 Good morning, everyone. It is 9 o'clock. And what better way to say good morning than with a lecture on Austrian capital theory? So here we are. Capital is defined by Mises in human action as the sum of the whole complex of goods destined for acquisition evaluated in money terms. And there's actually quite a bit packed into that definition. The one phrase that's important is this phrase destined for acquisition. The whole complex of goods destined for acquisition. What does this mean? Well, it means those goods used for production and sale of products. The acquisition here is the acquisition of money income. And so there are certain goods that producers have that they're going to use to produce monetary income to acquire monetary income. And the whole complex of those goods used to acquire money income that evaluated themselves in money terms is what he calls capital. So he also refers to capital as the sum, this sum of the whole complex of goods destined for acquisition evaluated in money terms. This sum is the starting point of economic calculation. And so we see in them that there's been a lot written on capital for good reason. It's not necessarily easy to simply get your finger on it, to get your hands on it, your head wrapped around it. People are either prone to see it as only physical goods. Some people are prone only to see it as dollars or money. And Mises says it's a sum. It's an evaluation. It's a sum of evaluation of capital assets. And Mises reminds us that in another spot, page 500 of Human Action, if you're interested, he says, quote, there is no such thing as an abstract or ideal, quote, unquote, capital that exists apart from concrete capital goods. Capital is always embodied in definite capital goods and is affected by everything that happens with regard to them. The value of an amount of capital is a derivative of the value of the capital goods in which it is embodied. So there is this capital as a tool of calculation is a dollar amount, a monetary amount. But it's the sum of the value of physical capital goods. And so we have to keep both of them in play. And I'm afraid probably what I will have time to do today in this lecture is focus mostly on the capital structure. To understand auction capital theory, it's helpful and it's necessary for us to understand the production structure and the capital structure, the structure of the intertemporal structure of the capital goods. But also we need to understand economic calculation and how economic calculation then works to allow the entrepreneur to calculate and to, in some sense, appraise the value of these capital goods. Now thankfully, right after this lecture, Dr. Salerno is going to be talking about economic calculation. So you're going to get both sides of the capital coin, so to speak. In this lecture, I probably am only going to have time mainly to talk about the production structure and how that all works towards an understanding of capital. The idea of auction capital theory then and the production structure is rooted in Karl Manger's exposition of the interrelationship of economic goods. And this is found in his Principles of Economics. And he distinguishes between two types of goods. One is consumer goods and the other is higher order goods. Or goods of the first order and higher order goods. Consumer goods, by definition, are those goods that are directly serviceable. Things that themselves directly satisfy us. In other words, when we obtain them, we use them, we don't need anything else besides them to give us satisfaction. So if I'm parched, it's relatively warm. And if I feel the need for liquid refreshment, I get a bottle of water, I drink it and I am refreshed. I don't need to add anything to water, right? You don't have to add anything to it. You just drink it in and there it is. That's what makes a consumer good, a consumer good in. Manger refers to these goods as goods of the first order. Goods of the lowest order and we'll see why in just a little bit. But then he contrasts these consumer goods, these goods of the first order with higher order goods. Higher order goods, we could also call producer goods. And these are goods that are indirectly serviceable. These are goods that are used eventually, ultimately, to produce consumer goods. We will be, there's all kinds of, any consumer good you can think of, there are goods used to produce those consumer goods. If we wanna get a bottle of water we wanna purchase, well that requires the water, yes, but also the bottle. Where does the bottle come from? The bottle has to be produced and therefore it's a producer good. It is indirectly serviceable. It is serviceable, it helps us accomplish our end but it isn't indirectly. We don't eat the bottle. We don't get any liquid refreshment from the bottle per se, but the bottle is helpful for us to eventually achieve refreshment because it holds the water that refreshes us. And so a higher order good is transformed into directly serviceable consumer goods only at some point in the future. Now, it is sort of customary to understand that we can categorize these higher order goods into three broad categories. Land, which includes all of the natural resources in the land, right? So the terra firma and any minerals or water in the