 Time to begin our lecture at on Austrian capital theory. I want to offer a certain disclaimer before we begin I typically my main general policy is no economics before 10 o'clock And so I'm I'm you know, I'm going the extra mile for the Mesa Institute That's how important the Mesa Institute is for Western civilization. So we're gonna do our best One of the things I was not able to get to yesterday when I talked about the division of labor is that the division of labor itself is Praxeologically linked with the capital structure And so when we talk about the capital structure capital structures like the other side of the division of labor coin that we would not be able to have an extensive division of labor without an extensive capital structure and the extensive capital structures made possible by an extensive division of labor So they go hand in hand So it is appropriate that this lecture is following up to a certain extent on what I said before now the Austrian capital theory is rooted in the Work of Carl Manger and his exposition of the interrelationships of economic goods that Dr. Salerno Discussed yesterday morning Where he lays out a consume the distinction between consumer goods or goods the lowest order as Manger would call it and higher order goods or producer goods consumer goods are those goods that are directly serviceable that you can consume directly You don't need to do anything if you have a bottle of water and you drink it You don't have to add anything to the water. You don't have to add water to get water You just drink it and that's a consumer good Producer good of course is a good that it provides a service It's helpful, but it doesn't provide a direct satisfaction direct utility if you will But it's used to produce something that will give you direct utility and there are in general three categories three large categories of producer goods There are Land and labor we call the original factors They are independently productive Again, we don't have to do anything to manufacture labor if we're here. We can use our labor On the other hand capital goods are another is another higher order good and by definition a capital good is a produced means of production So a capital good is not independently productive. It has to be produced first and Then can be used in production if if a carpenter wants to use a hammer the hammer hammers don't literally grow on trees They don't just sort of lay around You know dropped by the hammer ferry or whatever overnight and you just grab it You know you have to make the hammer first has to be produced and then he can use the hammer Now each consumer good is made possible by its structure of production and to make a consumer's good The producer must obtain services of the higher order goods The services of the necessary land the necessary labor and the necessary particular capital goods and So let's go through an example. I think what a better way to illustrate this principle by considering What it takes to produce one of the pinnacles of Western civilization, which would be the flowerless chocolate cake it's perhaps I consider it the greatest dessert in in in Western in the history of Western civilization, which means the greatest dessert in the world and It's it's so good. If you haven't ever had when you have to have one You know that you put it on your you know on your bucket list It's not something that you that you taste. It's something you experience I'm not kidding. I'm prone to hyperbole, but I'm not being hyperbolic at this point But ask yourself, okay What what does it take to produce something of this of this of this magnitude, right? Which on the on the other hand is only one little consumer good well It takes land of course and labor so you have this German pastry chef Standing in a German kitchen It takes a bowl and a spatula. It takes a Pound of semi-sweet chocolate a half a pound of butter and eight eggs. I told you it was good I'm not not making it up, right? You need a mixer Kitchen aid stand-up mixer was it's probably the best Springform pan you need a conventional oven and you also need a microwave oven that I don't have here Electricity would be good or some type of power But anyway, you need these higher order goods that are used to make this flowerless chocolate cake now Of course, yes your question. Okay, that's fine. That's great, right land and labor They are original factors of production, but where do the eggs come from? How do we get the semi-sweet chocolate? How do we get the mixer? How do we get the the oven? Well, they have to be produced and so we here we have I guess the the print is relatively small But here we have and this just tells it shows you how complex the structure of production is we have a structure production for flowerless chocolate cake Flyers chocolate cake of course is at the bottom here and then above that We have the land the labor the semi-sweet chocolate the butter the eggs the electricity the oven the microwave oven the springform pan the mixer the bowl and the spatula and I'm actually leaving a couple things out because I ran out of space and this is you know too tiny as it is But then you ask after yourself, how do you get semi-sweet chocolate? Where does that come from it doesn't grow on trees. No to get semi-sweet chocolate you need cocoa solids cocoa butter sugar a factory transport land and labor To get butter you need raw milk salt a separator tanks a Cherner packaging a dairy plant electricity transport land and labor How to get eggs, right? We need a chicken the chicken comes before the egg by the way in case there's any debate on this topic You need a chicken you need feed you need a chicken coop you need a water Some automated equipment if you're gonna you know if they're gonna really produce eggs at a price that we can all afford You need electricity a factory transport and labor for electricity need power plants coal or natural gas wiring land and labor For these other things the oven the microwave oven the springform pan the mix of the bowl and spatula You can