 Welcome, everyone, to the first lecture of Mises University, 2022. And physically enough, it's the birth of the Austrian school. One of the takeaways of this lecture will be for you to understand why the air in this room has absolutely no value. I'm serious. You will understand that proposition by the end of the lecture, or I failed. So as Jeff Dice said last night, the existence of the Austrian school really owes itself to one man, and that's Carl Manger. Had he not existed, his great students, who were very influenced by him, Eugen Bombavirk and Frederick von Wieser, and then later on Mises and Hayek, they would not have been, they may have been great economists, but they would not have had the same systematic vision of what the economy is. And the economy is simply the striving of human beings to satisfy their wants. Excuse me. So let's begin with a confusion. And that's the Marginalist Revolution. It's often said that Manger was part of the Marginalist Revolution, which he was, and that was his main claim to fame, being a Marginalist Revolutionary. And we'll explain what marginal utility means and where marginalists comes from in a moment. But basically, the Marginalist Revolution refers to the simultaneous and independent discovery by three different economists in different parts of the world, at about the same time, of the law of marginal utility. So who were the Marginalist Revolutionaries? Well, they were called Manger, from Austria, an individual from Great Britain who was born in Australia, William Stanley Jevins, and then the French-Swiss economist Leon Valras. And Jevins and Manger wrote their books, their great books, in 1871 and Valras in 1874. They used different terms to apply to this so-called law of marginal utility. Manger didn't use any term. It was actually his student that came up with the term Grenz-Nutzen, which is translated as Marginal Utility from the German. The Brit, the Briton, who was Jevins, used the term final utility, and rarité was used by Valras, who spoke French. Well, their photos are very interesting. We start off with William Stanley Jevins, kind of a dashing ladies' man on the left side. But then he turns into some old dude who feeds pigeons in a park. Valras starts off as sort of dark and mysterious, and then kind of looks like your kindly old grandfather. Excuse me. Manger starts off as kind of a handsome and hip guy. And he ends up as a handsome and distinguished guy. That kind of carries over to the modern Austrian school, by the way. But there was an important distinction between Jevins and Valras on the one side and Manger on the other side. And that distinction was that Manger rather Valras and Jevins thought that utility was some sort of a substance or a quantitative phenomenon that could be added up compared between people. That was not Manger's view. Manger viewed utility. And you can think of utility, especially in the Austrian sense, as satisfaction, satisfaction of human wants. And I'll come back to that. For Manger, it was based on individual actors' judgment about how important certain goods were to their own welfare, to satisfying their wants, how much it increased their well-being. So for Manger, for example, if an individual had $2 to spend and each of these alternatives, bottle of water, can of Coke, and granola bar, had a price of $2, not a cost, but a price of $2, the person would have to make a choice about how to best use those resources. Manger used the term economize those resources, the $2. How would they do that? How would they make this choice? They would rank the different ends, the different satisfactions that they believe, subjectively, these goods would give them. So in this case, the individual would spend the $2 on the bottle of water, having the highest satisfaction. Not that he didn't think that the other two would give him satisfaction, but they would have lower satisfactions. Now notice, he's not saying that the bottle of water gives me three times as much utility. It gives me 12 utils. You might see it in textbooks that utility is measured in terms of utils. I mean, what the hell is a util? And the can of Coke would only give me, let's say, three utils. So the bottle of water would give me four times as much. No, Manger simply said that these things were ranked. Later on, some of his followers seemed to make it quantitative, but there was always this idea of ranking from the beginning in the Austrian school. But Manger provided much more than the law of margin utility. He developed an entire system of economics that was based on subjective value, how people rank different things, and individual choice. The ranking always led to the choice. We could not know. You could stand in front of a candy machine or a vending machine and watch people buying bottles of soda or candy or potato chips. And some of them, and they would pay the same price, let's say, for bags of potato chips, if that's what the number of people bought. But you would never know what the cost was of those things. The price was $2, but the cost of a bag of potato chips might be someone not buying a bottle of