land. Then there is labor, right? Human exertion and land and labor are often referred to as original factors, right? The original factors, they're independently productive, right? If I want to do something, if I wanna produce something, I need to exert labor. I don't have to manufacture my labor first. I don't have to somehow say, oh, I'd like to make this ham sandwich, but first, let me go back into the pantry for about 15 seconds or 15 minutes, rather, while I manufacture the labor I'm going to use to make the ham sandwich. The labor is with me, right? And so I can just use that effort. Land, the same, land is here, before any of us was here, land is here. It's the original factor in some sense, right? And those two goods, land and labor, are distinct from another set of producer goods that we call capital goods. These are produced means of production, right? If I wanna make a house, right? The two by fours, the shingles, those things that have to be produced that we use to make the house, those are capital goods, the hammer, right? The nail gun, those would all be considered rightly capital goods, produced means of production, right? And so that is sort of the taxonomy of goods that Manger lays out. And that is, in some sense, the starting point for us to understand the structure of production than that is very helpful for us to understand the nature of capital. So let's talk a little bit more about this structure and we are going to begin by recognizing that each consumer good is made possible because of its structure of production. And we're gonna, by way of only the best for the students at Mises University. So we're going to begin by discussing the best quintessential dessert in the history of Western civilization, which means, of course, in the history of the world. And that is the flourless chocolate cake, right? The flourless chocolate cake. It is something that everybody should have, everybody should eat. I was gonna say everybody should taste, but you don't really taste a flourless chocolate cake, you experience it, right? It is an experience in gastronomical bliss. And words cannot express how tremendous this is. And to make a good such a flourless chocolate cake, it's actually relatively simple. What is needed to make a flourless chocolate cake? Well, it requires some higher order goods, such as chocolate, of course. I mean, it's a flourless chocolate cake, right? You need essentially a pound of semi-sweet chocolate. You need a half a pound of butter. You need eight eggs. I told you it was good. I'm not kidding. You need a mixer. You need a springform pan. You need an oven. There are other things that you need, which I don't have on this picture, but you need these things, right? And so before we eat the flourless chocolate cake, before we can consume the consumer good of the flourless chocolate cake, we need the chocolate, the butter, the eggs, the springform pan, the mixer, the oven, et cetera, et cetera. Now, how do we obtain these things? The producer obtains services of the factors of production by purchasing them in exchange for money. When the production of the lower order good is completed, the producer sells it for money. So when the producer of the flourless chocolate cake, let's suppose we are in a business and we own a business called Desserts R Us. And we make only desserts and our sort of dessert of name is the flourless chocolate cake, right? To make that then, we see here a whole host of goods that are necessary. Of course, land and labor, yes. A semi-sweet chocolate, which I mentioned, butter, eggs. We need electricity to run the mixer, to run the oven perhaps. We need an oven. It's helpful to have also a microwavable oven because you're gonna have to melt the butter and the semi-sweet chocolate together and it's easiest to do that if you don't wanna go the whole double burner route, which is kind of a pain. You need a mixer, a standup mixer. Well, you don't have to have a standup mixer, but it helps. We'll talk about that in a little bit. Oh, you need a bowl, right? You need at least one bowl. You need a springform pan. A spatula is very helpful because you don't wanna waste any of it in the bowl. You wanna get it all into the springform pan, right? So you need all of these goods, right? Well then, okay, that's fine, but then you could ask yourself, well, where does a semi-sweet chocolate come from? In order to get semi-sweet chocolate, it doesn't literally grow on trees, right? I mean, yes, okay, you need some cocoa solids, which are derived eventually from the cocoa beans, but the semi-sweet chocolate, you can't go anywhere, and well, maybe I haven't discovered it. If you can tell me where to find trees that grow semi-sweet chocolate, please tell me. I'd be very happy about this, but no, the semi-sweet chocolate has to be produced from cocoa solids, cocoa butter, sugar. It's produced in a factory, right? We need transport, transporting the finished product to the places where people can buy them, right? Of course, they need land and labor to make these things. What about butter? Butter requires raw milk, salt, a separator, tanks, in which the butter is churned, a churner itself. We need packaging, we need a dairy plant. We need transport, land and labor. What about eggs? Where