 Well, good afternoon. It's time for us to start this talk on the Division of Labor and Social Order. And let me start with just a brief remark on the latter part of the title, The Social Order. We heard Tom Woods last night wax eloquent about the market economy and the social order produced by the market economy. And I think he expressed all of our awe or at least appreciation for the magnificent accomplishments of the market economy. I just wanted to add as we go into this discussion about the Division of Labor that economics as a discipline was actually born in the insight that society under certain configurations at least, that is the market under that configuration, is a natural order. That it works, in other words, through the natural inclination of humans to strive by human action to attain their ends. And that this was not something like, the recognition of this was not something like an empirical observation that the first economists made in the 14th century, but was a firmly held presupposition that the nature of the world was configured in such a way that there were laws of human action and that these laws of human action that stem from human nature itself implied certain consequences. And one of these consequences was that we can engage in production in a division of labor. We can engage in social production without central command as Dr. Woods was explaining last night. In fact, I dare say that this insight is perhaps the central insight of being an economist. If you're an economist you think that there is such a thing as a natural order in society. The society is a natural order and it works, so to speak, by itself. That is to say we make it work in our actions and interactions. And of course the big point of debate among all economists, if we define economists this way, is whether or not the government or the state, the apparatus of compulsion and coercion, is necessary for defending person and property or whether it's not necessary at all. Because we just get along without it, period. By the way, I'll leave as an exercise for your own application given my claim about what constitutes being an economist, whether some prominent modern self-identified economists are really economists or not. You can do that as an exercise. Alright, so we want to talk about the division of labor. And we'll just start again with some definitions and some basic principles. And then we'll move on to some illustrations. We'll go through the logistics of the theory of the division of labor. And when we talk about the division of labor we're talking, the idea of the division of labor is that we have production by people not solely for their own consumptive ends. So anytime people are engaged in production to satisfy the consumptive ends of other people, then we have a division of labor. So only in self-sufficient production would we lack a division of labor. Now we've already seen in this morning's lecture that all action is predicated upon the recognition by the person choosing to act of a difference in value between alternatives. A person sees that as a means and he could apply it in different ways and one alternative has more value to him and another alternative lasts. And he chooses the more alternative and sets aside the less alternative. And so to choose whether or not to be self-sufficient in production or to enter into a division of labor would be based upon the same consideration. The person would just look at the two alternatives and say there's a value difference between the two alternatives so I choose one course or the other. So the complete explanation of the division of labor is based simply upon existing differences in the alternatives. Now we can identify these differences again with an illustration. So we'll use Caruso and introduce Friday and we'll just do this again a very basic way but it should be pointed out that this could be extended and I'll make comments suggestive of this. This could be extended to all the complexity of real social life as we experience it. So anyway just to reiterate from this morning so we have Caruso's production with his labor. This is the marginal physical product of labor in coconut gathering and berry picking. So these are the same numbers we had this morning. He can apply one unit of labor and get six coconuts by climbing the short trees nearby. And then once he's exhausted that if he wants more he has to apply another unit of labor. He can get a smaller output and so on. He applies his first unit of labor to berry picking. He goes to the most robust berry bushes nearby. Once he exhausts those he applies another unit of labor. He goes to a less productive area of berry picking and so on. So it all looks like this each entry then we're assuming in the chart takes one unit of labor with the complementary factors of production. Now we introduced Friday he has a marginal physical product of labor. The assumption that we need in order to see the what differences we're speaking about is we'll assume in the chart that each person Caruso and Friday has identical complementary factors of production. So the coconut tree configuration for Friday is the same as the coconut tree configuration for Caruso. The berry bush configuration for Friday is the same as the berry bush configuration for Caruso. That's so we have a pure comparison between the differences of their labor productivity. Again this is just an imaginary construct where we're trying to isolate these different causal factors involved in the differences between productivity and then what effects occur when people choose to take advantage of these differences. So we wouldn't want for example to do the comparison where Caruso had all the short coconut trees with lots of coconuts in them and Friday had all the tall coconut trees with not very many coconuts at the top. We're saying that their complementary factors of production are the same. So the differences we see are just based upon their labor. And we can see that we've suggested here the most difficult case that we could imagine analyzing. Well actually perhaps there are two cases of equal difficulty but this seems to be a very difficult case of seeing exactly how Caruso and Friday would configure a division of labor for their mutual benefit. Where are the value differences that make a mutually advantageous division of labor possible in this case? So again