 Welcome to Mises University, and welcome to those who are viewing online. I'll get right to the topic. The topic is the birth of the Austrian school. And the Austrian school has a very interesting beginning and early tradition, which we'll go into. So the Austrian school was founded during an episode known as the Marginalist Revolution. And basically the Marginalist Revolution was the simultaneous and independent discovery of the law of marginal utility, which I will explain by three different economists working independently of one another. Sort of like the discovery of calculus by Leibniz and Newton. They worked independently of one another. And that period of the Marginalist Revolution was in the early 1870s. The three economists were from different countries. The first I'm going to focus on was the founder of the Austrian school, Karl Menger. He published Principles of Economics in 1871. There were two other economists who were much more mathematically oriented. William Stanley Jevons from Great Britain and Leon Ball Ross, who was a French economist who exiled himself to Switzerland because the French economist of the time did not accept his mathematical methods and refused to publish some of his articles. So he wasn't very happy about that. There were different terms used for marginal utility. The term marginal utility was not coined by Menger. He didn't have a name for what he actually discovered but by his student, Friedrich Wieser. Jevons used the term final utility and Ball Ross used the French term rarité or rarity. And here's some quick pictures. William Stanley Jevons looks like he has a chip on his shoulder, especially there on the left side. Mellowed out as an old guy. You notice that. Well, Ross looks absolutely diabolical, right, in the left picture. Then he became kind of a grandfatherly type later on. And there's Karl Menger, who is the founder of the Austrian School of Economics. There's a notable, wait, we don't have the pause there. Sorry, I don't know how to get that kind in there. But anyway, Menger was considered to be the founder of the Austrian School of Economics. And let me just say before we really get to what Menger said. Actually, let's go through this first. There are a number of very eminent historians of thought who considered Menger to be the founder. Joseph Schumpeter, who was an Austrian himself, but not a follower of the Austrian school. He was a native Austrian. In fact, he was a follower of Ball Ross. In any case, he wrote, Menger is nobody's pupil, and what he created stands. Menger's theory of value, price, and distribution is the best we have up to now. So as late as 1926, remember Menger wrote his book in 1871, his price theory was considered to be really the central theory of neoclassical economics at that point. Ludwig von Mises wrote, what is known as the Austrian School of Economics started in 1871 when Menger wrote his book. Until the end of the 70s, there was no Austrian school. There was only Karl Menger. So he carried on and developed the tradition until his students began to, he found some students who began to follow him and write in his tradition in the 1880s. And finally, Friedrich Hayek points out that the fundamental ideas belong fully and wholly to Karl Menger. And he says, what is common to the members of the Austrian school and what constitutes the peculiarity and provides a foundation for their later contributions is their acceptance of the teaching of Karl Menger. So Menger is universally hailed or derided if you're anti-Austrian. And Frank Knight, for example, didn't like Karl Menger. But he's hailed as the founder of the Austrian School of Economics. So let me just say a few words about Menger before we get to the classical school briefly. Well, whereas Balras and Jevins, considered marginal utility, which as we'll see really means value, they considered it as a quantity, some sort of a quantity that you could measure in some way. Utility is simply another word for value. On the other hand, Menger viewed marginal utility or utility or satisfaction as a result of an individual actor's judgment about what goods are more important and what goods are less important to their own welfare. So he didn't view it as a quantity, as these two mathematical founders did. For example, I had the choice to have this bottle of water or a can of Coke Zero this morning. The fact that I chose this demonstrates that I preferred this. This has a greater value to me. It's more important to my welfare at that moment when I made the choice than the Coke Zero. So that's a Mengerian insight. I can't figure out if I think that this is five times as valuable, three times as valuable, or in terms of units of value, if this is 50 utils, which are units of utility and the Coke is 25 utils. That's ridiculous. That's a question you don't even have to address in order to determine prices. And if you did address it, you would find no answer whatsoever. But Menger was a creative genius, so out of this germ of an idea about value representing the importance to individuals of different goods and services that they choose between or among, Menger actually took this and developed a price theory. And from that price theory, he developed really a whole system of economics that was based on the striving of human beings to satisfy their wants. So that's what Menger did. He developed a systematic economics. And as we know, matter, no new things can come into the world. They can only change form. They have human ideas. So Menger's system was something new under the sun. It