 Okay, I've been teaching long enough to learn that any time there's a lull then then I start so Doesn't matter if we're on time or or not So let me just mention Where we're going to go in this in this talk And what we want to do is integrate this discussion of the theory of interest into our previous Discussion on yesterday on the theory of price So again one of the advantage of the Austrian approach is that everything is integrated from The foundation right all builds on this realistic foundation of the human Persons and human condition of action and and so on So yesterday when we talked about price theory we left two issues Untouched and one of these issues you heard a talk on by dr. Engelhardt Yesterday and this was on money So we didn't make any attempt in talking about price theory to talk about the price of money One of the great achievements of Ludwig von Mises Was the very first book that he wrote and published in 1912 theory of money and credit And he showed how to apply This approach of preferences and demand and supply to money To also explain the price of money the purchasing power of money And so we so that gap has been filled hopefully and Already which leaves us with one other issue that we did not address in talking about price theory yet And this is the element of time So all we talked about on Monday and all that dr. Engelhardt talked about with money on Monday It was what in finance we might call the spot price of Goods The actual cash exchange prices here and now in markets. That's what we talked about But most of you know that In addition to spot prices for goods there are also forward prices and then their derivative markets, right futures and Options and swaps that derive from the forward price And the forward price then introduces us to the temporal aspect of action and So that we haven't yet discussed and and so we want to we want to broach that Topic in this in this talk and then integrate again this discussion The of time And then interest of course refers to the inter temporal dimension of things Prices we want to integrate this with our price theory Now we'll proceed in in three steps First we just want to talk as we did on Monday just about fundamentals about the there we remember we talked about the fundamentals of Human action is purposeful behavior and we concentrated on the finite nature of the human person right, so we have ends But our means are limited We're finite beings. We can't just Will our ends to be attained? We make this distinction between ends and means and then we design action by employing the means to attain the ends and when we do this the satisfaction of our ends is typically Not perfect and and only temporary and then we have to act some more right? We have to act again and value and and so on so action continues on in our lives In in this talk now we want to concentrate on another fundamental character of the human person That human persons are temporal We're finite temporal beings. We exist in time, right? So we can also imagine infinite eternal beings Who wouldn't engage in human action the way we do so we're temporal and this is what we want to concentrate on? So let's again talk about what is fundamental then about our existence in time as human beings And then we'll talk about the second step the two valuations that we make with respect to time and Then the third thing we'll do is talk about the theory of interest so that that comes in in the natural sequence Okay, so here are some of the basic principles of time the first thing we want to highlight is that The the time at which we make a decision to act and the realization of our end are never synchronous The realization of our end at the moment we decide to act is always in the future to us So there's never a synchronous character in time of those two things It follows. This was the one point that we made about temporal existence on monday It follows that When we make a valuation about one end being Suitable for us to pursue in action We can only anticipate the value of the realization of that end at the moment that we're deciding to act It's only in anticipation Notice we stress this because all of the important principles of entrepreneurship and Profit and loss and so on all of these important features of human life stem from that fact Those of you who are familiar with the neoclassical economics know that in neoclassical economics, they don't have this realistic human element of time When they when they put time into their models, it's just like a time to the physicist It's just a variable, right over which something is moving or you know action Markets are moving or something. It's just a it's just a placeholder so to speak It's just click click click time passes. But for us as human beings time is much more robust It has meaning to us Uh a very important meaning that again if our theory doesn't incorporate we We don't have a very robust theory. We sort of reduced it to Certain elements that aren't false on the face of it, but aren't very helpful in understanding human Human action and so that's where we begin Now my definitions here of these concepts. I'm just following mesas in human action So if you've read human action, you've seen these definitions Mesa says one fundamental aspect of time for us as persons engaged in action is the period of production The reason this is important the period of production is it's a choice variable We can decide between different production processes that take more or less time And therefore the period of what he calls the working time the stages of production Let's say you want to build an automobile and you start by mining iron out of the ground and then You know shipping the iron to a steel mill