 I'm going to feature two views, not that there aren't many more of capital, there are lots of them. And the two views I'm looking at, one comes from Frank Knight. Do I hear a buzzing in here by the way? Pardon? You're going to work on it. I'm going to talk over the buzz. Two views. One comes from Frank Knight, and it's called a stock flow model, much about that as we get into the discussion. The other from Hayek, the stages of production model, which I'm sure you already heard some about. I know you got some from Tom Woods and from Jeff Herbiner. This morning, that's the two views. I could, and I'll make reference to a third view, I'll give it a short shrift though. And my third view is the Keynesian animal spirits model, which doesn't really deserve to be called a model. It's sort of a denial, a denial that we can say much explicit at all about capital. So more about that later. I'm going to start out with what I call the mini meanings of capital. And you could get this, by the way, by reading, and I think it's the second volume of Bombraveric's work on capital, where he tells you about more meanings of capital than you ever thought existed. I'm going to narrow it down some. And again, just to give you the play, one of the reasons that capital theory is difficult is you can never quite figure out which meaning of capital is in play. And so I'll try to make that clear as we go along. The first meeting I put up here, and these are all by way of saying this is not what I'm going to talk about, bank capital is listed second. These different meanings come down from the top. Bank capital, simply as assets minus liabilities, is a net worth of the bank. And so when the regulators impose a capital requirement, a capital adequacy requirement on banks, they're talking about net assets. A second meaning, which is very prevalent, is financial capital, which just refers to the way you fund an enterprise of cash or funds raised by stocks and bonds. And in fact, that meaning is sometimes referred to as the capital structure, but that's a term in finance that refers to stocks and bonds and cash and so on. And not to the structure of production as is used by the Austrian. So I want to make that distinction as we go along. Let's see if we've got a third one. Capital goods, you see this in Mises, which just refers to plant and equipment, raw materials, semi-finished goods in the production process. And above that here is capitalized value, which is the present value of net future receipts, corresponds to a company's operation they can calculate or try to present value of the future receipts. That's the capitalized value of a project or of the firm, for that matter. Human capital will say something about that, and conventionally in mainstream economics it means, well, what I've written here, present value of skilled workers, future earnings. People have human capital when they go get an education, they know something supposedly, and that's worth something to a firm and that's the human capital that they buy when they hire you at a minimum wage, I guess, or above the market wage for unskilled labor. But in some theories, human capital refers to the present value of all work that the worker can undertake, whether it's skilled or unskilled, that's more of a Marxist view of human capital. Okay, now we're getting to the good ones, the ones I'm going to focus on, indicate that by underlining some terms here. Sometimes you hear capital discussed in terms of the capital stock, the stock of productive factors which yields a flow of consumer goods. This is the stock flow model that comes from Knight, and before him, as we'll see, comes from John Bates-Clark. It's distinction here that's based strictly on the dimensionality, in other words, the stock of it is just its capital currently in existence, and the flow from it, which is measured in a per year way, is the flow of consumption goods, or as we'll see, sometimes the flow of services as opposed to the stock, which is sometimes called the source, the source and the services, more about that too. And I want to contrast that, most of my lecture, is going to contrast that with capital structure, not in the finance sense, but in the sense of a temporal pattern of heterogeneous capital goods. All right, and I'm sure you've heard about this already, and you understand that Austrian meaning of capital, the capital structure. So these last two meanings, which are now the first two listed things in the list are what we're going to focus on primarily today. And so I'll move on now from the many meanings of capital to something that we want to get a handle on, and that's the measuring of capital. And the business of trying to measure capital, either conceptually or actually in a, say, an econometric study, is a big stumbling block. It's what creates what's sometimes called the thorny issues of capital theory. I've learned that when I read capital theory articles, if you sort of squint your eyes and look at the first two or three paragraphs, you may well see the term, the thorny issues of capital coming up out of the page almost. There are some thorny issues, and it has to do with measuring capital. If you take an Austrian view, you get it right away that capital is heterogeneous, okay? Capital is heterogeneous. And you'll even find that written on one