was something new that was introduced into the world. Let me just talk a little bit about the classical theory which Menger's theory replaced. Now, Menger did not think that the classical theory did not want to overthrow the classical theory. They say it's the marginalist revolution. That's the term that they completely overturned the classical theory. Menger didn't do that. He was not trying to do that. He found some things about the classical theory that he liked, very many things. Classical economists were David Hume, Adam Smith. You may have heard of him if you've taken history of economic thought, who was thought to be the founder of economics, that is, Adam Smith. In fact, he really was not. And David Ricardo. These were the three very important classical theorists. And they immediately confronted a paradox. This is connected with classical theory. So some of the things that were wrong with classical theory was that they really couldn't figure out why is it that diamonds are much more expensive or have a higher exchange value on the market than, let's say, water. Water has relatively low exchange value per unit of weight, let's say, compared to diamonds. But yet, water is extremely useful to human beings. It's indispensable to sustaining human life for any period of time. Whereas diamonds, they're mere fripperies. Diamonds may be appealed to people's vanity. They're used for aesthetic purposes to enhance one's outfit and so on. But how could it be that something with a low use value, like diamonds, are not crucial to sustaining human life, can have a higher value on the market per unit, or per unit weight, than water does, or bread does. Sometimes it's called the water-bread paradox. So this was the first problem with the classical school. The reason why they were unable to solve this paradox was that they began to look at goods as being really classes. They didn't talk about the value of one ton of coal or the value of a given diamond or the value of a glass of water. What they looked at was the value of water versus the value of coal versus the value of clothing. So they looked on goods as abstract classes of things. Now, how did they resolve that? What they said was their solution was that, look, economics is concerned with prices. It's not concerned with explaining value. That is, use value. It is only concerned with explaining exchange value. So their answer was very simple. They said, well, we're just going to forget about use value. Yes, everything that people buy and sell has use value. However, diamonds are much more expensive simply because they have a higher cost of production than water does. And that's the reason why they're more expensive. Whether or not they have higher or lower use value is beside the point because we're splitting the two. And that's wrong. There's a real problem with that. And the problem is that how would you explain the price of land which is not produced? How do they explain the high prices of collectibles, whether it's art or antiques or baseball cards? Some examples, a very rare baseball card from 1910, Honus Wagner, sold for $600,000 on eBay. John Lennon's handwritten lyrics for being for the benefit of Mr. Kite, sold for $106,000 very recently. And that diamond that I showed you at the time, the graph pink diamond, 24 carats, certainly didn't cost $46 million to produce. So cost of production theory of value, which is what the classical school held, was useless in explaining the value. But they would say, well, that's a different kind of non reproducible good along with land and along with many other things that aren't reproduced. And therefore, that's determined by supply and demand. It's not determined by cost of production. So they split value theory, which is something in science is something you don't want to do. You don't want to have different explanations for the same phenomena, that is for prices. So they had different explanations for prices of goods that could be reproduced than they did for goods that could not be reproduced. So what are some of the implications of the classical theory? First, they implied that value was inherent in a good, meaning it's some sort of metaphysical substance that gets stuck to the good during the production process. No one can see it, but it's sort of there. The production process itself, the fact that labors are sweating over producing these goods, brings about value. They also were backward looking. They didn't think about how the consumers evaluated these goods and how important these goods were to the consumers. They just looked backwards at how much labor was used and how much land was used and so on. They also claimed that, well, if cost of production determines value, then a good that costs the same amount as another good will be equal in value. So for them, exchange was between two goods that equaled value. So if I purchased that bottle of water I just showed you for $1.50, that meant that a bottle of water was equal to $1.50, or if you purchased a normal bill for $30,000. In the classical theory, that implied that there was an equality of value between the two. The $30,000 equals, in some sense, the value of the car. It was easier for them to do that because they were talking about the gold standard at the time, so the gold standard also had a cost of production. So the unit of gold that had the same cost of production as the good would exchange for that good according to the classical school. Finally, the classical school really can't explain the losses of firms. If prices of goods are