 In addition to Registering and being able to watch this online if you if even people here if you register if you go to academy.mesis.org And register for this seminar how an economy grows then you'll be able to get The slides that are for that are being used and recordings of this So in addition you'll have a link to this comic And this is the comic book that we're actually going to use in this presentation It's called how an economy grows and why it doesn't it's by Irwin Schiff and there's a free PDF online That you'll have access to when you go to the academy page Now it starts off in this island and there's three people Abel Baker and Charlie and they all fish They fish by hand, which as you can imagine is pretty difficult They don't have any tools to help them in their fishing So this is a form of production now. You might think wait a minute that producing the fish fish are already there Well, you need to produce fish on the plate fish in the sea isn't going to do you any good So what they need to do is produce the product Which is again fish on the plate and the fish on the plate is a consumers good So it's something that they're literally consuming or enjoying for its own sake. They're not using the fish to produce anything else It's a consumers good Now in order to get that consumers good they have to use factors of production resources that they use for that production and One of the factors that they use is their own bodies their own hands and eyes to go grab the fish Another factor is the fish that's out there in the sea Okay when it's part of nature Economists call that land even though it's a little weird to call fish land, but there you go So fishing labor plus fish in the sea equals fish on the plate, which is what they want That's why they need to engage in production Now let's think about their productivity. We see here But after much trouble they each managed to catch one fish per day now is that high productivity or low productivity? very low productivity and Because of that every day they're able to Baker and Charlie And able consume the fish each had caught Enabling them to survive to the next day to catch another fish. This is survival and that's about all So that means they're in a condition of extreme poverty. They're very poor They have little time for leisure because they have to spend all day fishing and they have little time to produce anything else that they might want There's more to life than just fish It also means that they're very vulnerable Okay, they're on the brink of starvation because what if they get sick or what if they break their hand? And they have a bad week bad day or even a bad week. They'll starve So able it one day is sitting looking at the stars and he's thinking, you know There must be more to life than catch eat catch eat catch eat He wants to improve his living standards. He's tired of being poor and So he thinks of a way to improve his living standards. He makes he wants to make a new factor He wants to make a net. He's hoping that'll improve his living standard Now the thing is that he has to gather the net materials. He has to build the net that takes a whole day That's a day that he can't be fishing If he doesn't fish he doesn't eat for that day. So he has to sacrifice He has to go hungry He has to delay consumption Now, why would he be willing to do that? Why would he be willing to go hungry? Well, what would make it worth it to make the net anybody? Yeah, yeah to get more food to be more productive. He wants to raise his productivity above one fish per day's work So he does he works he works he works and then finally at the end of the day. He's created the net Now, how do we classify the net? The net isn't land because it's not part of nature There aren't just nets that grow up out of the ground It's obviously not labor It's not a consumers good. He's not using it to as a back scratcher or something like that. So it's something else It's called capital good And now because it's not land. It's not found in nature. He has to produce it himself Because it's not a consumers good. It's not something that he wants to use for himself It's used to produce something else to produce the fish on the plate So it's a capital good is a produced factor of production Now he's also worried. He's got to go hungry, but it might not even work now That's risk and Peter Klein is going to be talking about risk and uncertainty later right now We're going to kind of ignore that aspect and we're mostly focusing on time as you'll see So he goes out with his new capital good and he uses it and He's able to catch two fish in a day. So success. He's had greater productivity Now just to make things a little cleaner. We're gonna we're gonna change the comic We're gonna say that he was able to catch three fish in that day. Okay, so now it's not two. It's three So let's compare the two production Processes because he made a choice. He could either keep fishing with his hands or he could go the net way Okay Now hand fishing There's an upside to hand fishing. It's short. It's a short process of production You get results pretty quick. It's just one day boom fish But the downside is that it's not productive one fish per day. That's not very productive Then there's building a net and then using the net to fish The downside of that is that it takes longer at first Because you've got to spend a whole day building the net and then you got to spend a whole day using the net and So you've got to wait two whole days before you get any results So it's a longer process of production, but the upside is that it's greater productivity It's three fish over two days. So that's one and a half fish per day instead of one fish per day and And after that then then it's two fish per day So it's much greater productivity even though at first it takes longer So basically he's choosing Whether to do one fish today close in time to him or three fish tomorrow Now one versus three you might think well, that's a no-brainer But