 This talk is on Austrian business cycle theory and really one of the first things that I like to point out when I start talking about Austrian business cycle theory is that this is something that is a part of the hampered market economy. It's not a part of the unhampered market economy. Over the past two days, yesterday and today, you've seen a lot of the mechanics of the unhampered market economy. You've seen how we economize the use of our resources that are around us in such a way, well, economizing simply means that we don't waste things, that we achieve our highest valued ends and forego lower ranked ends or less important ends. And I think really the best example to think about how this process works is with the Crusoe economy. So Crusoe, he winds up on his island and he sees that there are a few things he can use to increase his, make him happy. He can eat coconuts. He can eat berries. He's got all of these sorts of things that he can use to sustain his life and his health and all these sorts of things. And so he can, because he is only one will acting in this environment, it's a conceptually easy problem to solve. So he just ranks his end, or he has his rank of ends and he decides I value this many coconuts to this many berries. So he allocates his labor effort in a certain way to achieve his most highly ranked ends and forego the low ranked ends. It's a conceptually easy problem for us to think about. It becomes more difficult when we put Crusoe together with other people or if we combine people in a social environment. And the reason why is because there are multiple wills, multiple sets of ideas, multiple sets of preferences about how to combine resources. What's most important? What do I want? What do you want? And because of the incommensurability of our satisfactions, it's a difficult problem to solve or more difficult problem to solve because we can't do that interpersonal utility comparison. And so what we've seen over the past two days is what's sort of arrangement has arisen to solve that sort of problem? And the answer is market prices, profit and loss, economic calculation. We can use those things as a part of a division of labor where people are doing different things and have different values such that we economize the use of our resources. We satisfy the more highly ranked ends and forego the low ranked ends. So we economize resources that way. So that's the unhampered market economy. Lots and lots of good things that you can say about that. We've actually already been introduced to one infringement or one violation of the market economy with Professor Salerno's lecture on socialism. So we've seen how it's impossible for us to organize production rationally under socialism without ownership of the means of production. So if we don't have ownership in exchange and prices of the factors of production, it's impossible for us to do that allocation, to make those decisions in a way that would satisfy people's ends. So that's at least one violation. The next one that we'll talk about is Austrian business cycle theory. It's another one of Mises' crucial insights or conclusions I should say. I consider it one of the crown jewels of Austrian economics just because of how nice it is to have to explain what has happened in the 20th century. So Austrian business cycle theory, if I can go back to Kruse, I came up with this example last year. A good analogy is Kruse wakes up one morning, he walks out of his cave and he sees that there's some colorful mushrooms. He had a certain plan for the day that he was going to continue working on the shed and collect a few more coconuts and berries. But instead of going through with the plan that way, he sees these colorful mushrooms that grew in the middle of the night outside of his cave and he consumes them and he starts hallucinating. He totally changes the way he perceives the world around him and the hallucinations are such that it looks like his stockpile of saved resources is a lot larger than what he thought. It looks like he has way more coconuts, way more berries, way more tools, capital goods, maybe even the island itself is larger. So he just hallucinates and it just looks like, oh man, I'm in some sort of utopia now. This is great. My stockpile of resources is much, much larger than I had expected. Okay, so the way the thought process would go here is that he would change his plans. He would change the sorts of production projects that he would pursue that day under the impression that he had a much larger set of saved resources. So he sees that there's this much larger stock of saved resources. And so he decides to build different things or maybe build things bigger. He decides to instead of fixing the hole in the roof of his small little structure, he decides to start building a mansion instead because it looks like he has the capability to do that quickly and easily. And instead of putting together a small raft to try to get off the island and rejoin the division of labor, he might build, it could be a terrible hallucinations. He might try to build a cruise ship with robots that would deliver food to him or something like that. Who knows? So he would change the sorts of, he would change his plans. He would change the production projects that he would pursue in that case. So I think that this is a good analogy for what the business cycle is for a market economy. And as you can see, this is not something that would happen in an unhampered market. There's nothing that would trick all entrepreneurs into pursuing these different lines of production in the same sort of way. But we will see that it takes some sort of, some sort of incursion into the market economy for that whole process to get started. Mises has an analogy that is very useful