just to list out the possible configurations we could have, we could have the easy case. The easy case would be one person is more productive in the production of one of the goods with the complementary factors and the other person is more productive in the production of the other good with the same complementary factors. If our chart was that Caruso could produce a lot of coconuts and Friday could produce a lot of berries. But we didn't do that example, right? Because that example that's just easy to see that they could divide their labor by having each one produce what they're more proficient at and that their output would rise. So that's simple. We want to take this more difficult case. This is the second possible case. This case is where as you can see Caruso is more proficient at producing both goods. He can produce as an absolute amount more of coconuts than Friday for each labor unit allocated and he can produce more berries than Friday for any given allocation of labor into a berry production. So that represents the more difficult case. Again just to suggest how this would be applied to the world we live in. This would be a case where we had like a very productive country like the United States trading with a much less productive country for whatever reason like I don't know let's say Afghanistan. People are very productive and could produce more of everything than other people. Why would they ever engage in a division of labor with these less productive persons? That's the difficult case. So that's the case we've taken. Now there is a third case. A third case would be where the two parties that we're contrasting and comparing have exactly the same production schedules. So Caruso and Friday would just be clones of one another productively but they have different preferences and so they exploit each one of them exploits their production down into the lower marginal physical product areas of their productive activity because for example let's say Caruso really likes coconuts and so he devotes all his labor to coconut production and Friday really likes berries so he devotes all of his production to berry, is labor to berry production. If that's the case differences would exist at the margin and they could engage in beneficial trade. This again in the real world is how you explain trade between people in different countries that are very similar. How is that possible? How do you explain trade between people in the United States and people in Germany who have similar productivity in different things? Well it might be that their preferences are different and so in the U.S. we exploit the production of something if we're in isolation to an extent that we've lowered the marginal physical product tremendously of doing that and the Germans have done this with another good, like beer making, right? So they lower the production tremendously of that and we lower the production tremendously of automobiles or something and then when we come in contact with each other and we think we can trade with each other there are value differences to exploit and we can be made better off by doing this sort of thing. So we can cover all the difficult cases in the real world. All we need again is the basic assumption that there are differences in productivity and in particular differences in efficiency. This is a key as we'll see in a minute. So I put these two words on the slide, right? Proficiency and efficiency. Proficiency is just the amount of the good that a person can produce with the complementary factors. So Caruso is proficient enough that he can produce six coconuts. So we say Caruso is more proficient than Friday in coconut gathering. He's also more proficient in berry picking. Efficiency has to do with cost. The efficient producer is the low cost producer. And cost of course in human action is opportunity cost. It's the value of the thing given up. And so I've made their costs different too, right? So for example, if Caruso produces six coconuts with one unit of labor, a first unit of labor, he gives up two berries. So he's giving up three coconuts per unit of berries. If Friday produces, he could produce five coconuts or half a quart of berries. So if he produces coconuts, he gives up half a quart of berries. That's 10 coconuts per quart of berry. So we can see that Friday is a much higher cost producer of berries than Caruso. And we can take advantage of that difference, the difference in opportunity costs, to the mutual advantage of the two parties. So anytime there are differences in efficiencies, then it's possible to engage in a division of labor and actually increase physical productivity. Okay, so this is the next step that we want to see. Now, in order to give the full example of this, we'll assume something about the demand for the products. Because the demand for the products, again, will dictate the extent to which production is moved down from the more efficient to the less efficient areas, and hence the efficiency differences. So let's presume, just for the start of this, that Caruso and Friday have the same basic preferences. But they have these different production schedules, and they allocate labor, one unit to coconut gathering, and two units to berry picking. So if Caruso does this in isolation, he'll get six coconuts and three and a half quarts of berries. If Friday does the same thing, he'll get five coconuts and one quart of berries. So that's how we're going to start in self-sufficiency. Okay, so it looks like this. Caruso allocates his three units of labor. He gets six coconuts, three and a half berries, three and a quarts of berries. Friday does the same pattern of allocation. He gets five coconuts, one quart of berries. So their total production is 11 coconuts, six plus five, and four and a half quarts of berries, three and a half plus one. But you'll notice that their costs are quite different. Their opportunity cost for producing berries is radically different. So again, if we go back to here, we see that if Caruso is producing at this point and this point, then this production of berries, I mean, he's producing here, if he wants to extend berry production, he'll get one more quart of berries and he would give up six coconuts. So his cost for producing one more quart of berries is six coconuts per quart of berries. Friday's right here and right here. So if he produces more