 Okay I think we'll declare it 9 o'clock and begin with the first lecture of the day which is titled in your program the Austrian Theory of the Business Cycle. Actually I think of this material as a little more general than that. I call it capital-based macroeconomics and the most well-developed aspect of that theory is the business cycle. But if you look at my book Time and Money you'll see that I deal with other issues that aren't business cycles. I deal with fiscal issues. I deal with tax reform, consumption tax versus income tax. I deal with the idea of infrastructure and how that looks in this framework. But this morning it's going to be the Theory of the Business Cycle. I don't want to save my punchline to the end. I want you to see how this works out. The distinction we'll be making throughout the hour is a distinction between sustainable growth and unsustainable growth. It's the macroeconomics of boom and bust. That's the unsustainable part. And I can even give you a clue on how to know whether the growth that you might be expecting is sustainable or unsustainable. If growth is used as an entrancity verb, which in the context of macroeconomics that always should be, then it's sustainable. In other words, leave the economy alone and it grows. That's an entrancity verb. It doesn't take a direct object to, you know what an entrancity verb is. Leave the economy alone and it grows. Well, it'll grow on the basis of how much you're willing to save, but it will grow. The transitive verb, elect a Keynesian to office and he will grow the economy. Okay, watch out. And dating back from several presidential elections ago, the phrase grow the economy has become a staple of both Republicans and Democrats. And so it has the effect of fingernails scratching on the blackboard to me. Okay, so I wanted to have that effect on you too. So I want to start out by just setting up the elements of capital based macro over the theory of the business cycle. And what I want you to see is that I'm using to the extent possible, some off the shelf, graphics that can go together and tell the story of boom and buzz. Production possibilities frontier will be somewhere in the first 10 pages of every elementary textbook that you pick up today, although it doesn't come into play in the exposition of business cycle in those texts. The loanable funds market is a staple derives. It comes out of Alfred Marshall. It was developed by Dennis Robertson, a British economist. And it's a workhorse in macroeconomics of the Austrian school, but tends not to get used certainly in the Keynesian theory, as we'll see. The structure of production is the only one that's sort of uniquely Austrian. That's that's what's so Austrian about the Austrian theory. It's at stages of production, the Hayekian triangle and all that. You've seen it before, even in my lecture, and you've seen it in other people. So you should be prepared to see that. And labor markets, well, of course, that's heavy in Keynes. It's all about labor, unemployment and malfunction of the labor market because wages are sticky downwards and all that. But in the Austrian view, we have to have stage specific labor markets to tell a better story. So that's what it's all about. And the applications as the cover slide indicated about sustainable growth supported by saving and unsustainable growth is triggered by credit creation. Now, one of the things you'll note about this lecture, and especially if you keep looking at your watch from time to time, is that most of this lecture, probably two thirds of it, will be dealing with the sustainable growth. And I do that because of a particular methodological maximum articulated by Hayek. I think that comes up next. We'll see. Well, there's Mises and Hayek. Mises originated the Austrian theory in the business cycle. I can say now over 100 years ago, 2000 from 2013 back to 1912, in theory of money and credit. And in that book, it's only a few pages near the end where he sets out the Austrian theory. And it was developed by and large by Hayek in the late 20s and throughout the 1930s. And now turned out to this methodological point, which seems to command a scent just on reading it. Before we can even ask how things might go wrong, we must first explain how they could ever go right. One's a prerequisite of the other, surely, surely. And I remember in an article that I wrote about Hayek in Keynes, I mentioned about Keynes that he passed over the first question. Well, partly because he saw no way the market could go right. And I brought this up to some mainstream economist and the response was, well, he's in good company because no one explains how it could go right. Well, the Austrians do. The Austrians do. And they consider it a prerequisite. So I start out with this production possibilities frontier. I hope the light on the screen doesn't wash it out completely. So we've got investment on the horizontal axis and consumption on the vertical axis. And it shows that there's a trade-off. There are alternative ways of using resources. You can invest with them or you can consume. Goods have already been produced. This right here is just a start difference between Hayek and Keynes. If you remember your Keynesian theory, consumption C and investment I are just two components of total spending. C plus I throw in a G and you've got the whole thing. Let me ask just for a show of hands. How many have gone through a basic macro book and got a full dose of C plus I plus G? Okay. That's good in one sense and bad in another. You know what I'm talking about when we say C plus I plus G? Well, here what we're saying C instead of I or I instead of C. That's what the PPF