and then making steel and then In another step of production you form a Body panels for the car and then in the final step of production. You have an assembly Factory where all the parts of the car are put together. So there's a certain time Structure to this production. There's working time involved, right? And we could imagine that each production process we could arrange in a technological way that would either link them out the time of production Or shrink it So there are various You know automobile production processes that are more hand And labor intensive and less capital intensive And they typically take a longer period of time. It's a choice variable for us. And so it's relevant The the working time and then there could be also maturing time There could be the time between the end of the production The physical production of the thing and then the beginning of consumption So the classic case of this would be a wine Production So you grow the grapes right and then you harvest and Then you make the wine and then it sits As a physical good you're done with production so to speak and you're done putting inputs into production But you have this maturing time The same thing could happen by the way with automobiles The automobiles are produced. They're shipped to a dealer. They sit on the dealer lot There's a marketing period, right? There's a maturing period where you're trying to find a Synergy between the consumers and and what you produced So so this is always involved in in action as well And then there's the duration of serviceableness of the good that's been produced There's the durability of the good that's been produced And again, the reason this is important for us as human beings is because we we can choose We can make cars that are more durable And we can make cars that are less durable And the production process for a less durable car might be cheaper The resource use the opportunity cost might be lower and so we might have a market for that with people whose wealth is You know not as great right the middle class and then for the rich We might make cars that are much more durable and feature laden and so on and so forth This is a choice variable. And so it's relevant for our action to think we have to think about Our production of things with respect to these these elements There's also the period of provision the period of provision is a is a planning horizon It's the time horizon over which we plan action And again, this is a choice variable for us All right, so we could we could think out like some of you're thinking about going to grad school and so you're planning out Right the four years or maybe it's going to be five or you're thinking about you know, what the career paths are beyond that and Right you you're planning out over decades. Maybe even Those of you who have small children, you know, you've come to the realization you can plan for things after you're dead Right we can have intentions to accomplish certain ends In other people's lives after we've left this world So this is important to us, right? It's relevant and therefore it's a it's a praxeological concept. It's a it's an important logical feature of of action And then we get to the The point that is most important for interest theory Which is this distinction that we make between sooner and later Now here again, I'll rely on mesis's phraseology You can't really improve on his Genius in these respects. So he says this he says Time as we experience time as human beings time is an irreversible flux But you have to love that phrase right an irreversible flux And what he's trying to get across and once you hear that of course it should ring a bell with you But what he's trying to point out is that time is not like means It's not like labor or or let's say capital funding or Land or something where we can accumulate a bunch of it and then expend it all at once on an action That's not time isn't like that We don't we don't like accumulate a hundred days and then expend it all at once in a single action Time is an irreversible flux. It just moves. It just marches on right And therefore we we we can't allocate time like a means it isn't a means It it's it's something in which our action is taking place But it's not a means to us And the and so the relevant concept as mesis goes on to say is between Sooner in time and later in time the reason this is relevant to us is because again, it's a choice variable We can choose to take an action sooner in time or we can take the action later in time How will we choose between taking it sooner and taking it later? We'll choose according to the way that we value those those alternatives And this is what uh, we would call economizing an action with respect to time We economize our action with respect to time by choosing when to take the action So for several different actions, uh, when we take it Matters for the value that accrues to us when when we act Just to give you a mundane example of this. Well, it's mundane to you. It's actually quite important to me Sublime I might add My uh, my wife and I have our wedding anniversary on november 17th Now i'm not going to go to her tomorrow and say honey, let's uh celebrate our wedding anniversary You know that it does be like No, of course you might be married to someone where they would think that highly romantic and it would be but the point is it It changes the value Of it when we take the action We'll change the value of it even if our action is exactly the same even if we plan the exactly the same event And so the timing of our action matters to us It's a choice variable again and and this is uh, this is one of the ways in which we value with respect to time Okay, so let's turn to that question