berries, he goes down to get one quarter of a quart of berries, but he gives up five coconuts. So that's a cost of 20 coconuts per quart of berries, right? So they're radically different in costs. Caruso is a much lower cost producer of berries than Friday. So obviously you have these cost differences. What should you do? What would be the economizing thing to do? It would be to allocate production to the low cost producer. That's what the division of labor does. That's how these two Caruso and Friday would derive mutual benefit from their social interaction, from entering into a division of labor with each other. Okay, so let's see what happens when they do that. Let's say that Caruso, let's say that both of them again just desire to allocate three units of labor to the production of coconut and berries. So Caruso, since he's a lower cost berry producer, he's going to give up producing six coconuts and produce one more quart of berries. So he's going to produce two, one and a half, one. That's how he's going to allocate his three units of labor. And so in total he'll get four and a half quarts of berries. And then Friday he's going to give up berry production and he's going to move to coconut production. And so he gets five plus four plus three, and he doesn't produce any berries at all. So he gets nine plus three, twelve. So now let's summarize this. This is production in the division of labor. Caruso allocates his three units of labor. He doesn't produce any coconuts because he's specialized now in berry production because he's a low cost producer of berries. He gets four and a half quarts of berries. Friday goes the other way because he's not efficient in berry production. He moves into coconut production. He gets twelve coconuts. And now the group gets twelve coconuts and four and a half quarts of berries. They increase their physical output in the division of labor because their differences in the physical efficiencies of their conditions to begin with. So they're doing exactly the same thing that everybody does in every action. They're seeing a value difference between two options and they're moving away from the lower value to the higher valued option. And by doing that they gain. And here the thing to notice of course is that here they gain not only in utility. In fact we haven't even explained how they gain in utility yet. They gain in physical production. With the given inputs they're actually producing more output now in the division of labor than they did in self-sufficiency when we add up all their output. So this is the key insight. Now the other question that we can address right here with this example is how far should this specialization go? As we mentioned before the more that Caruso specializes in berry production the lower his marginal physical product goes. And so he becomes less and less efficient at the margin when he extends his production. The same thing again happens in the real world. Most of you know that America compared to the rest of the world has some advantage, some efficiency advantage in the abstract in agricultural production. So the question is look if the most efficient corn growing region in the whole world is eastern Nebraska, that's why they call them the corn huskers. Then exactly how far should this specialization go of American land in corn farming? Because corn can be grown in other areas that aren't as efficient. And the answer is it depends on demand. It depends on world demand. So if world demand is great enough to outstrip the production of the eastern Nebraska corn farmers then corn production would be extended to less physically productive areas. And that would still be the most efficient thing to do. So it should be produced there and so on until the efficiencies are at the margin roughly equated. So the corn could be produced, I don't know, in other places in the world as well that aren't quite as efficient. In other areas in the US that aren't quite as efficient as eastern Nebraska farmland. By the way just as an aside on this, if you're wondering well what difference would this make this is a point that will be talked about in lectures later in the week. If you're wondering what difference does this make in prices the answer is that it won't make any difference in the rate of return, the interest return from investing in these different efficiency areas. But Nebraska farmland will command a higher price than farmland in western Iowa because it's more efficient. That's where the difference will manifest itself in the market. Okay, so the answer is here again I've done the calculation. The answer is they'll extend their specialization until the efficiency is the same. So again when Friday is producing nothing but coconuts he's gone five, four, three. If he were to shift now out of coconuts and into berry production he would lose three coconuts he would gain half a quart of berries. That's a rate of six coconuts per berry production. That's the same rate at which Caruso is producing berries, the same efficiency rate at which Caruso is producing berries when he produces the last quart of berries. So at that point they will stop and they won't specialize further because specializing further would actually be detrimental to physical production. By the way it follows from this that it isn't fundamentally in specialization itself that generates the gain in productivity. The gain in productivity comes when people specialize according to the efficiency that exists in their different production processes. We would not increase overall output if we had all of the oranges grown in Nebraska and all of the corn grown in Florida. Specialization doesn't do us any good per se, at least not necessarily. We have to identify the value attached to these different alternatives. Now let's go on to the effects of the division of labor. This is the first effect we were just demonstrating. We can now define the division of labor more exactly. The division of labor is not just when people produce to satisfy the consumptive ends of other people. The division of labor is specialized production according to efficiency. It's when people recognize their efficient areas and move into those and not just again producing for the consumptive benefit of other people. And as we've seen, specialization in this sense increases productivity. But again this is only because there are