do eggs come from, right? Well, they come from chickens, of course, but then to produce eggs, and we need chickens. We need chicken feed. We need a chicken coop of some sort, places like a chicken apartment, if you will. Maybe it's condos if the chickens can own their own places. Water, we need certain automated equipment if we want to produce eggs most efficiently. We need packaging, electricity. We need a poultry plant or an eggplant, an egg factory, not the gourd looking thing, egg plant, not that kind of egg plant. When you transport, when you land and labor, electricity. We need power plants, et cetera, right? So you could look at this stage just above all of these goods that are going to be used in the manufacturing of the flyer-suckler cake, and they all need to be produced, right? Where are we going to get the oven? The microwave oven, the springform pan, the mixer. While we go to a kitchen supply shop, and the kitchen supply shop, of course, they need buildings, they need fixtures, that they have to accumulate wholesale, all of these goods that are used to make the flyer-less chocolate cake. And then then, of course, if you go far enough up the structure, if you consider the mixer, the mixer requires zinc castings, metal parts, paint, tools, electronic parts. Needs the factory in which the mixer is made. Land and labor, of course. And then you go far enough up, of course, it requires a certain amount of mining and farming and refining and production of various other higher-order goods that we can't even go into because we only have so much space on one screen. And quite frankly, it begins to boggle the mind. And so at every step of the way, when a consumer good is sold, the producer that consumer good gets income, also, however previous to that, the producer that consumer good has already purchased higher-order goods from higher-order producers. And so the capital good, the semi-sweet chocolate, the butter, the eggs, the electricity, the oven, et cetera, has been purchased by the producer first. And then those goods are used for the production of a lower-order good, in this case, the consumer good, which is also sold for money. And this process starts at the very top, right? The miners invest in mining zinc, and then the zinc is used to make a zinc casting, which is then used to make a standing mixer, which is then sold to the baker, which is then used to make the flourless chocolate cake, which is consumed by a very, very happy person. And this process then continues from the higher stages to the lower stages. And that by itself then tells us about a very important principle related to the production structure. And that is that production effort moves down the structure of production. Effort moves down the structure of production. What that means is that we don't start by making the flourless chocolate cake, and then we make the semi-sweet chocolate to make the flourless chocolate cake. No, to make the flourless chocolate cake, we first have to make the semi-sweet chocolate. Before we can make the semi-sweet chocolate, we first have to make the cocoa solids. To make the cocoa solids, we first have to harvest the cocoa beans. And so the production effort has to start at the top of the production structure and then moves down. On the other hand, value and income directionally move up the structure of production. The reason why there is, say, that butter is valued is partly due to the fact that butter is used in making flourless chocolate cake, as well as other things. The reason semi-sweet chocolate is valued is that semi-sweet chocolate is used to make flourless chocolate cake and other things. Semi-sweet chocolate, of course, can be used as a consumer good, but that's a topic we're going to talk about just briefly down the road. The point is that the chocolate, butter, eggs, mixer are all valued because they can be used in making the flourless chocolate cake that is valued. Cream is valued because it can be used to make butter that is valued. Chickens are valued because they can be used to make eggs that are valued. And the eggs are valued because they can be used to make flourless chocolate cake. And so we have this principle of derived demand. The higher order good, the demand for the higher order good is derived from the demand for the lower order good. So value is imputed up the structure of production. Now in a monetary economy, of course, that means that money income also moves directionally up the structure of production. The consumer buys a flourless chocolate cake from Desserts R Us. Desserts R Us invest in higher order goods. They spend money buying a mixer, buying semi-sweet chocolate, buying butter, et cetera. And the money that they spend on butter and eggs, et cetera, become income is income received by the maker of butter, the maker of semi-sweet chocolate. When the butter manufacturer buys the cream, they spend money investing in the cream, that is income that's received by the dairy producer. And so value is imputed up the structure of production. Monetary income moves up the structure of production directionally. We're not saying that when we say income moves up the structure of production. We're not saying that income is the most, it's the largest magnitude at the highest