of the Mises Institute's t-shirts, if that's the one you choose to wear, you could explain to the world that capital is heterogeneous. But it's kind of a limp thing to say. Capital is heterogeneous, and it certainly is. But some Austrian economists, and I have in mind Ludwig Lachmann, would go further. He'd say capital is radically heterogeneous, okay? And you see by the italics how much emphasis they radically get. And might make you wonder, well, all right, how radical is it? How radical is it? Lachmann goes a long way in that direction. I like to use a different description that I think has just a little more substance to it or is able to say something definitive. And that's to say that capital is dimensionally heterogeneous. But it'll take some explaining what I mean by that, but once I explain it, I hope you'll get it. You'll see what the issue is. And let's look at the other factors of production and we can see why capital is different as being dimensionally heterogeneous. Here's a pop quiz. And you have to fill in the blank. And what you have to fill in is the units, the units. You see the typical response when I say capital is heterogeneous, the typical response is, yeah, so is labor, so is land, what are you talking about? How is capital more heterogeneous than that? And the answer is it's dimensionally heterogeneous. In other words, if you were to fill this in, not all blank of labor are alike, what would you put in there? I hope it'd be worker hours. Isn't that right? That's why you made your work. Now, of course, it's heterogeneous because not all worker hours are alike, but at least we know in the unit it's worker hours. Some are different than others. Look at the next one. Not all what of land are alike. Well, it's got to be acres, or you could say acre years if you want to make it conformable with worker hours, and they're not all alike. So there's heterogeneity in land, too. And now look at capital, not all what of capital are alike. And I've learned in reading articles about capital to pay close attention of what is used there. It gives you a hint about what kind of article is, what school of thought they're from, and what conclusions they're willing to draw. Now look at that blank and I'll show you what probably most commonly gets replaced there. Can anybody guess? Does anybody know? Look at the blank. Units. Units. Not all units of labor are alike. You know, wait a minute, wait a minute. We have to realize a unit is not a unit. If nothing else you write down in this period, write a unit is not a unit and then try to convince your friends that that's true, but it is. Unit is a generic term for all the actual units, like worker hours or acres, or whatever. And a lot of the work on capital theory, especially those aimed at the Austrian school, aimed to discredit the Austrian school, use units as their unit. In doing that, they totally corrupt their analysis, because a unit's not a unit. You need something else. So there are other things that you can use, and we find them in the literature. In fact, I've started making a catalog. You know, it's sort of interesting to see what other units people will use. Let's look at a few of them. Doses. Another dose of capital, really? Try another. A chunk. And maybe closely related, I don't know, a hunk's from the capital. So I don't know about this. I mean, I'm open-minded, and I even googled around to see if any of these would work. And so there are units. You've got your choice, pounds, gallons, cords, yards, inches, and so on, okay? Let's call it units, that doesn't work. What else have we got? Dose. How big a dose, okay? Can't say. I don't think that's appropriate. There's a chunk. It looks like coal. That could be capital good, couldn't it? But a chunk, it doesn't work for all. And hunk. I don't get that one at all, you know, I just don't get it. That could be the human capital, I don't know. Okay. So now we're going to start with Frank Knight and Hayek because they battled head-to-head over a period of years back in the 1930s. And it was Knight that argued in terms of a one-good economy. He was trying to deal with capital, and so he had a one-good economy. It was all-purpose good. It was both the producer good and the consumer good. He called it a crusonia plant after Robinson Crusoe, I assume. So it was a crusonia plant, and that's all there is. And you wonder how the market's going to handle it. But the crusonia plant grows at some rate, 10% maybe. I've forgotten now what growth rate that he chose. The crusonia plant grows at 10%, and so if you just stay away from it, just hang back, you get 10% more crusonia the next year, and 10% more than that, or you might get hungry in the meantime. If you eat 10% of it every year, well, the next year you won't have any more than you had to start with. So make your choice. The problem was that by using a one-good economy, well, for one thing, you take the market out of play, and you conflate the distinction between a growth rate and an interest rate. Very knowledgeable capital theorists can write and do write. The crusonia plant grows at 10% a year, therefore the interest rate is 10%. No, no, that's the growth rate, that's not the interest rate. The interest rate is determined by suppliers and demanders of credit in the market, and there is no credit, there is