determined by cost of production, then firms would never lose money. But in fact, if we look just, I picked up a random year, 2011, Sears, the retailer lost $3.1 billion. Sprint lost $2.9 billion, the telecommunications firm. The parent corporation of American Airlines lost $2 billion during that year. Energy future providers, energy producers lost $1.9 billion, and so on. There were billion-dollar losses throughout industry, and there always are every year. Well, if cost of production determines price, then how could there be any losses? Everybody would break even and just earn a normal profit. So it really could not explain the losses that firms incurred. Finally, it really just focused on the business decision maker. The business person was the one who paid the cost of production and then sold the goods to the consumers. So he was at the center of economics. The business person bought low and sold high. That was his sole purpose. There was no indication that the businessman was an entrepreneur. And in fact, in classical economics, the capitalist who invested the money and the entrepreneur were the same people. The entrepreneur was not necessarily forward-looking. He wasn't trying continually to figure out what consumers wanted more and what they wanted less. Or what sorts of qualities of goods to provide on the market. Or whether or not to stop producing one good and begin to produce another good. Or maybe to engage in research and development and come up with a wholly new idea about things. You couldn't really explain that from classical school. Now, what did Banger like about the classical school? This is one thing that he liked. He said, look, classical school is right in one way. They believe in the law of supply and demand in the short run. So they could explain prices and profits and losses in the short run. But in the long run, they believe the cost of production determined value. So for example, if the demand for something went up, the price would go up. It would be above its average cost of production. You'd have profit going up and therefore people would be attracted into the industry. Your profit would be above normal. Other entrepreneurs would begin to move into the industry. That would increase supply, drive the price down, and you'd be back to the normal long run price, which was determined by cost of production. Well, Banger liked the supply and demand aspect of that. In fact, though, he believed that it determined value in the long run and in the short run, unlike the classical economists. And the reverse was true that if demand went down, the price would fall below the average cost. The firm would incur losses, which means that some firms would contract. Other firms would go out of business or leave the industry and eventually supply would increase again. Price would go up to the normal value. So Banger liked the emphasis on supply and demand. He also liked the fact that the classical school said the laws, or some of the classical economists said the laws of economics are universal. They apply to every nation and immutable. They apply to all time periods. So Banger also adopted that view of the classical school. So what Banger did, he was a journalist. And the way he figured out that the classical school was wrong was he looked around him as an economic journalist. And he looked at the markets, commodities markets, stock markets, and so on. And he saw that prices were changing every day and they were changing in ways that were much different than their costs of production. Their prices continually diverged or were different from the cost of production. So he realized it had to be another explanation for value. That in fact it's not just the business decision makers who should be focused on economics. The consumer should be the center of economics. So let me just give you his sort of programmatic statement. He said, I've devoted special attention to the investigation, and these words are important, of the causal connections between economic phenomena involving products, and the corresponding agents of production. Not only for the purpose of establishing a price theory based on reality. So he was looking for a causal realist theory, something that explained the real causes of actual prices that are paid in real markets. That's what he was interested in. And he wanted to place all phenomena under that, or explain all phenomena by this one theory, including interest, wages, ground rents, and so on. And to explain other economic processes by this theory. And the theory was grounded on the law of marginal utility. So that was Manger's aim in what he was doing. And he wrote notes to himself actually before he wrote his book. And these are some of the notes that he wrote. Notice what he wanted to do. We call this by the way causal realist economics. That's the tradition that we are in today, that Austrian researchers, that the faculty members here in doing their research, they follow the causal realist method of Manger, which is the investigation of the causes of real prices, wages, and interest rates, paid on real markets. So as Tom Di Lorenzo mentioned last night, we're not interested in some model that explains some equilibrium price. In Never Never Land. We're interested in the actual prices that are right now being paid at McDonald's or Walmart or elsewhere. How do we explain them? That's what Manger wanted to do. And he gave us a theory that was adequate to that. So here are the notes he wrote himself. He put human beings and their wants squarely at the center of economics. He