 We're going to begin the Newman part two of the talk. So if you think of it as the end of the day, you might be a little tired, a little overwhelmed. And what do you want to learn about the most? And well, it's Austrian capital theory, of course. This is why we're all here. So what I'm going to talk about in this lecture is capital theory. Something that's not really discussed a lot in economics. But what capital theory is, is it's the, you can kind of define it as the study of mankind's network of produced inputs. And what causes this network, or we'll really see a structure to change. It's the study, it's the theory of capital goods. And in learning about capital theory, we're going to understand the importance of time in production, the importance of savings, specificity, so the uniqueness of different capital goods we'll talk about, and what's known as roundaboutness. Capital theory has a very time-honored place in Austrian economics, the earliest Austrians, Karl Manger, and his disciple, Eugen von Bomberwerk. We're very big into, very interested in capital theory. Bomberwerk wrote this massive work called Capital Interest. It really influenced Mises. It's one of the great treatises of Austrian economics. Got capital interest, you've got human action, man economy and state, et cetera. So it's important that as Austrian students of the Austrian school, we understand what capital theory is. Especially because as I mentioned earlier, capital theory is neglected in modern economics. Time in the heterogeneity of capital goods are unimportant. It's like, well, you don't really need to look at capital goods. We can kind of lump them all together. We just focus on labor markets, et cetera. I'll be going through the differences between the Austrian and the neoclassical approach to capital theory later on in the talk. But it's just something to mention to keep at the back of your mind throughout this entire time that this is really some of the most of the money in banking stuff I was going through, a good amount of it. You learn about balance sheets and all of that in your traditional money and banking course. But you're not going to learn this in any standard economics curriculum. Capital theory is completely absent. Before getting into capital theory and capital goods, I just want to mention that capital goods in a profound sense is what makes humans unique. It's what makes humans different. Our standards of living have risen from the primitive level to our sophisticated modern level because humans, we've devised an increasingly intricate edifice of capital goods. We've just had more and more stuff. We started off from a hut, then we go to a medieval house with a fireplace, then we go to a modern house, and eventually we'll get to the Jetsons, we'll have our flying cars, and all the buildings high in the sky. I estimate this will be there in about two to three years. You know, beavers, they're still making dams, but humans have moved past huts, right? We were constantly evolving by creating better and better tools and better stuff, all right? So we want to look at this structure because when we buy a good from the store, it's a consumer good, we buy bread at the grocery store. We don't think about the fact that the bread just wasn't transformed, created instantaneously and just from raw ingredients. There's this entire complex structure of production of all these capital goods that had to have been made in order to make the bread, all right? So I've been talking about capital goods. It's important to know what exactly are capital goods, all right? Well, what exactly are factors of production, et cetera? This is basic mangarian economics. I know it's been described, but we just want to go through this again. We know from praxeology that humans act. They use means to achieve ends, right? So let's say you're hungry, right? You have an end you want to feel satiated, you want to feel full. So you buy food at the grocery store, then you make a sandwich, and then finally you eat the sandwich, all right? So the finished good is known as a good of the first order. It's a consumer good. It can satisfy our ends, right? So the finished sandwich eaten at the, let's say in front of the television, right? That's the consumer good, all right? Of course, that consumer good had to have been made, right? That first order good was previously a second order good. So the sandwich made in the kitchen is a good of the second order, right? So there's a production process that goes into making the sandwich. You got to combine the bread and the meat and the cheese. You know, that's what they did with Jersey Mike's, the sandwiches we had. And you put it on a plate and then you walk back to your couch, et cetera. And of course, in order to get those ingredients in the kitchen, you had to have bought them at the grocery store. So the purchased ingredients are goods of the third order, et cetera. So the second to the nth order goods are known as higher order goods, right? The good of the third order produces the good of the second order, the good of the second order produces the good of the first order, and then we consume the good of the first order, right? Higher order goods produce goods of a lower order, right? Or lower orders. These lower order goods produce a consumer good, right? So just from very simple, you never think about this, right? You're an average