 Okay, our final lecture today is Dr. Roger Garrison, who is a professor of economics at Auburn University He's the author of time and money the macroeconomics of the capital structure he was in 2003 he was named the first visiting Hayek fellow at the London School of Economics and Dr. Garrison is going to be speaking to us on Austrian capital theory Roger. Thank you Thank you If my count's right you've set through five lectures already today is that correct and you're ready for a sixth one This isn't quite in mesh with the Auburn culture But I'm glad to see the enthusiasm Austrian capital theory and I have subtitles here two views The nightian stock flow view that would be Frank Knight and the Hayekian stages of production view or model and my Goal here this afternoon is to use the Hayekian view as something of a set up for tomorrow's lecture on the Austrian theory of the business cycles And the nightian view will serve as a setup for a later lecture when I talk about the differences between Hayek and Friedman and explain why Friedman had no use for the Austrian theory of the business cycle because he was an idea and he had a stock flow view of capital and Not the Hayekian stages of production I would have liked to include a third view which we could have called the Keynesian view But Hayek's criticism of Keynes was precisely that he didn't have a capital theory that he Had a macroeconomic theory without an underlying capital theory base, which is What accounts for the huge difference between Hayek and Keynes, so if you're going to call that anything have to be the animal spirits model, that's what Keynes thought drove investment decisions Okay, I want to start just By recognizing that the word capital Gets used in several different meanings and I just want to sort out a few here and zero in on the ones That I'll be talking about today the many meanings of capital You hear a lot these days about bank capital There isn't any or there's very little And when they say bank capital it simply mean assets minus liability that is net worth They are settled with capital requirements and banks are worried these days about not meeting their capital Requirements, which is why they're hesitant to lend money. That's bank capital. Let's see if we can find another one Financial capital I went too far financial capital, that's just the the cash and other funds raised by Stock and bond sales so affirms financial capital is simply the funds that has to Invest to operate based on how much is borrowed or how much stock it's sold That's financial capital, okay capital goods a distinction that between capital as you've seen them these first two things and Capital goods distinction made by bomb of air can picked up on by Mises that the goods themselves refer to The physical goods the plant and equipment and stocks of raw materials and some finished materials Okay, those are our capital goods Then goods in process These are these are things that are in the mill sheet steel It's it's been processed. It's no longer iron ore But neither is it a fender for an automobile or a part of a finished automobile It's goods in process That's working capital and a lot of the Austrian theory especially the business cycle theory Makes do with that concept of capital just because it's cleaner and simple simpler and it it avoids dealing with some very complex problems about Capital in other forms Capitalized value No, let's see. I Keep Skipping them capitalized value that's simply the present value of some future Income stream that gets used as there are one of the definitions of capital human capital Would be the present value of Skilled workers earnings in the future and now I'm getting when I write capital stock here underlined stock And I want to pay particular attention to this because this is the num of what we're going to talk about Today the capital stock is simply the stock of productive factors that yields a flow Of consumption goods and so I've underlined stock and flow and this view of capital is very holistic View it applies to the economy as a whole in the sense that we have a capital stock which yields a Flow of consumption goods so we have a stock of it and a flow from it And that's the basic vision that Frank Knight used In talking about the issues of capital and the contrast then is with capital structure That's the Austrian view and by structure. We mean a temporal pattern of heterogeneous capital goods and here they the focus is more on how these things fit together to produce consumer goods and What the time profile is of the structure of production and when those goods can be Delivered is it in short order to take a while? Those are some of the issues I want to turn now briefly To the measurement of capital and You hear the Austrians talking about this quite a bit although Very little of the theory actually depends on a hardcore measurement of particular pieces of capital goods or certainly of the whole collection of capital goods As a whole and partly because capital is so heterogeneous and so We're right capital is heterogeneous and you could say yeah, yeah, it is but so is labor So is land Factors are all heterogeneous Well, if we had new the clockman here, he would introduce an adverb there Capital is Radically homogenous and again, you can say okay, okay fine. How radical is it right? Well, the way I like to put it is that capital is dimensionally Heterogeneous which sort of forestalls any effort to try to add up the different pieces of capital Let me explain what I mean when I say dimensionally heterogeneous You can write three