get those at your local kitchen supply shop But where do they get their goods right they don't just sort of click their heels and have them appear They have to be produced as well Right and so to make an oven you need a metal machine presses You need automated equipment electrical parts plastic parts enamel insulation hand tools land and labor To make the springform pan you need a metal machine presses automated equipment, etc to make this the mixer You need zinc castings metal parts machines paint tools electricity electronic parts a factory Land and labor so at every stage of production the producer obtains the services of the factories of production and then purchase and they obtain am I purchasing them in exchange for money, right and so the Let's suppose that we own a dessert shop. We'll call it just desserts. I always like Shop names that have double meanings right just desserts. It's all we serve is desserts and then we're gonna give you your just desserts and I know it's early. It's I'm doing the best I can't so Just desserts in order to make the flyerless chocolate cake. They're going to sell as a consumer good They need to first spend money on the land the labor and all of these Capital goods and then the capital goods then is used in production to produce the lower order good that Just desserts sells as a consumer good Likewise the Egg producer has to first advance money to the owners of higher order goods They have to spend money on chickens and on chicken feed and on water and on the chicken coupes Etc. They have to spend money there Before they can then produce the eggs that then they will sell for money And so this process of course begins clear at the top with the mining of the ores the metal ores The farming that's necessary to raise the chickens and the cows that are going to produce the milk it begins with refining the metals and the zinc that is going to be used in the zinc casting and Production of various other higher order goods. So this is actually I mean there's a lot of stuff up there But this is just this is a very very simplified production structure And by the way if anyone is is any I think everybody who is in the social sciences political science economics Ideology if they are at all prone to consider perhaps we need to engage in economic planning Everybody in the social sciences should should have somewhere along their line pick just pick your favorite consumer good and Then trace out the entire structure production for that consumer good Just do it as an exercise and by the time you get to the end you should be at all sort of be You'll figure out that there there is no way that we could plan an entire the entire production apparatus For just one little slice of flowerless chocolate cake How are we going to do it for the rest of the economy right? So I think it's a very helpful exercise But any event as we look at this production structure There are a couple of important principles that were Mentioned by dr. Soleno. We're just going to review again here And one of those important principles is that effort moves down the structure production Production effort moves down the structure production meaning we have to produce the higher order goods first. I mean we can't We can't make the flowerless chocolate cake without the eggs or without the butter We don't make the flowerless chocolate cake and then get some butter to use to make the fire That we can't do that. We have to have the butter first Which means we have to have the raw milk and the churn first before we make the butter To make the mixer we have to have the zinc castings first Which means the zinc has to be mined first and so the production has to begin at the higher stages and then Production effort moves down to the the lowest the stage of the lowest order the consumer goods stage On the other hand Value and income is imputed up the structure production. Why is it that people produce eggs at all? Anyway, well, it's because people want them to consume directly But then also to use to make fireless chocolate cakes to make flour full cakes and other, you know other things right omelets Why is it that people produce? Mixers because mixers can be used to produce other things that people value and so if for instance the value of Well, if people take complete leave of their senses and they said I don't want any fireless chocolate cake ever again That that'd be no way to make America great again by the way But if that happens right the value of semi-sweet chocolate would fall significantly right wouldn't wouldn't all go away Right because some people there's other uses for semi-sweet chocolate, but it would fall significantly and so it'd be less valuable there would be less incentive for semi-sweet chocolate producers to produce as much semi-sweet chocolate because there would be less revenues being reaped by the producer of semi-sweet chocolate because people would be buying less of it and so people value the higher-order goods because the value of the lower-order goods we call that derived demand and Likewise as people make investments the income is moving up the structure of production The flourless chocolate cake producers spend money to obtain the higher-order goods to obtain the butter The springform pan and the spatula the spatula maker spends money To obtain the silicone and the molds and the presses necessary to make the spatula Right and so income The direction of income is moving up the structure production now those producers who use money to invest in the purchase of factors of production are called capitalists because it is a time that's a time transaction people These these capital goods producers they spend money they advance money in time to owners of higher-order goods producers and Then they take those factors and produce the capital good And then they will sell the capital good to the person who's demanding it at the next stage and so every active production like that is a time Transaction the producer advances money to the owners of the factors of production in order to