 Our first lecture this afternoon is Dr. Guido Holtzman. Guido is a professor of economics at the University of Angers in France. He's the author of Mises, The Last Night of Liberalism, which I encourage you definitely to take a look at. And he's also a member of the senior faculty of the Ludwig von Mises Institute. His lecture this afternoon is on the division of labor and the social order. Thank you, Mark. I was a little bit deceived by this introduction. You said that all the fun part is over. No, it starts, right? And then people shouldn't just look at my book, they should buy multiple copies. At least one for each hand. And then also don't be, don't be negately. Also think of your aunts and uncles who you haven't seen in a long while and everybody else who marries a copy. So our subject is the division of labor and social order and what I will walk you through is a basic theory of the division of labor which is an important element in the theory of wealth creation. And we will in particular underline that the division of labor is to large extent dependent on the volume of savings and what economists call the roundabout production. So our lecture is a little bit halfway between basic economic theory that does not yet pertain to the market economy per se and the theory of the market economy in which capital accumulation plays a very big role. I will first start off with a couple of definitions, some fundamental terms and then we'll go through the discussion of the division of labor per se and then the dependence of the division of labor on savings. So our definitions, first one is the division of production. Production is the conscious transformation of nature and the division of labor concerns of course production in that sense. So in production we have always the phenomenon of choice and it's not something that is occurring automatically or to the extent that it's occurring automatically, it's not something that we would call production. You can of course put a few thousand nice bottles of wine into your cave and I recommend it must be a very good cave. So not everybody should try to do this because most caves are actually not suitable for wine storing. So if you have a nice cave and so on, you can do this to the bottles and then you're producing wine that is no longer just 2 years old or 4 years old but 10 years old or 15 years old or 20 years old and if it's well done the product is really excellent. So you see I'm biased in my examples coming from France and one of the reasons I went to France of course is because I have good wine. So in that sense then this keeping wine in the cave is a production process because somebody must have put the wine into the cave and it's up to your choice to take the wine out of the cave or not or leave it there. So it's a conscious transformation of nature. The wine is being transformed into a type of better quality of wine. Now labor is a production through human action. We shouldn't confuse labor in that sense. It's a very general sense from labor in the more colloquial sense in which it is often used in the sense of paid assistance and we're talking often in economic texts where there are laborers and capitalists then we mean by laborers we mean employed people and that goes from the PHD who is the CEO of the company to the guy or the girl who was working on the production chain somewhere. So labor in that sense paid assistance is a more limited phenomenon and what we have here in mind is the larger sense labor being in the sense of production through human action. So for example we can imagine a society in which there are no employees at all in which everybody is his own entrepreneur and in that society there would be labor in that sense but not labor in the more narrow sense of paid assistance. Production always involves some labor. There can be no production without simply because somebody needs to make the choices and somebody needs to stock the wine and the cellar and keep it there. Now the division of labor occurs when several persons associate in such a way that each of them specializes in one type of activity. Each associate then produces economic goods in excess of his personal needs in order to share or exchange his surplus with the other associates. So I promise I won't be any slides of this sort unless when it comes to definitions or in case of definition I will just read my definitions I won't say in other words. So it's just for you to see. So division of labor can be organized according to different principles and that's of course a big subject of economics. Most notably it can be organized according to a common plan. It's a centrally planned economy like a socialist economy and it can also and that is the case that is of most interest to us in this week. It can also result from the mutual adjustment of individual plans which is of course characteristic for the market economy. In the market economy there is no central plan but different firms and households are interacting but that doesn't mean that there is no plan. There is rather competing planning, competitive planning and the plans are not unrelated but they are related through the mutual adjustment. The process of mutual adjustment is complicated, multifaceted but what for us is important is the role of market prices in steering and coordinating and orienting this mutual adjustment of plans. So this is not a subject that we will go into in this lecture so here we're dealing more with more fundamental issues so this is something that we will deal with in other lectures. Now our plan here is, as I've announced, first to go through the benefits of the division of labour then turn to the relation between savings of the division of labour and then highlight some ways in which the problem of coordination can be solved that is the mutual adjustment of individual activities can be brought about. In the case of the benefits of the division of labour it's most convenient to illustrate this with a numerical example. So this is what I will do and we will distinguish most notably three cases according to standard procedure by economists so economists distinguish the case in which the different associates have what is called absolute advantages that is in which one is the absolutely better specialist