as well with the master builder. So he says, 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 oversizes the groundwork and 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 was not an overinvestment, but an inappropriate employment of the means at his disposal. So here Mises was dealing with one particular misconception of the business cycle theory that it was based on some sort of overinvestment. Mises was saying, no, it's based on malinvestment. That's the crucial error that happens during the boom of the business cycle. But the reason this is such a helpful and good analogy is because it works in both a literal sense and in a metaphorical sense. It works in a metaphorical sense because you see that the error that the master builder makes is similar to the one that Crusoe makes and the types of errors that entrepreneurs make in business cycles in general. But it also works in a literal sense because as we saw in the most recent complete boom bust cycle, there was a housing boom and a bust that followed. So we actually had cases where whole neighborhoods and houses were started but never finished or it took a long time for the builders to come back or different builders to come back and finish the development of the neighborhood or the house. So they had this idea that they had enough resources available to them to finish the house or finish the neighborhood. It turns out that they didn't and that's so they had to abandon the projects. And if you take that small little case and multiply it and see how that same category of mistake or that same category of phenomenon pervades the whole market economy during the bust, you see that this is a great analogy of what happens in a business cycle. So let's first clarify what business cycles are not. Business cycles are not typical run-of-the-mill business fluctuations. This is the sort of thing that happens all the time. So there are constantly changes in the market economy. People are changing their preferences, their ideas about how to complete projects. The availability of natural resources is changing. All of these things are changing all the time and it's up to entrepreneurs to anticipate these changes and align their lines of production in such a way to adapt to those changes or meet consumers' desires in such a way that takes those changes into account. So this and this is just the proper functioning of a market economy. This is not what we mean by a business cycle. This is just this is what you've seen in Professor Bailens and Professor Klein's lectures about entrepreneurship. Entrepreneurs anticipate these sorts of changes. And what that means is you're going to see some changes in the data. It means that if you just look at a market economy, you're going to see ups and downs within industries. You're going to see ups and downs within certain types of labor, like their wages might increase or decrease. And that's simply because of the mundane changes that we experience all the time. That's not what we mean by a business cycle. A business cycle, what we see are the general booms and general busts. An economy-wide increase in wages, increase in employment, increase in the prices of capital goods, and then an economy-wide decrease in the same sorts of things. So it is something that is happening on a broad scale. So here, here what's important for you to see is the shape of the line. It's not necessarily what the lines represent. We've got some stock price indices up here. The unemployment rate is on the top right. I think that's the home price index, the K. Schiller home price index on the bottom right. So you see that there's this up and down. And these are things that apply to the economy in general, economy-wide. It's not particular. Another thing that we notice in business cycles is that there's more fluctuation in the prices of capital goods. There's more dramatic changes in capital goods industries compared to consumer goods industries. And this is something that Rothbard points out. I highly recommend reading the first few chapters of, I'll read the whole book, actually. America's Great Depression by Rothbard. I still think that this is the best exposition of Austrian business cycle theory to date. So he points out that in business cycles we see, and if you look at this data, there's a consumer price index and a producer price index. You see that the producer prices, the capital goods industries, there's more fluctuation there. So whenever we come up with our theory, whenever we go through the theory, this is one of the things that we need to explain. First, it needs to be general. Second, it needs to explain this. And we also need to take into account the cluster of entrepreneurial errors, as Rothbard calls it. So there's all of the entrepreneurs, it seems like, make the same sorts of errors at the same time. And so that's something that we need to explain. If we start looking for suspect areas, we might look at money. And one reason we would look at money is because it pervades the economy. It's everywhere. So money is the widely accepted medium of exchange. If this is a general boom followed by a general bust, it seems that we would look at something that is general to the economy. So money is a suspect area. We might also look at credit, not only because it's because it's general. So credit pervades the entire economy as well. But also because we know that entrepreneurs change their production decisions based on the availability of credit. So we've seen that producers can take loans and they can decide to pursue different projects. And if credit is doing one thing, we know that the two are related. We know that the choice in production projects that entrepreneurs make is sensitive to what's going on in credit markets. Okay, so