Um The question i'll put it this way the timing of an action So as we said already the value of a good uh, or an action with a good can vary at different moments in time And because it can vary at different moments in time, we'll take account of that It doesn't mean we'll always take the action at the moment at which its value seems to be the greatest because that might involve cost Ancillary costs, right? And so the net benefit may not be as great But we'll take account of it. That's the point. We'll uh, we'll incorporate it into our decision This element of different value that can accrue to a good Now here we're speaking about consumer and producer goods So a consumption good like a Like a dozen roses that I might give to my wife our anniversary a consumption good like that can Vary in value depending on when I deliver the roses Or to take a you know an economic example We could think about the oil market So when oil is supplied on the market and you know bought and sold on the market Its price might be different The price of oil in the spot market today might be 70 dollars a barrel But it might be that the forward price in six months is a hundred Or it could be 50 or it could right? And so obviously if you have these differences in value at different moments in time The economizing thing to do is to move the supply of the good to where its value is higher where its price is higher And it says that's what would happen the speculators would be doing this in the market This is where forward prices and derivatives come from So just like with any other Arbitraging activity where we take a good from where it's lower valued and supply it to where it's higher valued Anytime we do this kind of you know people are engaged in this kind of activity The marginal value of the good will come together So if it were true that the forward price of oil was $100 six months forward and the spot price today was 70 that difference wouldn't last very long Because the producers of oil today would simply withdraw the supply and hold on to it And then supply it with the anticipation of supplying it six months forward Or or a speculator would buy it today if the entrepreneurs are too dull to see this And then and then hold it off the market and supply it in the future But the very act of doing this of reducing the supply in the present and increasing it in the future brings the prices together And that's how we know that allocation has been The economize that the profit has been earned so Here the timing of action is no different in that sense Then all all of the pricing activity that we talked about again on monday or the other discussions that you've had already about production and allocation Okay, so let me for those of you who aren't Up to speed on this. Let me just give you a definition of a forward price So some of you may never heard of this before A forward price is when two parties today make an agreement to exchange a good At a stipulated a date in the future at a price they agree upon today So the six month forward price for oil we have traders today saying You know getting together and saying I'll sell you oil at a hundred dollars a barrel Six months from now and the other guys is yes. Yes. I'll I agree to that trade Now obviously just like any other trade that trade would only be mutually beneficial if the two parties have different preferences Right the they must think differently about how the future is going to work out So the one person who's selling the oil at a hundred dollars a barrel In this forward contract six months from today Thinks that the actual price is That's a better price than the actual spot price will be six months from today But the person buying at at a hundred dollars a barrel thinks that's cheap right compared to what the spot price will be Six months from today they have as we say reverse preferences And so they can make a mutually advantageous trade and so this is where we get forward prices And we mentioned already then the efficient temporal allocation of goods So this is the first way in which we value Our actions with respect to time And the second way is what we call in Economic analysis time preference And as I alluded to already this refers to the distinction between sooner and later Now in order to tease out this principle Just like we did with the laws of utility on monday. We have to uh make a satyr's paribus Assumption we have to stipulate something right so remember when we did this on monday and we talked about the laws of utility we said Suppose we have caruso and he chooses a unit of coconut consumption of two coconuts And then he has different ends to which he can put two coconut unit of size He can drink the coconuts or he would also use two coconuts to eat the coconut meat and So on and so forth. These are stipulations right that isn't always true in action that you know Units are like this or the people choose in this way But hopefully you can see right away that in uh in markets units actually do come in equally serviceable amounts A gallon of gasoline 87 octane same as every other A gallon or a barrel of oil of this particular grade same as every other barrel of oil and so on and so forth So this uh, it's a realistic uh stipulation that that applies in the real world And so we could do the same thing or we're doing the same thing When we talk about time preference time preference is The preference a person has for a given satisfaction sooner as opposed to the same satisfaction later It's again as a satyrus paribus Deduction that we make from the distinction between sooner and later by the way, hopefully you can see that that just is When I say this it just uh rings true to you Just like when I say the second law