wrote, man himself is the beginning and the end of every economy. Our science is the theory of a human being's ability to deal with his wants. And all laws are subject to the law of cause and effect. All things are subject to the law of cause and effect. These are just some of the notes that he wrote in setting out his book. He also had what we might call three trinities of causation. He believed that subjective value, that is the wants, the value consumers attached to their wants, determined their actions in the objective world. And then their actions in the objective world, which bring forth goods, then satisfy their subjective wants. So you begin in the subjective world. People have ends and they use means. They find means, their labor and other resources, natural resources and so on. So their ends then cause them to act in the objective reality, which then when they complete that action and a good is available to them, they use it to realize the satisfaction of their wants. So subjective causes the objective actions, which in turn then satisfies the subjective needs that motivated the action. And the same thing is true here. You start with the human being, the man. There's an external world. He operates on the external world and that brings about the subsistence that is the satisfaction of his wants. And the same thing here, wants, goods, satisfaction. He actually got this from a mid-19th century free market economist, a French liberal economist, Frederick Bastia, who entitled one of his chapters, wants, efforts, satisfaction. You begin with wants, you put forth efforts in service of those wants, and then when the fruit of your efforts are available, you then satisfy those wants. That's very, very important. So human beings are the alpha, the beginning, and the omega of economics, the beginning and the end of economics. In developing this theory of economics, he had to develop a theory of goods. What is a good? Is anything tangible a good? Are non-tangible goods? Non-tangible things, are they goods also? Well, Menger said there are certain preconditions of a good. He said there had to be human need. One, okay, so I'm thirsty, so I have a need. There has to be something that's capable of being brought into causal connection with the satisfaction of the need. Okay, so that bottle of water can be brought into causal connection when I sip it to satisfy the need. There has to be human knowledge of this causal connection, and the command of the thing, that is ownership of the thing, must be sufficient to direct it to the satisfaction of the need. He brought that third one in, for example, because let's say you want to go to a baseball game, and there are many things that you need, goods that you need to get you to the baseball game, many means that you need. Transportation, money to purchase the ticket, time, and so on. However, you also need a sunny day, okay? No rain. But since we have not yet been able to control the weather, we don't have ownership in any sense of the weather. We can't manipulate it to our ends. Even if you have the first three things, that you need a sunny day, that's your need, and you know that there's a causal connection between the clouds clearing and the sun coming out, because you lack number four, you still cannot bring about your ends. Now, Mises corrected this. Mises says, look, number two and three are really incorrect, because what's important is a human being's belief that the thing has a capacity to bring about the satisfaction of the human need. So, for example, we know that people buy things all the time that have no causal connection to a human need, or most of us would have that belief. Diet pills on QVC, right? I mean, a psychic that's going to put you in touch with a dead relative. People pay you good money for that. And of course, getting news from the New York Times, right? I mean, that's objective news. I mean, people pay money for that. Okay, so that's what makes a thing a good. So Manger pointed out that when a person does not have all of his or her wants satisfied, they must make a choice between the different resources that they have. Resources are limited. So scarcity leads to choice, okay? There's a scarcity of things there to satisfy your ends, which means that people then rank their wants. They decide what is more important to themselves and what is less important. And they economize on the goods that they do have. They use those things to satisfy only the goods or only the needs that have the greatest value to them, only the wants that are most urgent or most important to them. And Manger came up with a theory of economic goods. Now an economic good to Manger was the fact that goods, that there weren't enough things in the world to satisfy all human wants. Once that occurs, then we have the scarcity and then there must be choice, okay? So for example, right now there is enough air in this room and in Auburn to satisfy all the human wants for it. So as we'll see, air has no value, okay? Air has zero value. Also, Manger recognized the subjective nature of goods that for example, some people will not attach any value to a diamond. Someone who's an aesthetic or the Amish, people who live in southeastern Pennsylvania, parts of Ohio and elsewhere, they believe that any sort of ostentation on the clothing is sinful. So they will not even use buttons on their clothing. They use hooks and hoops to fasten their clothes. So if everyone adopted the values of the Amish, we would see that there would be no value on diamonds. We'll get to that in more