efficiency differences that can be taken advantage of. Now the second line here explains how the two parties benefit from their specialized endeavors because remember they don't wish to consume what they're producing. Their desires for consumption were they wanted a certain amount of coconuts and a certain amount of berries. Their demands were split between the two. But when they divide their labor and specialize they're producing exclusively in our example one good or the other. Cruces producing only berries and Friday only coconuts. But they don't wish to consume this way right so if they're going to benefit from the division of labor they have to be able to trade. And one possible of course given the fact that they've produced more output it's always possible for them to trade and both be better off. It's just a question of what exchange rate they would trade at. So again this is just discovered on the part of people who wish to engage in the division of labor to get this greater productivity. They can figure out what the exchange rate is and then mutually agree to do it because both of them would be made better off. So for example Caruso could trade one quart of berries for six and a half coconuts. And if he did this he would wind up with six and a half coconuts and three and a half berries. And Friday could trade six and a half coconuts for one quart of berries and he would end up with five and a half coconuts and one quart of berries. Which is half a coconut better than they started out with for each of them. There could be other exchange ratios that would be mutually beneficial. So trade and the division of labor are linked together. We'll follow up on this point in a minute. Now the third point I have here says that specialization may augment or degrade efficiency. Once people begin to specialize then it may be that through processes let's say of learning or practice or say the people who specialize their labor might again become more productive because they specialize as they learn how to do the activity better and so on. Or it may be that their land they learn ways to cultivate it better to increase their productivity as they advance in concentrating on just producing certain goods. So this is possible. It's certainly possible that specialization could augment the efficiency differences and then lead to even more intense exploitation of these differences in efficiency. It's also possible though that specialization could degrade efficiency. This is just an open empirical question. So lefties like to point out that are lefty friends. They like to point out that working on the assembly line all day and it's boring and people make mistakes and you get cars that are defective. Or you have all these farmers in Nebraska and all they do is produce corn so they wear the soil out and so on and so forth. But the point is again to treat human beings as Tom Woods said last night as human beings. Human beings is real human beings who see these problems and react to them to solve them. So naturally if you were an entrepreneur and you were running an auto factory and you saw that your workers were becoming bored and making mistakes you would move them around right or you would self-select the different workforce. I have a friend who a few years ago retired from a job he had with a gas company and he moved to Arkansas and wanted to get a part-time job. He had a part-time job on an assembly line where he just mindlessly put widgets together or something. I don't even know what it was. He just makes this connection and then the thing moves along and he does it again. I asked him one day, doesn't this drive you crazy? Aren't you just bored out of your mind? He says no. He says no. I think of other things when I'm doing this and I can do that at the same time that I'm technically accurate. And it's actually quite soothing and calming. There are people like this. We are different, right? And they'll self-select into these jobs. That's what the division of labor, that's how they would solve this problem or one of the ways in which this problem would be addressed in the market. Now we get to the principle of the law of association. The law of association is taking this idea of the division of labor and furthering it to a social theory really, this theory of social order. And again, we're just dealing with the technical aspects of this, but the first point to make is the one I have written here is that each factor is efficient in some line of production. That while it's possible for Caruso to be more proficient than Friday in both lines of production, it's not possible for him to be more efficient in both lines of production. So as we saw before, the efficiency calculation for Caruso and Friday producing berries was that Caruso gave up six coconuts to produce another unit of berries and Friday gave up 20 coconuts per unit of berries. That's what made Friday the high cost producer of berries. But if we were to calculate their costs of producing coconuts, if we were to invert the calculation, then those ratios would simply invert. So if Caruso trades six coconuts for one quart of berries, he trades one quart of berries for six coconuts. And if Friday trades 20 coconuts for one quart of berries, he trades one quart of berries for 20 coconuts. This makes him a very low cost producer of coconuts. Why? Not because he can produce a lot of coconuts, because he doesn't give up very much to produce coconuts. And so his opportunity cost is low. So one person cannot have efficiency advantages over another person in everything. This is just not possible. It's a mathematical law of reciprocals. If you have two ratios and they're different and you take the reciprocal ratios, the inequality will reverse for all ratios. So if there are differences in efficiencies, one person more efficient than another in one thing, we calculate the other efficiency of the other good, the efficient producer will be the other person since the ratio will invert. Now what this means, of course, is that it's always possible, no matter how slight the productivity of a person, for a person to enter into the division of labor, to out-compete everybody else because that person is the most efficient producer of something. So for example, just another stylistic example, suppose we assume for the sake of my example that Tim Cook is a great carpenter. He's