no market, because all you've got is a crusonia plant. Hayek wrote some biting articles, one called The Mythology of Capital, where he just exposed the whole enterprise as a myth about the crusonia plant and about its ability to shed any light whatsoever on the interest rate or on changes in the interest rate or on how markets deal with interest rate. It just wasn't there. Now I'm going to change your pictures here, and yet this is the same debate that took place 30 odd years later, right before and right after the turn of the century, with John Bates-Clark and Eugen Bonbaverk. And once again, they just line up perfectly almost with a debate that followed by Knight and Hayek. Bonbaverk, of course, picked up on Manger and he dealt with the time element in terms of roundaboutness that's translated from the German whatever it is, you'll have to ask one of our German speaking participants. Roundaboutness is not a very descriptive term or it's not a very easy term to use and to defend, but nonetheless, if you understand clearly what Bonbaverk meant, and you have to pay attention in reading his volume, too, to figure it out, it's one way of dealing with the capital structure, the intertemporal arrangement of goods and services in the production process. John Bates-Clark, however, argued that the production time was really irrelevant and he was the one that actually introduced the stock flow idea and I'm going to turn to that next. And it goes like this, I call it black box capital theory. What does black box remind you of? What's a black box? Anybody know? Yeah, it comes, you think about the airline having a black box and paying attention to the news. Do you know what color of the black box is? It's orange, okay? It's orange and it looks like this, there it is, black box, fought flight record and do not open, okay? And actually the term itself, black box, comes from engineering and specifically electrical or electronic engineering and what a black box is, the blackness of the black box is you can't see through the cover, you can't see through it, it's dark, it's black, okay? So any complex piece of equipment, typically a plug and play unit, an electronic system with contents about which the user has no need to know and that's why they call this a black box, not because it's black, it's not, it's orange, but because the airlines, they build an airplane but they don't put together the electronics for a black box, they just order one and it comes with an input cord and an output cord and they plug it in, it's plug and play and they leave it alone, that's their black box, okay? And so it occurs to me that the 90th theory of capital is black box capital theory, in other words you're not telling you much about or anything about what's in the capital stock. So there's the capital stock and all we know about it is there's a little input funnel near the top because you have to maintain the capital, you've got to put something in it and there's an output pipe there at the bottom, that's where the flow of consumption goods comes from, okay? And then the analogy is almost complete until we add do not open, okay? In other words, Clark or Knight thought it was unnecessary to look in the black box to see what was actually going on in there, all they were concerned about is there is a stock of capital and it does provide the flow of goods and services, it's good enough, okay? They put that out of the way and don't try to talk about how markets influence what's going on inside the black box, okay? It remains inside there, okay? Now start with a steady state economy and you can imagine what that is, I've got a black box of a certain size, it's loaded with the stock of capital and it does have an output. Now it needs some maintenance so part of the output, maybe not a very large part but part of the output, has to be fed back in to the black box to maintain the capital, all right? So you have a flow from it but part of that flow that goes into the capital stock, let's see if we can get it going here, okay? It's not going just like it's supposed to go, there it goes, there it goes, so you got a flow from it, that's a flow of consumption goods and you've got maintenance of capital. That's the little bit that goes back in to the black box, all right? And so says Clark, let's see, did I mess that up? Yeah, let's see what it did, I eliminated the flow and I also eliminated the maintenance but now I've had to put the maintenance back on in order to be consistent with Clark's theory, I want you to understand Clark's theory. And so what I've got circled there or put in a square is capital, okay? In other words, according to Clark, the capital stock in this theory includes maintenance as a technical detail, the technical detail you've got to keep maintaining the capital to keep it constant, to keep it from shrinking, okay? But that said, we can say that the capital stock is permanent. And one of the things I've learned, actually it was Gerry O'Driscoll who wrote some of the early stuff during the resurgence of the Austrian school back in the 70s, tipped me off to the quotation marks that were around certain words in Clark. So he said the capital stock is permanent and you can also look for other sort of qualifiers that let you know that Clark understood what those parentheses or what those quotation