obtain the fact that you're producing it They're going to sell in them for money. Hopefully but in the future right so there's a present future dimension throughout the production structure Now the fact then that all production takes time each each producer must produce each producer of a good must produce in anticipation of the sale of a product and Any investment in the production of a good is made in anticipation of a later sale to lower or owner producers or eventually to consumers Now we've made this point that if you notice the bulk of the goods listed on this very simplified production structure the bulk of the bulk of these goods are Capital goods they're produced means of production. So the complex structure of production that we have Supporting any consumer good is made possible only by the use of capital goods by produced means of production and using capital goods requires longer production processes Using capital goods requires longer production processes. It requires adding stages to the production process Because in order to obtain a capital good, you have to forego Direct satisfaction you have to forego consumption if you want to buy for instance a Standing mixer to use making fileless chocolate cake and pizza dough and other culinary delights You have to first be willing to sacrifice The money that you would spend on the KitchenAid mixer. You have to do without some other good, right a Consumer good. This is a drift trike. I didn't drift trikes are becoming a thing it turns out like trikes for adults I guess Literally, that's what I've seen the pictures anyway Hey value subjective, you know, whatever and So one if one has $500 just sort of laying around they could spend it on a drift trike and get direct satisfaction from that or They could spend it on KitchenAid a KitchenAid mixer that you're going to use to produce some other consumer good So what do we have we have a situation where the The person who's going to obtain the capital good has to forego Present consumption and this sacrificing the restriction of present consumption is what we call saving it's called saving so Obtaining an accumulating capital requires saving Requires the restriction of consumption and then of course we're not restricting consumption for Restriction of consumption sake those savings are going to be directed to accumulating capital accumulating capital goods And so when people say their resources when they direct those resources to the accumulation of capital goods That's called investment. So saving investment go together So people say they restrict consumption in order to invest But if they're restricting consumption that means that they're going to be doing it without some present some present satisfaction They're going to be reducing their present satisfaction at some level. Why would they do that? Why go to all this trouble just to you know, get your hands on a couple of capital goods Well, it's because capital goods increase productivity They increase productivity for the user and they do so in two ways The first way is they increase the productivity in tasks. We can do without capital goods Right, you can imagine that it's possible to Say beat eggs with your fingers You could crack, you know, eight eggs in a bowl and just kind of go to town But I mean you could do that right I'll be honest It's not as effective as using a mixer it takes a lot of Hand motion and you have to move your hands real fast and at some point you begin to suffer from carpal tunnel syndrome So it's not easy, right? It's a whole lot easier to put in the eggs in a bowl and Just hitting the button and let let the capital good do its work Right and it's even better because you put those eggs in the bowl and let the capital good while that's doing its thing You can go over and put the you can you can have the the chopped up semi-sweet chocolate and the butter in The bowl and put it in the microwave while the eggs are going right so you're essentially you're doubling your labor in some sense That's how capital goods increase productivity. They allow us to produce goods that we can produce without a Capital good more importantly, however Capital goods increase our productivity Because it allows people to produce goods that otherwise we could not obtain at all Here is a photo of ancient man I don't know who the photographer was but they happen to catch some sort of ancient men fishing in their And they're in their in their dugouts and they're thrusting their hands down into the water and as the As the commentary says before they hook the pole and the worm were even thought of there existed a time known to fish as the golden age and Why is that because they can't catch fish just by you know Grabbing grabbing their fists down in in a pond, right? They need a they need capital goods. They need a pole a hook A bow and an arrow or something right they need a capital good And so there are certain goods that we flat out could not have at all without capital I mean think of think of our think of that what we have here that projector right the projector The laptop computers the smartphones. We would not have those at all if we did not have Capitals my glasses I would I would be you would all be fuzzy if it wasn't for capital goods because we need capital goods to make Glasses and so there are a whole host of goods that we now look at not even as luxuries But as necessities that we would not have without capital goods And so capital goods increase our productivity In fact the role of capital the role of capital is to advance people in time towards their objective in producing it consumers good It helps us to achieve our end more quickly if I had to mix the eggs by hand It would take quite a long time to do that and then when I got done I still would have to take care of the chocolate and the butter and melt them together But now with the KitchenAid mixers I said you press it It whips it up real nice in about four minutes And that gives you just the right amount of time to melt the chocolate and to melt it But I feel like