person that make a sandwich, they don't think about this, but now the next time you make a sandwich, you can say, all right, what's the structure, production, what's the first order good, the second order good, right? And all your friends can kind of look at you weird. They're like, what is he doing? Why is he mumbling to himself? You say, oh, this is Austrian economics, right? But you know that there's this complicated structure of production behind each and every consumer good, right? There's all of these higher order factors of production, right? There are really four factors of production for you, at least we can describe here. You've got the labor, right? To make the sandwich, humans, these are produced by other humans, right? We can leave it at that. You've got land, you've got these nature-given resources in the space we stand on, right? So initially the food we ate had to have been grown in the ground, right? When we make the food, we have to be standing in a particular place, et cetera, that's what we call land, right? And then there's the capital goods. These are the produced materials made from labor, land, and other capital goods, right? These are all the tools and all of the stuff. This is, again, what makes humans unique, right? And we can split up capital goods. We have a clear idea of what I'm getting at. You've got the circulating capital. These are the raw materials turned into another capital good or another circulating capital good or a consumer good, right? The sandwich, the bread used to be flour, right? The flour, the bread that you use to make the sandwich, those are circulating capital goods, right? Just like the cow that is turned into the roast beef that you put on your sandwich, right? You've also got fixed capital goods, right? These fixed capital goods, these are the tools that are used to transform the circulating capital goods, right? In order to make the sandwich, you have to use a knife. You're not going to eat the knife. At least I don't advise you to, but it's a free country. But you are going to use the knife to cut the sandwich or to spread the mayonnaise or the mustard on the bread, et cetera, okay? We're really going to be concentrating on capital goods in this talk. And then you've got technology, recipe. You have to know how to make a sandwich, right? A certain way, you get a triangle, cut it, you're going to cut it, you know, rectangle, of course you can do triangle, where you're going to put the seasoning, you know, you can put the oregano, right? You got to put oregano on your sandwich, et cetera. There's a lot of stuff that goes in this. I can talk about it after. But anyway, just a couple more points just want to mention, land and labor are what are called or what's known as the original factors of production, right? Because that's what you start off with as we'll see every capital good initially, you know, can be, you can think about it initially, every capital good had to be created from nature, right? In human effort. The civilization we live in, the building that I'm giving this talk in and we're spending the weekend, you know, is eventually all just natural resources, right? And in a very profound sense when you think about it. A more advanced talk would distinguish a little bit more between land and capital goods. We don't really have time to do so. So we're just going to consider land as nature, nature given resources, et cetera. There's also a difference between capital and capital goods, right? Sometimes economists will, it can be confusing. We mentioned, we say, oh, the structure of capital or the capital structure. We're really referring to the capital good structure. Capital goods are the produced factors of production. Capital is really the monetary value of those factors of production, okay? Economists will sometimes use them interchangeably when they're really referring to capital goods, but it can be confusing. They are separate, right? So I'll even do this, but that's just important to know. And another thing that's important to know is that factors of production, especially capital goods, differ in terms of their specificity. They are heterogeneous, right? The, there's only, if you want to make a turkey sandwich, well, then you're not going to use roast beef, right? Roast beef can only be used to make roast beef sandwich, there's going to be knives. Certain knives are going to be better at cutting bread than other, other things you can use, one knife to cut bread. You're going to need another knife to convert the cow into roast beef, you know, or the, et cetera, and so on, right? They differ in terms of their specificity, right? Certain people are going to be really good at making sandwiches and food. They're going to be chefs, et cetera. Others are not, right? All factors of production have varying degrees of specificity, okay? So to summarize, what we know, what we know just from our simple example is that in a production process, actors use technological knowledge and they apply original factors in fixed capital goods to transform circulating capital goods into consumer goods, right? You make the sandwich, you got to use your knowledge of how to make a sandwich, you got to use your labor, you got to stand somewhere in the kitchen, you got to use your tools, you know, your toaster, your knife, et cetera. And you got to use the circulating capital, the food you bought