water or someone else giving up a granola bar or someone else giving up something else later on in the day, giving up a bottle of a can of Coke later on in the day. So economic phenomena were fundamentally subjective and internal to the individual. Manger was a creative genius. He drew on many different influences. He was very aware of what the classical school, the classical British school was writing at the time. We'll talk about them in just a moment. He was aware of the German tradition. He absorbed that tradition. But he himself used the law of modern utility and the idea of subjective value and individual choice to build really a systematic architecture of economic theory. And it was unique. It was revolutionary. We know that human beings can't produce material things. They can just rearrange the elements of their environment. It used to be said that production was creation until in 1802, there was a French economist, JB Say, he said, no, only God can create. He said that all human beings do in producing things is to rearrange the elements of their environment. They transform these elements. That's what production is, into something that is more useful in satisfying their wants. Manger understood all of that. So what is some of the great historians of economic thought who were also Austrians? What did they say about Manger? How did they view him? Joseph Schumpeter was a great historian of economic thought. He was an Austrian by birth, but he didn't completely follow the Austrian school. He actually followed Valras, kindly, or grandfather. So Schumpeter said, Manger is nobody's pupil and what he created stands. Manger's theory of value, price, and distribution is the best we have up to now, and that was in 1926. von Mises said, very tellingly, what is known as the Austrian school of economics started in 1871 when Karl Manger published a slender volume under the title, Principles of Economics. Until the end of the 70s, that is the 1870s, there was no Austrian school. There was only Karl Manger. And finally, let's just see what Hayek had to say. He said that the Austrian schools, quote, fundamental ideas belong fully and wholly to Karl Manger. I mean, that's an important statement to make. What is common to the members of the Austrian school, and this is still true today, what constitutes their peculiarity and provided the foundations for their later contributions, is their acceptance of the teaching of Karl Manger. So we are all Mangerians in a very fundamental sense. OK, let me just start with a few words about the classical economists. They're British economists. They're brilliant men. They came up with a system of economics. It was very, very impressive, but they had a fatal flaw, as we'll see. But these are some of the names. You may have heard them. David Hume, famous philosopher as well as economist. Anna Smith, who is incorrectly characterized in most history of economic thought books as the founder of economics, he wrote The Wealth of Nations. And David Ricardo, who sort of came out with a verbal mathematical rendition of classical economics. It's a pet bugaboo of Murray Rothbard that records a terrible writer because he didn't know much math, but his writing was very mathematical. So there were a bunch of number of contributions of the classical school. First of all, they knew that prices were not arbitrary, not random, that the law of supplying the man, which was universal and immutable, applied everywhere and would apply through time, would never come to an end, this law determined prices, at least in the short run. These prices were used by business owners to calculate profits and losses, costs and revenues, and to help them determine how much to produce, what to produce, and so on. All of this was correct. Menger accepted it. But there was, and Menger did discover, the great flaw in classical economics. When the classical economists talked about prices, they talked about the prices of abstract classes of goods. And they were puzzled. They were puzzled by the fact that diamonds had a higher price on the market, a higher exchange value on the market, than did bread, let's say, which had a much lower exchange value, much lower price per unit of weight. But on the other hand, they recognized that diamonds served much lower wants, much things just like ornamentation and conspicuous consumption. You wanted to show how rich you were, so you wore diamond embroidery on your clothing and so on. And these sort of trivial human wants, human beings who go on without ever having seen a diamond, whereas water or bread, which had very low prices per unit of weight compared to the diamonds, had a very low exchange value, yet a very high use value. Without water, the human race would die out pretty quickly. Without bread, which was sort of the staff of life and which was the main staple back in the 18th and 19th centuries, without bread, human beings would starve. So the paradox was called the paradox of value. Why was something with such low use value, such as diamonds, so expensive? Why did it have such a high price compared to something that had a