that's sort of the problem that we have to solve. And we've got some suspect areas that we can look at. So on our way to get there, we need to step on a few bases. So we need to do an overview of the structure of production. We had an excellent lecture by Dr. Patrick Newman on that, but we'll recap that. We'll cover time preference and interest. We had an excellent lecture by Professor Herbner on that. We'll look at sustainable growth so we can contrast it to unsustainable growth. So there's a great quote by Hayek that goes something like this. I've got it at the end of the lecture. We first must understand how things could go right before we can understand how things could go wrong. So first let's get, let's analyze what it takes for an economy to grow sustainably before we can answer the question of why does, why does a seemingly healthy economies, why does the bottom drop out of it every now and then? So that's what we'll do in step four there. We'll look at unsustainable growth. And what we'll see is we'll see that the really the culprits, the main features of, of the boom are malinvestment and overconsumption. And so we'll spend just a little bit of time talking in particular about what those are since their central features of the of unsustainable growth as opposed to sustainable growth. But first structure of production, I like to use a ham sandwich. I go through this example in my, in my classes at Bryan College. Usually there's some back and forth here, but in the interest of time, I'm going to do, I'm going to do all the work for you. So what I'd like for us to do is, is figure out what does it take to make a ham sandwich? What does it take to, to produce a consumer good like a ham sandwich? And we'll do it this way. We'll start with a ham sandwich in the middle of the screen here. And we'll start to network out, we'll start to branch out the first ring around ham sandwich will be the, will be the things that we need immediately say at the deli to, to provide a ham sandwich to a consumer. So definitely need ham, wouldn't be a ham sandwich without ham bread, wouldn't be a sandwich without bread, lettuce, tomato, some condiments like mayonnaise, like to put my ham sandwich on a plate. So we had that there, some tables and chairs. We need the deli and also the person who's putting the just behind the counter putting the elements of the ham sandwich together, they occupy some space. So one element of land is the space that we occupy. It's also natural resources, which we'll get to in just a little bit. So we've got land as another essential factor of production here to make the ham sandwich. And we also, as I've already referred to, we need the laborer, we need somebody there to put these things together. And that's it. Right? That's that's all you need to make a ham sandwich. Right? No. Okay, good. Finally, I was making sure somebody would take their head. No, no, we have to explain where these things come from as well. So we, we know that the ham comes from the butcher bread comes from the bakery lettuce and the tomato might come from farming mayonnaise who knows what's inside mayonnaise, I think there's some like some eggs in there. So maybe like a chicken farm and other things from farming that goes into mayonnaise that if it's a paper plate that the deli uses, then those inputs came from a paper mill, the table and chairs came from a furniture manufacturer. And you'll notice that there's no other extensions beyond land and labor and that's because as we know, those are originally factors of production. So the capital goods we can keep going further back until we get to land and labor, the originary factors of production. At the butcher, there's a butcher, there's the laborer, but they also occupy some space. And so they have some, they have land labor and other capital goods like a refrigerator and knives to chop up the meat into nice little slices to go on a ham sandwich. Same at the bakery, land, labor and oven, some flour as well. And as we go, I'm going to speed up here because I think you get the idea. You'll notice that the structure of production just for a ham sandwich is incredibly complex. We had this chicken and the egg problem, metaphorical chicken and the egg problem with the with the metal manufacturing because you need big metal machines to make the big metal machines. So who knows how that happened? But we've got plastics, play a role, oil drilling. And of course there's transportation. All of these things have to go from one spot to another. And it gets extremely complex. So so this this setup is actually really good for just showing how complex production is. But we can't really go much further. By the way, if I look at my students papers on the first day, sometimes it just looks like this. They're just furiously, you know, scribbling down. At some point, they've given up like, okay, I get it. He's he's making the complexity point. So so this but this arrangement here is useful for seeing how complex production is, but it's not really useful for other things. And so what Austrian economists have done is they've taken this very complex structure of production, and they've organized it in at least or yeah, two dimensions. So there's a time dimension. Some things happen before other things, right? The egg comes before the chicken, right? So and also you have to you know, plant the farm, you have to put the fence around the farm before you can get the lettuce out of the farm to put it into the ham sandwich, you've got to you know, make the big metal machine metal machines to make the little components of the oven and so on and so forth. So something's happened before other things. So time is one dimension. But there's also spending by entrepreneurs at all of these different