sentences here and allow you to fill in the blank. This might be on your final exam I don't know okay Not all units of labor are alike. Well, yeah, it's their heterogeneous not all units Of land are like you know Same thing heterogeneous and not all units of capital are alike But the challenge is to fill in the blank and tell me what do you mean by units? Well, the first two are easy Not all units that would be worker hours Not all worker hours of capital are alike. That's correct, but they're all worker hours. Okay Not all what would you put in land? Acres could be square feet. Okay Not all acres are alike. Well, that's true But they're all acres right and What do you put? For capital, this is what I mean by dimensionally heterogeneous In fact, I became sensitized when I was a graduate students to the different words that the neoclassical Economists use for units of capital and one of the more common one of those. Can you guess it? units See a marginal unit of capital, okay, and that's I always circle that you know, well, what is a unit a unit Is not a unit. I you know, it's a it's not a specific unit But there are others that I became sensitive to one was doses You buy into that Another one chunks the chunk of capital and Another one Hunks, okay, take your choice, but it just emphasizes that Capital has no units that are serviceable all around Actually Google to find out what these so what is it? What do these things look like in I Google to find out? There's a dose And a chunk And a I think it's a reference to human capital, okay Okay, there's a couple of more honks That's night and hi-hack they had it out back in the 1930s about the nature of capital and it was over this business of a stock flow or a structure of capital and Knight argued that the time element in the production process was simply irrelevant There are economists today that argue that same thing and we'll see some of the more recent ones that have argued that But the time element is irrelevant according to night and we'll see why he thinks that hi-hack wrote a famous article at least famous in our Austrian circles called the mythology of Capital and it was 1936 and he was just literally making sport of Frank Knight's view So hi-hack and knight in the 1930s by the way, I like knight very much on other counts his treatment of risk uncertainty of profit and profit or great book and so on and His defensive liberty his critique of Keynes. It's all great stuff. It's just when he turns to capital That he's just missed it by a long shot and then I might recognize that that same debate was held About 35 years earlier about the turn of the century by two other economists and that would be John Bates Clark and Bomb of Eric and of course Bomb of Eric who talked about a Capital structure in his own terms Under under lies the Austrian theory of the business cycle. We'll see more about that Clark adopted a view that's the same as night. In fact night picked it up From Clark and I have to say that I also have a very special place in my heart for John Bates Clark, but only because he looks exactly like my grandfather Okay Now The term I like to use here is black box capital theory They were this black box remind you of anything we're seeing here at about a black box Anybody know Yeah, the flight recorder the flight recorder There is flight recorder on an aircraft is a black What color is it? Orange, okay Now why they call it a black box actually it's a technical term that comes from the field of electronics written it out here that Any complex piece of equipment typically a plug-and-play unit in Electronic system with contents about which the user has no need to know that's in electronics you call that a black box you You get you do for your client what he wants. He says I've got these inputs And I want those outputs put something in this box that will do it and you put it in there And you sell it to him and you say you notice it says do not open Do not open well, they don't need to open because I don't know what don't need to know what's in it They just plug it in and Play it right and has input has output and that's all they need to know It said well, that's night's capital theory. In fact looked googled and I found the capital stock. There's input output and a black box, okay appropriately colored Only thing mixing missing is do not enter. Okay, or do not open so the The night ends or the Clarke ins don't don't bother about just what's inside the box now I want to illustrate first steady-state economy which is Largely the focus of Clarke and night and the steady-state Economy has a given capital stock. There it is in the box and it has a flow alright, but Capital tends to wear out As it proceeds and so you need some maintenance you need to need to Put some back into the capital stock just to keep it from falling maintenance. Okay, so let's see if we can get a flow going here Doesn't want to work. Just write but you can get the idea that No, it works on the screen here. It just doesn't work on mine. Yeah There you go, so you've got the flow of consumption goods and you've got the maintenance of capital which is a feedback loop going back into the Going back into the stock and that can just go on forever. Okay, that's the story now Let's just look at the capital stock and actually I need that maintenance there because there's a certain critical point to be made and that is that the capital stock in this theory Includes the maintenance as a technical detail just as a matter of a technical detail this capital has to be maintained If if it weren't maintained