a little bit like Julia child. I don't know I'm giving like cooking instructions I'm sorry first you take the chocolate. No anyway, so So the role of capital advances us in time it allows us to achieve our end More quickly So what keeps people from investing more and more resources in capital goods of capital goods are so, you know If they help us to be so productive. Why don't we just do nothing but invest? Well, it's because of what we call time preference, right? People prefer to have their end satisfied sooner than later and one of their ends is a satisfaction from consumption at some P at some point people will value the present good more than the same amounts in Than some amount of goods in the future People do have to eat to survive if you're going to produce you have to survive And so at some point you're not going to you're not going to invest a hundred percent of your income or Either in terms of goods or money in investment because you have to eat So the intensity of preferring Present money to future money or present goods to future money the intensity or the level of time preference that determines how willing people are to Save and invest People with relatively high time preferences. They want present satisfaction now And so they are very there they're less willing to put off present consumption They're less willing to save and invest on the other hand people lower time preferences. They still it's still positive They still have time preference, but it's not as intense. They're more willing to put off Some of their present satisfaction to obtain more capital goods to consume more in the future so time preference is very important now that leads us to the question of What kind of capital goods and how many capital goods do we accumulate choices related to capital goods, right? and one Dimension that we have a choice about we can arrange production in a more or less capital intensive process, right? If we want if we say okay, well, we're not going to mix eggs with our fingers We still have a wide variety of choices to choose from we can use a fork You can beat eggs with a fork you can use a spatula, which is even better. You can use a hand mixer In fact that the original recipe that I use I by the way I recommend the recipe from cooks illustrated for a flyerless chocolate cake is called the ultimate flyerless chocolate cake, and they're not kidding So just this just this little tip from dr. Rittner to you all They recommend using a hand mixer if you can't you know if you can't be more capital intensive use a hand mixer And then put it on books so to have a makeshift standing mixer, right? That is okay, but it's better to have an actual standing mixer Now if you could go whole hog and have an industrial standing mixer I mean this this thing is about that that mixer there clear on the on the right there for you that has about oh my goodness about 30 This is about 30 Perspective on it that's huge right and so this from from from left to right is different levels of capital intensity Which one is right for? The producer well depends on the preferences of the producer It becomes a choice variable right a producer is not forced in a free society It's not forced just to use one type of capital good right it can be it can be There's a range of capital goods and it's determined by its preferences Also each capital Good has a different degree of specificity Think of eggs and springform pans right of those two The springform pan is that's what's up there in the top top right the springform pan is a little It is more specific right springform pan only has has fewer uses than eggs eggs or you know use eggs for a whole lot of things You can eat them, you know you could eat them raw I've been told me Rocky Balboa drank them raw before you know beat Apollo Creed, so I guess it's pretty good You can you know you can fry them you can you can fry them sunny side up you can scramble them You can use them in an omelet even the flourless chocolate cake and your regular cake using cookies You could use them as a weapon You can use a springform pan as a weapon too, but you don't you don't that's really you don't hear that about that a lot but There's a whole host of uses for eggs eggs are relatively less specific than springform pans And I would suggest that that that milk chocolate on the bottom there the milk chocolate on the left is probably less specific Than semi-sweet chocolate on the right. I don't know if that's true, but there are different levels of specificity and that's also then something needs to be taken into account and it can be that that that sort of ups the See ups the risk factor for a little bit if you use a factor that's more specific if the demand for the good That you're producing goes away The value of that capital good which will shrink more than the good that's less Specific that's less specific right for instance if the demand for flourless chocolate cakes fall right the value of springform pans would fall more By larger magnitude than the demand for than the value of eggs because eggs have a whole lot more Uses so the degree of specificity is something that you have to figure out something you have to choose right the another Choice variable is the durability of the Of the capital good this also needs to be chosen all because all capital goods are perishable There's no capital good that lasts forever. They get used up and this rate at which a capital good gets used up is called Depreciation the rated appreciation And so each particular good has a different rate At which it is used up it has a different duration of serviceability Eggs for instance eggs used to make a cake are used up just like that you crack the eggs and you put them in the bowl That's it right You can't you can't you can't somehow start mixing the eggs and they say oh wait a minute I Didn't mean to do that I'm gonna extract the eggs out of the flourless chocolate cake batter and use them for my omelette You can't do that right so eggs get used up very quickly the oven on the other hand can