it's not that simple because of the time element If it was one fish today versus three fish today, of course three is better than one But since it's three fish tomorrow, there is a sacrifice because you have to wait longer So it's not quite as sweet of a deal But it's sweet enough for Abel. He's willing to wait for the extra fish Especially because he'll get a net at the end of it. That is actually a kind of an exchange Now usually it's weird to call something like that an exchange because he's not making a deal with another person It's just in his mind. He's Making a trade-off in his own mind. He's saying, okay, do I want if I give up one fish today? Then I'll get in return for that three fish tomorrow. So he has to think is that a good exchange And for him, it's a good exchange But it's not good for everybody as you'll see if you read the comic later on in the comic Baker and Charlie They refuse to do the same thing. They don't want to make a net even though they see how effective it was for Abel Because it's not a good enough deal for them one fish today versus three fish tomorrow Yeah, three is is is nice that it's more in quantity But it's further away in time and they're just not willing to wait They want to eat today even if it just means one fish today They want to meet today that means they have a higher what's called Time preference than Abel Time preference is what Austrian economists refer to as the importance of now the importance of soon Okay, so for them sooner is really important to them So even though one is less than three. It's sooner than three and so they prefer that over the three They prefer not to make the net Maybe the three isn't a sweet enough of a deal Maybe if the deal was sweetened and and and the net was more effective and they could get five if they waited Maybe that would sweeten the deal enough that they would be willing to sacrifice and make the net But three is not enough. They have a lower time. They have a higher time preference than able Abel has a lower time Preference, which means he will be willing to save more So you see now that he has more fish to consume and remember we're saying to two more fish to consume Because of his low time preference. He has generated savings. Okay, so savings is important because It allows him to make even more capital goods Because the next day he doesn't have to fish all day. Why doesn't he have to fish all day? Because he's already got fish from the day before So then he could spend the day doing something else like creating more capital goods So for example, maybe he wants to make a rake and use that rake to farm and to grow carrots So he's used his savings to support capital goods and the capital goods Make him even more productive the net made him more productive the wreck the rake gives him more productivity further So he's got lots of carrots now also But then it doesn't just stop there Because the rake helps the productivity and the productivity helps savings too Because now that he has all these carrots and all these fish. He has more stuff to save So we're not talking about just a line of Savings and then capital goods and then productivity. We're talking about a cycle Because productivity in turn Supports more savings which supports capital goods which put products productivity and it goes around and around and around And what we might call a cycle of growth this is a virtuous cycle of growth and With every lap around that cycle. He's getting richer and richer He you can you can imagine every time he goes around that cycle just more tools are piling up that he can use and His living standard improves with every lap around the cycle too Because now the more he has the less vulnerable he is now. He's really far away from starvation He's far away from the brink the edge of starvation Because now even if he has a bad day or a bad week. He ain't starving. He's fine. Okay And because he is so productive. He's so productive and he has so much stuff He can actually consume more than he used to at the same time as he saves more than he used to Saving doesn't have to necessarily mean going hungry all the time if you're more productive It just means saving some of the stuff that you could consume Now this is how living standards rise in a market economy as well in a very complex market economy like the one we live in But we'll learn more about that from Mark later right now. We're gonna stick to the island Now people in the community they Start having his own their own ideas about what he should do with his savings. So one guy says how about charity? divvy up man and Let's think about that phrase divvy up Okay That actually represents something that's kind of a big word. It's called egalitarianism now egalitarianism basically means equalizing things Okay, so what he's saying is that? that able now is wealthier and The guy is less wealthy So he wants able to give him some of the wealth that makes able poorer and that makes him richer So they get closer to being equal, right? Now a lot of times that's stimulated by envy you just see someone who has more than you You want their stuff? But it often results in something called primitivism so some tribes Stay really poor because of egalitarianism in some tribes throughout history What will happen is that if any member of the tribe starts to save more than usual Then other members of the tribe they start applying social pressure They start saying hey, man divvy divvy it up or like Obama says spread the wealth, right? and Now let's think about what kind of an effect that has on the cycle of growth if every time you save more You have to give up that savings to spread the wealth Is that going to encourage you to save more or discourage you to save? Discourage you exactly it's gonna discourage saving and remember that this whole cycle of growth depends on saving so If you take if you knock out saving then you knock out the whole thing you break the cycle of growth in Fact not only that it becomes a cycle not