it would eventually wear out you wouldn't have any cap Has to be maintained and so maintenance ends up being a technical Detail now Knight has something to say about that. He says hence the capital stock is permanent and Permanent is night's word and also the quotation marks are Nights in other words you look through night's work He puts quotation marks on a lot of words that sort of tip you off to mean does he really mean that you know that capital is permanent He qualifies it sometimes let's see Capital stock is permanent. He says in a sense. Well, what's the sense the sense is if you maintain it It's permanent. Okay Other places he has a little different way of putting it capital is permanent as a word. Okay, I Became sensitized to this in graduate school to capital is impermanent so to speak The some the some of that is capital is not permanent, you know, you got to do something They think he but from wearing out. Okay. Now that has implications and you can guess what they are downstairs I hope you can see it accordingly The permanent capital stock yields a perpetual in income and put with perpetual in quotes. Okay, does he qualify that? Well, yeah In a sense as it were so to speak. Okay, so that's the night in capital theory now Okay, so we have that The economy is a system of capital yielding consumable output All right He even gets more severe than that in his terminology and I present this because it'll come back to us when we look at Friedman in his treatment of the Austrians instead of calling the using the word capital he uses the word source and Instead of consumption he says services. So in this consumption and let's change it in our Diagram is probably what we do here Yeah, so we've got sources that are maintained automatically as a technological detail And we've got services which are produced by the sources. So instead of a stock flow you have source service and the essence of this is That anything any actual thing like the chunk or any some you could hold in your hand any thing That you think might be a consumer good. Think of one now According to night really isn't it's a capital good yielding a service. Okay So if it's a radio, is that a consumer good? No, it's a capital good It yields a service which plays music and so on. Okay, so There's no more any capital goods. It's just it's just flows Services And from this he concludes night does that really there's only one factor of production Can you guess what it is? It's capital that yeah, that's right So it's capital in the broad sense of the term or in the broad sense of sources So it turns out land labor and capital are all capital in the broadest sense because you just have sources yielding services I put an asterix on labor because it's hard to think of labor as a stock as As capital which you could think of the workforce or you could think of human capital Okay, you got human capital it'll yield the services Provided by the labor and so on so we have that going for us in the nightian view Okay, let me back that up what I'm showing here is an expanding economy in other words even night recognizes that economies grow and sometimes you plow back more Then is needed just for maintenance and if you do then then the capital stock increases and so that's what this shows You see you got a bigger flow Back into the capital stock and so you get a big capital stock so you can't have an expanding economy like that Can you have a contracting economy? Well, yeah If you if you under maintain so if what you're plowing back is less You have a big flow out and a little trickle going in Then you get something like this Okay, so it could it could go to pot for you to that that gets recognized now from all of that Night concludes that we don't have to worry about production time. That's taken care of within inside that box okay, and And People after night defend them that especially the people from the Chicago school The one I'll focus on here is Stigler cuz Stigler was a cohort of Freedmen. They were very close And Stigler wrote his dissertation on capital theory. It was called Production and distribution theories that was the title of his dissertation 1941 and so we'll see what he had to say In a minute, I'll show you what he was talking about. What about the production time in the Clark night? vision well following Clark He posited a Forest from which we can harvest wood. Okay, I'm just showing One row of the trees actually there are lots of rows behind that you just can't see them for the first row. Okay About 50 rows behind that We can look at one of them and Here's the story that once a steady state is a reach and now see that's the qualification instead of saying Something about Maintenance is a technological detail. He said well, okay once the steady state is reached. I suppose that's a technological detail Then production time is around How so well The trees Have a linear maturity structure is actually long linear, but we're getting let him get away with linear And each period of sampling can be set out and at the same time a tree is harvested, right? You have a whole row that you Set out in a whole row that you harvest and let's see if we can do that Here's your one So you set out a new sapling there on the west side of it. Did you see that? Yeah, there's a new sapling and you harvest The big one All right, that's period one and then the next period You have the same maturity profile because these things grow there. They are Okay, and you can do it again. So each year you can set out a tree To the west there and harvest one on the east and it stays the