a great handyman and he can produce, you know, carpentry-skilled works, cabinetry for kitchens and so on and so forth, at say twice the productivity of the local carpenter in Grove City. His name is Frank Weintraub. Would that mean that he would push Frank Weintraub out of a job? Would this lead no room for poor Frank in the division of labor because Tim Cook is more productive than him in all these different things that he could do? Well, no. Because no local carpentry company is going to hire Tim Cook to come and do carpentry work in Grove City. They would have to pay him, you know, $500 million an hour or whatever he gets for running Apple. He's a very high-cost carpenter and Frank Weintraub doesn't lose sleep at night, you know, worrying about Tim Cook come taking his job. No, there's room for everyone in the division of labor. There is, by the way, a caveat to that principle. And the caveat is that this principle is true as long as the human population is not large enough to fill all of the Earth's surface with productive activity. In other words, as the Earth is configured now, human population can all be employed and we have sub-marginally productive land. We have huge tracts of land that are not used for anything. They're just idle. Well, we could put productive activity on this land, you know, in the Rocky Mountains or, you know, I don't know, what did they do in Canada so we could, you know, right? We could put more productive stuff in Northern Canada or Alaska or whatever. And, you know, we're not doing that now. So the human population hasn't grown to the point where it's necessary to take up every area, surface area of the planet in productive activity. If that were true, then this principle of the Law of Association would not follow, right? Then if that were true, if the human population exceeded the actual surface area of productive activity on the surface of the Earth, then we would have sub-marginally productive labor. We'd have some people who could not find a place in the division of labor. And they would be permanently unemployed. Again, some of our lefty friends think this way about the world, right? It's overpopulated and you have these masses of unemployable people and so on. But actually the world is not configured this way. Now, let me make one other point about this with, again, I'm just making these points as suggestive to use to sort of think about and muse over as opposed to fully explaining, right? The other thing is that it depends whether or not every square inch of surface of the Earth is taken up with productive activity. It depends upon the nature of our productive activity. So for example, when the normal production processes were primitive hunting and gathering and agriculture and herdsmen activity and so on, the possibility of the human population to cover the Earth with productive activity was fairly low, right? The human population would have covered all of the Earth with viable productive activity was fairly small. I don't know how reliable this figure is, but I've always heard that when the Europeans came and discovered the New World that the number of Indians living in what is now the United States was on the order of maybe two to ten million hunting and gathering and primitive agriculture and so on. Ten million people live in New York City, right? Because we have this extended capitalist production system. So it depends, right? The law of association, in other words, it seems naturally, according to the progress of the market, would probably never be exceeded. That is, we'd never have this problem where the law of association was not true. The human population would never grow to the point where it exceeded the productive capacity of the planet. Again, I throw that out just for your consideration. Let me make one last point about this. It follows from this, if we're correct about this, it follows that there should not be, on the market, there should not be something like natural unemployment. People could be willingly unemployed, right? You'd have people retire or, you know, you guys could take a year off of, you know, after you graduate from college and tour in Europe or whatever. But we wouldn't consider that problematic unemployment. There should be none of that. That should not be a natural condition to the market. If we, again, as economists, when we see unemployment as a problem, we naturally point the finger, not at the market, but at something else. Why? Because the market is a natural order where people would naturally avoid this. There's no inherent reason for it in our world, at least. Okay. So we know that employment can be indefinitely expanded as long as the market is working to accumulate capital and so on. That isn't problematic. Okay. Now let's look at limits to the division of labor. And one of these is the extent of the market. So this was one of the great insights of Adam Smith, right? That the division of labor can develop only to the extent of the market. And we know, again, just from economic theory, from just an investigation of theoretical considerations in economics, that if we were left to our own devices, if we were given our full human dignity as human beings and not interfered with through coercive power, that there would be one world economy, that we would integrate all of our economic activity into one gigantic division of labor including everybody in the world. And all the possible value differences that existed then among people could be exploited. And we could be as efficient in production as humanly possible. This would be the natural condition of the market economy. So anything that interferes with this, this natural development of integrating the world economy into one gigantic trading relationship, one division of labor, would then limit the extent of the division of labor. And obviously government intervention is the archetypical case of this. So the government intervention in trade, if they prevent trade through coercive means, then they actually make us physically less productive. It's just that we don't get to buy those great Japanese cars if they put a big tariff on Japanese imports. The world becomes less physically productive. Our standards of living are actually suppressed by this. We don't lose just utility, but we lose the advantage of using our inputs in the most productive fashion. And the other