of utility the second law of utility is that more of a good is preferred to less Hopefully when I say that it's just yeah, okay. I see that a good is scarce, right? So more of it has to be preferred to less because I can accomplish more Um with more of the good than I came with less of the good So that has to be true, right? It has to follow out logically Hopefully it seems just as obvious to you that the sooner satisfaction of a given end Is preferred to a later satisfaction of the same amount, right or the same the same character However, you want to stipulate this it just seems so But for those of you who are somewhat skeptical of this Let me provide you then with the logical implications That mesis again rehearses these in human action the logical implications if we assume that that's not true What if we assume that people always prefer a Future satisfaction a later satisfaction to a sooner or present satisfaction Well, hopefully you can see right away that if that were true then a person would never consume Because right now they prefer to consume, you know and get this satisfaction in the future But when that future moment arrives, they'll also still prefer the future, right? That that seems problematic. We know that people in fact do act The other logical alternative would be what if we don't care Between sooner and later. What if we're we have no preference? What if we treat them equally? Then what what follows from that well as mesis points out what follows from that is because we prefer more of a good to less If we didn't have a preference for sooner over later Then we would start right now on the longest most productive production processes we can technologically imagine We'd forego any shorter Production processes that weren't more productive And engage only in the longest ones possible But this again is is precisely the opposite of what we do What we actually do is we engage in the shortest most productive production processes First and then exhaust those and then we go to the longer more productive production processes Right, so you can imagine again a kind of stylistic example of this. Yeah Adam and Eve kicked out of the garden and you know instead of just uh, you know hunting and You know gathering and doing these primitive sorts of production processes they they they hit upon the notion of you know building a Aframed house They can conceive you know cut you know knocking down trees and cutting them up and so on and so forth So I had to have to build saws first and so on and so they set upon those production processes because that would be so much more Valuable to them than just you know grubbing On the ground and sleeping under the stars and in the rain and snow and so on No, of course. They don't do this. They they set upon the shortest most productive production processes just again like we do today So This this is the idea that mesis has in mind here Okay, let me also mention that Just like preference time preference cannot be shown false by examples Again mesis takes a few of these just to illustrate But let me start with an example of preference just to show you again That the logic the power of the logic involved in this And this is an example I give to my students at gross city college Suppose we have a person and this is to be a fairly common experience. I I imagine You know among younger people among people of my age and Something like this, you know you you come across a person you meet a person and and the person's smoking smoking cigarettes And as as the person is smoking the cigarette He's telling you how much he would love to kick this filthy habit He hates smoking cigarettes. He wants to you know, he understands. Oh, this is terrible for my health in the long run And you know, it's kind of annoying to other people, right? I'm doing this and then blowing the smoke and they hate that and but like I just can't stop or whatever You know excuse he gives to this And then and then and then here's the question does this guy prefer to smoke And the answer that economists give is yes indeed he prefers to smoke How do we know this or what do we mean when we say that he prefers to smoke? Because his preference is always consistent with his action this idea of demonstrated preference, right? Preference is just that that valuing choice that we make between what we value more highly and what we value less highly It we're just using the word this way in other words And so you can't you can't say that uh, you know This this guy who's smoking does not prefer to smoke Right, then you're using preference in an ambiguous way. That's not the way economists use the word preference And so the same sort of logic applies to time preference. It's very difficult to come up with the counter examples Mises gives three possible counter examples in human action He says suppose we have a guy who has a theater ticket for friday night And then he meets a friend And his friend has a ticket to another theater production also for friday night And the guy who has the theater ticket says oh, I wish that ticket were for saturday See, I prefer the future good, right? I wish that I wish it was not a present good But a future good and as mises points out this is not is not a counter to time preference, right? This is just again the problem of uh scarcity We can't do we can't do two actions synchronously because we're finite beings And so uh, they're mutually exclusive. We choose one over the other right and we always have to give up the one The other case seems a little bit more difficult, but actually again, it's quite uh Easy to resolve logically. This is the famous example of ice in the winter and ice in the summer So we have a person who in the winter says I