tells us. And it says I say here that under favorable conditions I just leave the market alone. The economy will find itself somewhere on that production possibilities frontier. Now the frontier itself, I've been given some flak about this, but I can take it. The frontier itself stands for sustainable combinations of consumption and investment, which doesn't preclude some movement beyond the PPF, but by virtue of being beyond the PPF, it's by construction unsustainable. It ain't going to hang out there very long. It's going to come back in your face. Okay. So it's a boom if it's pushed out there, but it goes bust and comes back. Okay. That's the idea. And by the way, that's the standard interpretation of the PPF if it is employed in a macro sense. All right. It's a sustainable level of output of consumption and consumer goods. Okay. And here I've just indicated that, look, this little piece of graphic is used for a lot of things. International trade theory and different applications that trade off of one thing or another, even if it's beer and pretzels, which is a bad example because those two things are compliments. But it's rarely used in a macroeconomic construction. In fact, that's an understatement. I don't know anybody else that uses it in a macroeconomic construction. And here I'm saying that featuring this trade off gives us that contrast with Keynes because Keynes treats those two magnitudes as additive. Okay. So investment in this construction and in most macro constructions includes replacement capital or capital maintenance. And so that horizontal distances is the addition to the capital stock, most of which is just making good on worn out capital and used up resources and so on. Okay. Typically investment or replacement capital or capital maintenance is a pretty good portion of total investment, but not all of it. So there's some net investment. So you get so much replacement capital and the rest is net investment. All right. And that means that the trade off next year will be more liberal in the old sense. In other words, the PPF will shift outwards because you've actually added some net amount to the capital stock. So there's net investment. So positive investment means the economy grows. That's in transit. Okay. The outward shifting represents sustainable growth. All right. And so now we watch the economy grow. You can hear the economy shifting, shifting outwards as we go. Okay. After about four shifts and you're up there quite a ways you can consume more and invest more just because you've saved back in the earlier period. So I've got four points here. And the actual rate of growth, I say it depends on a number of factors. I mean, replacement capital increases too. Plus, this is probably what this says. You don't need to read it. Plus, as the economy grows, people are more wealthy and more income and they tend to save more. The more you make them more in proportion, you tend to save not for everybody, but for generally for the population. So that can change too. And I haven't taken into account that. Importantly, I probably should have importantly, in italics here, if we have a change in saving preferences, if you all decide to save more, then that gives you a movement along that frontier. In other words, if you prefer not to consume so much now, but to save, why would you do that? Well, because you want to consume more in the future. Okay. So your time preference are lower. You decide that you want to save more. That's represented by a movement along the frontier. So suppose people become more thrifty. And it says here, watch the movement along the frontier. Well, we can move along the frontier. And when we do, we get less in the way of consumption more in the way of saving and investment. That's what savings do. They work themselves into the investment community. And then investments are undertaken. Okay. Now that has a certain effect here. And that is the economy grows faster. You have a little saving going on, the economy grows faster. As you can see. And in fact, we can do a little comparison here. This is all just for illustrative purposes. I haven't looked through any data to show these things. Increased thriftiness makes the difference. Okay. So let's compare those two instances. And what we see is that after Oh, let's do it. Yeah, let's do it this way. Look at the one on the left. And you see that yeah, yeah, you got growth. It was a little bit sluggish. But there it is. And on the other on the right hand side, you see that first you had First, you had an increase in saving and then a more vigorous economic expansion precisely because more resources were put in the hands of entrepreneurs. That's the way it works. And that after four periods, we can just cut across here and see that people now are consuming more than they would have been able to consume. Have they not saved in the first place? Okay. Well, of course, I mean, that's the way it is. You save up for something. In fact, in when I teach macro for sophomores, I like to use instead of S for saving, I like to use SUFS save up for something because people don't save for funds, not fun. Okay. Now don't get me wrong. I'm not getting preachy here. I'm I'm not your father. I'm not telling you you ought to save more. You ought to save more. I'm just saying that if you save more, then the economy will grow faster. If you don't save more, then it won't grow faster. And for Lord's sake, don't save less and then vote for politicians who promise to grow the economy. That's a disaster. Okay. Now I look at the loanable funds market here. And what we see is just an application of supply and demand. And this comes out of Marshall 1890. You