marks meant. He says capital is permanent in a sense. What is a sense? Well, if you keep maintaining it, it's permanent. But that's considered a technological detail where sometimes he would write capital is permanent as it were. Capital is permanent, so to speak. You get the idea, okay, which all tells you it's not permanent. You know, if you want it not to shrink, you better maintain it. And as a corollary to capital stock is permanent, what he gets is the permanent capital stock yields a perpetual income. Notice the perpetual is in quotation mark. And so the qualifications apply here too, in a sense as a word, so to speak. And you think this might not get us very far, and that's what Hayek had in mind when he accused Knight and implicitly Clark as trying to sell us a mythology of capital. Okay, now the economy is a system in yielding consumable output, yeah. And the real purists, the purists of this theory, don't even like to use the term capital and consumption, because you might think of capital goods and consumption goods, okay. And no, it's more rarefied than that, it's more strict than that. It's rather seen as a system of sources, that's a capital, yielding services, capital services, so that your toaster, for instance, you have at home, that's not really a consumer good. That's a capital good, and it yields a service of toasting your bread. So the whole notion of capital goods is wiped off the slate here. And we just get services that are mated by the sources. And one of the reasons that I use this, sources and services, is that in my last lecture, I think, on Friday, I'm going to deal with Hayek and Friedman. And Friedman, in countering the Austrian theory of the business cycle, counters it with this language, in other words, he talks about sources and services, and the market equilibrating those two magnitudes. As a way of dealing with the Austrians. And you can see very easily that, oh, I get it, he's got a Clark Knight version of capital. And that's why he can't see any of the Austrian stuff. In fact, Friedman is very upfront that he learned his capital theory from Frank Knight, and he's going to stick with it. So that helps you see why Friedman has trouble seeing even what the Austrians are saying, let alone believing that they might be correct. So I'll re-label that, sources, and all of consumption is just services. Knight goes so far as to say, there's really, think about it. There's really only one factor of production, there's just one. It's capital, all right? And sure enough, it is if you're this strict, okay? So capital in the broad sense, for instance, land, well, that's just one kind of capital. Labor, and here I put it, asterisks. Because you have to conceive of it as human capital in the very radical sense. Not just the discounted value of skills, but the discounted value of humanly ability to produce labor, okay? So land, labor, and capital are all just capital in the broader sense of sources, or sources of services, as the story, okay? Now, let's see if we can get an expanding economy to work. And it's rather peculiar that after saying that capital is permanent, then they allow us how, well, okay, if you actually beef it up, if you feed more inputs back into capital, then it takes just to maintain it, then the capital stock will grow. And the way you do that is just making that stream bigger, even though it means making the flow of services less. So let's see if we can get that to work. Sort of lost its dynamics, but you can see what that says. That if your flow of services is smaller and you're feeding more into the capital stock, the capital stock grows, okay? We got that. Let's try it the other way, contracting economy, does that work? And here you get a shrinking of capital and you're out of capital, okay? So, that's the way it works. Now, one of the payoffs for them, for Knight and Clark, is that they no longer have to worry about the time element in production, because you've got the sources and the services at the same time, okay? And how do they understand that in terms of the real economy? Tom Woods talked about how we're dealing with a real economy, the real stuff out there. How do they deal with it? And here, say what about production in the Clark Knight vision, okay? And I get this from George Stigler, Chicago economist, very hardcore Chicagoite. And he actually wrote a dissertation on income and distribution theories. That's not quite right, I'll have the title for you in a minute. Production and distribution theories in 1941, it was his doctoral thesis. And he argued in terms of a maturing forest, and here I sort of represent the forest just by what a handful of trees there. There they are. Once steady state is reached, this is what Clark says, this is consistent with Knight, and this is drawn directly from Stigler. Once a steady state is reached, production time is irrelevant. Also, well, the trees have a linear maturity structure. They're actually in log linear if you're a purist here, that's fine. Each period of sapling is set out, and the mature tree is harvested, okay? So let's look at year one, there it is. Let's set out a sapling, there's our sapling, okay? And then let's harvest the biggest tree there, there it is. Okay, now we've, okay, they're a little smaller now. We put out a little one and cut a big one. But