at the grocery store. And at about, you know, 10, 15 minutes, you're going to make a sandwich, right? And then you can enjoy that sandwich and eat it, okay? So let's explore the creation of capital goods more. And in order to do so, we're going to be using the Robinson Caruso economics, right, so this comes from a story written by Daniel Defoe in the 1700s about a man who's stuck on an island, the ship crashes and he's got some goods with him and he's got to sort of remake his life. More modern version is Tom Hanks in Castaway, you've ever seen that. So the Hanksian economics hasn't caught on, so that's why we stick to Robinson Caruso economics. And then here's an updated version of Robinson Caruso. So a couple of years ago, I was asked to do some modeling for the cover of a Robinson Caruso book. I got my dog, you know, I didn't shave for a couple of weeks, I did Harry, and I was like, well, you know, I've been working out. So anyway, this is what you see, you know, so that's Robinson Caruso. I think we look identical. But anyway, all right, so Robinson Caruso, he's stuck on an island, he's got some supplies from his ship, and you know, he's got to figure out what he's going to do, right? So the first thing he's got to take care of is he's got to satisfy his end that he's hungry, right, he wants to feel satiated, right? He wants to get food in him. So he can satisfy this end by sort of searching around the island and picking berries, right? And he's going to eat these berries, he's going to, it takes time to figure out, okay, where the berries located, which berries are good, which berries are bad, et cetera, and let's say each day for him to get enough berries to survive, he's going to have to spend 10 hours searching for berries, right? This is the period of production. The time it takes from the beginning of the production process to when the actor has the consumer goods, right, that he can consume, right? So it takes 10 hours and then let's say the rest of the day, he's got to, he's got to sleep, he's exhausted, he might have to do some other things, again, just part of his gather, wood for his fire or whatever, but 10 hours for food, that's a while. It's not exactly like eating berries is a good nutritional life. Certainly not going to look like the cover right there. One thing you can also do is he could, instead of just picking berries, he could produce capital goods. Let's say a bow and arrow, right, to hunt animals, right? So he's, you hunt boar, you can hunt deer, et cetera. This leads to greater consumption, right? We'd say that the food is more nutritional, Robinson Crusoe's going to feel happier, et cetera, but it takes more time, right? Let's say it takes 30 hours and this is takes 30 hours to build this bow and arrow, right? I'm abstracting from the time it takes to actually hunt an animal and then to turn the animal into something edible, but just to build the bow and arrow is going to take 30 hours or something like that, right? So can Robinson Crusoe do this? Well, fortunately, Crusoe recovered a knife and twine from his ship and even better before the ship crashed, he had went on WikiHow to find out how to make a bow and arrow, which is also what I did for this PowerPoint. So he was like, oh, this is great. I know how to make a bow and arrow now. I went on WikiHow and he has this technological knowledge. So in order to do so, there are three stages. He's, one, got to find the right wood and sticks, right? The right wood, it's got to be certain length, a certain shape, durability, et cetera, to make the bow. He's also got to find the right sticks for arrows. This takes time. He's got to search around the forest, you know, on the island and et cetera. The second stage is he's got to use his knife to sharpen the wood and the sticks, right? So he's got to start to bend the wood and he's got to put notches in the wood and then he's got to smooth the sticks, make them in the arrows, make them pointy, et cetera. And then the third stage is he's got to, he has those notches, he might have to flesh them out a little bit better and then he's got to tie his twine to the bow, right? And then, you know, voila, he's got his bow and arrow. It's taken him 30 hours and he's off to the races, so to speak. He can now enjoy much higher level of consumption. So how can Caruso do this and not starve? Because remember, we said each day he's got to pick berries for 10 hours, right? But if he's spending 30 hours to make this bow and arrow, well, he's got to eat in the meantime, right? Well, in order to do so, in order to not starve and create this capital good, he has to save. He's got to restrict present consumption. He's got to save a supply of berries each day. So over a couple of days before this, he's got to maybe get, he's got to get more berries and he's going to consume. So he can have a pile of berries that will last him for the 30 hours while he is making his bow and arrow, his capital good, right? And he's also got to invest, right? He's got to construct the capital good, all right? When we talk about savings, this brings us in the time preference. He has to postpone present satisfaction for a greater future satisfaction. We're going to get into that later when we, Dr. Herbner discusses the theory of interest. So I'll just mention this now, right? So, but at the end, for his restriction of present consumption, he's going to