high use value? So they were bogged down in this paradox of value. And so that caused them to simply push aside use value and say, well, anything that's bought and sold on the market has use to consumers. It's useful. We don't have to really go into it much further than that, much deeper than that. What's important is to explain why prices are high or low on the market. And they then made their fatal error and said, well, prices are high on the market because to produce a diamond, it costs a lot of money. You have to pay a high price to get diamonds out of mines or to deep die for pearls. Whereas on the other hand, the production of bread was not very costly. It didn't cost much to produce bread. So they only explained exchange value, and they pushed aside use value. But then the question, of course, came up. Why is land expensive, but yet it's not produced? Why are pieces of art from the Middle Ages, from Da Vinci and so on, why is that so expensive? But it didn't cost much to produce that. So they said, well, there's another class of values, another kind of value. So they split value theory. And that theory is that value is explained by supplying demand. If something is very scarce, yeah, it's going to have a high price. And they even went as far as to say, these things are monopoly goods, especially land. Because there's only so much land, that's why it has a high price. And that was kind of the skeleton in the closet. So when Manger came onto the scene, this was a state of value. In fact, right before he came on the scene, the leading classical economist, John Stuart Mill, who's also a philosopher, in the 1860s or so, came out with a statement that the last word has been said on value theory. In the future, no future work will advance value theory. Value theory is closed. We've discovered what causes prices, what determines prices. In the long run, it's the costs of production. And the short run is supply and demand. All right, so here you have a diamond. Now, this diamond sold for $46 million at auction. This was back in 2010. Some diamonds have sold for more than that since then. But at the time, that was the highest price. Did that diamond cost $46 million to produce? No, of course not. I mean, and people don't care what the costs are produced. In other words, it could have been found on a beach, okay, and then sold to the auction, or someone could have mined it. In any case, the past doesn't matter. Those costs, production costs are sunk. What matters now are the wants of consumers and how well the good satisfies those wants, okay? So now let's move on to Manger. And his response to all this. So he didn't really wanna overthrow classical economics. He thought that there was a lot of good in it. He believed in the law of supply and demand. He believed that the laws of economics were universal and immutable. That is, they don't change over time and they're not between different places. He also believed that prices were not accidental or arbitrary, they weren't just set by big corporations or big landowners, okay? They were determined by supply and demand. And he agreed with the classical school's laissez-faire policies, okay? Classical school's pretty laissez-faire and so is Manger. So in the preface to his great book, which is not very long and I recommend that you read it. It's called The Principles of Economics, very simple title. What Manger wants to do was to come up with a realistic price theory, a price theory that explained all of the phenomena of value together. Not just the cost of bread or the price of bread, not just the price of iron, but the price of diamonds and land and as well as interest rates and wage rates and all other price phenomena. So he wrote in the preface to his book, I've devoted special attention to the investigation of the causal connections between economic phenomena. It was very, very emphatic about cause and effect. It's being the primary law of economics. Involving products and the corresponding agents of production, meaning the things that you use, the labor, land and capital goods. Not only for the purpose of establishing a price theory based on reality and placing all price phenomena together under one unified point of view. So he began what we call today the causal realist tradition in Austrian economics. We're searching for the causes of satisfaction of wants, the causes of prices, the causes of interest rates and we're doing it by looking at real markets. Manger, before he became an economist, was a journalist who watched the markets daily and he saw prices changing up and down daily for different commodities and so on, but the costs of production weren't causing this, okay? This phenomena. So he wanted a realistic theory of price. So he wrote some notes out, some notes to himself. He wrote a notebook before he wrote his book and in that notebook, he set down the main themes and I've taken out the three that I think are the main themes. He says, let me actually just step back for a moment. Once the classical school said that the value is simply exchange value, that what we're interested in is explaining