points in time. So we have two dimensions, we've got time, we have spending in the different stages. So and if we arrange all of these things by time, which might look like something like this. So so all of the early things go to the left and all of the later things go to the right. At the very end, we had the consumption good, we had the ham sandwich. By the way, this should look familiar to you. If you've read man economy in state, this is figure 32. In man economy in state, just the arrangement of factors of production that that yield a consumer good at the end. But if we if we take these things in their individual stages and tally up the spending, we would look, we would get something that looks like this. So this is typically called the Hayekian Triangle. Although recently I've been looking at the history of the structure of production. And it turns out that William Stanley Jevins actually drew the first one. And Hayek realized this. And so in a footnote in one of Hayek's works, he said, we should be calling these Javonian investment figures and not Hayekian Triangles. But but either way, here's our structure of production. This is the left to right we have time. So we have the earliest stage of production over here, and then the latest stage of production over here, or the spending on the consumer goods, spending on the ham sandwiches. This doesn't have to be just for one particular line of production like ham sandwiches, because we can generalize this to all goods in the economy. So this is a macroeconomic graph diagram. This is the entire economy, all spending on capital goods, land and labor, but also all spending on consumption goods. Not only does it show us all of the spending in the economy, but if we look at the price spread between stages, we see the rate of interest. And the reason why is we learn from Professor Herbender's lecture, entrepreneurs who are engaged in production are also engaged in inter temporal exchange. They're parting with present consumption so that they can have consumption in the future. They're parting with present money so that they can have future money. They're paying for factors of production today so that they can have revenues from the sale of their output in the future. And so because of that, what that means is they're going to apply a discount to the payments for the factors of production today so that they can get that uncertain revenue in the future. However, if we take out the uncertainty, which means we're in the evenly rotating economy, ERE, then the only remaining spread, the only remaining return here is the interest rate, the social rate of time preferences, what is what we see in production. So it's not just interest that determines the level of spending here. We could also say that there's the anticipated revenue from the sale of output, as I've already mentioned, it's discounted. But I just want to point out since we're summarizing the structure of production that value is imputed backwards in time here. So at the end here, we've got consumption spending. If we if we go back to maybe an industry specific example like like cotton t-shirts, what if there was like this big dramatic decrease in demand for cotton t-shirts? Like everybody hates cotton now. And so then what we would see is there would be a decrease in how much entrepreneurs would be willing to spend on the specific factors of production that go into making cotton t-shirts in the in the previous stages. So there there would be a response that that that logically goes backwards in time. So even though production goes forwards in time, value is imputed is imputed backwards in time. And the way that happens is through entrepreneurial anticipations of the future. So right now, entrepreneurs are trying to think about the future. How much do consumers in the future like cotton t-shirts? How much are they willing to spend? Not only do they have to think about how much consumers will value that stuff in the future, but they also have to think about the interest rate. They have to think about their own rates of time preference and discount what they're willing to spend on those factors of production today. So lots of things are going on here, but we've got production existing in time. The reason I'm dueling on this is because this is a uniquely Austrian thing. You don't see this sort of thing in other schools of thought, and we'll see the implications for that when we look at the business cycle theory. OK, so next up, we have time preference. Time preference is how much we prefer a given satisfaction now or sooner as opposed to later. And because there is a variety of rates of time preference, it means that we can trade. It means that the people who have high time preference can borrow from the people who have low time preference. Please don't cancel me either for saying that there are different groups of people. So all we're saying is that we can have a demand curve and we can have a supply curve. There are some people who want the money now, perhaps a producer who has this grand idea for a business, grand idea for a line of production that will be profitable. Some other person who's just sitting on a big pile of cash doesn't really know what to do with it. And so they see this other person come up to them and say, hey, I'd like to borrow this amount of money I'll pay you this amount in the future and so they can trade. And here I've got another example like we've seen earlier today of two people who have the different preferences. They have the double coincidence of wants. It's not apples and oranges and coconuts and berries. It's present in future amounts of money. But fundamentally, it's the same idea. They can have a mutually advantageous trade. So this is a loan market. Borrowers