hey, the next period, period two, these trees grow and they're just like they were the year before, okay? So, and this is using the knighting kind of expression. It's the setting out that enables the harvesting, and you notice enable is in quote, it's as if it enables the harvesting. Not that you couldn't set one out without harvesting, but it's as if it enables the harvesting. Setting out the sapling now produces the harvestable, I won't try that again, tree now, okay? So does it really produces, does that one produces it? Well, as it were, so to speak, and so on. And therefore, production and consumption are simultaneous. So we don't have to worry about production time, it's simultaneous. Now, I wouldn't blame you if you had the view that Stigler didn't say this. Stigler wouldn't write anything like that, okay? He's George Stigler. He's a University of Chicago economist, all right? And yet, let me quote you, there's your qualifications in a sense as it were. Let me quote out of Stigler's dissertation and see what he says. He says, we can say that any one row of trees takes 50 years to mature. But since there is a constant output of timber forever, there is simply no point in saying it, all right? And that's Stigler 1941 production and distribution theories. Check it out yourself. So this is the extent to which the Chicago School, Stigler and Friedman as well, bought into the nightian way of modeling capital. Okay, a little summary slide here before I press on with the Austrian ideas. Again, we've got night in Hayek. And I just want to give you several aspects of the contrast so you can see how large a contrast it is. So with night, maintenance is a technical detail. With Hayek, maintenance is a matter of choice. Of course it is. Capital is permanent. No, capital is ever changing in the Austrian view. Capital is the only factor. Capital is unique and heterogeneous factor. Production time is irrelevant. And production time is a key variable in the microeconomic system, in microeconomics too, for that matter. So very much contrast here. And according to Frank Knight, it's all about sources and services. According to Hayek, it's about a temporal capital structure and the sorts of consumption goods that that can create. It's about steady state equilibrium. As in the forest, it doesn't change. No, it's about dynamic market processes that guide production decisions in accordance with consumer preferences. A big difference. Now let's see, before I start talking about Minger's law, and again, I know you've heard some of this already, and so I'll take that into account as I go through it. But I want to suggest how you could see the Austrian school as the moderates. Some of you here might like to think of yourself as a moderate. I won't ask for a show of hands. But some of you might think in terms of being a moderate. How could the Austrian school be characterized that way? Well, if you look at the Frank Knight view, what you see is that, especially as adopted by people like Friedman or Stingler for that matter, is that they regard markets as so efficient that they don't have to worry about the fact that capital production takes time. And there might be some uncertainty there. And there has to be some entrepreneurial insight. And the insight might not always be correct. They don't have to worry about that, because the market will correct for that quickly enough that they can safely regard it in discussing other issues, such as what causes business cycles, why do you have boom, bust, and so on. That's pretty radical to believe that markets work so quickly that those capital markets just don't get meaningfully out of whack. In fact, even the terminology that Friedman uses suggests that. If you've read any of Friedman, his first objection to the Austrians is, oh, they're just talking about first-round effects. In other words, something starts to get out of kilter. Well, the next thing that happens, it gets back into kilter. And don't worry about those first-round effects. It's corrected so quickly that it's just trivial to focus on something that happens to take you away from equilibrium, even for one period. And Hayek recognizes, as the other Austrians do, that no, with bad policies being undertaken, the economy can get out of kilter sequentially over a number of periods and can even be self-aggravating, but not sustainable. Ultimately, you get a big adjustment. So the Austrians make much more allowance for things like that happening than do the Chicago School. So we're moderating with respect to the Chicago School. If you look at Keynes in the animal spirits business, and he used the term animal spirits three times at a page and a half. He tells you that he means it. And what he's saying, essentially, is that capital markets are so ill-behaved and they're so unresponsive to market forces that they're destabilizing. And they make the economy dysfunctional. And the only thing to do is to adopt socialized allocation of resources in the capital sector. He advocates the socialization of industry. That's in the swan song chapter 24. That's pretty radical. But look at the Austrians. They're right there in the middle. They're saying, yeah, things can get out of whack, especially if there are ill-conceived policies or politically motivated policies. They can get out of whack, but