detail in a moment. So now we're going to come to the law of marginal utility, which is the centerpiece of Manger's economics. And what Manger said was that the value of a good, now he didn't use the word marginal utility, remember it wasn't, he didn't coin it, is determined by its marginal utility. That is the satisfaction from the least important or lowest rank and served by the available supply of the good. So therefore as the supply of the good increases, the value of the good to the individual decreases. So as the supply that the person possesses increases, the value of the additional unit is less and therefore of every unit is less. Now let me explain how Manger figured that out. He took an example of Robertson Crusoe, the fictional cast away on an island, and in this case he doesn't have a soccer ball like Tom Hanks did in that take off on Crusoe. He's got sacks of wheat. And he has a number of needs for wheat. These are all his needs and he ranks them. So for Manger, it wasn't wheat as a whole that had any value. It was the different units of wheat, what he called the concrete units that had value ascribed to them by the individual. So the most important is to stay alive for the next year until the next harvest. So the first sack of wheat he would use to sustain his life. The second would give him vitality. So he would use the second one also as food and bake it into bread just like the first one. And that would allow him to be healthy and strong and to achieve other ends. His third is to have some of the wheat, save some of it for seed to plant for the next harvest. His fourth is to feed, let's say, his goats on the island and he wants to vary his diet and have milk and cheese. So he'll use some of the wheat, another sack of wheat for goat feed. And Manger said the fifth he'd use for whiskey. I like vodka better so I put that in. Sixth he'd use to feed a pet parrot. He's lonely, at least a parrot can talk back to him. But there are many, many other uses he could have. So this is his value, what we call his value scale. Let's just go back for a moment. So he asked this question and he was very good at asking questions to advance theory, as we'll say. He said, look, what is the value to Crusoe of a sack of wheat? And let's assume that Crusoe has five sacks of wheat now. So what Crusoe will do with those five sacks is to satisfy the first five most important wants, ranked in that order. So set those aside. Well, the sack of wheat is equal in value since they're interchangeable. Every sack of wheat is like every other sack of wheat. Since they're interchangeable, is it the value that he attaches to the first one? Is that the value of any of those five sacks of wheat? Because they can't be different. They're exactly the same. Or is it some average of all five of those, though you really can't average that up, right? Because these numbers are ordinal numbers, first, second, third, fourth, fifth. You can't add, subtract, or do any arithmetic operations with ordinal numbers. Menger said, no. The way to approach this is to assume that one night some rats get into where he stored the wheat right before he begins to use it and eats, let's say, the third sack. Is he going to give up the seed for the next harvest? Is that what he's going to forego if it eats the third sack? Let's say he's numbered them just for his own benefit. Of course not. What satisfaction, the satisfaction of what want will he lose? He'll always give up the lowest valued want that he can serve with that supply, with those five sacks. So no matter which sack is destroyed or devoured by these vermin, he's going to give up his vodka the lowest rank, that's the lowest rank satisfaction. So from that point he said, well, if vodka is the lowest rank satisfaction, then no matter which, when I have five sacks a week, no matter which one I lose, that's the value. So it's the marginal utility, the marginal means the relevant. What is the relevant satisfaction that he gives up? It's the value of the vodka. The marginal utility determines the value of the good. So each unit of the good is equal in value to the satisfaction of the vodka. Because no matter which one he loses, that's the satisfaction he's going to give up. That determines the value of the good. If that actually occurs and he only has four left, now he has a smaller supply, right? What happens to the value of the good? The value of the good now goes up. Each unit now has a higher value because there's a higher satisfaction that depends on any one of those units, and that is the milk and the cheese for the year. So you can see that as he gets more unit, let's say he gets another sack of wheat, a sixth sack, the value then falls to the feed for the parent. No matter which sack is destroyed in some way, he'll give up the satisfaction from domesticating a parent and feeding the parent for the year. So that's the law of marginal utility. Again, he asks the question, what does a human being give up if they lose one of these units of a good? In the real world, let's say a family has three cars and one for the primary breadwinner, one for the spouse who does the household chores and needs a car, and one for Junior who's continually pestering the parents for the car. Let's assume they're all equally serviceable or they can all serve the same ends, pretty much the same. So what if the old man cracks up his car? What happens? Well, now the two remaining cars have much higher value. Who loses the car? The lowest value of use, Junior. So they'll put up with his pestering rather than