as compared to the other guys. The second case is the case of comparative advantage and in that case you have some market participants or some members of society who are absolutely better in all fields of activity such as myself and my wife. She wouldn't agree, therefore I say this. Adults and children typically, at least very small children, you're better as an adult in everything and so on. Healthy people, handicapped people often right here. So there's a clear superiority in all fields and so on. So here but then still we can show that there are benefits of the division of labour between unequal partners and finally the case in which we have perfectly equal market participants or the clone economy if you wish. And so the point for us will be to see that first of all there are material benefits for all members of society cooperating in this way and secondly that these benefits indeed derive from the fact that they are unequal, that they are different. Okay, first example of first case is the case of absolute advantages. So I fear two members of society, Peter and Paul, they are cooperating and to make things simple. So I suppose that we have a very primitive economy in which there are only two products that are of interest to both Peter and Paul, namely rabbits and plums. So we have here the R, R is rabbit. So you see Peter has a physical productivity of two rabbits per hour that is he can grab two rabbits per hour. Somebody always asks me so what does he do with them? Does he kill them or something? He has them in his hands and then maybe he's patting them or something. And Peter probably has a big family or something like this and so some rabbits are there for patting and others are there for other things. And he has a productivity of 500 plums per hour so he can pluck 500 plums per hour. In the case of Paul, we see his physical productivity is different. He is not as good a hunter as Peter. He can only grab one rabbit per hour but he is better in plum picking so he has 1,000 plums per hour. Now if we suppose that each of them divides his working day. So now this is kind of a Japanese working day where it's not as in the US or in Germany. We work seven hours a day or six. In France it's four and a half. It's a 10 hour working day. It's not China either, it's 15 or something. So each of them divides his working day in two times five hours. Five hours hunting, five hours plum picking. And so Peter in those five hours grabs five rabbits or excuse me, ten rabbits and in another five hours he picks 2,500 plums. And for Paul at the same time it would then be 5 rabbits and 5,000 plums. So we get the aggregate product of this little community that is so far it's not really a community, it's just two individuals working one next to the other just pursuing peacefully their activities and not slapping each other's head, which is already something. And sometimes it's a lot, right? If people just don't wage war at one another we can be happy about this, already not bad. So under such peaceful conditions but of mutual indifference and so on they have an aggregate product of 15 rabbits and 7,500 plums. Now Peter and Paul for whichever reason might consider that they might simply share in a division of labor. Maybe they're not completely indifferent to one another but Peter looks at Paul and says, wow this guy has very fast hands. So he's kind of slow so he doesn't catch many rabbits only the lame rabbits and so on, right? But he has many plums and wow but whereas I'm much faster but I've kind of the big hands and so on so I don't move very fast. So maybe we should just do it together. Adjust all plans so they talk and they strike a deal and say look, why don't you specialize in plum picking and I specialize in rabbit hunting and so they come up with this scheme, right? So Peter's physical productivity is unchanged but he now specializes entirely in the production of rabbits so the production increases from 10 to 20 simply because he spends more time on rabbit hunting and as a consequence because he spends all of his time on rabbit hunting of course there's no plum that he picks and for Paul it's the other way around. So the overall result then is that the aggregate result is an increase of total production and rabbit production increases from 15 to 20 total prompt production from 7,000 to 10,000. Now what that means is of course here we don't talk about the way how they divide the addition of the surplus among them, right? They are free to do this. It just depends on their negotiation skills or whatever, altruism, right? Peter doesn't give me one extra rabbit and whatever, 10 extra plums so you can have the rest completely for all they share equally, right? They're kind of egalitarian. Each one needs to have the same thing and so on. They're free to do this. For us the important point is the overall product has increased. So it is possible to benefit each of them materially as compared to the situation in which they do not cooperate. So they are material incentives to cooperate. That's the crucial thing. So even doesn't mean of course that in practice they will cooperate, right? For example, they might still hate one another. This guy is smelly or whatever. He's a German or whatever. We don't want to do this. So there are still other reasons that might prevent this cooperation but what we here see is that there is a material incentive to do this. So this gives us then the key to understand why people would look for cooperation in the first place. Now you see here that I put division of labor one. So this is the result of the division of labor. The immediate impact. That is the impact without taking into consideration that the division of labor itself will transform the two specialists. As a consequence of specializing in rabbit hunting, Peter will become a more efficient hunter. As a consequence of specializing in plum picking, Paul will become an even better plum picker. And of course each of them will lose somewhat in its ability of producing the other good. So you have these learning effects that result from specialization. And here we have the initial inborn, natural difference or talents and so on. And as a consequence of the division of labor they acquire certain capacities or lose certain capacities