have a supply of it, which is just to say, the more interest you're paid for saving, the more likely you're willing to save. And this gets demonstrated in recent years in the opposite direction. If you're earning 0.7% on your certificate of deposit, you might as well cash it out and buy a new car or something, you know, equity. So it works both ways. And then the demand for loanable funds, of course, is the demand on the part of people undertaking investments. I actually net out consumer borrowing on the supply side. In other words, how much do people in general or in the aggregate devote their income to saving, realizing that some people may be dissaving. In other words, they may be borrowing and buying wide screen TVs and new golf bags and that sort of thing. But the saving here is the net saving done by income earners. And the demand then is the entrepreneurs borrowing the money to undertake investments. That's the way it is. And of course, the interest rate simply equilibrates that market like other prices equilibrate their own markets. Now I note here that this was the agreed upon interpretation of the loanable funds market from way back and certainly to Keynes and even back to Bombavere. So here you have an Austrian and the Keynesians or Keynes himself agreeing on this point that the loanable funds market is conceived broadly as the market that puts unconsumed resources. In other words, you go to work, you make things, you get paid toward, it's called income. You spend part of that income on consumption goods and the rest you save. Well, the rest you save represents some amount of stuff you produce but didn't consume. If that's true on an economy wide basis, then that's the part of output that can be used for investment purposes. And the way it gets put in the hands of the entrepreneurs that are going to invest it is through this loanable funds market. So they take command of the unconsumed resources and use it to beef up the stages of production, beef up the economy and give you growth. So that's sort of the macro meaning of that whole diagram. Now what that amounts to is that that horizontal axis which represents supply of savings, demand for savings, it also represents the investable resources. That stands with those savings. The entrepreneurs can buy the output that was produced in the period but not consumed. Because that's the same output that would be represented by your saving. You didn't consume. That's the way that works. And here I just give Dennis Robertson a plug. He was the one that developed it and used it to hit Keynes over the head with, by the way, because Keynes didn't use it. He specifically rejected it and we'll see more about that in this afternoon's lecture. In fact, you see a little bit about it here. When Keynes was writing the general theory, he let a few people, not many, see it in manuscript form. Roy Herrod was one of them, read the manuscript. And what Herrod told Keynes is something like this. It's not a direct quote. My God, Keynes, it looks like you're throwing out the loanable funds theory. And if you are, you better make that clear because people won't believe you. Okay. So Keynes made it clear. He put the graph in the general theory and then indicated this is why he's throwing out. And in fact, that's the only graph in the general theory. If you've taken introductory level Keynesianism, you guess that the general theory is full of graphs. It's not. It doesn't have any graphs. It doesn't have any except that one. And he only put it in there because Herrod told him to put it in. He put it in through it out. What do you think is the loanable funds market? That's what that says. That's the only diagram to appear. Okay. Now let's go back to this business of people deciding to save more, whether or not they got the advice from their father. They decide to save more. And what that does, of course, is shift that supply of saving right. There it goes. All right. And you shift it right word. And of course, you get a lower interest rate and you get business people willing to borrow more money to undertake investment. If you're saving more, that means you're consuming less of the output that you produced in the period and left more for the investors to take command of by the borrowing of the funds that you save. It also works out. That's the market at work. So you get a decrease in the interest rate and an increase in both saving and investment. Okay. This is prerequisite, as others have told you, to sustainable growth. All right. Now we want to just put those two diagrams together because they tell the same story. But in a little different way, they line up, in other words, the investable resources in the bottom diagram. There's the same thing as investment in the top diagram. All right. And so we're in a position here where that just shows what the two tell you. This is available to you on the website. In fact, I think the Mises Institute has all these PowerPoints available. If you want to actually read through all this stuff, you can. But I've only got an hour, so I'm not going to read through it about it. But what we want to do is indicate that these two diagrams are telling different aspects of the same story. So as before, we assume that people decide to save more and we're going to watch the market respond. Now you have to watch both diagrams at once. That might have to turn your head sideways or something. But watch both diagrams at once and you can see how it works. Okay. Saving increases, interest rate falls, firms borrow more, people are consuming less. That's what saving means. All right. It works out. This is all part of Hayek's idea. You got to see how