of growth, but of shrinking it it actually leads to becoming poorer Because what happens is that? Decreasing savings can lead to capital consumption Consuming capital doesn't mean we said that the net was capital so does consuming capital mean he starts eating the net No, what it means is that the net eventually wears out It needs to be repaired Repairing capital goods requires resources if you don't save enough You can't support repairing the capital goods They start breaking down the net eventually just tears and fish just start swimming through it and then It's not even a capital good anymore It's useless and then you're back to the productivity that you started with and so you end up You're back to where you started you're poor again Okay So that limits productivity Now there's another character here There's a guy with a club who's waving it at Abel and he says well how about this and basically he wants to steal Abel savings from him Now that also happens a lot in history for example, there are these This type of people called brigands and it's just like a band of ruffians that goes around and looks for Rich communities wealthy communities and they just come in and invade and they they take all their stuff now if that happens all the time if every time you save up and you become a rich community and And then you get raided by barbarians each time Is that gonna encourage savings or discourage savings? Again, it's gonna discourage savings. It's gonna have the same effect It's gonna turn the cycle of growth into a cycle of poverty Sometimes the brigands they don't just come in and then leave they come in and then they settle down and they they call themselves the nobility and The top brigand calls himself the king and they still plunder But they they just call the plunder taxation They call it by another name even though it's the same thing They also do something called prescription. So what can happen is that if any individual in the community Starts to get really wealthy starts to accumulate a lot of wealth Then the king will find some excuse to throw him in prison or or kill him and take his wealth And so that's why in history There are a lot of stories of buried treasure like in the Arabian thousand and one nights and Basically what they're doing is basically trying to hide the treasure from the king so that you don't get proscribed Now buried treasure is not invested treasure. If you bury your treasure It's not going towards the production of capital goods. So again that Creates poverty, but it's not just kings who plunder democracies plunder too Democracies sometimes their favorite kind of plunder is called progressive taxation it now with progressive taxation if you save a lot and become more productive then you get taxed even more than everybody else so that is Another form of egalitarianism actually because basically they're trying to tax the rich to bring them closer to the poor to make them more equal But it's also plunder because it's taking it by force Now what about greed This little bird who apparently comes into the story. I don't know why he says won't it be bad if able turns into Be a greedy guy wanting more and more wealth and the owl says bad for who? The only way Abel's wealth can increase is if he makes his wealth available to other members of the community and when you think about it that makes sense Because there are only so many fish that Abel can eat. There are only so many uses he has for his own nets Similarly think about modern times Steve Jobs and iPhones There's Steve Jobs when he was alive. He had a lot of iPhones But there's only so many iPhones that he himself can can really benefit from using them himself He doesn't love Angry Birds that much And it's not like he like bathes and iPhones or something like that. So the only way that he can benefit from them is by exchanging them with other people sort of like here in the comic how Abel is renting his nets his extra nets and he's loaning out fish and Both of those practices are exchanges Big savers can only benefit from their savings if they use them for exchanges with other people and the thing about exchanges is That they're win-win some people like to think of them as win-lose like there's only one winner in an exchange And one then there's one loser But by definition their win-win both win Because if you give up something in order to get something by definition You value the thing that you get more than the thing that you give up And that's true for the other party too. So all exchanges are win-win So the more exchanges that Abel's savings enable him to do The more people he benefits think about Steve Jobs He and Apple saved a lot of money. They created a lot of iPhones and made millions of Exchanges win-win exchanges he benefited millions of people throughout the world So there but that's one kind of exchange that can happen because of savings is production and sale but also lending at interest is another kind of exchange or You could use your savings to pay wages. That's another kind of an exchange and through all these Exchanges what happens is that non-savers they get access to capital goods That would have been Completely out of reach if it hadn't been for the saver So his savings benefits everyone his capital benefits the whole community not just himself that cycle of growth that we saw That lifts everybody up capital lifts the whole community up So if Abel's able to get rich by making many exchanges he's made he's benefited many people But then again when egalitarianism spreading the wealth around and plunder Break that cycle of growth. So now it's not just hurting Abel it's not just hurting the saver. It hurts everyone everyone that might have made an exchange with him if he had been allowed to save So there's nothing fishy about growth. There's nothing fishy about savings nothing fishy about Accumulating capital. There's nothing fishy about being productive There is something very fishy about egalitarianism and plunder. Thank you