and savers are interacting here. But I want to mention that what fundamentally what's happening here is the same as what's happening with with producers who are engaging in production. So they're foregoing present satisfaction so that they can have future satisfaction. They're foregoing present money so that they can have future money. This is just a different kind of time market instead of production. It's it's lending. The reason I show this is because we're going to line it up with the trade off between consumption and investment that the macro economy faces. So in the bottom here, we've got the same loanable funds market. We've got a supply curve upward sloping and downward sloping demand curve interest rate that emerges on that market. But up above we have we have the trade off between consumption and investment. So we can either consume resources today. We can have a big party like we did last night. Have have a nice reception and we can consume or we can invest. We can set aside resources today so that we can produce and have things tomorrow or at a future date. So that's what's if you've seen a production possibilities frontier in one of your classes, you'll notice that it looks the same. This is technically not a production possibilities frontier because we're not producing consumption or producing investment. But it is a trade off just like a PPF shows. It's a trade off between how much we can consume and how much we can invest. By the way, the these four graphs that I'm putting together originate from Roger Garrison's time and money text in his lectures. So if you want to look more into what's going on with these graphs, you can check out that text. I've got I've got the reference at the end of the of the presentation. So we've got this real resource constraint. There we only have a certain amount of consumption goods. We only have a certain set of producer goods that we can use in production, which means that there's a trade off. The more we consume, the less we can invest. The more we invest, the less we can consume. And that's why it's downward sloping. But there's going to be some heterogeneity there, which is why we have a boat outward. OK, so why did we line it up like this? Well, if we if we assume or say that on the demand curve of this loanable funds market, we have businesses who are demanding funds so that they can buy factors of production, buy investment goods. It means that the two graphs will correspond with each other. And that's why the dotted line extends from one and goes to the other. So what what that means is the total amount of of lending that happens. If we make that that small caveat is the same thing as the total amount of investment spending in the top. And so here I just showed an increase in saving and increase in the supply of loanable funds that corresponds with a decrease in consumption. I'll do it again. A decrease in consumption and increase in an investment. So that should be very intuitive. If we haven't if we decrease our rate of time preference and decide to consume more, excuse me, consume less and save more, we see that happening in the top right as well. We we consume less. We're not consuming as much stuff and we're saving more. We're investing for the for the future as well. So we just move down or across that that tradeoff. And the result of that is economic growth. So if we set aside resources for production today, it means that we have tomorrow more. It means that we've produced more goods and services for tomorrow or for the for the for the next period for the future. So if we save, then we can have more stuff. That's how we generate sustainable economic growth. And really the only assumption that we have to make here is that this increase in investment is net investment. We're adding to our capital stock. So it's it's an it's a decrease in consumption and increase in investment that adds to our ability to produce, which means that in the next period we have we have a nicer tradeoff. So it's still a tradeoff, right? It's still downward sloping, but we can we can do more of both if we wanted to after we have saved and produced more first. That's what's going on in this graph. Next up, we have our Hayekian triangle instead of the dollar sign stacked up on top of each other. I have smoothed it out some just to make it easier to work with in PowerPoint. So we've got we've got the Hayekian triangle from left to right. We've got production time. From top to bottom, we have spending in the various stages. We can single out some stage specific labor markets. So here we have at the retail end closer to the consumer. We have labor markets and over here at the early end we have a labor market perhaps for like lumberjacks or miners or people who are in research and development at the beginning of a production process. And we might want to look at these labor markets because we're going to or we could compare this theory of the business cycle to the Keynesian theory of the business cycle and then make lots of claims about what's happening to employment. So we can do the same thing here. We can say that there's there are labor markets and factor markets in general in all of these different stages. So this is our this is our starting point here. We've got the four different components. So let's summarize. We've got the Hayekian triangle. We had a trade off between consumption and investment. And we have a loanable funds market in the bottom right and in the bottom left we have a stage specific labor markets. Let's do that example that I showed you before. But for all four graphs now where we have an increase in savings people voluntarily decide to part with present consumption. They decide to consume less save more. They offer they offer more money to to