same forever except the whole forest keeps moving west I guess Somebody location theory is pretty much it need there So now here's again a night with his quotation marks. So he says this It is the setting out that quote enables the harvesting And if you didn't quite get that look at his next one setting out the sapling now Produces the harvestable harvestable tree now So there's no production time Production and consumption are simultaneous again in quotes It's not that I'm quoting night. I probably should have put it in double quotes because he had the quotes in So There's simultaneous so so much for Hayek and all of that bladder about production time That's night Qualifications there are there they are again in a sense as it were so to speak works that way now This sounds a little bit insane and yet. That's the Chicago view of capital theory That's the reason that Chicago didn't want to hire Hayek when he tried to get a job there in the economics department Because they didn't like his capital theory because they were all nighty ins Okay Now for the Friedman eyes for the for Chicago not really as bad as it sounds because it's it's not really It's not really that Friedman Worked this theory into his own Theories about money and prices so he didn't really do that You can't imagine him doing that because this this just doesn't ring true at all but what he did do is Take it on the authority of night that he didn't have to worry about production time And he didn't have to deal with Hayek. All right Because production and consumption are simultaneous More about that when we get to Friedman and here I'll show you Something this directly from George Stigler's 1941 Book when he deals with this issue. This is Chicago economic Stigler in 1941 He defends Clark against Monteverg Okay And here's what he says he says we can say that any one row of trees Takes 50 years to mature to mature but since there is a constant output of timber forever There's simply no point in saying it Okay, now that's just night in through and through all right and he might as well added Sentences so much for Hayek Now a little summary slide here where you can see what's going on I'm can contrasting night and Hayek and night says Maintenance is a technological detail. No According to the Austrians Hayek Maintenance is a matter of choice. You choose to maintain it choose to under maintain choose to make capital grow Capital is permanent. No, it's ever-changing Capital is the only factor No, but capital is a unique and heterogeneous factor. It has to be dealt with a little differently than other factors Production time is irrelevant No production time is the key variable one of the key features of the Austrian theory is that it It puts production time in as an endogenous variable from the get-go okay, and That's something that many macro theories don't do it all certainly Capital theory coming out of the Chicago school because times irrelevant and even in Neoclassical economics or Keynesian economics if anything Time is added as almost an afterthought as lag lag structure. Maybe this lights that Leads that okay, but with the Austrians. They put the time element into the theory from the get-go It's a key factor So summarizing even further here, it's all about sources and services No, it's all about the temporal capital structure and whether it accords with people's saving preferences it's about steady-state equilibrium in other words all of the Hardcore propositions that night and Clark made were propositions that were only true when you had a steady state in other words when Maintenance just kept the capital stock from Falling or rising for that matter and according to the high act. No, it's it's about dynamic market processes how does the market Respond to a change in saving for instance, how does it respond to an expansion of credit? So those are the dynamic aspects Okay, now I want to shift to high. I can show what a world of difference We have here and I'll come back at the end and we'll compare them once more Mangers law It was Israel Kershner that started using that phrase mangers law and it was expressed in terms of orders of goods and the orders were related to one another and temporarily And his ordering looks something like this And they get the orders up there and then we'll discuss I've ordered them from bottom to top first order goods second order goods and the reason I do that is only because the early goods Which here is seventh order goods earliest They're earlier goods were called higher Ordered goods higher higher ordered goods by minger. Okay, so we'll put them higher I don't want them down here at the bottom and call them higher order goods But the top higher order of goods And those goods of the first order than those are guess what consumer goods. Okay consumption goods Now Minger's law is stated up there the value of the higher order goods derives from the value of the respective consumer goods this was this was Bedrock it was ground zero of the subjectivist revolution And for the most part not completely but for the most part Economics that had gone on before that Adopted some sort of a labor theory value or cost of production theory value some cost is what determines production and Minger was there to say no no That's not the theory value the theory value starts with the valuation of the final product the consumer goods And and that value gets imputed then backwards to the factors of production And so to show how radical it was we'll put two arrows here. No, there's an intermediate goods higher order goods so what minger is