that they would otherwise have had. So let's look at this. Peter becomes a better hunter so his productivity increases from 2 to 3 rabbits per hour and his productivity as a plum picker decreases from 500 to 400. And for Paul it's the other way around. So as a consequence then of these learning effects the benefits derived from the division of labor increase even further. So it's a numerical example. And that is of course what we observe as we can easily understand what would happen in any case, any two goods, any two individuals in which we have these initial conditions namely that there is inequality in productivity we get a similar result. Okay, so let us turn then to the second case the case of comparative advantage. In the case of comparative advantage we have as we have said one superior being the man, one inferior being the woman. Here is Peter and Paul. So Paul is the superman and Peter is the lesser human being. So we see that Paul can do everything better than Peter and at first they don't cooperate and they produce a total of 30. Why do I have L here? This is strange. Oh this is because I translated my French slide. L stands for lapin. This is rabbit. That's the same thing. Just substitute alpha. Okay I won't make any further jokes on this. So for a very long time people who thought about social organization thought that under such conditions there would be no incentive for the superman, for Paul to engage in any kind of trade with Peter. What could Paul possibly gain by cooperating with Peter? He can do everything better. So if L.A.E. provides certain services to Peter it's not because he expects anything in return but it's just out of pure charity and goodwill and he's a nice human being but then of course he might expect something in return in the form of obedience. And so we add here the classical justification of social hierarchy. There's one guy who determines how the show is going on the other guy's obey because if you don't obey I'll use the big stick to hit you on the head or elsewhere. Things change then when David Ricardo, a classical economist discovered the principle of comparative advantages and what Ricardo discovered was that in fact even in such a case a division of labor is possible that benefits both partners the superior or the inferior and the superior. So this is what we see here the trick is as compared to the previous arrangement of absolute advantages is that Paul the superior producer he cannot become a pure specialist so he needs to divide his time differently but no longer five and five but in different ways. So here you see that Paul spends three hours on hunting and he spends seven hours on picking plums. So as a consequence his productivity is four rabbits per hour so he produces in three hours twelve rabbits and with two thousand plums per hour he produces in seven hours fourteen thousand plums. So the result is again an increase of the overall product. There are both more rabbits and more plums available in the society. So we understand here that the material benefits that push people to cooperate do not only exist in the case of absolute advantages but also especially in the empirically very frequent case of comparative advantages. So there's always a way to figure out a division of labor that is beneficial material beneficial for all parties involved. It's not true on the individual level but it also holds true if we consider groups, collectives and so on such as nations for example. So in the 1980s there were lots of concerns in Europe yeah the Japanese are taking everybody over they will outproduce every one of us nobody can stand up to the productivity of the Japanese. We'll all be drowned in Japanese products and we'll disappear from the face of the earth. So what this theory shows the Japanese can become as productive as they wish always have an incentive to share the division of labor with less productive nations. The difficulty in practice is always to find the arrangement the division of labor that is beneficial for all parties involved but there always is such an arrangement such a division of labor. In the market economy this problem is solved through the process of market pricing. In the countries that are very productive and so on there's a lot of capital typically something that we'll talk about later typically they have a higher profitability then in those but in other countries there will be some trades will be profitable still and more profitable than in the countries that are from the overall point of view more productive. Okay and here we have of course the same learning effects that we discussed already before. As the consequence of specialization Peter will become a more efficient hunter and in the case of Paul here too there will be such an effect his productivity in hunting will decrease from 4 to 3 and in rabbit plum picking from 2000 to 2500 will be increased. Okay finally we might consider the case in which there are no inequalities no differences whatever but in which we have perfect clones and the purpose of this consideration is only to highlight the fact that indeed the benefits that derive from the division of labor in which we see here derive from inequality from differences. So if we consider the case of natural equality but in the case of artificial equality like cloning for example the same result would hold we get no benefits no immediate benefits in the division of labor. Peter and Paul you see their exact clones as far as productivity is concerned and so if they divide labor amongst them there will be no improvement as compared to the situation without a division of labor. Rabbit production stays at 20 and plum production stays at 1000. Now things change even in that economy only to the extent that due to the specialization if they engage in whatever specialization they become different. Paul specializing in rabbit hunting becomes a better hunter. Paul specializing in rabbit plucking becomes a better plucker. Rabbit plucker when this is yeah right it increases from 500 to 700. But then there are no longer clones there are no longer equal. They have become different. There is an acquired inequality that results from specialization that results from the division of labor. And to that extent then we observe again that