have a greater amount of future consumption. Okay, so every act of savings, every act of creating a capital good involves restricting the consumption of consumer goods. And we think about my example in the banking talk, when I set up the loan bank, I restricted my consumption by $10,000. I could have spent that $10,000 on a nice trip to the Bahamas. Instead, I said, no, I'm going to save, run a loan bank and then make more money in the future that I can increase my consumption, all right? Used to increase my consumption, all right? We can analyze Crusoe's situation more. And so after he builds his bow and arrow, and he's been hunting animals, things are going well, et cetera, he's getting plenty of food. It's not going to stop there, right? He obviously was used to a much higher standard of living before his ship crashed. Crusoe, he can continue to save berries as well as other goods needed to further increase his future consumption, right? He can improve his bow, get a better piece of wood. He can sharpen it more. He can add heads to the arrows. He can add feathers to the arrows. So they go better through the air and they can kill an animal more easily, et cetera. He could build a net and a spear to catch fish, right? So he could subsist off of a diet of deer in the morning and then fish at night. He's living like an aristocrat already, et cetera. It's going better for him. He can build a hut and so on, right? Well, we call capital widening, and again, this is really capital goods widening. This refers to creating more of the same capital good. So if Caruso is saving and he's investing by building more arrows, right? He's already got the arrows from before, but he's just building more of the same arrows, right? Or he's building multiple spears, something like that. Capital deepening or capital goods deepening is creating new kinds of capital goods, right? So he's building a net. He's building a better bow and arrow. He's building a complicated trap to catch animals, et cetera, something like that, right? Capital widening and capital deepening, they always take more time. They lengthen the period of production, right? Because if you want to make a better type of bow, well, if an inferior type of bow took 30 hours, the better type of bow is going to take 40 hours. And if you want to make multiple more arrows, right? If arrows making 100 arrows is going to take 10 hours, well, then making 200 arrows is going to take 20 hours, et cetera, it always takes more time. They lengthen the period of production, right? Because to construct all the capital goods, it takes more time. And this adds, we would say, higher order stages to the structure, right? Because if we're making a better bow and arrow, you've got to add the extra stage of adding the heads to the arrows that require searching for the right rock and sharpening the rocks and then getting feathers, right? Feathers from animals and then you got to add them on and that's an additional step on WikiHow. I didn't have space for initially, so they're now the higher order stages, et cetera. So in other words, more productive processes, those that lead to greater increase in consumption take more time, right? Because if you want to get a certain level of consumption, you could build the bow I mentioned before. If you want to get a greater level of consumption, you got to build the bow, you got to build a net and a spear, et cetera, right? This is what Bombavirk called roundabout production processes, okay? It's a little confusing because you would think, well, don't we actually want to take the shortest route to accomplish something? Later in the day, as we go out to dinner, right? The quickest way to get the dinner is to go to dinners, we go down the stairs right there and we walk right out, right? We could take a longer route and we could go downstairs, then we could walk around, we could do two laps around the building and then we could go get our dinner. We don't say that's more productive and that reasoning is absolutely true. It just so happens that in order to get a higher level of consumption, we have to use, we have to adopt processes that take more time, okay? So not every longer production process is going to be more productive, it's just the ones that are productive take more time, okay? If we want to build a more complex capital structure, we have to forego more and more time, we have to forego more and more present consumption, okay? So if Caruso is adding to his capital goods stock, he's accumulating more berries, he's accumulating more arrows, he's adding more complicated net, he's building a hut, et cetera. We call this capital accumulation, a really capital goods accumulation, right? His stock of capital goods is increasing, okay? On the other hand, let's say Caruso said, ah, I'm not really gonna repair my bow and arrow, I'm not going to make that additional net, I'm just gonna pick berries and just kind of let the chips fall where they may, et cetera. He's going to be consuming his capital goods, he's going to be engaging what's known as capital consumption, okay? So if actors are saving, they're engaging in capital accumulation, they're building more capital goods, right? If actors are not saving, if they're decreasing their saving, they're going to be consuming their capital stock, okay? So what do we learn from our simple Cruso thought experiment, okay? Well, we learn