prefer ice in the summer But you see again, uh Satyrus is not paribus here, right? You've changed the stipulation doesn't hold you're not getting the same satisfaction in the in the in the present as the compared to the future because Having ice in the summer allows you to do all sorts of more enjoyable things that you wouldn't dare do in the winter At least not in pennsylvania You know sitting out on the veranda and sipping iced tea, right? Yeah, you can do that. So so I prefer the ice in the summer of course I do because The conditions under which I'm going to consume in at that moment in time are more valuable This hopefully this rings a bell. This is the timing of an action, right? Of course, I want ice in In the summer because I can do things with it that are much more beneficial than I can do with ice in the winter And this is not a violation of time preference And then the third case he gives is of the miser So the miser, right who just hoards money all the it's a scrooge mcduck Horns up all his coins and swims in them In his vault or whatever And you know never expands and as mises points out. Well, yeah, the miser has Very low time preference Maybe he doesn't do much consumption in the present. He says most of his Wealth, but he doesn't have zero time preference or whatever negative time preference would mean He still has a preference for sooner. It's just that he has very very low time preferences. We say In economics so again these don't seem to be very Effective counter examples So now from from these considerations, we'll move on then to the discussion of the rate of interest And here We're going to talk we're going to use this terminology We're going to talk about what we'll call the pure rate of interest and the pure rate of interest is the Premium that people place because of their time preference on the present So it's the premium that people place On the present or sooner as opposed to later the future This is how we define the pure rate of interest Okay, so here's the schematic. Here's the logical schematic of how the argument runs out And I've superimposed This with some of what we did on monday So again to show you the integration of how we integrate interest theory into price theory So this top Line is what we talked about on monday for consumer goods. We have preferences that people have And then because the buyers and the sellers have reverse preference they can Both gain in trade and so they Those who want the good more urgently demand it And those who have it who desire to keep it less urgently supply it And then the market clearing price for the consumer good emerges. So we get the price of the consumer good It's exactly the same logical structure for time preference. We have people with different time preferences Some like the miser have low time preference And some have a very urgent Present gratification that they want to satisfy They have what we call high time preference And so the high time preference person is willing to pay The low time preference person a premium at which they can Both gain For the lending of the present money and then the payback in the future And so this is The second line and we call that interest rate the pure rate of interest because it depends on nothing but time preference At the end of the talk, we'll get to the other factors that influence Interest rates, but but at this point we want to talk just about time preference And then the integration comes in in the bottom part of the chart And and again, we talked a little bit about this on monday The the prices of consumer goods generate revenue. So this is the marginal revenue product For the producer of the good. So whatever this consumer good is, let's say it's smartphones or whatever the iPhone 10 that we used in is in our example on monday Selling the the price Which it sold generates revenue for apple And so that's the marginal revenue and then the product part the marginal revenue product the mrp The product part is the physical production Of the producer good Remember, we use the example of a tech worker So the tech worker has a certain physical productivity in the production process generate, you know with this team He generates a certain physical product a new innovative 3d feature on the phone or whatever and then and then consumers value that to a certain extent and then that generates Marginal revenue product and then the interest rate gives us the discount So that's the d part in d mrp That comes from the interest rate So the entrepreneurs demand for a factor of production if he pays in advance If he fronts the money to the worker paying the worker, you know every month as you go along But the worker is producing something that's not going to be sold for you until next year Well, then the entrepreneur has to earn interest on that on that loan right on that implicit loan that he's making And so he discounts the wage He's only willing to pay The marginal revenue product discounted by the rate of interest because he could take his funds that he saved up in The past and just lend them out on credit markets and earn the rate of interest He doesn't have to engage in production to earn a rate of return Now you can earn this in the credit markets And then there's the opportunity cost of the worker right and these two factors then determine the price of producer goods So again, this fills a gap that we that we left on monday Okay, so now the next step we want to we want to look at these arrows just like we did again on monday for the top line We want to look at the causal arrows How do preferences lead to demand and supply for Present money. How does the demand and supply for present money lead to the interest rate? Now one very important