limitation that we want to mention, and I've already alluded to this, right, is the extent of saving and investing. Because it's through saving and investing that capital accumulates and we get more and more indirect production. So we move from direct production, this primitive, carousel kind of hunting and gathering and primitive agriculture and so on. We move then to indirect production where we can engage in stages of production to produce capital, and then longer and longer stages of production. Again, since we are human beings, we're creative and we have intellect and judgment and so on, there doesn't seem to be naturally in the market any limitation to this. Once we have a market economy, then saving and investing can proceed ad infinitum, as long as we're desirous of it doing so. It seems to be even though the government is heavily interfered with this process, that we've been doing pretty well anyway. We become more and more productive, we accumulate capital in the world year by year, and only government intervention impedes this process. Okay, so now let's talk about overcoming the limits to the division of labor. And we want to pay some special attention to accumulating capital, since this is again more on topic with respect to the development of the division of labor. But first we can just point out the initial idea from the last slide. That if we want to overcome the limitations of the division of labor, then we have to eliminate state intervention and trade. That would be the first step, because the government, state intervention, can forcibly prevent people from trading. I already mentioned the case of terrorists. So terrorists forcibly prevent us from trading, and that means that value differences still exist between the people who would have traded otherwise, that could be exploited, right? We could buy all those great Japanese cars, and we could reconfigure the division of labor to get greater productivity out of both the production processes in the US and the production processes in Japan, or whatever it might be, cell phones in Korea or whatever. So if they're tariffs or quotas or other kinds of interferences, what the government does is create a permanent legal wedge, creating value differences that we can't exploit, unless we're willing to break the law, in which case we would exploit them less efficiently than if it were permitted legally for us to do this. The government can also, through state intervention, can forcibly require us to trade, and that too would then diminish the division of labor. We could be forced into trading with other people, for which there are no value differences. We could be forced to trade anyway. And what would happen if we do that is it would create, again, this artificial value difference. We would trade more extensively than we choose to voluntarily, and we would push the efficiencies away from their greatest level. We would become less efficient through this kind of thing. Regulations do this, or can do this. Sometimes production subsidies could do this. Certain people are subsidized and then they trade with other people when they wouldn't have otherwise, and this distorts the efficient production patterns. Now, this leads open the question, by the way, as to what would be the process in the market of overcoming the limits of the division of labor if they're naturally arising? We said again that in every action, we're always going to aim to exploit a value difference. What if there are value differences that are naturally arising that people don't initially exploit? Should we have some kind of a policy to eliminate those? A classic example of this in the economics literature is transaction costs. They're costs for making transactions, trading costs, or their transportation costs would be another example. And because of transportation costs or transaction costs, there can be residual value differences. So down here in the south, and it may be for other reasons than this, but I'll use this as an illustration, down here in the south I just noticed that gasoline prices are quite a bit lower than they are back up in the northeast, in Pennsylvania where I'm from. So they're 30 cents, 40 cents a gallon lower here. Now that's a significant value difference that might be exploited if we just had a market. It might be worth it for the sellers to shift supply, and to move it. It might be that transportation costs create some of this difference though. And maybe even if we had a free market, there would still be a dime's difference in gas prices in Pennsylvania versus Texas or something of the sort. So the question is, should we strive somehow to eliminate that difference? Should we force people to eliminate the transaction costs? Should the government eliminate transportation, absorb it socially, and eliminate transportation costs among the private producers? Well clearly again the answer is no to this. The answer is no. These value differences should remain until we figure out how to reduce transportation costs or transaction costs. Then they would naturally be eliminated in the same process that all costs are reduced over time. These differences too could be based on subjective considerations. So differences in valuations could exist. Mises and Rothbard like to use the example of higher rental prices in New York City compared to the countryside. There's value differences. So why aren't those completely exploited? And again there's government interference in increasing the supply of housing in the city and so on. But it might just be that subjectively people value things in such a way that we get these differences that are permanent or at least not easily dissolved. And if that's the case, well we should just leave them alone and let people figure this out for themselves. You hear this kind of complaint again from our lefty friends about economic imperialism of America. So we explored our rock miser, our rotten culture to innocent places in the world and corrupt them. And well we shouldn't do this. But again so economic theory would say well no it just depends on how people choose. It's true that if the government is subsidizing the rotten music well we should eliminate that. But if it's coming about naturally that's fine. And if there are people who want to live without this like again in Pennsylvania we have big Amish communities. They don't play rock music