saying is that of Course production itself proceeds from top to bottom in other words You have to start by digging iron ore out of the ground and then work on it a while You might get some sheets deal and keep working Eventually you get a car fender or something and eventually a consumer good All right, so production Has to start in the higher orders, but the value Goes the other way. Okay, the value goes From bottom to top which Changes the whole way you look at economics one way it changes it is is that you recognize the crucial crucial need For entrepreneurs. I mean entrepreneurs are people that are back there at that Seventh order looking forward and thinking now What was it would sell? You know what would how would people value a consumer good that we could produce by doing this that and the other Over a period of time. So you need some very forward-looking entrepreneurs Usually they're just looking one stage ahead. That's that's what the stages of production are all about but you need some entrepreneurs to Keep the economy glued together Okay, where do we go from here? There's an alternative By bomb of Eric, you know, when you look at the orders of goods you might say, okay, that's very logical Didn't take much to think that up didn't really stick originally one of Mingers Followers was a bomb of Eric and yet he had his own way of looking at it Concentric rings. I don't know why he did this but Essentially the different rings mean different orders of good and starts in the middle He's in starts in the middle and emanates outward And what he's doing here is just contrasting a poor country with a rich country and recognizing that Only a rich company or country The people can't afford to wait You know can't afford to have Resources tied up for a longer period of time to go through a number of stages to get The output that they want the poor country's hand-to-mouth and so on and so you don't have As many stages of production. So let me just take a survey here I know you're all Austrian enthusiasts you read Austrian literature and so on you listen on I want I want to ask how many have seen this diagram before be proud My god one two three four five. I'm amazed that that many have Congratulations, you've seen it. Okay, but the point is that nobody has Except five people in this room how many people outside this room have seen it In other words, it was I call it a pedagogical non-starter Nobody went with bonba bear. We're sorry So we go back to orders of goods, but Hayek went this direction except he just used a different language He talked about stages of production And not orders of goods But if you've read prices in production or if you've looked at it, how many have done that look at prices in production Okay, more not too many more. Okay, but some more You'll see his diagram. It looks like that And I'll clean it up. Let me get rid of minger here Instead of orders of goods It stages of production, but it's the same thing. All right, and it makes the same point that you start Producing in the higher orders and eventually get the the consumer good Okay, I'm gonna clean it up a little bit is to simplify it All right, and so now if you look at the the horizontal dimension output of consumer goods We're measuring that final output horizontally Along that vertical axis. That's what Hayek did and it means that The vertical axis shows production time and The time is coming down along the vertical axis Well, all right, but that sounds kind of odd and if you're trying to Pursuade people who don't know anything about the Austrians they get hung up on that time is coming down the Austrian Or the vertical axis. What does time do when it hits the origin? Well, you've got the consumer goods there So it occurred to me that there ought to be some way to fix that problem because you normally think of time going along the Horizontal axis got to be some way to do that and there it is. Okay There it is. I Show that because Walter block. He's not here today. You're not in the room Walter block and one of his articles credited me credited me for having turned the high for the triangle sideways, you know, I think I think I should take a bow I guess I don't know Now I turned his sideways and then Beyond that I did actually what Hayek did too is I cleaned it up Because we do call that a Hayek in triangle, which is just a almost an iconic representation Of these stages of production and the stages themselves are a little bit iconic, you know Because it's not intended to claim that there are seven stages and only seven stages. No, no, no There are lots of stages It's just for pedagogical reasons. We divided into stages to emphasize the temporal nature of the production process and the Output of one stage feeds in as input in the successive stage and over a number of stages, which entails a lot of time Eventually consumer goods emerge That the consumer buys. Okay, so we do it that way, right? And I'll clean it up a little bit Hayek in triangle So production time is measured as simply a sequence of Stages and yeah, that's simple, but that's a virtue. You know, we want to keep it as simple as we can and still keep the concepts there and in fact if if you're if you have an immersion to simplicity Then I recommend Hayek's 1941 pure theory of capital And you can use those diagrams. I think I've got one here. There it is So That says a modification and it's the worst of worst of both worlds in other words it's not complex enough actually to capture all this going on in the markets for capital goods, but it's much too complex to do anything with