from the things at the earlier stages of production process to the final goods and services that we're really interested in. Now, one of the things that these teardown experts do is they try to figure out, OK, how much does it cost Apple to get each one of these components? And then a company that makes the batteries, they might try to figure out how much does it cost to make that battery and so forth. I found some data. It's completely 100% reliable because I found it on the internet for the iPhone 5 of how much the different components cost. So this is some journalist on some website. I don't know where they get these numbers exactly. But they figured out that here are the major components of the iPhone 5. There's the memory, the display and touch screen, the processor, the sensors and so forth. You can go on down the list and they try to figure out, you know, if you were to buy an iPhone 5 display and touch screen just by itself on the market, maybe you get from eBay or something, you know, you'd pay $44 for it. And you could get the camera, the cameras that go into an iPhone for 18 bucks and you could get the cellular radio for 34 bucks and so on. Right? So you add all that up. And according to this estimate, you know, it was $226.85 of materials. But there's also some research and development expense that they try to compute. There's some administrative expense and cost to write for the software and so on. They added on some extra for that. And so they came up with $288.03 as Apple's cost for the iPhone 5. Now, part of the reason that journalists and other techies like to go through this exercise is because they want to do what? They want to complain that an iPhone is too expensive, right? So if you buy an iPhone 5 off contract, right, not subsidized by Verizon or AT&T, I think you would pay about $650, you know, an unlocked iPhone with no service agreement. And so you think, wow, $650 minus $288, that's a lot of money going into Apple's pocket, right? It looks like Apple is making a big profit on the sale of these iPhones. And, you know, maybe you think that's terrible and Apple shouldn't do that or whatever. The more thoughtful writers will point out that, you know, just looking at the gross profit margin per iPhone is not a very useful or reliable way to see how Apple is doing overall, to judge Apple's overall financial condition and exactly how profitable is it to manufacture iPhones. I mean, there are other expenses that need to be taken into account. I mean, there's lots of overhead setting up factories, hiring workers, you know, establishing a management team and policies and procedures, all of the things that are involved in running a large company and creating a large company, right? Those costs have to be factored in as well. There are certain fees that Apple pays to other parties, carriers. There's advertising and there's lots of other expenses we would want to figure in there. Not to mention Apple has to pay taxes to the federal government and because we live in a society in which the federal government can shut your business down, if they don't like you, businesses often pay what some people would call bribes, but other people call lobbying expenditures. And so, you know, there are a lot of other costs that would need to be taken into account to try to figure out what is Apple's actual net profit margin. But what's really important for our purposes today is that, you know, Apple also has to deal with time and uncertainty. Time and uncertainty, right? I mean, you don't get from all of these materials to an iPhone overnight. So Apple is paying for the materials upfront in advance and then it only gets the revenues from selling the iPhone later once the consumer actually purchases the device. That could be a substantial delay. But think about the uncertainties involved, right? You know upfront how much you're going to pay for these materials, but you don't know at that time how much money you're going to make from selling the device. Maybe the demand for iPhones will fall. Maybe a new competitor will come onto the market. Maybe, you know, the things to do with the wireless spectrum will change. Maybe consumers' preferences will change. You know, a lot of people now are wanting larger screens and a big, you know, criticism of the iPhone as the screen is too small compared to Android phones and Apple doesn't make a so-called phablet when maybe the iPhone 6 will have a larger screen and so on. You don't know what consumers are going to want when you start making these things. And of course, what's really important is not, you know, conditions when Apple starts paying, writing the checks for these components, but think about all the planning that has to go into it before you even get to that stage. Just the design of the device, thinking what the device will look like. I mean, there are many, many months and years of planning that go into the production of something like this, right? So whatever new devices come on the market tomorrow have already been in the works for months or years. And at the time those initial investments are made, the entrepreneur doesn't know whether it's going to pay off. Okay? So it's not only the fact that you pay for some things up front. You get the money later. It's that when you have to start planning, you don't know if this thing is going to work at all. And just by the way, think about the original iPhone. That was a really revolutionary device. No device like that had ever been made or sold before. And there were huge uncertainties about whether people would like it and whether people would buy it. Much more than the uncertainty about introducing the iPhone 5 over the iPhone 4 or something like that. You know, I love Steve Jobs, Steve Jobs. The late Steve Jobs was one of America's greatest entrepreneurs. Great tech, great innovator, great benefactor of mankind. And when we think of Steve Jobs, we most often think of his great successes. Like the iPhone, there's jobs with the original iPhone in one of his famous press conferences. Of course, the iPad, right? Which has also been phenomenally profitable for Apple and spawned a slew of imitators, just as the iPhone did. But it's often forgotten that Steve Jobs had a number of very important and high-profile failures, which are largely forgotten. The young people in here will not remember any of these, but some of you old-timers may, some of the parents may. Apple's first attempt to develop a handheld device was something called the Newton, which was developed in the mid-1990s. And it was going to have handwriting recognition. There was no internet connection built in, but you could keep your appointments and phone numbers and so on on it and take little memos and notes. And Apple invested millions of dollars in developing the Newton, and it was a complete commercial failure. Apple made huge losses on the Newton. Steve Jobs, you may know that Steve Jobs was the founder of Apple, but he was kicked out by Apple's board. He was fired. And then he went and started a new company that he called Next. And he introduced what he thought would be a revolutionary new computer called the Next Computer, which completely bombed and the Next Company went out of business. And then a few years later, Steve Jobs was hired back to Apple, where he was phenomenally successful afterward. So entrepreneurs don't always make money. Entrepreneurs fail as often as they succeed. It's very difficult to be an entrepreneur. It's very hard to anticipate what's going to happen in the future. It's