markets work first before you see what can go wrong. Okay. And that just summarized what has happened. Now it's worth pointing out here the contrast with Keynes will have something more rigorous in the next lecture that I give. Keynes denied that this could happen because we have opposite movements in consumption and investment. We have consumption going down while investments going up. And Keynes says essentially that doesn't happen. That can't happen. Is that consumption and investment moving the same direction? Okay. This sounds so Keynesian. Well, it really is. So according to Keynes, any reduction in consumer spending would result in excess inventories, which in turn would cause production cutbacks, worker layoffs, spiraling downward of income and expenditures, economy would go into recession. And the business community would commit itself to the less, not more investment that's Keynes paradox of thrift. And on recognizing that, then you recognize you need to elect somebody who will grow the economy. Okay. It will turn it around and get it going back the other way. That's so it's really a claim that markets can't work. They don't work. And so we need some help here by government. That's Keynes paradox of thrift. I mean, that expression you've heard, you probably had to answer a question on the test about the paradox of thrift. That's what it is. Okay. Now, here's where we segue to this production, structure of production. And that is that what Keynes is saying, he's right. He's right if he's talking about inventories at retail, he's talking about inventories in late stages of production. In other words, if you quit going into Walmart and buying goods, then Walmart will have fewer good shipped to the store. Okay. Might want to write that down so you don't forget it. And this is called the technical term is the derived demand effect. Okay. I call it the well done effect. And Keynes thought the well done effect was the only effect. All right. But the other effect is the reduction of interest rates. Okay. And the reduction of interest rates means that people that are starting to produce something that requires an investment in early stage can get the financing more cheaply and can expect to be able to sell the goods when they come to fruition, if he's a good entrepreneur, because people are saving now and people don't save for fun is not fun. They save up for something. And the entrepreneurs who can make them something they're willing to buy will make profits. That's how the market works. Okay. So it does require some entrepreneurs here. But of course, no one ever doubted that to advocate market solutions to economic problems. So in the early stages of production, then you get the opposite effect. In other words, you get a decrease in consumption of current consumer goods to give you an increase in production in early stages of production that are aimed at providing consumption in the more remote future where people have saved up funds that they can spend. All right. Now it's not all mechanical at all. It takes some foresight. It takes some entrepreneurship. It takes some luck probably, but that's the way that markets can work. And that's the interest rate effect dominates in the long term. Okay. So in the early stages of production, the interest rate effect dominates in the late stage, the well done effect will demonstrate. So to keep track of that, that's why you need that structure of production. And I can go through this maybe a little more quickly. Not much. We went through it pretty quickly last time. So that's why capital based macroeconomics, the Austrian view focuses on this structure of production. So they can look at those allocation effect within the structure. And here you saw yesterday that you have early stages that's research and development. It could be exploration for oil. It could be steel mills. You can think of a lot of things that are early stage. And late stage, of course, is just retailer. It's Walmart or it's the public or whatever. Dividing the stages into five is just for pedagogical reasons. So you could have some going up more than others, some going down more than others, some something in the middle, not going anywhere. Okay, there's nothing unique about the five. You can make it 55 if you want. But it's harder to see that way. I've had people ask me now just, just how many stages of production are there? I actually have heard mainstream economists ask, is anyone figured out how many goods there are? So this is pedagogy people. We've got five stages of production. Okay. And the point here is there's always two interpretations. And I had to do this from my sophomores because when I started talking about resources going from the late stages to the early stages, they said, that's time travel. You can't do that. So two interpretations. One, it's a process where resources go through the stages of production from early to late. On the other hand, it's something that's going on in all stages at the same time. In other words, if at Mises University we took field trips, we could go out to different producers that were each in a different stage of production. We don't have to wait till tomorrow to find the next stage. They're all going on at once. It's just that they're aiming for output at a different point in time. So it's possible for somebody in the late stage of production to transfer to the early stage of production. A greeter at Walmart can become a security person at a steelman. So he's gone from late to early without any time travel. So watch the goods in process move through the stages of production. We saw that yesterday. So let's just show we're going from left to right