people who would like to borrow it. So there's an increase in the supply of loanable funds down here. You'll notice that there's a lower interest rate. By the way that gives us a clue as to what's going to happen to the Hayekian triangle in the top left. But for now we'll see that there's a lower interest rate and an increased amount of loans. There's more lending that happens. And since we said that this demand curve is businesses who are borrowing to purchase factors of production. Then we can say that there's an increase in investment as well decrease in consumption. So far this is just review. We've done this already. What is the Hayekian triangle do. However so it gets shorter. So there's less consumption spending because people are deciding to save. So at the very right hand side it's it's shorter. But it gets longer and there's additional spending in the earlier stages of production. So at this at this lower interest rate now new longer lines of production appear profitable. So at the lower interest rate now this this extra idea that the that some businessman had potential businessman had now is now profitable for them to pursue that. So they see that social rates of time preference have fallen. It's now profitable for me to pursue this line of production. In effect what what entrepreneurs are saying is OK consumers I see that you're not consuming as much. You're you're freeing up resources for us to use in production. So they take they say OK fine we'll take those resources and we'll expand production. We'll make new longer lines of production. More technically what's happening is that the dist so since the interest rate has decreased the discount that's applied to the to the factors of production in these different stages of production has gotten smaller. There's a smaller discount that's applied to the earliest stages of production such that now it's now it's OK. Now the it's economizing for us to to produce new capital goods where as it wasn't before at the existing interest rate with the with the higher discount that we would apply to those capital goods. OK what happens in these stage specific labor markets we've got a decrease in demand for the late stage labor and an increase in demand for the early stage labor also brand new markets emerging because we're making new capital goods where we're expanding production new stages. And the result is economic growth. We've got an expanded set of options for consumption and investment. We don't have to keep the same proportions. We could we could say oh great we expanded production we've got more stuff. Let's just have a party now let's celebrate the fact that we lowered our time preferences time preferences before or what they could do is they can maintain the same proportions of consumption and investment or they can say wow that worked great let's do it again let's lower our time preferences even more. Whatever they choose we know that they have they have expanded possibilities now. In fact what we see just throughout history is we see that that lowering time preferences and having economic growth just makes it easier for us to have even more economic growth. So making more capital goods expands our ability to produce which which makes it easier for us to expand into producing new and different things. So economic growth sort of begets economic growth not in an automatic sort of way but in a way that that it's almost like if you think about Crusoe alone on the island he's got to he's got to settle his his food problem first before you can build a some shelter perhaps or find some fresh water before you can do other things so we get the basic things out of the way then we can pursue the new longer lines of production that would increase our standard of living even more. We can we can think about that happening on a macro or international level as well. OK so the structure of production also can can increase in size as well as we increase investment pursue new even different lines of production after that. So here's our summer qualitative as opposed to graphical summary of what's going on saving involves freeing up resources for production. In credit markets saved funds are made available to entrepreneurs to purchase factors of production. New longer lines of production are started which is in line with consumers time preferences and the additional investment represents an increase in that in in our capital stock increase in our productivity and that pays off with an expanded set of resources in the future which we call economic growth. OK so that's that's sustainable economic growth. That's how our economy can function in a healthy sort of way. Let's see what happens when the Fed decides to to increase credit. So what if instead of starting with an increase in savings what if we just insert new money into this credit market that does not correspond with an increase in people's desire to save. What if we increase make available more loans without saying that people have lower their time preference and they're going to forego present consumption. It would look something like this. So we have this increase in the money supply. There's the delta M there that increases the supply of loans in the little fund market. Notice that that dotted line supply curve is still the same. And that's because we haven't started off this thought experiment by saying that there's a change in time preference. There's not a change in people's willingness to save. So that supply curve stays the same. But we just have this extra supply provided by a central bank or a fractional reserve banking system that's extending loans beyond what people have deposited. So we have this increased supply of money here. But people's time preferences are the same. What that means is