that, again, from the simple example that we can now use to apply to more complicated examples, well, factors of production differ in terms of their specificity, right? So certain sticks are gonna be able to be used for bows and for arrows, others will not, certain pieces of wood will be able to use for a bow, et cetera, certain rocks will be able to use to make a spear, right? If you want to make a spear, you're gonna need different factors of production than if you want to make a net, okay? We've also learned that the creation of capital goods requires savings and it takes time. In order to construct capital goods, we have to forego consuming in the present, all right? We know that increases in future consumption require longer production processes, all right? So if Cruso wants to satisfy his end of, it's just sleeping, he's gonna build a fire, right? It's gonna take several hours, but if he wants to have an even greater place where he can sleep, not just in the sand or someplace, he's gotta build a house, you know, a hut, that's gonna take more time, so on and so forth. And we, last but not least, we know that Cruso's standard of living is based off of his, is based on his stock of capital goods. And if Cruso's standard of living is to go up, he requires more and more capital goods, okay? So now let's look at the modern economy. So this is a, when we talk about the modern economy, there's money, right? One person just isn't producing everything, there's not just Cruso, there's multiple people, there's tens of thousands of people, right? Hundreds of thousands of people. We're all specializing in different things, right? We're specializing at different stages in the structure of production for different goods, okay? And there's also these individuals called capitalists that we will talk about, right? So with a modern structure of production, there's multiple stages, it's much more complex and in depth than just the simple Cruso example. So let's look at the iron and steel industry, right? So the first stage, you gotta mine, someone's gotta mine ore, coal and limestone out of the ground, right? You gotta find it, right? There's a certain land factor, certain workers involved in that process, et cetera, certain tools to mine resources. The second stage is you gotta take the ore into iron, it's gotta be smelted into iron, right? The third stage is you've gotta refine iron into steel, okay? The iron has to be transformed into steel, right? The fourth stage is you have to shape the steel into plates, okay, so there's all sorts of capital goods involved in that. And then the fifth stage is you gotta fabricate plates into railway cars, right? And let's just stop there, say the railway car is a consumer good, you know, someone just likes to buy a train to live in or, et cetera, or collect, and so on, right? So we see you've got the circulating capital, it's being transformed through each stage and it's successively moving through each stage of production, okay? So the relevant factors of production, they all have varying degrees of specificity, okay? Let's see where I am here. So you wanna have labor, right? Certain workers are gonna be working at the foundry, other workers are gonna be making the railway car, other workers are going to be mining resources out of the ground, right? Their skills do their innate inequality as well as their relative experience, they're gonna be more adapted to producing certain goods than others, right? You've got land, right? Where the ore is discovered, right? Certain places in the world have the right resources, others do not. Certain places are going to be advantageous for factories and plants. Back in the day, this was near some river or some method of transportation where you could ship the produced goods to a later stage in the economy. You also have your fixed capital goods. These are the mining implements, the blast furnace, the hammers, the tongs, et cetera, you've got the circulating capital, you've got the ore transformed into iron, the iron transformed into steel, the steel transformed into a plate and the plate transformed into a railway car, right? So at each stage of production, factors of production are being combined, the original factors plus the fixed capital, transforming the circulating capital good into later stages. So again, some of these factors can be used in other lines of production, others cannot. So if the demand for railway cars completely plummeted, so no one valued railroad cars anymore, certain factors of production, they would still retain value because they could produce other goods. Workers could switch, right? But the particular machinery used to make the railway car that's the only thing they can do, the specific factors of production are gonna lose all their value, right? So the more specific a factor of production is the more specific a capital good is, the more its value is going to be tied in with the good it's directly producing, okay? So for me, all I know how to do is to give economics talks. If people stop valuing economics talks, I'd be on the street, I'd be homeless, I have nothing else to do, I couldn't work or do another job. On the other hand, well, I guess I could, I could do the modeling thing, right? But, but you know, at least I, for other economists, we would be unemployed, let's say. All right. And then we can talk about advances in the capital