and not down from up to down or in any other direction. So these are the Hayekian triangles and we can just make do with the triangle for a lot of purposes and don't need to divide it into stages, which was just for pedagogical purpose in any case. So in a growing economy, and think about that PPF increasing year to year, if the economy is growing, well, so will the triangle. I'm not presuming some change in saving here. People are saving maybe the same percentage this year they saved last and so on. But if they are saving, have net savings, then the triangle will grow. In fact, we can even link it up with the PPF and show that they grow in concert. So PPF grows and the triangle grows. All right. So everything still lines up. The output of consumption goods is larger now because of the general called it secular growth, just ongoing growth, which doesn't depend on some change in the saving rate. It just depends on their beings and saving. Okay, we got that part. Now, once again, when people become more thrifty, they choose to save more, that sends to seemingly conflicting signals. Okay, the decrease in consumption dampens the demand for investment goods in close proximity with the consumable output. That's the derived demand effect, the well done effect. And reduced interest rates, which means lower borrowing cost, emulates demand for investment goods that are temporarily remote for a consumer. That's the interest rate effect or some times called the time discount effect. And so the triangle is going to change shapes. Point out here that these two movements seem conflicting, only if you're trying to treat investment as a simple aggregate, as in C plus I plus G. So Keynes could look at this. In fact, I sort of push him in this direction. Well, what about this I? Which ways are going to go up or down? And Keynes view is to look out the window. In other words, we're talking about a depression on here. Look out the window, see which effect dominated. Did it go down or down? Well, it went down, you know, we're in a depression. It must be that drive demand effect that carried the day. And of course, if you disaggregate within the investment sector, you get both effects. They just work at different points in the triangle. That's what this says. Well, there's something you want to see because it really was in this context. When Keynes reviewed, I'm sorry, when Hayek reviewed Keynes earlier book, he has treated us on money. He made the statement that Keynes aggregates conceal the most fundamental mechanisms of change. And this is essentially what he meant, except in that context, Keynes was aggregating profits. The treatise on money enters total profits as one of the key variables. And of course, the economy doesn't, it's not run by total profits, it's run by differential profits. You know, some losses, those people go out of business, some gains, those people get better, you know, and so on. So if you're going to just look at total profits, you've aggregated yourself out of any chance of understanding what's going on. So Keynes aggregates conceal the most fundamental mechanisms of change. Again, I emphasize this time discount effect and drive demand effect, but I won't go any further with it. What's the structure of production respond to an increase and say, well, you know what it's going to do. Resources has to flow out of the late stages and into the early stages. They look something like that. And that means that they're going to be producing less in the immediate future. Well, people are consuming less, they're saving more, but it'll have more available in the more distant future. Well, people are saving up for buying things in the more distant future. That's how the market is at work for you and for me, for both savers and investors. Now, let's do this with both the PPF and the structure of production in view. And again, we get the increase in saving. And you can see what happens rotated along the production possibilities front here at the same time that the structure of production takes on a more future orientation. And so what we can see here is that you have both more investment total, you get more investment and is distributed disproportionately in favor of early stages. In fact, late stages go down because people aren't buying somebody. And so if you look at the stages of production, what you see, you get an uptick in the early stages and a downtick in the late stages. Well, that's exactly the kind of change you need to adjust production decisions with intertemporal preferences. That's what we're going for. Structure is given more of a future orientation. We get it. Okay. Now watch the economy grow more rapidly. And of course, here, I'm just showing you this is consistent with what we've done so far. And you notice here the time element. There's a time element. But the time element is shown by the sequential shifts in the period O, period one, period two, period three, and so on. And I think it's worthwhile to show the time element specifically on a graph. So I'm going to get a graph in here with time on the horizontal axis and consumption on the vertical axis. All right. And if you look at these upper two diagrams, you can see consumption first falling and rising in a more rapid rate. Look on the right, for instance. Okay. It falls and it rises. Look on the triangle. It falls and it rises. Okay. If we plot that on our diagram, the economy was already growing. But with increased savings, it could grow faster. So it looks like this is growing. And then people start saving after which the economy grows faster. Now, I made this dramatic where it actually goes way down. Chances are it would just slow in