the market is at work and it'll bring it back eventually. And if you don't have policies of that sort, if you don't have bad policies, then it'll pretty much equilibrate, but we need to pay attention to how that happens and make sure we're not interfering with it. So the Austrians, in that sense, are the moderates. Hey, if you still want to think of yourself as radicals, okay, I'll permit it, having been said. Now, let's look at Minger's law. I think you've heard this before, but I want to take it a little further and bring it closer up to date. The value of higher order goods derives from the value of the respective consumer goods. You know that. And Minger talked about goods of the first order, so I've stacked them from first order up just to get my orders lined up. It's arbitrary how many orders that you put there. This is just a pedagogical reckoning. And of course, by first order goods, what we mean is consumer goods. That's what consumers want. And so in that kind of a system, we've got consumer goods, and then we've got higher order goods, like that. And Minger's insight that broke company with the classical school and certainly with Marxist ideas is that while it's true that the production process starts at the higher order goods and goes to the lower order goods, how could it be otherwise? Time only runs one way. By the way, when I was at University of Virginia, we had a guest speaker who had a more general theory than others. And he says, well, let's assume just for the sake of argument that time runs both ways. You know, and you're trying to, how does this work, you know? But he had the math, he had the math, you know, to show. And I, being a naive PhD student, asked, well, what if time ran all six ways, you know? And it sent him back to the blackboard, you know? He didn't get it. Time runs one way. You have to start producing before you finish producing in a particular process. But at the same time, valuation goes the other way, all right? So the higher order goods have their value because of the value associated with consumption goods. And that's what you've heard about. So I won't belabor it in this lecture. Now, that's not the only way to look at look at the structure of production. I'll just tell you this, if only to amuse you. The Bombavere, for instance, who was picking up on Minger, somehow he chose to represent stages of production as concentric circles. He even said, think about the rings in a tree, you know? Growth rings in a tree. And you can have one with a lot of rings or one with not many rings. One, the top one has roundabout processes with lots of, well, he wouldn't use stages of production. He used maturity classes. Each ring is a maturity class. And the lower one has fewer rings and fewer maturity classes, not as much roundaboutness. And he used just this to identify a poor country with a rich country. Well, okay, we get it. But it's certainly not an improvement over Minger. And I'll challenge you to use that diagram to develop, say, an Austrian theory of the business cycle or something like that. Okay, it just didn't go anywhere. I don't tell him, but I would almost agree with Walter Block that this graph shouldn't be used. But the triangle, you know, is fine. Now, this is much more compatible with what Hayek did. In fact, you can see that. I can superimpose a page out of prices in production and show the goods of different orders that culminate in goods of the first order which are consumption goods. And you have orders of goods going down the vertical axis as things are being produced. And you've got the output of consumer goods on the vertical side. Let's see if we can clean it up a little bit. I just eliminated Minger, but showing you that I'm staying with exactly the same conception, clean it up a little more, maybe. And then you sort of squint your eyes and see where this triangle came from, you know? It's just, if you just superimpose a triangle on that, you can see it. Now, clear back when I was at the University of Virginia, one thing that bothered me, because it bothered some of my professors, is that the time element, the production time, which really isn't a pure time element. It's tied up with the value that's taking the time, measured in dollar years. But the time element, it shows coming down the vertical axis. Well, how odd is that? This is a matter of pedagogy. It's not easy to get that idea. Let's see, time comes down the vertical axis. I don't know, well, what does it do when it hits the bottom? So I thought, there must be some way to reformulate this where it's on the horizontal axis. There must be some way, and I worked at it. There it is, okay? And now time goes on the horizontal axis. And I did that with, just to get it to line up with other graphs I had in, because it was just easier to sell in a seminar that you've got time running from left to right. But in print somewhere, I can't tell you where, Walter Block has actually credited me for changing the triangle in this way. Or maybe blaming me, I'm not sure, you know. But that's the way it's currently used, okay? And I can superimpose the triangle like that. And so you can see that just as a pedagogical tool, you can use the little bars to indicate different stages, or you can just put the triangle there. And you know that refers to the different stages of