this is critical And there's a lot of discussion about this in the literature for those of you who are in the The graduate seminar That they'll do on thursday. We'll talk quite a bit about this point, but here I just want to introduce it So you're aware of it So here's my here's again the definition of the pure pure rate of interest It's the premium on the present or we could say the discount of the future as we just went through But this comes about in the form of intertemporal trade of money So money actually has two prices. It has a spot price An exchange price right now the purchasing power of money right now as we exchange it and it has an intertemporal price Present money is traded for future money Goods also have two prices. They have a spot price the price today the cash price that you would pay to buy it today And they have forward prices You notice people do not make loans in kind There are no loans in apples or in You know lug nuts or in machine parts or things of this sort Because if you made a loan in in goods Then when the future came The actual market value of the good could be radically different Depending upon the timing issue right depending upon the demand and supply conditions Timing It's consumptive value or productive value could be wildly different And so people don't do this instead. They make their intertemporal trades only in money This is because money is the medium of exchange the general medium of exchange And so it it's not subject to the vagaries of Value from changing conditions of consumption and production Every dollar always has an interchangeable Value in the market with respect to its use as a medium of exchange If I have a hundred dollars today, you know in cash, I'm Perfectly happy to trade it for a hundred dollars Somebody else has right five twenties for five twenties But nobody would trade six twenties for five twenties today, right? They're perfectly interchangeable or as we we say the Money is the is the unit of economic calculation and economic calculation covers all possible configurations of calculating Across persons across places across time And so people naturally gravitate toward money when they make loans And not goods So that's an important Point and again a lot can be said more can be said about this, but we'll we'll leave it at that Okay, so here's how we go from preferences to demand For present money and supply of present money So in the left hand column, I've got a one person who has these preferences We're assuming and again, we'll get to this at the very end But we're assuming that the purchasing power of money does not change We'll we'll get to that what happens if it does we'll get to that later So a thousand dollars today is preferred over a thousand in one year because of time preference But there is some amount of money in one year that this person would be willing to Accept in exchange for a thousand today And in my stipulation, it's eleven hundred dollars So if someone were to come along to this person and say I'll pay you eleven hundred dollars One year from today if you give me a thousand today those preferences say this person would take that trade They would prefer that Now the person on the right hand side person b Places a much larger premium on the present In order to bid away a thousand dollars from person b Someone would have to pay three hundred dollars right a year from now So we say person a has lower time preference the premium Person a requires is smaller or lower and person b has higher time preference He's much more urgent demand for the thousand dollars in the present So the two of them Could then get together and make a mutually advantageous trade at into any pure interest rate between 10 percent and 29 percent right Person b would prefer to get the twelve hundred dollars today as opposed to let's say I mean a thousand today as opposed to twelve fifty Let's say a year from today So he'd be willing to pay twelve fifty to person a person a ranks twelve fifty up here So person a is happy to get twelve fifty a year from today and give up his thousand today That that's where the interest rate comes from the pure rate of interest right just from this mutually advantageous trade Just like the price of any good comes from the mutually advantageous trade when two persons have reverse preferences Okay, so now what about the market? Well, we'll skip over the details of this because we can't cover this on monday, right So in a market, we've got a whole bunch of different people with a whole spectrum of preferences across all these people And so when they meet in markets, they gravitate toward exchanging at the market clearing price So that all of their preferences will be satisfied just like we had explained on monday And so here we call this the time market. This is all the trade of present money Uh for future money and then the interest rate is is set by people or Gravitates Toward this point where all of the lenders can find a borrower and all of the borrowers can find a lender That's the only rate at which this this happens Okay, so that's again the ground that we covered already Now just to just to summarize this part Time preferences then determine Both elements of the market Just like preferences In general determine both the price of a good and the quantity of it traded Time preference determines both the market clearing rate of interest the market rate of interest And the amount of lending and borrowing that goes on there's nothing except time preference behind Um The these these phenomena in the market of prices and quantities traded Now it is true that Uh, it And I didn't stress this on monday, but it is true that uh, economists Austrian economists Recognize that preferences