structure. So you can think of widening and this is building more blast furnaces and factories. So building more of the same capital good, right? Building more machines that can mine iron ore out of the ground, right? And you've got deepening. So this could be researching and development into new steel processes, adding an extra stage of production, doing something to the steel before it's converted into plates, something of that nature, right? Both of these are going to take more time, right? And both of them are gonna add to our capital stock and add to the amount of consumer goods that can be produced. Okay. So continuing on, we'll talk about the capitalists now. So these factors of production, they're not just moving through the structure of production automatically. There are individuals involved, right? These are what we call capitalists, right? And when you think of capitalists, you think of, oh, you greedy capitalist pig or you corporate fat cat or something. So you've got this picture of big business. You think of some guy, like the monopoly man. He's dressed like he's from the 19th century. He's got a monocle. He's got a bag of money, et cetera. And you think, well, he's just exploiting people, because the workers, he's not doing any work. The people making the steel, et cetera, they're the ones who are toiling. They're the ones who are engaging in the tough work. But the capitalist is there and he's just extracting money from them. This is something the Marxists used to argue, but our friend, Oigin von Bomberwerk, thoroughly demolished this line of reasoning. Because this is what he said. He said, well, the capitalists, they're actually performing something that's indispensable. It's needed for production. Because at each stage of production, capitalists are restricting their present consumption. They are saving money. They could have used that money to buy consumer goods, but they're not. They're saving money and they're investing this money by purchasing factors of production. So the capitalist in the mining industry purchased the machines needed, hired the workers, he bought the land that someone initially homesteaded, et cetera, and they're advancing money to these factors of production while they're producing the good, while they're mining iron, while they're mining the ore out of the ground. And that ore is going to be a circulating capital good that can be later sold down the next stage. So for this act of savings, he's not earning some sort of rate of exploitation like the Marxists would say. He's earning interest. This is a valuable function that he's performing. In the real world, to learn more about later, later in the week, he can also earn a profit for his entrepreneurial judgment. This is in the world of uncertainty, right? We're just going to abstract from that. We're saying he's just earning a return, okay? So this return is really, the savings is what keeps this whole process going because the original factors, the workers, their time preferences are too high. They're not saving enough, right? The capitalist is not exploiting them, right? He's performing a valuable service like everyone else involved. So for example, let's say the State Street capitalist buys $1 million of iron and other factors and these factors transform the iron in the steel, then the capitalist sells the steel for $1.1 million. The capitalist earns a 10% interest return, okay? We don't say, oh, well, if the capitalist wasn't there, then the workers could get that extra 10%. Now, that's faulty economic reasoning because if the capitalist wasn't there, the workers, there wouldn't be that product that could be sold for $1.1 million, okay? So the capitalist is, you know, is not, well, you know, they might look like that, but they're not, it's the same sort of nefarious function that your average person thinks. All right, the capitalist is extremely important. They're indispensable for the structure of production. Okay, so we can move from the structure of production for a sandwich or for a bow and arrow to iron and steel and then we can go to the overall economy, okay? So the structure of production can be depicted with the same sort of series of stages each with their own specific and non-specific factors of production, okay? So the first stage is mining or harvesting some sort of raw materials, right? Harvesting wheat, right, from the ground that has to be grown. Second stage is refining these raw materials, right? Say you are, someone's got to thresh the wheat, the miller has to thresh the wheat and turn it into flour, okay? In the third stage, it's manufacturing. The baker is gonna take the flour and make some form of bread, all right? Fourth stage is packaging and distributing the goods. So the wholesaler is gonna add some shrink wrap or some seasoning and get everything, put the nutritional facts on it and all that stuff and then the fifth stage is selling it to consumer goods. All right, so you've got the finished bread. Start off from wheat, you go to bread, okay? So with this longer structure of production or this more complex structure of production, right? What do we know? What do we know aside from now we know how to make bread from the ground, starting from the basic raw materials that, again, there's still the same higher order goods turned into lower order goods, turned into consumer goods. When we're looking at the aggregate