there are overall benefits and therefore also individual benefits resulting from the division of labor. Okay let us summarize then these findings. The first conclusion that we can draw from this analysis is that the division of labor entails material advantages for all associates and this advantage results from the exploitation of the differences in physical productivity through specialization. And as we've seen the specialization reinforces natural differences that is rather natural it would probably be better to speak of initial differences because it's not unnatural that you have an acquired difference. So reinforces initial differences and creates man-made cultural differences in physical productivity. Third, by understanding these material advantages we can explain the formation of human societies. Ludwig van Mies is called this the law of association. The law of association tells us that human beings under all circumstances have a material incentive to cooperate to form societies not to remain isolated as individuals but to look for the cooperation with other human beings. There's always material advantage material incentive to derive from this. Again doesn't mean that they will do it. There might be other considerations that come into play you have a hermit or something like this or a monk and he just wants to be with the other guys he wants to keep to himself and just think of God and look at the birds and so on. But still so he foregoes it comes at a cost he stays for himself but he foregoes these benefits that he could otherwise have derived. Now Mises coined the phrase law of association and he did so in his book socialism which was published first in 1922 but Mises was not the first to discover this principle that the origin of society resides in the material advantages that society provides and the first source that we find which this fact is highlighted is in fact in Plato and those of you who study philosophy might know the text we study where the philosophy students here so which text is it very good as the Republic the opening chapters of the Republic Plato wants to device the ruling principles of a just society and so in order to identify them he first analyzes how would society operate without any consideration of justice right so natural spontaneous emergence of society that's what he does first so he highlights these facts well people gather together and they cooperate because they derive material incentives from it and that idea as then remain throughout western philosophy well for the next 2500 years and was known by the medieval scholastics Thomas Aquinas highlighted this fact right the origin of society is in the material advantages that it procures to all associates etc etc that goes through the classical economists and Mises highlights this again Mises to this extent here it contributes only the expression it's a law of association the second conclusion is that the division of labor as we have seen is beneficial only to the extent that the associates are different and it follows there from that egalitarian policies are antisocial egalitarian policies I mean government interventions measures involving the violation of property rights with the objective of making people more equal or less different to the extent that we turn the whole society into a whole bunch of clones or something like this we destroy society there's no more incentive to cooperate the only binding thing then that would remain is just law for other human beings I don't say that's not important I think it's very important but empirically we see right now even if we have very strong material incentives to cooperate we're not clones people are still waiting for all the time so you imagine how it would be in a society where they're just clones I mean it would of course be much more very few people love their neighbor enough to keep peaceful if there are no material advantages to derive from this the second point is that natural differences are a useful starting point for the division of labor and the building of society so rather than trying at all price to eradicate differences it is useful and this is actually what human beings have done throughout the ages of great success is to build on your strengths doesn't mean that you shouldn't try to eradicate your weaknesses but your contribution to society is always built on your relative strength and of course we can spend our time trying to cut the heads of people a little higher than us in certain respects to make everybody equal or we can try to work and develop our own strengths which result from our natural endowments as females males older people, younger people different individuals have different natural position that gives them both weaknesses and strengths so the point is to identify the strengths and make a contribution with this to social cooperation so this is the starting point we've already covered important ground we will now highlight the fact that the division of labor depends to a very large extent on the availability of capital and the availability of savings without savings the division of labor wouldn't go very far it would by a large concern the cooperation between hunters and gatherers so people were producing rabbits and plums on maybe a little cloth making or even cloth making that would already be difficult there's no place for accountants there no place for economists, no place for fashion designers, no place for taxi drivers, etc as a very primitive society with very few opportunities for the division of labor very few opportunities for each of us to bring to fruition his or her particular abilities and talents so we have to analyze this process that makes that the division of labor increases and this is dependent on savings so we'll start again with a few definitions which should be familiar to economists savings are that part of a person's revenue which she or she does not presently consume so we have this arithmetic equality is just a totology that is the equality between revenue and the product the addition of consumption and savings we have revenue and by revenue economists mean the final usable goods that accrue to us in any given period so typically consumer goods that we obtain in a given period the Austrian economists like