stage. We're just simply saying we're talking about the rational directions of movement here. Now those producers, those producers who use their money to invest in the purchase of factors of production are referred to as capitalists. Those producers that invest, that savings in the accumulation of factors of production that they will then use to produce a good that will be sold sometime in the future, they're called the capitalists. And so the capitalists are the ones that produce and own various stages of capital goods throughout the structure of production. Now we know that any act of production takes time. And hence, because production is an action, all action takes time, engaging in production takes time, making a flourless chocolate cake makes, takes at least I would say an hour. And quite frankly, it takes more than that because really to get the Primo flourless chocolate cake you wanna make it the night before and let it set in the refrigerator and let the flavor sort of mellow and get really, really good. And so there is a time span there. And I mean, and you're gonna want, you're not gonna wanna do that. You're gonna see it come out and you know you can't dive into it right away because it's warm, it's hot, it's baked. But you don't even wanna, if you wanna just leave it sit for maybe a half an hour and then dive in, but don't do it. You will, there will be, what shall we say, a higher level of satisfaction if you wait, right? You wait that just make the production structure a tiny bit more roundabout and things will be better, trust me. In any event, production takes time. And hence is, and of course, so we invest and we produce now, we don't reap the reward, we don't reap the revenue until some point time in the future. Well, what do we know about the future? The future is uncertain. And so because production, all production takes time, it's based on a speculation about the future state of the market. The structure production is the other side in some sense of the division of labor coin. The structure production is the other side of the division of labor coin. All of these goods, the vast majority of these goods are produced by people that specialize in producing these things, right? And you think about different companies, right? That produce certain things like KitchenAid. What are KitchenAid known for? Well, the stand-up mixer. They produce mixers. They produce other things too, but they're really well-known at producing mixers. A lot of companies specialize, you know, Jaredelli specialize in producing chocolate, right? There's a lot of these goods are produced by people who have specialized in producing just that thing. And so the structure production in some sense is the other side of the division of labor coin. Just like the division of labor, the production structure must be coordinated by entrepreneurs. I mean, how do we know exactly how many eggs should be produced? How do we know how many cocoa solids should be produced? Well, that is handled through the coordination process of economic calculation by entrepreneurs that Dr. Salerno will be talking about shortly. So any investment in the production, any investment in production is made in anticipation of a later sale to lower order producers, and then finally to consumers. So the complex structure production is only made possible by use of capital goods. A production structure like this obviously has loads of capital goods in it. And using capital goods requires longer production processes, meaning we have to invest in the production of the capital goods first before we can use them to make the consumer goods. And so if I want to have my dessert shop, you know, Ritty's desserts or something, and I need to get myself a mixer, well, I can't just click my heels and say there's no place like mixing, there's no place like mixing and hope it's just right there. No, I have to invest money, I have to spend $500 to get a standup mixer like this. Well, that means that I cannot spend that $500 on something else. Which means I'm gonna have to forego my ping-pong table or not my ping-pong table, it's a ping-pong table I don't own because I have a body yet because I've spent the $500 on a mixer. In other words, I have to forego the opportunity to purchase a ping-pong table that I'm gonna use for fun because I'm spending the $500 on the mixer. So I can use the mixer to aid in future production of flourless chocolate cake only by sacrificing recreational consumption now in the form of no ping-pong games. Now this restriction of consumption, we call saving, the restriction of consumption is called saving, and the transfer of the saved resources, the transfer of the $500 towards accumulating the capital goods, that's called investment. So saving and investment go together. In order for investment to occur, someone has to save. Investment requires saving by somebody. Now why do we do this? Why would we forego the joy of ping-pong just to get a mixer? Well we get a mixer because it helps us produce what we want to produce. It aids in our productivity and capital goods, that's what capital goods are good for. They increase our productivity. They increase the productivity of land and labor and they do so in two ways. They increase productivity in two