economy, we can sort of redefine lower orders as those production processes that produce consumer goods in the near future and the higher orders as those production processes that produce goods in the remote future, right? So the wheat harvested out of the ground is gonna produce bread at a later date then bread at the wholesaler right now, okay? Now it's important to note when we look at this, we're considering the aggregate, production processes for each good can take various lengths, right? So the time it takes to build a railroad car is gonna take longer than the time it takes to make bread, right? So when we're trying to analyze the economy sort of split up the higher orders and the lower orders, we, the production for an overall, for a good might be considered the lower orders, well, production for another good to be the higher orders. So the textile industry or making clothes could be considered lower orders, whereas more intensive projects like making railroads or something involved with technology are the higher orders. I mentioned this point because a lot of economists will say, well, this entire higher order, lower order structure production analysis is all nonsense because goods can be used in multiple stages or there's no way of distinguishing it empirically, et cetera, and we gotta scrap it all. And that view is wrong. You can empirically distinguish, yeah, that's wrong, yeah. You can empirically distinguish between or at least conceptually the higher order and the lower orders, and you can do so as well. Again, just calculating the overall time it takes to transform the raw materials into a consumer good, right? Well, you've got this overall structure production with multiple stages, right? Goods are being produced, capitalists are saving at each stage, et cetera, they're advancing the produce good further down the line, and so on. So we can show this using the Hayekian Triangle. So F.A. Hayek, he's a noted Austrian economist, and he built off of Bombaverk. So Bombaverk showed this structure of production using circles, so the series of concentric circles, right, where the earlier stages were the circle in between, and as we moved farther and farther, the rings, it's like the ring, the layers of an onion, et cetera. Hayek said, well, it's kind of confusing, let's just use a triangle or a trapezoid to show this. It's really a trapezoid than a triangle. And we can now graphically show the process I was just mentioning. Where at the earlier stages of production, say the capitalists in the mining industry, they're purchasing the original factors, let's say for $8, right? Actually they're purchasing original factors and they're producing a good, the ore that can be sold for $8, right? That's sold to the capitalists in the second stage, involved in refining, right? Where then it'll purchase new original factors, land and labor, he'll purchase the circulating capital for $8, and then he'll sell the refined product for $16, okay? And we move further and further down the list where the manufacturer is purchasing the goods from the refiner, the wholesaler is purchasing the goods from the manufacturer, until finally the retailer is purchasing goods from the wholesaler for $32 and then he is selling the consumer goods to the consumer for $40, right? At each stage of production. So if you've ever looked at Roger Garrison's time and money, he takes the triangle, his big innovation is he goes like this, he flips it, right? And then it becomes a triangle. I like to use the old school diagrams. You can clearly see the stages, right? And as Austrian economists, we can now use this. This is like our model of the entire economy. It's not an aggregate like Keynesian economics, it's really like a halfway house between an intermediate stage between the microeconomics and the macroeconomics. This is our bridge, right? Where we're gonna move beyond the individual actor to the economy at large, okay? What are we gonna use this diagram for? Well, we're gonna use this diagram to show what happens when you have increases in savings. I can only briefly go through this now because you have to understand the economics of interest rates, right? But it's the same basic analysis. It's gonna just like in the Crusoe economy, capital accumulation is gonna lead to capital widening and capital deepening, and both of these are gonna increase stages, right? They're gonna create additional stages in the overall structure of production and they're gonna lengthen it. They're gonna make the structure of production more roundabout, right? And then we know that when you have more capital goods, this is gonna lead to more consumer goods and standards of living will go up. So the economy, actors in the economy will become wealthier when they save, right? We can see from this diagram here, an additional two stages was created, right? We don't need to go through the intricate numbers involved there. All we can just see is that the structure production is lengthening and it's becoming more roundabout, right? It's important to note from this example, and Austrians emphasize this, is that technology, the technological knowledge is actually somewhat secondary in this process. It might sound counterintuitive because you say, well, wait a second, with better technology, we'll be able to make better goods, right? Which is absolutely true, but in order to make those goods, we