exchange value and not use value, the consumer dropped out of the picture because the consumer is the one to whom goods have use and value in their uses, okay? So they dropped out. Now, the businessmen, the business decision makers were the ones that bought factors of production and they tried to buy at the lowest price as possible, land, labor and capital goods and then transformed these things into goods that had higher prices, hopefully, because they wanted to earn profits. So who or what became the center of economics? Production became the center of economics, not consumption and businessmen became the center of production, not the consumers, okay? So what Mengele wanted to do is to reestablish the full human being as a fundamental element of economics. So he wrote out, man himself is the beginning and the end of every economy and we'll see that he means that literally. So it was human beings at the center and it was something that human beings were attempting to do. Our science is the theory of a human being's ability to deal with his wants. So human beings being imperfect were dissatisfied. They were in a constant state of unease. Mies is called a felt uneasiness. They always felt that they could make things better for themselves. They were always looking to improve their situation. And in order to improve your situation, you have to have things that wants that are unsatisfied and you have to know or believe that there are things out there that can satisfy those wants. And so for Mengele, wants cause people to look for and produce goods which in turn caused the satisfaction of those wants which was the initial cause of the production process. So it was a circle. All things are subject to the law of cause and effect. That's a key, okay? That's still a key to Austrian economics. So let's look at Mengele on causation. He wrote out three, what I call trinities of, he wrote out a trinity of this process. First, he said that ends cause people to look for means that is human ends. You're aiming at an end. You're trying to improve your welfare. You're trying to satisfy your hunger. You're trying to satisfy your want for a very cool form of transportation by buying a Maserati or something like that. So you're trying to find the means to satisfy these ends. And when you have these means, these means then allow you to realize your ends. So the circle is closed. So the ends cause the means. The means cause the realization of the ends and so we have the arrow going back. He also wrote out man causes him to look around in the external world for things that will provide his subsistence which in turn allows him to continue to live and to continue to search for means of subsistence and stay alive. And finally, and this last trinity comes back to what was called what the 19th century free market economist wrote as a heading of a chapter, Frederick Bastia, wants goods and satisfaction. That's what economics is all about. Human beings have wants. Those wants cause them to search around to acquire goods, to produce goods which in turn causes the satisfaction of those wants. So here's something else. Some Austrians have kind of gone off straight from the path and have claimed that economics is all subjective. It's all in our minds and it's all about knowledge and expectations. Yeah, that's true. It's about that, but it's not just about that. It's also about the objective elements of the real world. So if you look on the right, it's all action begins in the human mind, uses elements of the objective world. This key here, just as key is as the human mind and ends in the human mind, okay? And that's what those three trinities show. And here it is in the form of sort of a cartoonish type form. There's an individual, he has a wand, I'm hungry. That causes him to search around for means to satisfy that wand. He looks at his refrigerator and then his utensils draw and he finds the knife, ham, cheese, all the things needed to transform. He transforms, he doesn't create them. He transforms them into a final good. Now, the ham sandwich itself does not have elemental or fundamental value. It's not the ham sandwich. Even though it has a price, you can buy it at Deli. That's not where final value comes from. Where final value comes from is, if you see the guy on the left there, it's where he's biting into that sandwich. Because when he bites into the sandwich, the sandwich, the services of the sandwich in swaging his wants, in satisfying his wants, is what has the value. So it's not the Maserati that has the value, okay? It's the actual driving of the Maserati. The services one gets from the pure transportation and also from showing off how wealthy they are and what kind of a cool car they have. That is what has the value. The mind attaches the value directly to the services. And we'll talk about this. Menger saw that things went backwards. It went from the human mind to the ranking of wants and the most important wants that were satisfied then imputed value back to the good or to the services of the good, the Maserati, that were satisfying those wants. And then the Maserati is