growth and then rise. But I want the people in the back of the room to be able to see that it changed like it was supposed to. And eventually, it will surpass where you would have been. Well, that's what this story is all about. In other words, this is a market mechanism that allows you to trade off consumption in the near future for more consumption in the more distant future. You can even see where that is on the diagram. So you're giving up all that consumption voluntarily. And you're going to get in exchange more consumption in the more distant future when you can spend those savings. And now quickly, I want to move through this application to stage specific labor markets. And all I have to do here is look at supply and demand diagrams for labor, but at different stages. And I'm just going to use two because it gets pretty cluttered if I try to use all five. And those diagrams are just taking the place of the photographs you saw earlier about the researcher and the retail manager. But what we notice is that the demand for labor moves differentially in those markets. Keynes always talk about the demand for labor, the market for labor. No, no, you can't do that. You have to look at labor in the different stages or look at other resources in the different stages. Labor tends to be more mobile than a lot of sorts of capital. But some isn't. I mean, you can have specific labor, you can have non-specific capital. But typically, economists like to think of labor as the most mobile factor. And so what you can see here is that if you watch the demand curves in those two diagrams, a change in the saving rate, more saving, is going to reduce the demand for labor in the late stages and increase the demand for labor in the early stages. All right. Let's see if we can do that. That's what that says. So watch the economy respond to an increase in saving and watch the labor market. It moves with that triangle. In fact, the dynamics of the labor market is what helps bring about the movement of labor from late stages to early stages here. Hayek even mentions the term he uses a wage rate gradient. A gradient here is just an increase over stages, in other words, from early to late. And it shows up graphically here as a slope of that line. In other words, well, conceptually, as a slope of that line, I'm going between two different graphs here. And if you look in the second edition of Prices and Production, he has a diagram, something like that, in a footnote where he shows the wage rate gradient. Well, that's what it looks like in my own reckoning. So I'm true to Hayek in this case. All right. Now we can put it all together. And look, we've got the loanable funds market, production possibility frontier. We've got structure, production, stage specific labor markets, and they all fit together to tell a coherent story about boom and bust. And now you have to watch the economy respond to an increase in saving. Well, you know how it's going to work. You've seen it separately. But what I want you to see now is that it's really poetry in motion. It's an orchestration. Everything is mutually consistent and consistent with people's preferences, which is what we want. I'll show this twice because you've got to look at everything at once anyhow. All right. More saving, rotated along the PPF, shifted the structure production towards early stages, which was brought about in part by the differential changes in the demand for labor. Show it again. Okay. Now, you see, it's a 20 or maybe even 18 to 10. And I've just gotten through dealing with how the market works. But once I've set myself up in the sense that now I can show very easily what happens when things go wrong. What happens when a politician tries to grow the economy. And I'm going to start out. I want to give myself a little extra credibility here by showing Steve Hankey because I can't look that stern. That's a stern looking guy. And what you know is whatever he says is probably true. So look what he says. And he says this in May of eight, think how that corresponds to the crash. He's a little ahead of the curve, a little ahead of the game, isn't he? So look what he says. With interest rates artificially low and boy were they not as much as they are now, but boy were they, consumers reduce saving. They reduce saving. Okay. Because they're artificially low. They're not low because people have decided to save more. They're low because the government says you can't have any more that much money for saving. Not going to reward you for saving. I don't want to save less. Reduce saving in favor of consumption and entrepreneurs increase the rate of investment spending because they're getting cheap financing. And then you have an imbalance between saving and investment. You have an economy on an unsustainable growth path. This in a nutshell is a lesson the Austrian critique of central banking developed in the 20s and 30s. That's Steve Hankey. I'm going to skip. I'll let you read this on your own. It really just, it's Hayek confirming in 1978 that yes, he still believes this theory. He still accepts this theory because a lot of critics of Hayek say, oh well, he dismissed the theory after he got through with it in the 30s. Not so. He still believes it. Okay. So now what we have instead of an increase in saving, we have an increase in the money supply. But money gets pumped into the economy through credit markets. All right. The new money comes through credit market and masquerades is saving. Supply of loanable funds shifts rightward but without there being any increase in savings. So that supply curve is, yeah, it gives you more loanable funds but it doesn't give you more saving. It