to talk about present goods that can be presently used and final used in particular consumer goods but also money so this is our revenue and our revenue we can either consume if our revenue is just real as we are in a natural in a barter economy and so on we have rabbits and plums as revenue then we can eat the rabbits and the plums so this would be consumption or we can save them that is we put them aside and have them again the next day and so on but there are no other uses either we use them now or we do not and they are just these two possibilities so it's a totological equation in a monetary economy we do the same thing with money we have monetary revenue and the money that we earn can be spent on consumer goods or not spent on consumer goods exactly these two possibilities there is no third possibility so in all cases revenue equals consumption plus savings in parenthesis savings can be made in the context of a person's household or a person's firm most savings that are being made today are actually made within the firms not within household revenue let me give you an example annual revenue of 100,000 dollars in the average American households right now I think they would save around 5000 dollars out of this so you have a savings rate that is very low out of current revenues around 5% but in fact the households typically have also wealth so they have whatever the same household might have 1 million dollars of wealth what is this wealth well it's saved revenue either his own saved revenue or saved revenue of his ancestors or friends that he has inherited or that has been given to him and this revenue typically is invested in firms and then firms to the extent that they spend this money on producers goods and so on well they are using the savings spend investing the savings and each time they gain revenue again and they spend again on factors of production they use savings so the bulk of all savings does not come out of the revenue of households but of the revenue of firms in the developed market economy but this is in their emphasis so what we need to do now is to look at how do savings benefit production how do savings benefit therefore the division of labor and the key to this is what Austrian economists call the law of roundabout production what is the law of roundabout what is roundabout production well roundabout production is a gradual term so there is more or less production can be more roundabout or less roundabout for the word roundabout you can substitute the word indirect so more roundabout production means to reduce the proportion of labor dedicated to the production of final goods in particular consumer goods and to increase the proportion of labor dedicated to the production of intermediate goods and tools so called capital goods so I can spend all my time on the direct production of consumer goods in a very primitive economy as we have seen right Peter and Paul we didn't talk about any tools or something like this right they were running after the rabbits and grabbing them with their hands or maybe digging a little hole or something like this right so they spend all of their time on the production of consumer goods there is no production in the economy that we considered before no production of capital goods now Peter and Paul might of course increase their productivity by producing let's say a gun of course it's out of the question that they could produce in a lifetime a gun if you are in a primitive economy you never get there get to this point right let's say that so they could do this also some other weapon right maybe take a branch from a tree and then sharpen it at one end so use it for rabbit hunting or maybe bigger beasts right then the poor rabbits right so but in that case if they do this right then they subdivide their labor differently it's no longer 100% invested in the production of consumer goods a part of it is now dedicated to the production of tools right so whatever Peter then spends 30% of his time producing hunting tools or maybe 70% of his time producing hunting tools and only 30% of his time producing or hunting actually hunting so why might he do this because 30% of his time spent on hunting 3 hours a day spent on hunting with a good hunting weapon with a good spare or something like this might be more productive than 10 hours without a spare so that's why we do this so the general law here is that the more around about the production process the more productive is human labor now there's one word that is missing here that you need to plug in is the more physically productive is human labor and the more physically productive is human labor the more tools that are at our disposition the higher is the productivity per hour spent on the production of final consumer goods that's the law of round about production now how do savings come into place well savings come into play because during the time that we are engaged in producing capital goods we do not produce by definition we do not produce consumer goods but we still need to survive the time that we spend on producing a spare or whatever else now this is not a big problem in the case of very primitive tools and so on we spend a few hours on making a spare even there it's true but it's not striking but think again think of something that takes many days to make like for example a net and I'll give you an example of a net in a minute then in order to make that tool we cannot spend any time for several days on producing consumer goods so how do we feed ourselves during that time and the answer is we feed ourselves out of accumulated savings so savings are needed to finance production and what is being financed is the consumption of human beings there's nothing else that from an aggregate point of view needs to be financed to finance means to sustain the consumption of the human beings involved in the production of capital goods so these are the most two important things that you need to know about the theory of capital we'll have other lectures probably repeat some of this and go into more detail I will give you now an example and the classical example of the fisherman an example that comes to us from 19th century German economist Russia William Russia and in Bumbavak sites Russia on that point Bumbavak and