ways. First, they increase the production of goods we can produce without capital goods. That they help us produce more efficiently. It is possible for instance, if you want to make a flourless chocolate cake, you can use your fingers and not a mixer. It is possible. I don't advise it, but you can do it. You can break your eight eggs in your bowl and just start moving your hands real fast, right? Now at some point, and it won't take long, especially in today's era of texting and tweeting and snapping and gramming and whatever else we do, like this, carpal tunnel sets in very, very quickly. We don't want that, right? Know who wants to just sort of go like, and then of course you have a hands full of slimy stuff, which is not altogether pleasant. So instead of doing that, we can use a mixer, right? You can use a mixer. And so the mixer increases our productivity. Now what's great about the mixer of course, especially the standing mixer, so you put the eggs in there, you put it in place, you hit the button at the right speed, it starts whirling around and that frees you up to go and chop up the chocolate and the butter and put it in the microwave oven and start it melting while the mixer is going. So in some sense, it's like you're doubling your labor output almost through the beauty of capitalism. It's capitalism that makes this possible. So increasing the production of goods we can produce without a capital good is one way that capital goods increase our production. A second way is by it allows people to produce goods that they otherwise could not obtain at all. Here we have, some goods cannot be produced at all without the use of capital goods. Here we have a, actually a very rare photo of a primitive man, they used to have a fishing contest, it turns out, centuries eons ago. And here we have the caption to this photo. Before the hook, the pole and the worm were even thought of their existence at a time known to fish as the golden age. And why is it the golden age? Because these are poor people trying to grab fish by ramming their hands down on the water and it's up to no avail, right? They're having a hard time catching fish. Why? Because they don't have a pole, a hook. They don't have a bow or an arrow. They all they have is their hands. And so they can't really catch fish without any of these things. They need capital goods to produce fish at all, right? We need capital goods to have glasses. Glasses would not be able to be produced without capital goods. This screen, this projector would not be at all possible without using tools and capital goods to produce them. And so the availability of capital goods even more importantly increases their productivity by allowing us to produce goods that would not be available at all without them. So having capital goods increases their productivity and ultimately the main economic function is to advance people in time towards their objective in producing the consumer goods, right? What the semi, what the flourless chocolate cake or what did the mixer does for us? What the springform pan, what the chocolate and the eggs, et cetera does for us. It makes it easier for us to get our flourless chocolate cake more quickly. It advances us in time towards our objective of obtaining the consumer good. Now, if that's the case, then what is it that keeps people from investing more and more resources in capital goods? If capital goods are so great because they increase our productivity, which they do, why aren't we just always accumulating more and more capital goods? What holds us back? Well, what holds us back is time preference, right? The fact that at some point people value present goods more than some amount of goods in the future. In fact, if we're talking about the same amount of goods, people prefer present goods more than the same amount of goods in the future, right? If you're on the wheel of fortune or not wheel of fortune, what is it the price is right? You know, they have the usually spin the wheel, the showcase showdown. And they say, what's in the showcase showdown, Johnny? He says, a brand new car. You know, they get so crazy and excited. They don't realize how much in gift tax they're gonna have to pay if they win the car, but they're really excited. And imagine, say, well, a brand new car, five years from now. That's nice, right? But it sort of takes the edge off of it a little bit, doesn't it? It's like, oh, well, okay, five years from now. Maybe I'll be here, maybe I don't, who knows, but even if I am here, it's like five years from now, I gotta struggle with what I have for five, I mean, the point is that people prefer their end satisfied sooner than later. And therefore, what that means is we have to consume something in the present to live. We're gonna value some goods in the present. We always value goods in the present. And we value goods in the present more than we value the same goods in the future. We cannot just continue to put off consumption forever because we need to consume to live. And it's time preference that determines how willing people are to save and invest. Everybody has a subjective time preference. Everybody has their, not only do they have subjective preferences over do I wanna eat apples or oranges today, but they also have a