losing the income from the father's job. So now let's ask the question, a quick quiz. What's the value of air? The value of air in a normal situation where you're not on the moon or you're not a deep sea diver or you don't have emphysema, in those cases you'd be willing to pay for air. But in a normal situation, the value of air is zero. It's nothing. Because we lost a cubic foot of air here. Let's say David Gordon went outside and began to breathe very heavily and sucked the cubic foot of air out of the room. Does anyone lose anything? No. None of our satisfactions are impaired. So air, as important as it is as an abstract class, if we didn't have any air we'd all die. When you look at it in Menger's terms as units of, concrete units of a good, the margin utility of air is zero. You lose a unit, you don't lose any satisfaction because it's super abundant in a normal situation and therefore the value of air is zero. And here's another little quiz. Let's say you have a farmer who has two different kinds of goods. Horses and cows. The horses are all the same and can be used for the same ends. And the same thing is true of the cows. But the cows and horses are not interchangeable. So in this case, which is the more valuable animal? Services from the horse for plowing wheat is ranked first. Increasing the productivity of the plowing, which would increase the amount of wheat, that's ranked second. So the first two horses he has would be used for those things. Then the cow is ranked third for milk and then the fourth cow would be sort of for beef and so on. And then there would be a fifth horse for recreational riding. So which cow or which animal has a lower value? So people tend to look at the top and say, the horses are more important so the cow has a lower value. But that's not true, right? Because the fact is that the margin utility of horses is much lower. So if there is a fire and the five animals are in a barn and you can only save four of them, which one will you leave behind? The horse. Because the horse has a lower value. But once that occurs, then notice what happens. Suddenly the value of horses jumps up to this extra wheat that you can get from hitching a second horse to your plow. And now the cow becomes the less valued animal. Because you value the satisfaction from the beef that you're getting for the year to the satisfaction from that extra wheat. Something else that Menger discovered. He pointed out that production takes time. Even if you're making a ham sandwich, there are a number of steps that you have to go through. There are a number of stages. You have to go purchase the ham and the cheese and the bread. You have to transport them back to your house. Then you have to use some utensils and your time and your counter and standing room. And you put the sandwich together. You make the sandwich. So those are the means. You've combined them through acts of production, step by step. And then you consume it and satisfy your hunger. So what Menger pointed out was that in fact you have many stages, especially in the developed industrial economy. So production starts with mining iron ore, let's say. You probably even before that you need tools. So there's another stage up here. You then have the iron ore. And then you can produce, let's say, equipment for making steel. And then you can produce the steel. And then you can roll the steel into different shapes and then stamp them into the shapes of automobile bodies. And then the steel from there goes to, and of course there's labor at every stage here, goes to the auto assembly plant. It's assembled into an automobile. And then it's transported to automobile dealer who then invests in a display room, showroom. And then it goes to the consumer. So there are many steps there. But what's important is the difference between the way the classical economists who did see that there was time in economics actually. They view this structural production or stages of production or what Menger called orders of production or orders of goods and the way Menger looked at it. They believe that the reason why the automobile was valuable, why it was valuable output, was because it was expensive to mine the iron ore. It was expensive to produce the steel. It was costly to do these things. And those costs determine the value. Menger looked at it completely differently. Menger has this law of imputation. Impute means to ascribe to something. To take from one thing and place it on another thing. So for Menger, the value of the means reflects the value of the ends or the wants they serve. So value is imputed backwards, not forwards. I'll show you in a diagram in a moment. So it starts with the consumer value judgments. The consumer decides whether a steak dinner is more valuable than let's say a salmon dinner. And then makes a choice. But it's not the physical steak or the physical salmon that's what's valued. It's the service that that thing provides him in satisfying his wants. So he values the service from the good and then that's imputed because the value of consuming the steak is higher than the value of consuming the salmon in this case. He imputes it back to the consumer good itself, the steak. The steak has value because of its services and then the value of the steak is imputed back to the higher order goods. All the things that are used in producing the steak have a value only because consumers value the services from that final good. So as an example here, the value of transportation services determine the value of the car and the gasoline. Which