themselves are influenced by the circumstances in which we act But there is no scientific relationship between the circumstances in which we act and the formulation of the valuations in our minds By which we choose one thing over another We we're just at a loss to know scientifically To give an account of this right And so that's why we start logically with preferences But but you shouldn't think that we're just uh stipulating that people have preferences. We're not saying that We're saying that you have real people like you and me In real set of circumstances and we go to the gas station today and we buy gasoline That that's what we're talking about or you know, you go to uh A pnc bank and take out a student loan to to enter college It's that that we're speaking about you do that because your preferences are such and such within the circumstances of your own life Um, so to highlight that point and then the last point on this slide that I will make is that um For the purpose of economic calculation that the entrepreneur is going to engage in the time market allows the entrepreneur to have either present money or Some amount of money in the future that these two are made equivalent By being able to lend and borrow and so in in my Simple example the future money is calculated as the present money or present value Times this term one plus the rate of interest So if I have a thousand dollars and I lend it out on interest for a year at 25 percent I'll have 1250 dollars at the end of a year That that of course is called compounding But if I'm if I'm an entrepreneur and I'm investing a thousand dollars in a production process with the anticipation of getting 1250 dollars a year from today I can know that those two sums are also equivalent right I can either have a thousand dollars today because of credit markets or I can have 1250 dollars in a year So if I if I'm producing and selling something a year from now I know exactly what it's what that future money is worth In the market as present money And so the entrepreneur can now compare all of the future revenues that he's going to receive the Through production to present money that he's expending in order to set in motion production processes for that to occur It's quite again a remarkable result And then we want to talk about components of the time market The time market is made up of two Major components. There are two ways in which present money could trade for future money One we call the credit markets and in credit markets, there's a contractual arrangement That's made between the lender and the borrower And so present money is lent under contract and then the borrower is Again under contract an enforceable contract to pay back the stipulated funds in the future And then we can further break down credit markets into consumer loans and producer loans And then we can further break down consumer loans into the different types, right? The mortgage loans and auto loans and general merchandise loans and so on and the same with producer loans triple-a corporate bonds A junk bonds and so on and so forth And then the second part of the The time market is the capital structure And the capital structure is what we've been explaining all along Where entrepreneurs are engaged in production by fronting money to the owners of the factors of production They pay their workers on an ongoing basis. They buy their materials Right the auto company buys the parts and then symbols the car and then sells the car six months later they're lending Paying upfront money not under contract but implicitly With the intention of getting future money back when they sell the product and that investment commands a rate of interest One last point about this producer loans By the way all end up in the capital structure So producer loans are not an independent part of the time market They have no causal Importance in explaining the time market time market is explained just by our demand for consumer loans and the entrepreneurs demand for Factors of production And that's it I point this out because the neoclassical theory of the interest rate Is the supply and demand for producer loans Just that right so again, you can see a pretty Distinct contrast between the austrian approach and the approach of the neoclassical school Now let's I'm getting to the end so of my time. So let me Mention one other aspect of the time market And this is the arbitrage we've mentioned arbitrage before This is the arbitrage that would take place to create Uniformity of the pure rate of interest across all loans So suppose to the contrary suppose we had consumer loans here in the left panel and the interest rate was very low at point a and we had loans implicit loans in the production processes that Entrepreneurs were making where they were earning very sizable rates of return Then what would happen, of course, is that the capitalists who Supply the funding Would shift their supply out of the low interest rate loans moving back to point b And into the high interest rate loans again until those interest rates came together And so we see even though we don't necessarily see the same interest rates across all loans empirically We know that the pure rate of interest is actually being equated Underneath that right we don't even though we don't see it empirically And so the last thing i'll say then on that point is that this is just another example of the Robust explanatory nature of the austrian approach What we're really trying to explain is the unseen meaning of action Right in addition to the empirical Features of it we can explain the actual meaning of it to human persons Whereas again our neoclassical friends explain only the empirical Okay, thank you very much