doesn't give you any abstention from consumption to free up resources to be used elsewhere in the economy. And I want to get your attention here to show you this is a basically different kind of process than what we've already talked about. Okay. So watch the opposing movements. Okay. There's the difference right there. There's the difference. This guy is here to grow the economy. All right. So he jerks that down. Okay. Now see, I don't have a new savings curve. I've got the old saving curve plus a ton of money, the Greenspan pumped out through credit markets. So it's S plus delta M. But the saving rate reflects the saving schedule that existed before and still exists. And with a lower rate of interest, you save less, not more. Okay. So how could that be? Well, the way it can be is that, see what we got here. There's pumping new money through credit markets drives a wedge. I like the language drives a wedge between saving and investment. The language is all sort of a disequilibrium kind of language. Investors move down along their demand curves and savers move down along their saving curves. Okay. And the difference is made up precisely by the money that Greenspan created and pumped into the economy. So one thing I'd like to point out here is that suppose that interest rate were lowered just by decree that Congress met or heck, Obama issues the executive order. And so this is starting noon Thursday, the interest rate will be down at that lower level. Well, what would happen? This is not monetary policy. This is just Obama's executive order. Well, what would happen would be a huge shortage of loanable funds and the market would crash immediately. Okay. So if you just put a price ceiling on interest rate or an interest rate ceiling into play, you get a crash immediately. Now, what Greenspan did will get you the crash. It'll get you the crash, but not immediately. It'll get you first a boom and then a bust. And by the time you get the bus, Greenspan can be out of office and can deny that the bus was associated with the initial increase in the money supply. That's the way it works. Okay. Okay. Now, all we have to do is sort of trace this around to see what's going up. And what we see is there's just a basic conflict about how much people are going to save and how much people are going to invest. And if you trace it upstairs there, you see that for the investors, they're thinking about spending more investment, getting the economy growing faster, so they're moving along the PPF in that direction. The savers, they're not saving, they're out buying the widescreen TV and the new bag of golf clubs. Okay. So they're going that direction and they can't both be having at the same time, because you got two different points along the curve. And in fact, the way we could look at it is notice that consumers are pushing upwards, consumption is measured vertically, investors are pushing rightward. That's the way investment, and if you resolve those two vectors, you get the pushes beyond the PPF. And so out there, you have what I call a virtual equilibrium. In other words, you ain't going to get there. You're not going to get there too far beyond the PPF. But the market forces are nonetheless pushing in that direction and can push to some extent in that direction because they can go outside the PPF given PPF is defined as sustainable levels. They can go to unsustainable levels. That's the whole problem with the unsustainable boom. It's unsustainable. Okay. We'll look at the triangle. Again, you get conflicting signals. You get a lower interest rate that stimulates investment in interest-sensitive activities such as housing and other early stages of production. Housing qualifies as early stage on the grounds of its interest rate sensitivity. In other words, with 30-year mortgages, its interest rate sensitive, you get a lot of housing. On the other hand, consumers are trying and succeeding to some extent to growing down inventories, buying a lot of consumer goods. And so there you have another conflict, good friend of mine and fellow economist at Metropolitan State, John Cochran. He named this one. He called it the Dueling Triangles. So the dynamics of the boom and bust entail both overinvestment. I think Mises let that one slide. He didn't like to talk about overinvestment because he wanted to focus on the malinvestment, which is in the triangle. But you can see on the diagram that you get some overinvestment and you also get some malinvestment. These distortions are compounded by overconsumption as shown in both the PPF and the Hayekin triangle. And you can see that here and over there. And Mises did use the term repeatedly that the boom is characterized by malinvestment and overconsumption. You see that frequently. And that has been recognized fairly recently. People have gone back and people first disputed that Mises allowed for any overconsumption. But when they went back to human action, they could find it in a lot of different places as I had found it in a lot of places. So now it's become sort of standard, oh yes, the Austrian view is malinvestment and overconsumption. So look at what's going on. Look at all the language of disequilibrium. We've got the tug of war that fits consumers against investors, pushes the economy beyond the PPF, the low rate favors investment, and the increasing blinding resource constraints keeps the economy from reaching the PPF point. Temporary conflict, inflicted structure of production, that's the dueling triangles, eventually turns boom into bust and the economy goes into recession and possibly into deep depression. You could see, let me go back, you could see the economy moving