simply a package of services that you can use for the next 10 years. So the value of the Maserati is derived from what? The services that it provides. Maserati itself doesn't have any, and we'll go back further when we get to more of Menger. All right, so very importantly, Menger came up with the theory of the good. He got this from the German economists. The German economists, the good ones, even going back to the early 1800s, always started off, the first chapter was about the theory of the good. So that seems like it's objective, but it's not really, because the way Menger looked at it and the way some of the better German economists went from some looked at it was that a good has a subjective element, a very important subjective element that pervades it. Okay, so he defined the good as a thing for Menger, only becomes a good when it is recognized by an individual as capable of satisfying one of his wants or needs. So what is what he called the preconditions of a good? And I'm taking this right from him. The first is that there must be a human need, right? The second is the thing is capable of being brought into causal connection with the satisfaction of the need. That person has to know that the Maserati or the ham sandwich will satisfy a specific need. They have to know that, okay? They have to have human knowledge of the causal connection. They have to know how to use it to satisfy their wants. And finally, they have to own it. That is they have to command the thing so that they can direct it to the satisfaction of their wants, so there has to be ownership. Now Mises pointed out later on that there was a mistake in Menger that number two and three really should be put together. You don't really have to know that the Maserati is gonna satisfy your wants or the ham sandwich is gonna satisfy your wants or the can of Coca-Cola. You have to believe that's gonna satisfy your wants, okay? You can be wrong. People can make mistakes. Someone can buy a motorcycle because they think it's something that they'll enjoy. And then if they're caught in a rainstorm and if they have a couple of close calls with 18-wheelers, they may very well regret that decision. People regret decisions all the time. So Mises wanted to be able to explain that. Now Menger actually did recognize that because a few pages later, after he gives these preconditions, he says that, well, there are imaginary goods, okay? So he says that services of a psychic or a quack medication, which people believe, they'll pay for those things. Oh, you pay for the New York Times, right? I mean, that's, no, you pay for those things, but they really don't satisfy the want, okay? So Menger actually, he's brilliant all the way down. He kind of understood it. He couldn't really fit it into his system, but Mises clarified it later on. Oh, by the way, so for Menger, an economic good is a good of which there is not enough to satisfy all the human wants. And that's why, as we'll see, air is not an economic good that doesn't have a price, okay? So Menger focused on economizing. If things are scarce, if there's supplies of economic goods that you possess, it could be money, it could be bread, it could be whatever you possess, that's scarce and that will bring you satisfaction. You have to choose about how to best use it since you don't have enough to satisfy all your wants. And in order to do that, you have to rank your wants. More important, less important. I'm gonna get to the ranking in a minute. And economizing is the act of applying those scarce or economic goods only to the most important wants, only to the ones that will yield you the greatest satisfaction. Greatest implies quantitative, so I should have said the highest satisfaction. So, by the way, so the classical economists talked about economic man or Homo economicus. And the economic man was the businessman. He tried to buy at the cheapest prices and sell at the highest prices. That was the economic act, prototypical or arch-typical economic act. For Manger, he focused on the consumer, so it wasn't the economic man, it was the economizing man, the person who took the things that he had and used them to satisfy the highest ranked wants. So now let's talk a little bit about the law of margin utility as Manger conceived of it. So the value of a good is determined by its margin utility. That is the satisfaction from the least important or lowest ranked end that can be served by the available supply of a good. So utility means satisfaction, marginal means the lowest ranked end that you can satisfy with your goods. I'm gonna give you an example of this. So the law of margin utility tells us that as the amount of a good, of any particular good, whether it be Maserati's or bread, possessed by an individual increases, the margin utility, the want that can be satisfied is now lower because you have more units. And therefore, the value of the good falls. So the value of a specific good depends on how many units that you possess of it. And let me give you an example. So the Austrians are often accused of starting out with Cuso economics, which has nothing to do