that people are actually going to decrease their savings. Their real savings. So we have we have two things going on. We've got savers doing this sort of thing. They're decreasing how much they save at the lower interest rate. But we have borrowers businesses in this case because we've restricted this demand curve. They're increasing the amount that they borrow. So like what explains that. How could there be a decrease in lending by savers and increase in borrowing by businesses. How is that even possible? And the answer is because of the new the brand new money. So what makes up the difference between those two is the new money that didn't exist before. Delta M. OK. So something interesting happens with our. Oh for God. So we have some behind the scenes footage of what's going on. How that how that happens. Can't believe I forgot about that part up in the top right corner. We've got the consumption versus investment trade off. So I said that this is a real resource constraint. So we only have a certain amount of consumption goods and investment goods in this economy. So we can only do a certain amount. So how do we how do we show that separation that's happening in the loanable funds market up in the consumption versus investment trade off. And the answer is we we what we say is that there is increased spending on consumption goods. There is also an increase in real consumption by the way but also an increased spending on investment goods in the form of malinvestment so they're purchasing new capital goods and creating new capital goods for lines of production that won't be profitable. But it's what explains the difference is that there's a breakdown between real and nominal variables here. So the real resource constraint but our nominal variables look like we're out beyond the beyond what's what's really possible in terms of our real resource constraint. The analogy I like here is the hungry hungry hippos game. We haven't increased the set of marbles. We haven't increased the set of resources here. All we've done is we've made a way for consumers and for producers to slap their lever even faster. So I think they're they're just all competing over the existing set of resources more vigorously. But we haven't actually increased the supply of resources for consumption or investment. We get a similar breakdown in the high key in trying on the structure of production. So entrepreneurs on the there's an extension over here to the left entrepreneurs pursue the new longer lines of production. Consumers increase their consumption spending and what suffers is the middle stages in the middle stages. There's not we don't maintain the capital stock there or we don't we don't entrepreneurs start the new lines of production that appear profitable because of the new lower interest rate and increased availability of funds and the loanable funds market. Consumers also increase their consumption spending because of the availability of funds through loanable funds markets. But but there's not what suffers is the middle stages there. So in the stage specific labor markets. Oh I always forget about these. So we've got the consumers saying shut up and take my money and we've got producers who are starting all of these brand new lines of production that didn't exist before. And actually it's important to say are not in line with consumers time preferences. In the stage specific labor markets it's a it's a party everything is everybody is happy. We've got an increase in demand for late stage and for early stage labor. So wages are up. Notice employment is up as well. Capital goods prices are up firm valuations are up. Everybody's happy. This this looks like a nice boom but it can't last. So we have that help on its signs everywhere for the for employment. It can't last. And the reason why it can't last is because that we didn't actually provide the real resources necessary to complete those new projects that were started by those producers. So they go they they have this plan they eat the mushrooms and they decide they're going to start building the mansion and the cruise ship. But they they can't actually complete the real resources aren't there for them to complete it. And what that looks like as they as they get into them the the middle of their projects they'll start to see the effects of an increasing scarcity of factors of production. They'll see an increase in prices. Maybe the Fed will will back up. Maybe interest rates will start to rise which which causes everybody to sort of re examine how they've allocated their money how they've invested their money. And they'll see that hey this I thought I would be able to complete this project profitably but it turns out I can't. So so they just they abandon the project. People get laid off. We have a bus and we instead of adding to our capital stock or adding to our profitability what we ate into our capital stock there was an overconsumption that happened. And the the structure of production also gets smaller. So let's summarize this qualitatively like we did before. So newly created money enters the economy through credit markets and represents an increased supply of vulnerable funds. The interest rate falls but that's not because of a decrease in time preference. It's just because of of the central bank or the fractional reserve banking system. We're both. So there was an increase in the supply of loans that was not backed up by by people's real saving preferences. Consumption and borrowing increase firms take the new funds and invest in the new longer lines of production. Factory prices are bid up. Everybody's happy. We have a boom. Wages are up. Employment is up. But it can't last and the reason it can't last is because of the overconsumption that happens and the