subjective preference or do I want five apples today or five apples tomorrow or five apples a year from now. So time preference constrains people's willingness to perpetually save and invest. So those are principles that are important for us to understand about the nature of the production structure. Now, these, when people engage in accumulating capital goods to help them produce their output, there are a number of choices that they have to make regarding capital and capital goods. One of the choices is how capital intensive do we want the production process to be? We can arrange production in a more or less capital intensive process. There are different ways we can, different things we can use to aid us in whipping and beating eggs. We can use a fork and a bowl. That's pretty easy and simple if we're just making a little omelet. But you can also use a whisk. It gets a little more action. You can use a handheld mixer. In fact, the recipe that I use, which I highly recommend, it's from Cook's Illustrated Magazine. It's called the Ultimate Flourless Chocolate Cake and I'm not kidding, it is the ultimate. They say, look, if you can't afford a KitchenAid, that's okay, just use a stand-up mixer, I mean, use a handheld mixer and you can just put it on books, right? You can put it on books and then use that as sort of your makeshift standing mixer. And I suppose it works. Thankfully, I've invested, actually, my parents were kind enough to invest for me. Years ago, I think when we got married, they bought us a mixer, a KitchenAid mixer. And we're on our second mixer. You know your marriage is a successful one if you're on your second mixer. Because that's a durable, durable good. And so far, we're a two-mixer marriage and that's good. But anyway, you can use a KitchenAid stand-up mixer or if you really want to bring out the big hauses, you've got this industrial mixer, which is huge. I mean, I don't know how, at least 30 or 30 to 50 KitchenAid stand-up mixer in terms of volume, right? And each of these are of different sort of capital or different, they're differently capital intensive. What the producer uses depends on his preferences. Depends on the choices that the producer makes. In other words, it's a choice variable, right? There's no one that says you have to use an industrial mixer or you have to use a fork or you have to use a hand mixer, a hand beater, right? The producer makes this choice, right? According to how well it fits in with his production plans. Another choice variable is the degree of specificity, right? Different capital goods are of different degrees of specificity. I would argue that eggs are less specific than a spring-formed pan because eggs have more uses, right? A spring-formed pan has particular uses, like for fly-less chocolate cake, maybe a cheesecake. There's probably other uses that you could use it for that is not really designed for. Eggs are more ubiquitous, right? You can use them for fly-less chocolate cake, of course. You could use them for flour-full cake. Interesting by side note is that fly-less chocolate cake is the only dessert that we know of that is named for the ingredient it does not possess. It's a little fun fact there, a little kitchen trivia. But if you want to make a flour-full cake, you also could use eggs. If you want to make chocolate chip cookies, eggs, right? If you want to make an omelet, eggs, right? If you want to be Rocky Balboa, you drink raw eggs. That's what he did in the movie. And it worked out for him, right? He ended up beating Apollo Creed and then a bunch of other people after that. Mr. T, I think, and it's Russian guy. So anyway, there's a whole host of uses for eggs. And so eggs are less specific as a capital good than, say, a spring-formed pan. Similar to chocolate, there's a difference between milk chocolate and special dark chocolate, right? The fly-less chocolate cake doesn't call for just any old chocolate, it calls for special dark. It's specific, you know, specific types of uses. So the degree of capital specificity is a choice variable. Durability also needs to be taken into account. All capital goods are perishable. No capital good lasts forever. And what we call depreciation is simply the rate at which capital goods are used up. And each particular capital good has a different rate at which it is used up, right? An egg used to make a cake, for instance. An egg used to make a cake is used up almost instantaneously. I mean, you put it in the bowl, you can't get it back, right? You can't sort of like whip up the fly-less chocolate cake batter and say, oh, you know what, I forgot I didn't eat breakfast today. I'll let me just let me extract two of the eight eggs out of the fly-less chocolate cake and I'll use those for an omelet, nay-nay. You can't use, you can't do that, right? And so the egg has a very high rate of depreciation. The oven, on the other hand, may last for 15 years or more, right? The oven may last a long time. Our oven actually lasted more than that in our kitchen. And so that is a much slower rate of depreciation. Here we have the choice between sort of a flimsy spatula and the sort of really more hearty, long-lasting sort of solid silicon spatulas and kitchen equipment. The little flimsy one on your left there is a