last for you know 15 20 years right and so different capital goods have different durations of of service ability in this case the Spatulas right this is a spatula on on the one hand the spatula seems like it's a two-piece spatula. It's looks relatively More flimsy less durable than the other spatulas that are pure Whole silicone that are I mean you look like you could just you know Bang the snot out of your kitchen with one of those things and they'd still you know Take a licking and keep on ticking to quote an old Timex watch commercial Regardless capital goods wear out Or they become obsolete and So if someone invests money and say spatulas they spend some money on a spatula using they're using it using it at some point it wears out and Once the capital good wears out they're back to where they started With your fingers right and So what do you have to do well in order to maintain the productivity that you get with an initial capital good? The producer has to save over the period of time that he uses that producer good to make a produce to make a Good he's gonna sell for money. He has to save so that he has enough savings to invest in replacing the old capital Good after it wears out and If he if he is doing if he's saving just enough to replace the old capital goods as a as they wear out We call that maintaining capital they're maintaining capital On the other hand to increase his productivity He got one spatula So well if I had if I had a second spatula Then I could I could make many fireless chocolate cakes in a row because after I get done with making one or two the other the one spatula is so gummed up with with chocolate goodness Then you could they could put I'll put that in in the dishwasher and I'll use the second spatula I can just keep going right and so that increases my productivity, but what does that mean that requires two spatulas? Which means even more saving right more saving than it's just enough to replace the first spatula when it wears out We have to save even more so now we can accumulate two spatulas and two kitchen aid mixers and two kitchens So when businesses expand their operations They're accumulating capital that requires even more saving and investment And then of course on the other hand we could consume capital We could just you know invest in these spatulas the eggs and the the semi-sweet chocolate and just use them up once not save at all blow all of our proceeds on bubblegum cotton candy and satellite TV and Smarty phones take talk and snappy chat And what do we have left to show for it? Well, we get a little boost of present consumption satisfaction and then We're we're gonna be less productive going forward because we're we have fewer we have less capital We have fewer capital goes with which to work and so the good news if your goal is to consume capital You basically I don't have to do anything except consume right but That'll let you allow you to live a little high on the hog for a short period of time But then your productivity will fall you'll be less productive your income will fall and you will be relatively impoverished So adding to capital and maintaining capital require Saving of a certain threshold Now the choice of whether or not to save or invest The choice of how much to save and invest ultimately then the choice to accumulate maintain or consume capital Depends on how much a person values present goods over future goods against depends on time preference The capitalists must decide whether or not to restrict consumption now in order to increase consumption in the future And that decision depends on two things it depends on the value of the good being produced how valuable is getting a flowerless chocolate cake or Revenue from selling flowerless chocolate cakes in the future how valuable is that just in general and then also What is my rate of time preference right? Let's suppose that I can I can if I put off present consumption For you know a couple of weeks I figure I can make enough flowerless chocolate cakes that I can sell over the two-week period for a certain sum of money I don't know how how much it would be. I haven't really thought it out. Maybe three thousand dollars I mean a great bake sale and Then I have to ask myself well, but is all this I could be consuming a lot With the money I'm going to have to spend on my factors of production to get three thousand dollars in two weeks Is it worth it? Well, maybe not maybe I really I really I can't I can't do without my I can't do without my My drift trike I can't I just can't and so I'm not going to make I'm not going to be willing to make that investment and so people's time preference rate of time preference and the value of the product produced are the things that will affect whether or not a person is willing to save and invest in a particular line of production Now this is just all the basics of principles related to the structure of production basically for one little good And it's a little good, but it's an important little good the flowerless chocolate cake But the entire economy of course you may you may I mean this may not be news to you There is there there are more consumer goods in flowerless chocolate cake that exists, right? There's a lot of consumer kids, which means there are a lot of production processes You just think about that you think about how how complex the the production structure for a flowerless chocolate cake is and then just to magnify that for the the veritable plethora of consumer goods that exist It is as I've heard one politician say it's huge It's amazing, right? It is It's tremendous and the entire economic order in which we live the entire market division of labor consists of one integrated complex production structure and that's the macroeconomy what we call the macroeconomy and As we consider the macroeconomy from the perspective of praxeology from the perspective of realistic human action And the fact that action has to take place in time. So all production is a time-intensive process using a myriad of a variety of different