with the real world. Well, Cuso economics is very important because some of the most important fundamental laws of economics can be derived by focusing on an individual acting in isolation. And so that's what we're gonna do. So Robinson Crusoe was a guy who shipwrecked on this island and has nothing but his own labor power. And the elements of his environment. So let's say, Robinson Crusoe finds that the land can be used to grow wheat. And there are some wheat growing wild on it, so he can use that as seed to grow a crop of wheat. And he does that. And let's say that at the end of the season, he harvest five sacks of wheat. And the most important use of a sack of wheat, most important end is the bread to sustain life. But that'll just barely keep him alive. He won't have much vigor, he won't be very strong. I mean, he didn't need the second sack of wheat to again, transform into bread and consume it to be very, very healthy and to be able to achieve other ends. So then he would use the third sack. Third most important use would be for growing wheat for next year, so he could stay alive another year. And then he wants to vary his diet. So he sees some wild goats, he domesticates them, he uses the wheat to feed them. So he can have some milk, cheese and meat, the goats will yield. And finally, well, Manger put in whiskey, I like vodka. So the fifth would be to have a beverage to make him happy, because he's lonely. And so that would be to transform the wheat into vodka. Okay, so now, what is the value of a sack of wheat to Manger? What's the value of one sack of wheat? Is it the highest ranked end? Is it an average of those five ends? Well, Manger solved this problem by asking a brilliant question. Sometimes it's the question that you ask that gives you the solution. And he thought to himself, what if, let's say some vermin, some rats or whatever the heck around those islands. I used to say foxes, but foxes don't run in packs and they don't break in any, they eat chickens, they don't eat your wheat. And I was corrected by Hans Hoppe's wife on that. So I took that to heart, Hans was staring at me when she was correcting me. In any case, let's say the third ranked, let's say the sack number three, the one that's gonna be dedicated to harvest another year's worth of wheat. Let's say that's eaten up, gobbled up by the vermin who then leave. Is he gonna go without planting wheat for the next year? No, no matter which sack is eaten, what end is he gonna forgo or sacrifice? The lowest ranked end, the one that gives him least satisfaction. So whether it's the second or third or fourth sack, whether they're eaten up, it's the fifth end that is not supplied by that wheat. So he gives up the vodka, okay? So what Manger said then is that a sack of wheat is equal to the satisfaction you get from drinking vodka over the course of the year. That is what it's equal to, okay? Now, if you were to lose one sack, so, and by the way, that is the margin utility of wheat. The margin utility of wheat is the lowest ranked satisfaction from the supply. And that is the satisfaction from consuming the vodka, okay? Now, if one sack is gone, what happens to the margin utility? It rises. So it becomes the satisfaction from the milk and the meat and the cheese that he could have. But then what happens to the value of the good? It goes up. So if he loses another sack, he lost something that's more important, a more important satisfaction, right? Now, if he finds another sack or if he finds that he can harvest another sack, there's many ends for these sacks of wheat. He'll use it, he's lonely, right? So he wants a pet parrot. So he'll see these beautiful birds on there and so he'll get a pet parrot and he'll use it for feed for the parrot. So the margin utility does what? It falls. What happens to the value of wheat now to him? It's lower. So he has explained what the classical economists for over 100 years could not explain. Explain the use value of a good. Okay, here's a short quiz for you. There's a farmer's value scale. He has three horses and two cows. All three horses are interchangeable. They can all satisfy the same ends, but they're different from the cows. They can't satisfy the ends of cows can satisfy. The two cows are identical, satisfy the same ends, okay? Which animal is more valuable? Someone said the cow is correct and the way you can determine that that's correct, the cow has a higher margin utility. If the barn is burning and the farmer can save only four of the animals, which animal gets left in there? The horse gets left in there because the horse has a lower margin utility. Even though the horse satisfies the top two ends, that has nothing to do with how value is established, okay? Now, once he only has four animals, which animal is more valuable? Now the horse becomes more valuable. And so we've solved the paradox of value. Why is it that bread, let's use water, let's say why is it that a gallon of water is much less valuable than one carat of diamonds? Because even though the highest ranked uses of gallons of water are much higher in value than the satisfaction