Menga were both great admirers of Russia as he was an excellent pedagogue so Russia gave the example of a fisherman right the fisherman he's kind of a cruiser who is stranded on his island so he has some technological knowledge and so on he's sitting on on this island there's nobody around to help him no shop where he can buy groceries and so on he has to do everything on his own he has no tools maybe he has some clothes left from surviving the shipwreck and so on he has two healthy hands and he is lucky enough to have been stranded on the island of a river with lots of fish so he can fish with his bare hands now in order to become more productive well this way so he produces a few fish per day let's say four fish per day and he needs whatever a fish per day to survive and so he fishes four fish in 10 hours and eats one of them and the next three days he can take off so he lives one to mouth existence and just the production is just barely sufficient to cover his needs but well he has some leisure so he's thinking of the good old times and in desperation thinks about how he might improve his lot and he thinks about yeah actually to improve my lot I need to become more productive because all the things that I want to consume I have to produce myself but my working day is 10 hours I can do only so many things 10 hours so in order to have higher consumption in order to benefit from more goods I need to produce more it's very simple so how can I produce more well I need more tools so he comes to the idea fortunately he comes from a civilization so he knows the concept of a net and he's going on to develop a net what does he need to do in order to produce the net well so he makes it out of whatever stuff that he finds in the jungle liens and so on and has never made a net in his life of course so it's a risky product because he's never been a net maker makes a plan this is an entrepreneurial venture will my net be sturdy enough if it's too sturdy I cannot use it right and so on but he thinks about these things already just thinking about how he will make the net takes time so fortunately he has his savings he has the three fish that he has fished on the first day that he has not yet consumed so he can take his time consuming making plans and so on and then finally he sets out to produce a net in order to produce the net what does he need again he needs savings because he now dedicates his time to to the making of the net so he cannot produce fish at the same time and so eventually he will have his net and then his productivity will increase but this is dependent on the availability of savings let's walk through a numerical example and so we have the production of consumer not only of consumer all kinds of goods so we have fish and berries and nets and so he produces four fish and he consumes one fish per day he doesn't consume any berries because he didn't produce any berries he could also consume leisure right leisure is a great good because he don't have to produce it you just need to have enough in your tummy to survive the day otherwise it will not be a really nice day of leisure and he has a savings so he has saved in terms of fish he could have saved also in terms of berries but he has only produced fish so at the end of the second day he has produced he has a savings of six fish so now he can set out to make his net that's what he does here right you see he produces no consumer goods no more fish production, no more berry production but he produces a net I put here so this is kind of fiction right I mean a quarter net does not strictly speaking exist there is no such thing as a quarter net that you can use 25% or something like that it just means the production process has progressed by 25% of the time needed to do this right so the net only exists on the sixth day and we see right so he needed to have savings to get to the sixth day because he couldn't dedicate any time to the production of consumer goods so savings on the sixth day have been run down from six to four fish and he has a net now this process economists call capital accumulation this is progression of the creation of the capital good it's a process of capital accumulation and then starting from day seven he can use the the net to fish fish and because he has a net he doesn't need to spend much time maybe he spends just whatever one or two hours per day on fishing he fishes a lot of fish in one or two hours with the net so he can do other things he can now indulge in leisure he can produce other things that were inaccessible to him before such as very plucking and during this process of course what happens is that the net itself is of course not eternal the net itself wears out this is the process of capital consumption so we have an example here in two hours he fishes twelve fish and he can use the rest of his time to plug berries and during these four days then the net wears out so we fear the process of capital consumption he doesn't replace the net with something else he consumes this capital he is an overall capital consumption so we see already then of course what will happen as from day eleven productivity will be back to the initial low level so in actual practice things do not usually work that way you build your tool and then you just wear it out from the flesh usually you benefit from the fact that you are in this tool that you dedicate a part of your time to replacing or making another tool or repairing the net and so on and from an aggregate point of view of course that's what's going on in the market economy where there's constant rebuilding of capital goods going on at the same time that we also consume them so the aggregate level of capital available does not necessarily diminish and usually in the growing economy it increases okay so we see that he builds up more savings and then he needs to make up his mind how to go from there he can build another net or he can just revert back have a few days of great fiesta Greek or Spanish economy like behavior so here this is the Greek scenario retirement at age 55 or something our cruiser he takes a great time out he doesn't produce anything just consumes his savings and why not, there's nothing wrong with this problems always result from the fact that sometimes you do not really