very hard to evaluate alternative courses of action in the present. Now, think how much harder it is to do all these things under inflation, okay? Let me give you some concepts and some theory. What economists call calculation or economic calculation is the process of planning and acting, right? By comparing what things cost now, the prices of things today, with the prices of things that you expect to prevail in the future, right? So in deciding, for example, whether to produce the iPhone 5, Apple has to look at how much it costs for all the components in the labor now and what they expect to be the market price of an iPhone in a year's time when it's ready to go to market, right? So should we produce iPhones or something else? If we're going to produce iPhones, what kind of materials should we use? Should we make the case out of metal as in the iPhone 5 and 5s or plastic? The iPhone 5c is kind of like an iPhone with a plastic body. What kind of labor should we use? Should we manufacture it in the US? Should we manufacture it in China, in Mexico? How should we market and develop it and so forth? Now, in order to do that, we need good information on the prices that prevail today. And we have to be able to make reasonable estimates of the prices that will prevail tomorrow, okay? Now, trying to anticipate tomorrow's market conditions is not a scientific exercise. We don't have a computer model that will tell us exactly what an iPhone will retail for in a year, but we can make educated guesses or what Ludwig von Mies is called judgments about the future. So the entrepreneur uses his or her intuition and common sense, expertise about the market and kind of deep knowledge of the industry to try to judge or anticipate what future conditions will be like. Now, to perform economic calculation, as famously demonstrated by Ludwig von Mies's, you need actual prices, right? You need real markets with real prices. You can't do what's called calculation in kind. In other words, comparing heterogeneous bundles of things by counting the physical units, right? You can't say three ounces of plastic and so many hours worth of labor will make an iPhone with plastic and so many ounces of metal and so many units of a different kind of labor can make it with metal because you don't know our three units of plastic more or less valuable than two units of metal. I mean, you can't just add things up by weight or by volume to get economic value. You need to know, you need prices. You need to know the economic value of plastic, the economic value of metal. For that, you need prices of plastic and prices of metal. This is not something that a fancy computer program can do either. You need to do this in a real market. Of course, to have real markets, you have to have private property where people who own plastic and plastic-making machines can freely bargain and interact in exchange with people who want to buy plastic. That, according to Mises, right, is why socialism doesn't work. Mises' argument against socialism is that socialism cannot be economically efficient because the state, the government, owns all the property. So there are no private exchanges of resources like plastic and metal. So there are no market prices for plastic and metal and no ways for entrepreneurs to calculate what things should be produced, how they should be produced, and to figure out afterward whether the entrepreneurs were successful or not by looking at profits and losses. Well, we've already talked today about how inflation makes these kinds of things more difficult. Right, so again, I'm using the term inflation here to mean an increase in prices or price inflation, if you like. Price inflation distorts these profit and loss signals that we've been talking about. Right, so for example, if all prices rose at exactly the same moment, right, if all buyers and all sellers could double their money prices in an instant, well then everything would be pretty much the same, except we'd have higher numbers. Right, but the way prices rise in the economy is unevenly. The prices of some things rise faster than the prices of other things when the government increases the money supply. So if prices of outputs were to rise faster than prices of inputs, it would make the entrepreneurs' profits look big, higher, right? If the prices of finished goods were to rise before the prices of intermediate goods and inputs, it would look like, wow, I'm making a ton of money, right? I paid $288 for these materials. I thought I could sell the thing at $600, but these things are selling at $1,000. Wow, this is a much more profitable process than I ever dreamed it would be. Okay, on the flip side, what if input prices are rising faster than output prices? It's like, wow, I'm not making much money off these things at all. I better stop producing them and produce something else instead. The profit and loss signals that are received by the entrepreneurs are distorted. Right, you get illusions of profit or illusions of losses that are mistaken guideposts to production, okay? Price inflation increases uncertainty. Inflation introduces sort of noise in the price system if you want. It's harder for entrepreneurs to anticipate future prices. It's harder for them to do long-term planning and make long-term agreements and so forth to make specialized investments when the whole price system is messed up by the noise that's introduced by monetary expansion, okay? And the whole related topic of the business cycle, how artificially low interest rates encourage entrepreneurs to make long-term investments they otherwise wouldn't make, distorts the economy structure of production. Okay, so just to conclude, I'm sorry. You know, there's a lot of, this is sort of the last talk. There's broader social and cultural issues here too, right? Price inflation can encourage overconfidence, makes people cocky. These illusory profits that are coming in to entrepreneurs make them less prudent, more reckless, right? Mises called the wealth generated by a credit-induced boom, a castle built on the sands of illusion. And likewise, if consumers are fooled into thinking that they're wealthier than they otherwise would be, they have a greater tolerance for business malpractice, malfeasance, you know, Enron type scandals, which makes business look bad. There are effects on individuals too that we don't have time to get into. People being more impatient, tending to discount the future, just like the people taking the wheelbarrows of cash to the grocery store in Germany, right? You got to spend whatever you have now because it's only going to depreciate in value, so people develop a very short-term orientation, which is harmful in another number of ways. Danny mentioned potential conflict between savers and investors that is exacerbated by inflation. The great economist, Wilhelm Rippke, described inflation as a moral disease. And I think that's right. Or to put it, as Mises put it, inflationism, the philosophy that we should always have monetary expansion and rising prices, is only one piece in the total framework of political, economic, and socio-philosophical ideas of our time, of the modern era, just as the sound money policy of the gold standard, sorry, of gold standard advocates, went hand in hand with liberalism, meaning classical liberalism, free trade, capitalism and peace. So it is inflationism, the mentality of inflationism, the philosophy of inflationism that is part and parcel of imperialism, militarism, protection, statism, and socialism. Thank you.