consumer producer goods and capital goods and land and labor We see the distinction Between shall we say the modern approaches to macro and to the Austrian approach to macro Modern macro you can look at it's sort of divided up into two or three There's more to it than just this but I'm just you know There's only so much time that a person has the Keynesian view right where the economy is why Why because we like it I don't know why is equal to C plus I plus G And if you want to get sophisticated plus NX net exports, right? Well, where does capital show up there? Well, it shows up in the big eye, right? It's just a flow of spending right you spend more on I you get more You get more why? If you spend less why you get less a less I you get less why and and and for Keynes the The secret to the fluctuations in economy is fluctuations in the voluntary I right I think it's what I think garrison helpful. No, it's the animal spirits model right when when the animal spirits are We invest a lot and why goes up and then You know then when the when when the mania wears off we're kind of you know sad and You know we go in the other direction and the animal spirits. It's you know bad juju and so then we have business depressions and And there is no rhyme or reason it's just animal spirits, but all the spending is this in the eye Right, so the more capital spending in general who cares how we spend it the better off will be the neoclassical growth model as a macro models used a lot and There we have capital is in that little kt, right? Output in time t is equal to At times a function of capital labor So so outputs a function of capital labor a is this this sort of amorphous I think a is for amorphous actually a production shift variable that anything that affects how productive the capital labor is Then it goes up and down, but the capital itself is K right and I don't think it actually is What should just coincidence that they signify K a capital with a K as in Kapital as in DOS Kapital. I mean, I don't know I could be wrong here, but K is for capital and it's it's just a homogenous blob of schmoo, right? well all of that Those views of capital in macroeconomics Obscures all of the insights of the Austrian structure production the fact that that the capital goods You know is actually heterogeneous. They're very different. There's a lot of difference between a spatula and a pound of semi-sweet chocolate There's a lot of difference between a microwave oven and eight eggs There's a lot of difference between a half pound of butter and a spring-form pan There's a lot of difference between all of those goods and electricity So capital goods are heterogeneous with different uses different specificities different durations of service ability and Those capital goods to produce a flourless chocolate cake the goods don't just have to exist somewhere sometime, right? It's not as if you know somewhere. There's a place for us somewhere No to be useful to make a flourless chocolate cake You have to have the chocolate the eggs the spatula the pans the ovens in your kitchen your kitchen at the right time Haven't them someday somewhere It's not gonna help you and so the capital goods have to be in the right place at the right time in the right combination With other complementary factors to be productive all of those things are necessary For production to take place for economic progress to occur and all of those factors are obscure When you say capital is I Or capital is K Now the general economic order is an integrated aggregate production structure that supports the production of all consumer goods And that's what we get in the Austrian tradition 20th century Austrian such as Hayek and Rothbard and Roger Garrison and Jesus, what are the Soto? Have represented the famously the Austrian capital structure as a Hayekian triangle named after Hayek Because I think he used it first Roger Garrison famously put it on his side More recently it seems I remember other contemporary Austrians such as Peter Lewin and Others I think referring to the work of Ludwig Lochman so that maybe it's better to represent capital as a web Right because it's in some sense in their minds. It's not purely purely linear for instance the Let's suppose, you know most most of these producers of the the miners the refiners KitchenAid The springform pan producer the dessert shop. They're gonna use personal computers Well, so as a personal computer a first-stage capital good a second stage capital good or a tenth stage capital good Well, it depends on the computer right it depends on where the computer is used It's depend upon you know where a good fits into the structure production is dependent upon the subjective use of the user Right semi-sweet chocolate could be a consumer good for some people It has been for me on occasion. It's also a producer good It depends on how it's used and so those people That want to focus on that aspect say well, maybe the capital structure is better thought of as a web Not as a linear sort of triangle from the higher stages to the lower stages I sort of understand what they you know the point of trying to make but in reality the fact is that the Economic import of a capital good is always going to be a capital good Whatever the good is the specific good is always going to be placed at some some order either nearer or farther away from consumption and So I don't think there's anything about the say that the Hayekian triangle that that makes it Say less useful than the concept of conceiving of capital good, you know The capital structure as a as an interlocking web that the main point the main point is simply that capital is not best represented as simply a stock of goods in general nor a flow of expenditure in general Capital if we want to get it right We have to remember that cap that the capital structure is a structure in which all the parts are interrelated with one another and They are interrelated with one another through production decisions that are made at every stage of production Now the same principles