okay and That That diagram has been treated about like boom bebeck's circular ring It doesn't show up except for entertainment purposes like that. Okay. Yeah, pure theory of capital. There it is All right now what I'm going to do is Show you how we use that triangle To illustrate much more than the 90 and black box theory could possibly illustrate and yet illustrated in a way that's a that's a Perfectly consistent with the way you think of the economy working and it goes like this We have temporarily defined in stages of production And it there they are So I'm still using the triangle, but for now at least I've divided it into five stages We can conceive of that early stage As something that's very future oriented and here I say product development The guy looks like he knows what he's doing But it's going to be a long time before he's got something to sell to the consumer In fact, when he's through with it it still has to go through a number of stages of production in order To be sold to the consumer if you look at the right side of the triangle and you see Inventory management that's capital even in the Austrian viewer the neoclassical abuse Stocks of consumer goods at retail in other words are not in the hands of consumers. So a late stage would be investment in Inventory and inventory management So it won't be long this guy hopes. I actually didn't have any customers. That's the only thing he's missing, but Won't be long until he's got customers in there buying the consumption good So I like to think of the stages of production in that way and not in trying to quantify Exactly how long it will be exactly how early stage or late stage Something is Okay So this is really just for pedagogical convenience that I've divided into five. I see I'm simplified it market said seven stages I've got five although eventually we'll get six out of it. Okay, so We're showing the structure that way having five stages with growth the number can increase as we'll see And Hayek makes the point that the that the triangle and Including the one on the screen has two complementary definitions one is that It shows a process through times you start at the Early stage. I like to say I call it early stage now because I don't have it at the top the higher order Is early stage you start at the early stage and move through to the late stages and it shows Processes that are all going on Simultaneously in the sense that if we took a field trip if we had field trips at Mises you we could go out and find Some mining operations or we could find some transportation services and we could find some Retail services all going on at the same time, but of course They're based on different phases of a production process the iron ore extraction won't show up As a consumer good until much later nonetheless, we can go to Walmart and see the consumer goods and Will be produced at that later time. So it has those two definitions so that when we transfer resources for instance From a late stage to an early stage. It doesn't mean That we're doing time travel Some of my sophomores get trips up that way Okay, so says watch the resources or goods in process. This is the working capital move through the stages Let's see if this will work. Yeah And move through the stages now this concept was available as early as 1931 I think I know that This is when he introduced his triangle the same year that Henry Ford was still producing the Model A It was the last year of the model a but that's how old the theory is and Henry Ford if you've read the history of Henry Ford He he really had dabbled in all the stages of production. He owned fields of iron ore and He owned the processing and and he just did it all Which is kind of neat. I mean Henry Ford is one of my heroes at least for some reasons I trouble with him in some areas But anyhow like to use them as an example to show what the stages of production means We ought to be able to use it to produce some of those model a is we'll see if it'll work there Those are model a roadsters 1931 Okay, let's get rid of that Okay, we got the triangle now to work with the summary depiction of the inner temporal structure and I Use the term secular growth in an economy that's experiencing secular secular growth the triangle increases in size But not in shape my secular growth. I mean that put it in 90 in terms Plowing back into the capital structure is more than just capital maintenance But that's sort of ongoing in other words. We're not talking about a change in the rate of savings Or we're not talking about credit expansion We're just talking about a healthy economy that's growing and that each year it produces a little more than a year before because That much of the output is plowed back into the capital structure and so Thing grows. What's the structure expand? Okay, so it's expanding but without changing in shape, right? So in a way I've already picked up On that aspect of night where he shows an expanding economy We can do that with the Austrians too, but it's just very much a preliminary thing and much more important Go back to my original triangle is what happens when preferences change Okay, so when people choose to save more The change in their preferred temporal pattern of consumption is registered by the market First and foremost by a reduction in interest rates. Well, yeah, that's true And that's going to change the structure of things reduced current consumption. See if they're saving more means they're consuming less And so if they're consuming less that guy that was stocking inventories not going to stock as much