production, it's just a pedagogical tool that works out fairly well. We could get rid of the bars, I think, yeah, there they go. Now you might say, well, this is just oversimplified. It's just way too simple to be serviceable or to be helpful. Well, I'd argue, A, it's not because the key is that it incorporates a key variable, namely production time, as an endogenous variable, if I can talk in mainstream terms for a second, in the macroeconomic model, okay? The production time matters, it's a key variable. It's not something that you add at the very end in terms of a lag structure. If you look at some of the older Keynesian models, you do the whole model, it sort of all works at once, and then you superimpose a lag structure. Different things take different times to work, and you do that mainly empirically, but what seems to take a lot of time. This doesn't superimpose anything at the last minute, it builds in at the ground floor, the notion that production takes time. So for that reason, it's just, I like to say, since it's a triangle, I like to say it gives the Austrians a leg up on Keynes, okay? I got two legs of this triangle. But secondly, if you really think it's too simple, then hey, let's go to Hayek, 1941, to his pure theory of capital, and we'll use the diagrams he has there. See, if I've got them here, there. So I could take a show of hands, and the rest of this lecture, which one do you want to use? That's Hayek's, that's directly out of crisis in production, and I won't explain just what it all means, partly because you wouldn't understand it, and partly because I can't explain it. And I've read prices in production. Okay, let's go on then. Now what I'm gonna do is crib from parts at least from my lecture on business cycles, so I can take just a little more time than I'll be able to take the next day or so to talk about the structure of production. But what I'm doing is using the same idea of a structure of production, and here we're saying capital-based macro disaggregates capital into temporally-sequent stages, okay? Consumable output is produced by a sequence of stages of production, and the output of one stage feeding into the, as input to the next. The temporally-divine stages are arrayed graphically from left to right, and the output, see, not from top to bottom, from left to right, and the output of the final stage, constituting the consumable output. And so we can put those stages of production up here. They look like that, all right? And I've shown here an early stage investment, it's product development, and you think about that guy, looks like he knows what he's doing, but he also knows it's gonna be a long time before something actually emerges as a consumer good that will pay for this kind of research. That's long-term stuff. It doesn't have to be a steel mill or a coal mine to be early stage, it just has to be a long way from consumption and therefore interest rate sensitive. You can't afford to spend a lot of money on research, unless it's gonna pay off big, it's gonna take a long time for it to pay off. And here, that's a late stage, maintaining inventory at retail, looks like the guy's pretty much got it knocked, he needs a few customers, I guess they'll come. And notice though that these different stages of production pertain to the macro economy, it's a whole economy. It's not that the product development guy is trying to make something, this guy's selling those bottles. It's a whole economy. And I point that out because there was a development back in the early 80s, 82, by Kiddlin and Prescott. And they're sort of Minnesota school, real business cycle types, but related because of that, at least once or twice removed from Chicago monetarism. They developed an idea that they introduced and made a big splash at the time called time to build, time to build with hyphens, time to build. And when I first saw that I thought, this is gonna be a move in the direction of Austrianism, time to build, realizing that it does take time to produce and things can go wrong as you're producing. But it turns out though that their time to build was strictly firm specific. In other words, the input of a firm to the output of that firm, that's time to build. And with the Austrian view, production time allows goods in process to be handed off many times from one firm to the next. So it's more of a macro context. Kiddlin and Prescott didn't address that issue at all. It was all time to build within the firm. Some people that referred to that article seem to believe that the Austrians were dead in the water now because if it's just a matter of time to build, then business people can figure out where they are in the structure of production. If they know where they are in the structure of production, they can avoid responding to market signals that might otherwise have caused them to do the wrong things, okay? But it's simply not true that business firms know exactly where they are in the structure of production. In fact, they may be at several places. They may produce several different goods in each or so to other firms that themselves are at different points in the structure of production. And the only way they can figure out what to produce, how much to produce and how to price it is through the market, okay? So it's really market signals that tells people