you could derive from one diamond, diamonds are so scarce relative to water that they have a higher what? Marginal utility. So if you're in the desert and you have that pink diamond that I showed you earlier, you have that diamond and you haven't had water for two and a half days and human beings can't last more than three days or so without water, someone comes up to you with a quart of water, are you gonna make the exchange? Yeah, because now the gallon of water, whatever it is, your life depends on it. That's a higher ranked value than whatever that $46 million diamond satisfies. And now you understand why air in a normal situation has no value, okay? Because the marginal utility of air is zero, okay? If we lose one cubic foot of air from this room, is there any reduction in the human satisfaction? No. Okay, Clay, start sucking the air out, we'll see it, we'll appoint, it becomes valuable. All right, so another example I might give you really very quickly is let's say we have an American family where you have, let's say a breadwinner. So you have three cars and all three cars are interchangeable, they're pretty much, they can all fulfill the same ends. So the first is used by the breadwinner to get back and forth from work. Second is used, let's say the second member of the family has a part-time job and uses a car to run errands. Third is a car that junior uses to drive around in, okay? Let's say the old man cracks up his car. What happens? Who loses the car? Does the old man lose the car? No, the kid, because it's the lowest ranked end. That is the margin utility of automobiles to that family, okay? That works better with 18-year-olds, but anyway. All right, now, Mango also said that goods, it's not just consumer goods, there's goods that go into producing consumer goods. So what he talked about were orders of goods. They're higher order goods, goods that are further away from consumers and lower order goods. So let's take the production of an automobile. You have to have the iron ore first, okay? The iron ore plus labor causes the production of steel. Putting the steel together with more labor and other goods causes the steel to be turned into sheets of steel, which can then be stamped into automobile parts, which can then be assembled. You see how the causality runs? It runs from the higher order to the lower order goods. Finally, when the cars roll off the assembly line or actually when they're being assembled. So the labor and all the automobile parts, putting them together, transforming them, causes the production of the actual automobile. And then the automobile goes to the dealer. So the transportation causes it to be a consumer good that's ready at the dealer. And the automobile, as we'll talk about, causes the satisfaction when it's finally driven off the lot by the consumer, causes the satisfaction of the wants. So causality in production runs from the higher order goods, the goods that are further away from consumers, years away, like mining iron ore that's finally wind up in a car, might be four years or in this example, if this is a year for each stage of production here, it's six years away. So Manger, that was really the first time in history that we sort of had this idea of production going through stages and taking time, and being the cause of the production of the next lowest stage. Now, production runs towards the consumer, runs from the higher order goods to the lower order goods, but what about value? Value starts in the mind of the consumer, right? And it runs backwards, Manger saw that. So he pointed out that the value of the means is determined by the value of the ends or the wants they want to serve. So what we're gonna see in a moment is the value of that steel mill, the value of that iron ore mine is not, they're not valuable in themselves, that's determined by the value of the car or more correctly by the value of the services from the car. So Manger put values imputed backwards from the consumer value judgments of the services of the consumers and satisfying wants to the consumer good itself, to the higher order goods. And we call higher order goods capital goods. Those are produced means of production. The steel mill, the metal iron ore and so on, those are all capital goods. Okay, and here we go. So production runs from the higher order goods, to the lower order goods, right? The farm tools cause the production of wheat, which cause the production of flour, which cause the production of wholesale bread and so on. But why is all that happening? That wouldn't be happening. Human beings wouldn't have a structural production if it wasn't for the fact that the consumer valued the end product. So which way does value run? It runs upward. So these things are valued precisely because they can produce things that ultimately value the consumer's value. So there was a good example used by Manger. He pointed out that what tobacco lands very expensive, right? And the tobacco rolling machines and factories are, you know, they have high prices. But he said, the only reason why that's true is because people consume tobacco and value