and listen to their big stereo systems or whatever. Okay that's fine. So we wouldn't say well no we have to eliminate the value difference inherent in that by forcing them to adopt our culture. So my point just being again I'm just trying to suggest lines of inquiry that this analysis of economics applies to. It seems like a kind of a narrow argument that we make at first but you can see that it has more robust results. Okay so then the second point we want to eliminate economic decision making by state officials. We want decision making to be entrepreneurial because as we've talked about in the talk this morning and more later in the week entrepreneurs can appeal to economic calculation so they can look in the market and see what consumers value more highly relative to other things. They see the configuration of prices of producer goods and they can make comparisons that are relevant to satisfying our preferences with respect to these value differences that emerge. Government officials of course do nothing of the sort so they're just involved in making decisions that from the perspective of economizing are completely arbitrary. Again just think of the difference between Tim Cook and making decisions about iPads and he's produced the iPad mini and it's a wild success and they're satisfying our preferences and rolling in the dough and plowing these funds back into production of more things that we desire to have and so on versus something like public education where lots of dough is being poured in but preferences aren't being satisfied. Everybody's dissatisfied because government officials don't make decisions on the satisfaction of our voluntarily chosen preferences. They can just coercively get the funds and then do what they want. They can move decision making out of the hands of state officials back into the hands of entrepreneurs. This would certainly overcome one of the limits of the division of labor and in the division of labor in the market we have, I gave an example of this before, we have the self-selection process in the market by monitoring Senate. So we don't have to have government officials choosing who's going to do what and assigning people to different productive tasks. We get this efficiency of self-selection. So if we had government officials involved in assigning tasks, they would assign tasks, I mean if they wanted to do this in the most reasonable way, I suppose, they would do this according to proficiency. They would see who the most proficient assembly line worker was and they put that person on the assembly line to put together the widgets but they don't know what the opportunity cost is. They might, when Tim Cook was just a college student, they might have assigned him to be an accountant or to be a widget maker or something when he turned out to be, I was going to say great entrepreneur but the jury's still out, I guess, whether he's great or not, but certainly a good entrepreneur. So without self-selecting in the market we can't have any indication of what these opportunity costs are. And so the market provides for that full self-selection process. The entrepreneurs offering us positions, they're selecting us for different positions in the division of labor and we select them as owners of the factors of production. We choose the job out of the array of things that we offer. And so this again improves efficiency. We should have this sort of thing. And then finally accumulating capital. This is the last thing we want to discuss. Now when we talk about lengthening the capital structure, the process of lengthening the capital structure occurs in the following manner. People first reduce or lower the intensity of their time preferences. So all of us have a certain degree of preference for present satisfaction over future satisfaction for having our satisfaction satisfied sooner as opposed to later. If this preference is reduced in intensity then we would be more willing to forgo present consumption and save and invest. If we save and invest more then we are devoting more resources to the building up of capital capacity and the additional capital capacity makes us more productive. So this in a nutshell is the theory of economic growth or the theory of economic progress. It depends upon the extent of our time preferences. So time preferences go down, we save and invest more, we devote more resources to producing the capital structure, the array of capital productive capacity. And doing this makes us more physically productive but doing it also lengthens out production processes in time. Because first we have to produce the capital capacity before we can produce the consumer goods whereas before we were producing the consumer goods more directly. So this is the idea of lengthening out the capital structure. And then in the process of lengthening out the capital structure we integrate new technology. And this too depends upon the entrepreneurs determination of what is economizing. So technology is not like an independent force that somehow impresses itself upon human history. In the market it's chosen and the different lines of technological improvement are also invested in by the capitalists and the entrepreneurs and then integrated into production. So we get all the various different kinds of useful technology that is appropriate given the complementary factors of production that exists in our capital structure. So it would be great to have those beaming devices that they have on Star Trek. We would just beam ourselves all over the world and we would never have trucks hauling stuff around anymore we would just beam our cargo here and there. And we may physically know how to do this there may be some sort of weird physics theory that allows for this, I don't know. But the problem is we don't have the capital capacity we don't have the requisite complementary capital goods to produce this thing. And that's why we're not investing in it right now. Our investment in technology is better invested in technology that we can actually implement given our capital structure. So this is where the improvement of technology comes from. All right, so let's take, we'll just use a briefly an illustration of how Caruso does this. Again, this just gives us the basic principles and then you can apply this to the more complicated cases of the real world. So let's say Caruso has this new