two-part deal that has like this little flimsy top, which does a job, but then the plastic handle is sort of stuck in, it's like rammed in there and it usually doesn't last very long, gets loose, especially if you wash it and use it a lot and it falls apart and it's, you know, that's why you probably buy it at the dollar store, but then you get what you pay for. But the point is, that's the point, that is the very point, right? That different goods are more or less durable and then that means that the producer gets to decide, do I want to invest in a capital that's more durable, given the price, or do I wanna invest in a capital that's gonna be less durable but it's gonna get me by right now with a lower price, right? Those are the decision variables. Now we know that after any capital good is used or wears out, if it wears out, we're back to where we started, right? In other words, we can use a spatula for great effect, but once if it wears out, then we have no spatula, we're back to our hands, right? And so to maintain productivity, it's not enough to save and invest in a capital good once. To maintain productivity, we have to save enough to maintain our capital. We have to save enough so that we have savings on hand to fund purchasing new capital goods when the old ones wear out. And we call that maintaining capital, keeping the value of our capital assets constant across time. Now if a person invests in capital but then doesn't continue to save so that as the capital good wears out, he does not have any savings to fund replacement and maintenance, we call that consuming capital, right? Because over time, your quantity of capital will shrink. The quantity of capital goods will shrink and so the value of capital that you own shrinks. Now if so, if you wanna consume capital, it is easy. Basically do nothing, just consume, right? Just use and consume, don't save, and pretty soon you won't have any capital at your disposal. But again, the choice of whether or not you accumulate capital, add to your stock of capital, or add to the magnitude of capital, or you maintain capital or you consume capital, that choice depends on how much a person values present goods over future goods. And this decision depends on two things. It depends on the value of the good produced. How much does he value the good that we're producing? It is demand for flourless chocolate cake relatively high so it makes sense to make flourless chocolate cake. And also, it depends on his rate of time preference. How intense is his preference of present money over future money? And as we said, the entire economic order consists of one integrated production structure. The entire economic order is not just the production structure for flourless chocolate cake. It is one integrated production structure that incorporates all consumer goods and all producer goods. And in some sense, this is what we would consider the macroeconomy if we wanted to call it that. And it's one important thing that sets Austrian economics apart from modern macroeconomics. Here we have modern macroeconomics. We've got a couple of different iterations there. There's sort of the Keynesian version. The comes right out of Keynes's book. Y output is a sum of consumption spending C plus I investment spending plus G government spending plus NX net exports. Or we could have the neoclassical, Solo's neoclassical growth model where you model the entire economy as one giant production function as if there's one economic czar pulling the lever, determining how much we're investing and how much labor we're using and all kinds of good stuff. No doubt, if you look at those models, those models require a lot of aggregation. A lot of aggregation of homogenous units. The I in Keynes is basically just investment spending, homogenous investment spending. It doesn't matter for GDP according to Keynes. It doesn't matter what we're investing in as long as we're spending, it's good. It is a little more nuanced than that, but not much. In the neoclassical model, K is a homogenous blob of something called schmoo, right? Samuelson or Lucas referred to it as schmoo, this homogenous blob. And so we can treat every unit of capital as exactly the same. Well, I hope by now if you look at that production structure for flourless chocolate cake, the differences in specificity, the differences in durability make, all the capital goods are very heterogeneous. It's the opposite of homogeneity. Capital goods are heterogeneous with different uses, different specificity, different durability, and they must be used in the right place at the right time in the right combination with other complementary factors to be productive. All of that is missed in Keynesian and other modern macroeconomic theories, models. The economic order, the general economic order, is actually integrated, is an integrated aggregate production structure that supports the production of all consumer goods. And this has been represented by concentric circles by Eugen von Bomberk in The Positive Theory of Capital, which sort of set the ball rolling along these ways. Bomberk then building on Manger's taxonomy of goods. And then his principles were taken and expressed in the form of the Hayekian Triangle by, not surprisingly, Hayek. It'd be