want this and other people try to consume your savings and it gets really nasty it's his property, it's his savings so why should he not be free to just consume them and that's what he does and then maybe one day he will consider again building a net and he goes from there again he will start on a real strong growth path and so on build a lot of capital and create a house or a traffic system for himself or maybe then a boat and he will get finally back to civilization okay so then what are the benefits of savings as we have seen that savings allow for a higher productivity of human growth because they enable us to pursue more around about production so for that reason alone therefore we took this example of a cruiser even if we are talking outside of a social context savings are beneficial but savings are incomparably more beneficial still in a society because then savings can be used to reinforce the division of labor think of it in our example so cruiser he was building his net and he might have gone on going from there still for example in the next step he might have become even more around about he might have set aside some time to make a needle maybe out of a fish bone or something to facilitate the making of the net and so on and so on you can become ever more around about become ever more productive finally and if cruiser is all alone he has to do this all on himself so he has to divide his time on these different activities but if you have a society you can specialize some people are the net maker some people are the needle makers some people are the fisherman some people are the berry pluckers and so on and so on and this is facilitated through the existence of savings even if there's just one guy who saves the capital list he might sustain the activities of other people engage in the production of capital goods even though those guys they don't have savings on their own they just share they're after they share his product there is a great comic book rendition of this process some of you might know this already the author is Irwin Schiff is the father of Peter Schiff so he describes a fish based capitalism have a look at it I think you will find it on the internet I think you can just download the comic it's very good instruction so if you have teenage brothers and sisters or if you enjoy comics yourselves this is a thing to look at surround about production is beneficial and even more beneficial if joined with division of labour and only round about production allows for a large scale division of labour without savings there is not much of a division of labour and that is the reason why some countries today are still very poor some countries are very primitive economists some African countries why is that because there's not much of any savings invested in those places and as a consequence people have the choice of specializing in hunting and gathering and becoming a robber and because there is not much else to do there's nothing that would finance those other activities in real terms you don't just need monetary finance you need real finance availability of real saved consumer goods and in other economies this problem does not exist because we have a lot of savings in western Europe and in the United States in North America savings are also important to facilitating technological progress or technical progress think of the example that I've given to you so Kruso sits there on his island and he just thinks about net making just taking the time being able to take the time to think about making a plan production plan and so on consumes time how does he finance this well he has consumer goods he has savings and if he's occupied with fish and so he just needs to watch the fish there's nothing else to which he can what which he can think he needs to be a leisure to do this so the answer the short answer to the question is how do we finance research and development is always out of savings research and development R&D department in a company is finance out of the savings build up in the company company earns revenue and reinvests in R&D that's part of the savings of the company part of the wealth that ultimately belongs to households and then once you set out to put a new technology into practice well you typically have a blueprint but then you need all the machines or the infrastructure and so on to put this into place need again savings technology per se doesn't get you anywhere African countries have all the technology they need I can just download most of the stuff from the internet or make a short excursion with a $400 fly to to Western Europe or to the US or somewhere just have to look at how things are being handled it's not technology the problem is savings and as a consequence as a further consequence then of course peace and cooperation tend to be reinforced because then as the consequence of this large scale division of labor everybody becomes more dependent on the support of other human beings Waging war in a society based on the division of labor is very expensive very high opportunity cost not only I lose my revenue but I destroy things my neighbors and their capital goods and so on as a consequence I will be hit myself well we forget about these two last few things I will now switch over to talk a little bit about the problem of coordination so the point here is just to highlight the different methods that can be used to coordinate the division of labor so what is coordination we say that persons in the division of labor are coordinated if their cooperation provides satisfactory results for each of them and that is important for each of them now of course you can be more or less satisfied that is a that's a gradual thing but there is no coordination if there are no benefits for each of the persons engaged in the division of labor the problem of coordination then is to put a concrete division of labor into practice and so this is the case that we discussed before we have the supreme Japanese economy that was the 1980s today it's we don't know exactly three years ago it was China and now China is losing some of the appearance of an overpower and so on but the problem was how do we arrange a division of labor between different nations or different individuals that's the true