tobacco in the form of cigars and pipes and cigarettes and so on. So that if you suddenly had a change in people's habits, if they suddenly thought that it was an unhealthy, that smoking or consuming tobacco in some form was an unhealthy, dirty habit, what would happen to the value of tobacco land, let's say? Land used to grow tobacco. Assuming it can't be used for any other kind of crop. It would fall to zero. And there was a great movie. You probably haven't seen it, but it's a Harrison Ford movie. It was called Witness. It took place in the Amish country in South Eastern Pennsylvania. The Amish are sort of a religious sect that dress very plainly. They don't believe in wearing any jewelry. It was a great movie, actually. It was a crime thriller. And so the question then becomes what if, and they didn't even have buttons on their clothing. They just simply used little hooks to keep their shirts closed because even buttons they thought were too conspicuous and vain and you shouldn't use them. And they didn't use cars. If you go to parts of Ohio or Pennsylvania, you see them with their horses and carts. So what if everyone had the values of the Amish? And what would happen to the value of diamonds? Assume you can't use them for anything else. Let's say all Americans adopted these values. Become worthless, they'd have zero worth. But not only that, what would happen to the high salaries of the gem dealers, the ones that assay the diamonds and polish them at all? That would fall to, and they'd have to go to some other business. What would happen to the value of diamond mines? Fall to zero. So costs of production don't cause prices. Diamonds aren't expensive because diamond mines are expensive or because the services of gemologists are expensive because they get high wages. It's the other way around. It's because diamonds have high prices that diamond mines are expensive. That high wages are earned by diamond dealers. Same thing is true of tobacco land which is very expensive in the United States. It only has a high value because people put a high value on tobacco products. Also, that's why the war on drugs can never be won because how does the government and its infinite wisdom try to end drug use for the United States? Do they, yeah, they actually make it more proper. They attack the supply side, right? But the supply side only does what? It's driven by, the supply is caused by what? The demand, until people's demands change, supply isn't gonna diminish. It's gonna find their ways around the law. There was an interesting article. It was back in the 90s that when there was a big crack down, and I forget what country in Latin America, it was in South America on the trafficking of moving of heroin, they actually built a submarine. They hired, yeah, so it was after the Soviet Union for they hired renegade Russian scientists to build a submarine in the Amazon jungle somewhere. And then they pulled it over a mountain and into the sea. And they filled it with heroin or poppies or whatever on cut heroin, and they used it, they stopped it somewhere off the coast of the United States. But why would they go through all that trouble? Why would they spend all that money? Because the heroin is so expensive because people have such a high demand for it, whether we like it or not, okay? Okay, let's just make, I had a great little analysis of exchange, which I think I'll end with. So if all value is subjective, then value, when you buy something, let's say you buy can of Coke, the $2 that you pay for the can of Coke is not equal in value to the can of Coke. In fact, it shows that there's a double inequality of value, that two people value the goods unequally. So in a simple border situation, if there's a person, so the good in parentheses is the good which the person does not have. So person A would like a horse, would satisfy a higher want than the cow that he currently has. Person B has the reverse valuation. Person B values the cow more than the horse. If that is the case and they know of each other, what will they do? They'll exchange. Each person will get a more highly ranked good than they're giving up, okay? So as Menger pointed out, value never shows in equal, I mean, exchange never shows equality between two things. It shows a double inequality that both people think that what they're getting is higher than what they're giving up in value. I was gonna use this BMW example, but my son flew down to Miami to see some friends and I didn't know this, but there's an Airbnb for cars now. So he rented a Maserati for $100 a day for four days. So the guy giving up the Maserati values the $400 more than four days use, four-day services really of the Maserati while my son values the Maserati driving around for four days more than the $400. So any kind of exchange shows that inequality of value. All right, I'll stop here. We have some time for questions about seven minutes, six minutes and I'll take some questions. We don't have time for questions? Why? Oh, jeez, I want to, okay, sorry. Well, you should have told me. Thank you, thank you. You should have said something.