that apply to the individual Production process for a flourless chocolate cake apply to all production processes throughout the entire Economic order the entire macroeconomy throughout the entire economic order money moves from the consumer goods industries up through the higher stage stages of production at the same time production effort Begins in the form of goods flowing from the highest stages down to the lower orders of production culminating in the production of all the consumer goods and at any given moment at any given moment in our economic order There is production activity occurring Simultaneously at the various stages of the production structure right now right now Somebody is mining zinc That will later be used for making zinc castings and right now Somebody is making zinc castings that will be used to make a kitchen aid mixer And right now kitchen aid mixtures are being made that will you be used by some thankful soul to make a fireless chocolate cake in the future and right now Somewhere someone is making a fireless chocolate cake that they're going to be able to eat tomorrow and experience gastronomical bliss And so this production doesn't it's not as if okay, we all start you know Producing only higher order goods and ten years from now That's the only time we're going to get consumer goods. No the production structure is such that there's production going simultaneously at all of these different stages and At the lowest stages produces of consumer goods exchange their products for money money moves up from consumers to the supply of consumer goods from consumers to the suppliers of consumer goods and The producers of capital goods invest their income and they invest their income in a higher order land labor and capital goods And the so on and so forth now as we consider these The capital structure three important facts are brought out to bear one Production the entire economy is heavily weighted to production of capital goods heavily weighted to the production of capital goods The amount of money spent on capital goods is much higher than the amount of money spent on consumer goods You think about all the money in the economy that spent on you know eggs semi-sweet chocolate butter Electricity ovens metal refining mining all of that stuff for all of the consumer goods That are being produced more money spent on capital goods than a consumer goods So the entire and this is a key the entire structure of production then is supporting by saving and investment not consumption It is not consumption that drives the economy does not consumption makes the economy possible It is true that all the producer goods all the acts of production is driven towards eventual consumption But what drives the economy? What makes consumption possible is production and so it's saving an investment that drives the economy Not the other way around another important principle is that capitalists the capitalists the one it saves and invests is the laborer's benefactor by advancing income to present workers It's the capitalists through his investment that sustains workers in through their time-consuming process The Empire State Building You may have heard of it. It's been in all the newspapers the Empire State Building They began work on it on June 22nd 1930 It was not finished and it didn't open until May 1st 1931 Pretty fast when you think about it but it was what 11 months For them to finish right before they could accept any tenants and make any money So suppose you're going to say hey, I'd like you to come work. I'd like you to start excavation for this but The bad news is you're not going to get paid for a year The workers thinking I've got a wife and four children. How am I going to support my child? That's not my problem I will give you money when we get money. No the capitalist invests. He advances money to the worker Here again, there's not conflict between the capitalist and the laborer. They work together Right the laborer supplies a service the capitalist receives income that allows him to sustain himself and his family And so the capitalist is the laborer's benefactor Also The economic order is is is extremely complex It is beyond the capability to design and plan the production structure for a single Capital or a single consumer good It's estimated that there are several million types of consumer goods produced in the u.s economy It is simply far beyond the capability of the human mind to comprehend let alone design Entire production process that's going to be Economically sound that's going to allow producers to actually economize to to utilize the scarce factors of production to produce The goods that that the people want that they really really want The ziggah ziggah so to speak and So anybody that says oh we can easily sort of plan this is is Is living in in a fantasy world? That's why we need entrepreneurs entrepreneurs using market prices of various capital goods Can then estimate the capital value Of the goods and the capital values of firms And so that's why what what sandy client talked about yesterday the the monetary price nexus is the connection between capital goods And the economic concept of capital that is a tool of economic calculation And and which is why mesis is right when he says that that capitalism only exists and works Capital only makes sense in a market with free market prices Which is why it makes sense to refer to the free market as capitalism It's not cronyism It's capitalism because we need those free market prices to to Use to calculate the capital values of the specific capital goods To sum up the capital values of the goods to obtain the capital value for the firm And then have the entrepreneur decide should I produce this or that Should I invest in this line of production of that line of production? All right, it's the the the use of economic calculation That provides that that makes the capital structure and the division of labor a social order And not social chaos and I'm over time. So I'll stop now. Thank you very much for your attention