technology of catching fish and instead of using his bare hands it's catching fish with a net. So he hits upon this idea not a very advanced technology but still one that would improve his productivity if he can embody this in a capital structure and so he searches around the island and he finds that he can do this and he engages in stages of production a capital structure to produce this net that requires him to save and invest. So in the third stage, this we call the highest stage, he extracts the raw materials out of nature. He walks around and gathers vine and twine that's suitable for, you know, constructing the net and this, let's say this takes him seven units of labor, seven half hour units of labor and then in the second stage he goes back to his cave where he's living and he weaves together the net. He fashions the net. So that takes him five units of labor and then once he has the net he fishes with it. That's the consumer goods production stage the first stage or the lowest stage of this production structure and then he would have a marginal physical product of his labor in fishing and again it would exhibit diminishing returns because as an economizing person if he could be a recreational fisher if he wanted and he wouldn't care how many fish he got that would be one thing but we're assuming he's interested in production and so he's going to go to the most productive areas in the stream first he's going to scope that out and find out where the best fishing is or what time of day is the best and so on he's going to get the most fish then he exhausts that and he goes to a less productive area with his next unit of labor and so on and so forth and so he exhibits his diminishing returns and then the other question the next step of course is how does he value these he's going to allocate his labor into these different activities like fishing with the net or gathering coconuts or picking berries depending upon as we said before his marginal value product so let's say he ranks things so that five fish is ranked above six coconuts is ranked above two quarts of berries so each of these he can produce with one unit of labor but the other consideration we have to bring into this discussion now is time because the production of the fish takes an extended amount of time for him to produce the requisite capital goods so that he can have the net and then produce the consumer goods so he can't have five fish or six coconuts or two quarts of berries at the same moment of time in the future in fact and I'm just assuming that he would do it this way what he chooses to do is invest over six days remember it takes twelve units of his labor to produce the net so he chooses to invest two units of his labor each day over the next six days to get the net and then on the sixth day he catches five fish and then he ranks that against he could have five fish in other words in six days or he could have six coconuts in a half hour today or he could have two quarts of berries in a half hour now where he ranks the fish depending on the time his time preference depends upon his conditions so before he engages in what we call plane saving saving consumer goods so he has a stock of these consumer goods to allow him to save and invest so he can shift his labor to producing the net while he's not producing coconuts and berries so he doesn't have anything to eat or consume he's going to save over a few days some of the coconuts and berries and then eat them while he's gathering the twine and so on so once he engages in plane saving then he would value the net and he would use it to he would produce it and catch the fish so his decision to construct the net oh and by the way in the complex social world this is just capital investment right it's just a capitalist and an entrepreneur deciding what line to invest in to build up my capital capacity what kind of factory will I build where would I put it and so on they do the same kind of consideration they say what are the sum of the values of the producer goods that are created by the net discounted by my time preference and compare the sum of those with the value of the things for gone the asset value of the plant facility from building it and the liabilities engage so let's say his preferences look like this so he Caruso values he's going to get the 5 fish per week that's how he's going to use the net once he has it and the net's going to last 25 weeks and he can start this production in 6 days after 25 days of using the net it disintegrates and isn't useful anymore he values that more than the goods he foregoes by constructing the net and let's say again each day over the 6 days he's up an hour of sleeping and an hour of berry picking and then he's going to have maintenance costs in parenthesis there so that's how he decides and maybe he decides again yes it's worth it to me to invest in the net and maybe he decides it's not that's again a matter of economizing given his values ok so just to summarize this capital accumulation he first chooses the extent of his saving and investing his time preference as we say and then he would invest in the different lines of capital goods that give the greatest difference between the value of what he obtains and the value of what he gives up the fish are very valuable to him and he doesn't give up very valuable alternatives then he would invest in nets now once he has one net it's unlikely that he would immediately invest because the marginal value product of the second net would fall what would he do with the second net until the first one wears out it would just sit around so he probably wouldn't do that he would go to another line of investment and invest in a different capital just like we do in the real economy we invest where the rates of return are higher but more investing there drives them down until there's no value advantage in investing any further in oil fracking or you know whatever whatever the new activity might be okay so so he obtains the greatest value from this capital accumulation by investing in this fashion where the value differences are made the same at the margin in all things and as we do this over time then we become more physically productive the human population can grow and not only do we have more people we have more physical standard of living alright so we've exhausted our time so we've quit today thank you