towards the virtual equilibrium point, but it's not going to get there. Resources won't allow that. And scarcity is developing within the structure, eventually turn a lot of firms sour and you end up with the curve turning back towards the PPF. And guess what? There's no market mechanism that would cause the economy to make a sharp right turn when it gets to the PPF and go back to where it started. The economy can cave into deep depression. In fact, Hayek, writing well before Keynes's general theory, identified that as a secondary deflation or secondary depression, that the primary problem was all the misadjustments caused by the monetary expansion, but when the thing, when the economy is trying to sort itself out, it can get into a spiraling downwards as a secondary effect. That means secondary in terms of not being logically prior to the initial cause. It was subsidiary and it's in the cause. It may well be that the damage done to the economy by the secondary depression outweighed in magnitude the initial damage done by the misallocation. That doesn't change the nature of the Austrian theory at all. In fact, the analogy I like to use is there are some people who study earthquakes and look at the earthquake in San Francisco in 19, you tell me, 07, is that right? Around there somewhere. Some people say that it was the earthquake that caused all the damage in San Francisco, but others who've looked at the data more carefully, written articles for publication, say that that's just not true. It was the fires that broke out after the earthquake broke gas lines. That's what caused the damage in San Francisco. You buy that? You buy that? What an earthquake. The fires. Give me a break. It was the earthquake compounded by the fires, sorry. Here it's the misallocation of resources compounded by the spiraling downwards. Now one more point here that'll come into play in our next lecture. It's hard to see this screen anyhow because of the light, but squint your eyes and look at the screen and the thing that stands out for you is that big orange arrow pointing downward. By the way, if you haven't guessed it, orange and blue are used in these diagrams because it's all burnt colors. That's orange and blue. When Keynes looked at that orange arrow, that's all he saw. That's all he saw. That was his basis for saying that the interest rate was the well-duh effect and not any other effect because things were going downward. All the Keynesian stuff that you had to learn in school were just in terms of how long that arrow was. Now fast things fell given changes in this and that and whatever. In fact, in Keynesian theory, the summary principle, you can use this on an exam if you're taking it, uses to help get your answers correct. If anything happens in the economy, if anything happens, the economy crashes because prices, wages, and interest rate, they're all sticky downwards and the economy might be at 12 employment only by accident. But if anything changes, if any market condition changes, then that'll be at odds with what the economy is trying to do and it'll cause it to crash as represented by that arrow. Okay, now there's the language of disequilibrium and we put it all together. I hate to talk about the three P's, it makes it sound like a management course or something, you know, where you have to learn the three P's or whatever. Padding the supply of loanable funds with new money drives a wedge between saving and investment. Papering over the difference between saving and investment gives play to the tug of war between consumers and investors. Putting, pitting early stages against late stages distorts the hierarchy and triangle in both directions, the central discoordination eventually turning boom into busts, okay. And so watch the economy respond to the credit expansion. He's the one that called me a couple, you know, poor old Bernanke had taken order, wasn't too happy. And this next picture you're all too young probably to recognize a bit, some oldies in here well, who's that? Joe the plumber, how old are you? Oh yeah, okay. Joe the plumber, he was the one that raised so much cane in a couple of elections ago, just somebody in the private sector that can't you people get as strange, you know, and keep the government off of our back. There's a couple of quotes here then I'll quit. Voices in the wilderness, there was recognition of the Austrian business cycle theory as it applied to dot-com boom in bust. It comes in 2002 and this is an unsigned editorial and the economists, a lot of them are, the recent business cycles in both America and Japan display many Austrian features. Landhoof it is a Swedish economist and he's writing in 2008, look what he says, operating an interest targeting regime. Here's a go, you know, Greenspan trying to hold interest rates at a certain level. The Fed was lured into keeping rates for far too low for far too long. The result was inflation of asset prices at its early stage combined with the general deterioration of credit quality. That's Fannie Mae, Freddie Mac. This of course does not make a Keynesian story, it's rather a variation that Freddie Mae, Fannie Mac on the Austrian over investment thing. And one more, I don't know this fellow, Forsythe, maybe some of you do, but the Austrians were the ones who could see the seeds of collapse in the successive credit booms and abetted by Fed policies, especially under former chairman Allen Greenspan. He disavows or skipped past that, that monetary policy played a role in the creating of successive bubbles in bust during his tenure, 87 to 2006. But Forsythe is onto it, he knows that it didn't cause the boom and the bud. Okay, thank you very much.