malinvestment that happened as well. So overconsumption is based on the fact that consumers did not show that they preferred future output to present output. In fact they decreased saving at the lower interest rate. So they they increase the amount that they were consuming. So there's there's a little bit of debate either because of the lower interest rate they decide that they can you know get the new credit card. It's it's more attractive for them to go out and spend because of the lower interest rate. But in fact we don't need to rely on that. We can just say because of the increase because the money has to go somewhere through the canceon effects through the the fact that the money enters the economy through the credit markets. People spend it on things and there's this increased money that people can use for spending. There's the overconsumption. The point is that it's different than what they would have done absent the intervention in credit markets. And we see that the credit expansion does not represent an increase in real resources available for consumption or investment. Factors of production become increasingly scarce. We're just describing why this has to lead to a bust. Prices are a bit up higher than entrepreneurs expected cost increase profits turn into what were expected profits turn into losses and projects are abandoned. And the malinvestment in particular is that comes from the fact that entrepreneurs were led to believe consumers had saved real real resources were available for production and the longer more capital intensive production would be profitable. But because it was based on a mirage it was based on a far so there those resources weren't actually there for them to complete those projects they started. We call it a malinvestment. It's investment in lines of production that were unprofitable. They wouldn't have done it without the intervention in credit markets. The bust is a complicated matter. If you look in just in the broader economics literature a lot of people a lot of economists say that we need to fix the bust need to fix the problems of the of the recession. But if you ask Austrian economists they'll say you need to fix the boom the boom is where the errors are the boom is where we had the overconsumption and the malinvestment. The the the bust is where we fix all the problems. So if I can go back to my Crusoe with the with the mushrooms example one option Crusoe has is to just eat the mushrooms again. So I suppose the hallucinations wear off. He realizes that he doesn't have all of these resources available to him. One option that he has is he can just you know ignorance is bliss. I'm just going to eat the mushrooms again and pretend like I have all this stuff that was nice while it lasted. So that's one option that an analogy that's an analogy for what Keynesians might prescribe during the bus. So well there's this decrease in spending that happens during the bus. Let's just increase spending. Let's just pretend like there's nothing wrong. Let's just boost all of the numbers back up to where they were before as if there weren't errors made in the past. So what Austrians realizes that the bus is where we fix the mistakes. The bus is Crusoe makes do with what he has. Crusoe realizes oh I made these mistakes and started making this capital good. I really shouldn't have. I pursued this longer line of production. I really shouldn't have. And so he just said well I can sort of salvage this project. I'm going to have to totally abandon this project. That's the bust for Crusoe's example. And a healthy recovery for a industrial market economy. It's the same sort of thing. We've just got to do the best we can with what we have given the mistakes that we made in the past. Don't try to don't try to you know keep doing the same mistakes over and over again but actually try to fix the problem. Fix the malinvestments liquidate the malinvestments. But in the bus wages decrease and workers are laid off so it is painful credit markets dry up prices readjust to reflect consumer demands specifically consumer time preferences and the bust as a recovery phase as people try to find profitable uses for for land labor and capital. Very quickly we can we can do some stock taking of the lessons that we've learned. One lesson that was sort of implicit here is that if we looked at aggregated data we wouldn't see all of the problems. And the reason why is because you had to look at the different stages of production you had to look at the the malinvestment in the structure of production to be able to see the errors you had to you had to disaggregate investment spending had to disaggregate spending in the economy to to be able to see that. But if you're just looking at increases in total spending and decreases in total spending then you're going to misdiagnose the problem and offer bad solutions like what I said what while spending is decreasing let's you know use the government to increase spending now. And that's I've also mentioned the this nice quote from Hayek about we had to figure out how the economy works before we can figure out how it can go wrong. And also we've learned that sustainable production is based on a real reallocation of resources away from consumption and it's voluntary. We have to save first we have to have real savings we have to dedicate real resources to production for our economy to grow and unsustainable booms are caused by artificial increases in credit recessions are at the time when we fix the mistakes of the past so that those are the lessons that we've learned by going through this so I've run out of time I've got some recommended reading here on the slides that you can take your picture of if you'd like and I'd be more than willing to answer questions. Thanks.