need not only the knowledge, but we also need these saved resources, right? If you have the knowledge of how to build a jet pack, right? The jet pack isn't just gonna be magically created. You have to have the right resources, right? It could be uneconomical. It could be not profitable for our capitalists to make the jet pack, right? Which is why it wouldn't be made. So Austrians had emphasized the way developing economies become rich is not just simply technological knowledge, right? They know how to make things that first world countries can make, but if they need the savings, they need the time preferences that are going to provide enough savings in the resources to forego consumption, to release those resources so they can be used to make those goods, okay? It's very important to note. Okay, so we've discussed Austrian capital economics. How does this Austrian capital theory differ from the standard neoclassical capital theory, right? Well, capital goods, the Austrians emphasize are heterogeneous, right? They're different, right? They're not homogeneous. They're not all the same. The structure of production is a latticework, or it's this intricate network of capital goods. It all kind of fits together like a puzzle, right? As we, as circulating capitals move through the structure of production, each hammer and tong and all the workers and the land, et cetera, they all play their part. Some of them you can shift around, others of them you can't. So they're all like quasi-imperfect puzzle pieces, okay? Mainstream economics totally ignores this. In their models, there's really just one capital good, right? They lump it all together. They just sort of treat capital goods like they're clay, okay? So it's like silly putty. Austrians treat capital goods like Legos, right? Neoclassicals treat capital goods like silly putty, right? Or it's just, it's all the same, right? So there can never be any distortions in the capital goods market because it's all just silly putty, right? Austrians also argue that time plays a crucial part of any production process, right? Neoclassical economics abstracts from time. They actually ignore time. They say, well, time's unimportant in production, right? And their rationale is that while in general equilibrium in this never, never land world of production, production is actually instantaneous. You say, well, isn't that, well, that's odd. And the way they argue this is they say, well, suppose you're looking at a forest, right? And on one side of the forest, someone's chopping down trees. And on the other side, someone's planting seeds. And since this is happening in each state, each time period in the structure production, well, plant seeds at time, you know, tea, they're harvesting trees at time tea. See, production's instantaneous, right? This is the totally incorrect view, right? It's not the same tree that's being planted and harvested, right? It's just, there's a structure, but neoclassical economics just totally abstracts from that, right? It's a very important point to make, right? Something a bomb of work got into a lot of arguments with some prominent economists in this time. And then lastly, as I mentioned, you said savings is the most important ingredient for economic growth, right? This is different than neoclassical economics, which champions technology more, right? And neoclassical economics can even say, well, savings is bad, right? And if people are spending their savings, that's good, right? We kind of hear this now, or you hear, oh, why is the economy recovering? Well, everyone's got all these pent up savings and it's just like, you know, they just spend it. And then like, it stimulated the economy, oh, it's all the savings. That was the reason why the economy crashed. Oh, right, that was the culprit, right? Blame the saver, no, it's totally false, okay? The argument, the Keynesian argument that savings can decrease growth is known as the paradox of threat, right? Which is incorrect. So for the future, all right, we wanna understand the importance of time preference and interest rates, okay? So I've mentioned savings, but we wanna see how time preference factors into this, specifically how interest rates factor into this. We also wanna look at how changes in interest rates affect the present value of long-term production processes relative to short-term production processes. So if the interest rate falls or rises, how's that going to affect the value or the profitability of embarking upon higher order production relative to lower order production? As I mentioned in the banking course, we also wanna look at how do changes in time preference and credit expansion affect the structure of production, right? Unfortunately, the answers to these questions, you're gonna have to learn them tomorrow, right? And Dr. Herbner and Dr. Jonathan Newman's classes, hopefully you can wait, right? Hopefully you can forgo the present consumption, necessary, right? So for more, I encourage you to read Mark Skalsen's The Structure of Production, Roger Garrison's Time and Money, Puerto De Soto's Money, Bank Credit and Economic Cycles. These are all great books on Austrian capital theory. I highly encourage you to read them if you're interested in the topic. And if you're sick of me, too bad, at least I was the spot, I think I'm on the panel, so we'll see. So thank you so much. I think we'll take a little break.