what the prices are, which then has some implication about where they are in the structure of production. But if those prices are being distorted by government policy, then they get a distorted view of where they are. So in times of all sorts of policies being pursued, that make the price system dysfunctional, they don't have any idea what to do, whether to produce more or something or less with something or shut down or expand or whatever. I try to make this point here. This is an enterprise of some sort. I'm not sure what, but there it is. If you look down here, the main gate is in red. That's over there. And I'm sure at that main gate, you'll see a little plaque that says, you are here. So you know how to get somewhere else, okay? That's spoiler plate that's always there. You are here. But what I want to emphasize is what's missing. What's missing here? You won't see something else. I'll pull it up so you can see it. We are here, okay? You don't see the business where I'm telling you here's where we are in the structure of production. No, they don't know where they are in the structure of production. They're responding to price signals like everybody else in the market, which is influenced by interest rates, okay? And the magnitude of that influence depends on lots of things about where they are and where other firms are that they're selling output to, okay? So you don't look for that sign anywhere. Or when you go on one of these trips to an industry to look through and get a tour, take a Xerox copy of the structure of production and ask everyone along the tour, where are you on this? Yeah. Throw you out. Okay, for pedagogical convenience, the capital structure is shown having five stages with growth and number of stages increase, okay? You can think of each stage existing at every point in time. I mean, all these things are going on at once. But at the same time, you can think of goods proceeding through the stages of production. In fact, we can even show it if the dynamics will work for me, like that. Then get the sound when we got the live in here. And just to show you how old this is, this comes from Hayek really. All I did was turn the triangle over, all right? So it comes from Hayek. Introduced in 31, which is five years before the general theory. And it was also the last year that Henry Ford produced the Model A. That shows you how old the theory is, okay? If I say, if you had PowerPoint, you could show how the Model As were produced with. And Henry Ford, if you know, he owned a lot of the stages of production. He owned iron ore deposits and mining. He had a lot of them. So you ought to be able to produce some Model A. Ford's in 31 Model A Roadsters, okay? Together, the sequence form the Hayek and triangle so we can use it without identifying the stages. Watch the structure of production expand. This is just to say, as in the Knightian case, it's possible that if you're more than maintaining the structure, it will grow. It won't necessarily change the interest rate and then involve that, but it grows, okay? More importantly, if you save more, that puts downward pressure on the interest rate. The triangle changes shapes because early stage stuff is more expensive. You have to pay more in terms of interest to carry it through to completion. And so in that case, reduced current consumption, you're saving, reducing your consumption. That frees up resources in the late stage. It allows them to be used in the early stages. So resources flow from early stage, from late stage to early stage. And no, this does not require time travel. It's not time running backwards. So let's see if we can't see that too. There it is. You get resources that you get the triangle adjusting in its shape. And then there's more investment total because more is saved, more is invested, and it's ranged with emphasis on the early stages. And so the triangle, the triangle will adjust. Let's see, I don't have that in here, but I'm, triangle will grow more quickly. I'm gonna, I could go back and make it work, but I'm gonna go on because I'm about out of time. So here, let's look at the nighting construction. Increased saving, savings beyond the technical requirement, results in an increase in capital stock and a decrease in the 12 consumables with no implications about capital's temporal structure. And just don't worry about that. I know, one minute. In the Hayekian construction, increased saving results in reallocation of resources among the stages of production. Here are the differential interest rates that sensitivities are at work, okay? Just one more slide, I think. No, I do have it growing. So it goes faster because you've added more investment. I'm going by that clock, make this. Okay, this is gonna be the last slide. We can clearly see the critical difference between night and Hayek. If we burn through the casing on the nighting box, we see the Hayekian temporal structure of capital that allows for differential interest rate sensitivity, and hence reveals the market mechanism that Taylor's production plans to intertemporal preferences. Does it burn through? There it is. That's what the nightingens and the Chicago people are missing, and it's a lot to miss. It sort of closes off any possibility of an decent theory of the business cycle on the part of Chicago. Okay, thank you much.