problem we always know that there are benefits to be derived but we need to find the right arrangement so how do we do this we have to answer most notably two questions the first one is who should do what and the more fundamental question is here would be who decides and how who should do what and the second question is who obtains how much of the aggregate product again in the market economy both questions find a simultaneous answer in the market process in the market process in the market process the decision who should do what remains with each individual we decide to pursue this or that activity of course often under the impact of we get an offer from a company so we become employees we insert ourselves in the division of labor as employees the revenue provides the incentive for us to join this company A rather than a company B or rather from a dynamic point of view I don't look just at the highest payment right now but I also project myself when you evolve in the course of time and is it a pleasant activity is it something where that pleases me emotionally and so on right so you might sometimes choose activities that earn us a lower revenue but they are more satisfactory for us on other grounds and so all of this is taking into account provides the incentives that steer us into this or that activity so in a market economy every single individual decides what he should do and who obtains how much out of the aggregate product well this depends on the contractual arrangement I insert myself as an employee in a company well decided how much I get out of the revenue but that's not the only solution to the coordination problem so if we now make abstraction for our violent solution right so the Nazi version or the Bolshevik version and so on just look at theoretically possible peaceful solutions then collectivism is indeed one possible solution something like voluntary collectivism like marriage for example and as we see by looking at divorce rates collectivism is difficult even if they are just two it's crazy right if you think you have millions of people billions of people should be involved it's crazy especially it's the same persons typically who are in favor of collectivism in some sort who have the highest divorce rates there's one of the mysteries of the human psyche in practice how do we see this if we okay marriage okay it's one thing especially called producer cooperatives right so here we have coordination through central planning and agreed upon distribution of revenues and there is a voluntary submission to the central plan on the side of each member of the cooperative now cooperatives work wherever the interest of the collective are fairly homogeneous where the collective is small and that's crucial as soon as becomes big then the negotiation was exponentially increased and it becomes unmanageable right so often this can work fairly well although how well it just works is difficult to tell because in most countries producer cooperatives are legally privileged by the text code and various other things two more minutes the other the second type of second useful solution to the coordination problem is representative central decision making and here the paradigmatic case would be the one of a guru so this is the reverend moon he sees the leader of the sect of the moonies and I came across them many years ago when I attended one of their congresses I was invited don't ask me how I came I'm not a moonie so they have the scientific congress every year in which they invite people especially that they do not really belong to the moony sect because they want to gain in credibility and so on statue so I was invited to the zoo I came to see not to handshake the reverend moon and I will spare you funny details about the theology and so on but what I found fascinating is one of the things that they do is to marry each other because one of the central elements of the moony theology is that marriage has been underappreciated in Christianity so the important point really is to get people to marry one another and really to marry completely across the board I mean you see that the reverend moon he's Korean he has also Korean wife but all others have to marry somebody from completely different place of the world the German marries the Eskimo and the French guy marries the Australian and so on gives all over the whole thing so they gather once a year in a stadium also in South Korea and then you have the mass wedding and typically most couples get to meet their future spouse at that very moment right but again there's nothing wrong with this why not it's kind of marriage lottery or something and so they do this voluntarily there's no coercion involved and so on they do this and the reverend moon he's doing this how many members does he have in this sector a few hundred thousand I guess so that's how far we get in the case of some of the most successful guys but even he is not running all economic decision making from his central place and it's completely out of the question that this method could be applied from the point of view of the world economy and a couple of billion peoples so the only solution that can be applied for very large scale division of labor is the market economy therefore understanding the market economy is one of the most crucial things that we can learn in economics can spend a lot of time on understanding central planning planning techniques and so on basically a waste of time if you haven't understood how the market economy works without a central plan so the market economy we have a private property of factors of production and decentralized planning based on economic calculation and different entrepreneurial visions of the future and we have a spontaneous coordination that is mutual adjustment of individual plans through competitive contracting and that is called the market process and the revenues as we've seen result from contracts and not from an arranged distribution of the boot or something like this so in the next lectures we'll go into more detail analyzing the market economy first looking at money and then more detail at capital theory and finally at competition monopoly and things like this okay I was very careful not to leave any time for questions so you cannot embarrass me