funny to call it the Hayekian Triangle if Hayek didn't use it. It was not called the Hayekian Parallelogram, but we won't get into that. But the Hayekian Triangle then was also then used by Rothbard and Roger Garrison and Jesus Huerta de Soto. The point is that capital is neither best represented as a stock of things or even as a flow of money, but as a structure in which all parts are interrelated through the production decisions made at every stage. And the same principles that apply to the individual process of producing firewood chocolate cake apply to the production of all processes in the macroeconomic economy. Throughout the entire economic order, and this is a diagram from Murray Rothbard's man economy and state. Throughout the entire economic order, money moves from the consumer goods industries up through the higher stages of production. And at the same time, production effort in the form of goods flows from the highest stages, mining and exploration down to refining, down to production and manufacturing of capital goods, down to wholesaling, down to retailing. And finally, the supply and the sale of consumer goods. Now there are three important points and facts we want to, that are brought out by the capital structure that we want to end with. And that is this. First, the production and the market division of labor is heavily weighted towards the production of capital goods. The amount of money spent on capital goods is much higher than that spent on consumer goods at any given point. The entire structure of production is supported then by saving and investment, not consumption, right? In order to obtain all of these higher order goods that are used to produce consumer goods, there's a lot more money that has to be spent on those higher order goods at any given moment. And so we do not sustainably stimulate, shall we say, the economy. We don't sustainably grow the economy by stimulating consumption. The economy is driven by saving and investment. Secondly, the capitalist is the laborer's benefactor by advancing income in the present to workers and sustains them through time-consuming production process. Just watch this film, Mission Impossible, Ghost Protocol, are you seeing the Ghost Protocol? And in one part, it's a very frightening part. I mean, you know it's all computer generated, but it's still very frightening. The Ethan Hunt is outside this gigantic, the tallest building in the world, the Burj Dubai, the Burj Khalifa. That is a 160-story skyscraper in Dubai. And the people there tell us that at any given moment there was 12,000 people working on this thing at any given day. Excavation began January 6th, 2004. It officially opened, however, January 4th, 2010. So six years it took to build this thing. And you have 12,000 people say starting on it. As opposed to, well, come in and start working and we'll pay you your salary six years from now when we start renting apartments. Well, I mean, no money for six years? Good luck with that. These people needed income to sustain themselves and their families for the whole time during the production process. How's that gonna happen? Well, it's the capitalist. The capitalist who saved and advanced money and gave them wages for the length of the production process before they saw a dime of revenue. So the capitalist is the labor's benefactor. The capitalist is not the enemy. The capitalist and the laborer work together. Dare I say it, they're comrades in arms. Fighting scarcity. Finally, the economic order is extremely complex. It is beyond the capability to design and to plan the production structure for a single good. And I actually think this is a very helpful task for any social scientist, be they an economist, a sociologist or whatever, a political scientist. If you ever have, have you ever attempted? You ever think for like half a second? Well, maybe we could design an economy. Maybe we could just centrally plan. It wouldn't be better. Eliminate the waste. Eliminate the anarchy. Sit down and trace out the production structure, the whole production structure of even just one consumer good. And ask yourself, well, how easy would it be to plan for just the production of one consumer good efficiently? And then, if that doesn't convince you, say, okay, now let's suppose we have to do it for all the consumer goods that we have available now. And the question in some sense, the problem answers itself. It's beyond our capability. It's beyond the capability of any one person to do that. It's estimated that there are several million types of consumer goods produced in the US economy alone. It's far beyond the capability of the human mind to comprehend, let alone design. Well, how does it happen? What happens is you're gonna hear shortly through economic calculation. It's the market prices of the consumer goods, but most importantly, the producer goods, the capital goods that entrepreneurs are able to use to appraise the value of the capital assets that will then allow them to assess what is the state of my company, my firm? Is the value of my capital expanding or is it shrinking based on what I have done and what I plan to do? And so economic calculation is crucial in our understanding of the value of capital. And that's what you're gonna hear about next.