inventory Right, so he's going to have to cut back So that frees up resources in the late stage And the lower interest rates favor more time-consuming production processes interest rates lower now because people are Saving more which makes more funds available and bids down the price of those funds and that favors long-term production Because long-term production has a big component of carrying causes interest cost All right, and so you expect to see that triangle now change shapes, right? This is something That night ignores and that Keynes never saw because Keynes Treats that initial reduction in Late stage activities as something that happens throughout the whole process throughout the whole structure so if consumption goes down then everything goes down that's the paradox of thrift in Keynes and So now what do we need to do here? So now says watch the structure production respond to an increase in saving Well, what do you expect to see you expect to see the resources migrate towards the higher Order goods, okay and you might even imagine that maybe some security guard at Walmart or wherever Working in retail becomes a security guard At a mine mining operation. Okay, so it'd be movement of labor in that direction. Let's watch it There it goes. Okay, the resources move that way now. We've got six stages of Production and the way I've shown it now you see consumption is reduced. Well, that's that's the initial part of the dynamic That's what we mean by an increase in saving is people reducing consumption in there, right? That's why people say they say it in order to be able to consume more in the future right and So it's only in the future that they consume more But now with a beefed-up capital structure the economy can grow faster. That's how it works and we probably can be able to see that now what I'm going to do is pair it up now with my capital stock and Show how that works Here's a high I can construction. I'll show half of the high I can construction and then come back to it after the capital stock So increased saving results in a reallocation of resources among stages of production Okay, here are the differential interest rate sensitivities and I like that term. I've been Using that term fairly consistently in my recent work to give the idea of how that Reallocation occurs differential interest rate sensitivities. So interest Long-term capital is much more sensitive to interest rates in short-term capital And that's where we see that saving Beefing up the capital stock. I might mention here just to nip in the bud some misunderstanding about Hayek or about the Austrians some people see the Austrians are particularly Hayek as cheerleaders for growth, okay That you people really ought to save sound like your parents You people really ought to save And and really that's not what it's about at all Hayek would say Save as much or save as little as you prefer. I mean these are preferences just like any other preferences for ice cream or whatever Save as much or save as little as you prefer but recognize that if you save a lot The economy will grow if you save a little it won't it might even go the other way Okay, just realize what the consequences are don't for instance save a little and Then expect the government to grow the economy They grow really shouldn't be used as a trans city verb in that sense It used to be only the Democrats talked about growing the economy But in the last several elections both parties want to grow the economy They just had different ideas on how they're going to grow it Well, I can't grow it. Okay, but you can grow it by saving But it's your choice Not I'm not trying to be your parents, okay Although you probably should save Okay So, no, I think I'm going backwards here I like to watch that. Okay So here's the nighting. Okay increase in saving saving bound technical requirements Results in an increase in the capital stock and decrease in the flow of consumables with no implications about capital's temporal structure so with night he doesn't even bother about what caused the increase in The the feedback loop in the plow back what caused that doesn't matter if it's saving is one thing if it's credit expansion Same thing. Okay, and so sure enough he can show that but he just shows the capital stock Growing like that with no implications whatsoever about the temporal aspect because you think that that's totally irrelevant. Okay Now go back to Hayek from for a minute So the increase in output of consumer goods and I Emerges over time as the early Intermediate stages move through the more time-consuming Production process, but here's what I'm showing is that the economy grows more Grows at a higher rate because more is being plowed back So once again what we've captured is the change in the rate of growth of the economy Okay, it's the change in the rate of growth of the economy as a result of your Deciding to save more for instance Okay, now Again, I want I want this lecture to be seen as a setup for some of the stuff. I'm going to do Tomorrow, but here. I just have a one-liners as this construction Allows us to depict both economic growth and the boom bus cycle. So Tomorrow when we look at this thing again, we're going to abandon you might be happy about this the the Frank night view We'll bring it back when we deal with Friedman But I'm going to abandon that that view and recognize that the economy behaves very differently from an increase in saving and it does from an increase in Credit expansion and we'll be able to track the particulars and see just how it works Okay. Thank you very much