determine the value of steel, the robot assembly machinery and automobile factories, the oil wells and the drilling equipment. So we can show this in the following way. If we're talking about bread being produced, production goes from the higher stages or higher orders to the lower orders. Proceeds through time. Now the classically economists would say, well so does value. The value of the farm tools because they're costly determines the value of the wheat which in turn because it's costly to grind flour from wheat. The flour value depends on the wheat and so on. The bread depends on the cost of all those things that go into producing the bread. But Menger said, no that's not correct. We start with the consumer. Remember the individual and his wants are at the center of economics. We start with the consumer. The consumer values the satisfaction that bread gives when he consumes it. And therefore value goes backwards. Bread is valuable because it's services and satisfying wants is valuable. And then the bread at the wholesale, wholesaler is valuable because the bread at wholesale causes the retail bread. In productive terms and objective terms you have to have wholesale bread before you can have retail bread. You have to have wholesale bread. You have to have flour and the ovens and so on that will turn it into bread. And then wheat reflects the value of the flour. So there's two causalities here going on. There's the objective causality because wheat and labor and mills and so on bring about the flour, cause the flour to be produced. They have value. The value of the flour that they cause to be produced causes the value of the wheat. So production causality goes from the higher order goods to the lower order goods and then the causality of value goes from the lowest order good which is the bread, the consumer good back to the higher order goods. So that was a very important insight of Karl Mengers. And then let's talk about the last thing, the law of marginal productivity. It's true that the value of all the things that go into producing a good and actually let me stop for a moment and just backtrack. Menger himself used the example of cigarettes and cigars. He said if people suddenly stopped smoking cigarettes and cigars and any tobacco products that would mean that the machines that produce cigarettes and cigars would suddenly have no value. And then if they had no value there would be no value for the tobacco leaves. If tobacco leaves had no value then tobacco land would have no value assuming that the land can't be used for producing anything else but tobacco. So tobacco land is only costly or only has a price because it's useful in producing tobacco leaves which are useful in producing tobacco products. Same thing is true with diamonds. If suddenly people in the world decided that diamonds didn't serve any of their wants then what would happen is that the very high salaries of experts who appraise diamonds and experts who are jewelers and so on that would fall to zero. At least in the diamond trade. And then the value of diamond mines would fall to zero. So it's not the fact that diamond mines are very expensive that cause the high price of diamonds. It's really the other way around. And in that example of the graph pink diamond I showed you that sold for $46 million the cost of that diamond is history. We don't know if someone picked that up on a beach or found it somewhere or went and mined it. Probably no one knows what the cost of producing that diamond was and it doesn't matter to pricing. What matters is people's value scales and on the other hand the supply of diamonds that are in existence at that point in time those are the only two things that matter supply and demand that determines value. So the last thing is the law of margin utility. Let's say that someone's producing wheat and they're producing a thousand units of wheat we want to know what each what's the value of each individual factor and let's say you need labor you need certain days of labor 90 days of labor you need two horses with a plow you need one plow you need a certain number of acres of land I have 40 acres there and you need 500 pound bags of fertilizer or 100 weights of fertilizer. What is the value of 100 pound stack of fertilizer? How do we even figure that out? All of these things are combined in the thousand units of wheat. Menger had a solution to this and he asked a very insightful question. He said what would happen if we lost some of the units of a given factor of production? So in this case let's say that we lost 100 bags of fertilizer but they were subtracted from this production they were destroyed or whatever. So what he said was look the value of the fertilizer of those 100 bags of fertilizer depends on how much wheat the change in the wheat that you lose so if you lose 100 bags of fertilizer let's say from that whole production combination you may lose 75 bushels of wheat. In that case the marginal product or the value of 100 bags of fertilizer is 75 bushels of wheat whatever the individual attaches to 75 bushels of wheat is the value of that productive factor that is combined. So he was able to separate out not only to show that value was imputed to these productive goods or resources but also how much value in each case was imputed. So therefore the value of the marginal product of 100 bags of fertilizer is really the marginal utility or value of the 75 bushels of wheat that are lost if you do not use those 100 bushels but use everything else and I will stop there right on time. Thank you.