Introduction to Economics: Part 2

0:00The definition, an entity consisting of inhomogeneous units, does that apply to the concept that if you said ice is a good, that means that all ice is a good. Any specific unit of ice, though, can be a different good from any other specific unit of ice. But it requires somebody desiring that unit before you can even determine that. It's only when it's in an unused or undesired state that they are in fact the same. But once somebody wants it, then they are different, can be different. Utility is part of the characteristic of the good, usefulness in a general sense, utility in whichever way you want to take it is part of the characteristic of the good, so it's not just the physical ingredients, so water for example is essential, cold water or lukewarm water is of the same good.

1:08Let's take another example. Let's say you need, I don't know, let's say you need, usually, we haven't gotten the law of diminishing marginal utility yet, but it's coming, it's teetering on it. Usually, if you have a supply of something, you get one more unit you value it less than the previous unit. So if you have four eggs, you value the fifth egg less than the fourth than the other four. However, supposing you need five eggs to bake a cake, you can't bake a cake without four eggs. If you get the fifth egg, you can make a cake. You can then value the fifth egg more than the previous four eggs and pay more for it. Because, by God, you're not going to get a cake. The fifth egg is higher utility and is more serviceable to you than the other four eggs.

1:54You know, each egg is the same, physically. The fifth egg can bring you a whole new thing, so you can value it more highly. You know that something isn't good if it consists of homogeneous humans. How do you know if it consists of homogeneous humans? What's the criterion? It seems to me that the ice cream and the ambiance do not constitute an entity that consists of homogeneous humans. Well, it does, but it varies. I understand what it means to say that this carton of milk, the milk of this carton, consists of homogeneous units, each molecule of milk is exactly like each other.

2:51But what are the units in the ice cream, in this ice cream parlor, and the ambiance and what not, which are like each other? I mean, it doesn't look as though ice cream is like ambiance. The question is, you've got an homogenous unit, she's saying only one unit and there's more than one unit in this. There's not only the ambiance, there's not only the ice cream, there's also the thickness of the carpet, the number of layers, and this sort of stuff. So, the second fortune of ice cream would be enough, so is it good in multiple goods sometimes?

3:40So, one good could be several individual goods as well? Isn't it an entirely subjective thing, what homogenous is? So, what's the criteria? What the criteria is, is if the people involved in whatever transaction is involved with the goods, If the people believe that they're homogeneous, well, they're homogeneous for that transaction. But somebody else observing it from outside may say that they're either are homogeneous and the people involved in the transaction don't see it that way, or conversely, they might say those are not homogeneous, the person involved. It's the people involved in the transaction, their view of the transaction that's important, their view of whether the goods are homogeneous or not. Not what any external observer sees. What you're trying to, what seems to be going on here is people are trying to use this definition as an objective definition, get an objective definition of things out of it, whether homogeneity in this sense is entirely a subjective thing from the people involved in the transaction.

4:47People never think in terms of this is a good with homogeneous units. True. But look, let's say you buy a portion of ice cream at Swensley's or whatever it is. You're not confronted with the question, should I buy a second portion? Well, the second portion is the same unit. Now, however, you presumably value a second portion less than the first portion, so whether full or whatever. Whatever the reason. So you have homogeneous units to that person. So it's two, when you compare two goods, it's then that you say they consist of homogenous units. I thought, looking at one good, I thought this was an analysis of one good, you know. This good consists of homogenous units. Right. Is that the Austrian definition of the word good?

5:32Yeah. Sorry, it's comparative, isn't it? You're comparing values, whether they're homogenous. Yeah, that's... It's not, you don't, you just describe one good as, that's just too much, that's not the next one. Svensons would say that ice cream, that ice cream parlor and everything is one, homogenous, one... Ice cream at, dash at Svensons would be a unit, okay? You have one portion, second portion, third portion. How much, how many portions do you buy, so you're profitable of this? There's only a third portion, let's say, you stay back with it. The World Point is just to know what you mean by the word goods when you're speaking and the fact that it's different than another economic system.

6:21That we know what you mean when you say the word goods and we understand that it's different than it is in their other system. Well, let's see, let's give another angle here. The famous Coase Theorem, now, which is very big in so-called public choice economics among alleged free-market economists. And theorem is, well, parts of it is that if,

6:51well, here's the actual example of Coase, the famous article written about 15 years ago. A railroad is chugging along, Locomotive is pouring out smoke, and smoke is lighting the orchards around the farms. And the question is, these are costs, in other words, which the railroad is imposing on the farms. And according to the coast people, the coastians, public choice people, it's important for somebody to pay the costs. In other words, this is so called externality or external cost. The railroad is imposing on the farmers. And they view it that it doesn't matter whether the railroad has to pay the farmers or the farmers have to pay the railroad to stop it.

7:36In other words, they don't care whether the farmer has property rights to be injured, or the railroad has property rights in the smoke and the farmers have to pay them off to stop the smoke. And that's, of course, because they don't have the theory of property rights. But the basic, the point I want to focus on now is, their view is, okay, let's say the railroad is supposed to compensate the former. The railroad then compensates at a market price. So you have an orchard which is destroyed by the smoke. If the market price is $10,000, the railroad pays you off $10,000 and that's it, it takes care of it. The Austrian viewer is that the value to the former might not be the $10,000, it might be higher, let's say. We might love that orchard. The orchard came down from his grandmother. The value of him, therefore, is a lot more.

8:22If they really compensate him, the railroad has to pay a lot more. It's like extroperating a little old greenhouse. Exactly. There's just no way to evaluate it. Exactly. And the interesting thing here is that the Austrian position is that you can't evaluate just on market price, because the valuations of each individual are different value. And the interesting thing is you can't know what the value is. Because a little old lady can say, I love this house so much I need a million dollars. There's no way that she might be a liar. There's no way to say she's a liar. It could be priceless. Right, exactly. There's no reason why it can't. So no money. This is not a voluntary market transaction. There's no way to figure out what this person is doing. The only way is to somehow go back in time, make your offers for the house in a free-market situation, and say what you would say and what you would take. But this whole theory of so-called welfare economics,

9:08where the government messes people up, confiscates their land and whatever, Compensation on the basis of what they think is a proper compensation. A proper compensation is a so-called objective basis. OK, the value is $20,000, I'll pay you $20,000. You can't do that, because you don't know what the person's value was, the subjective value of this thing. Yeah? What about in the issue of property damage? You have one party suing the other. What will stand as Austrian economic state if my neighbor's dog has been I've been ruining my garbage, all of my property, or has been biting my children, obviously my children are priceless, but of course I recognize that it's market free for children, obviously, yes, but maybe in the region it would be, but I think the NP will work in the right way, but what I'm wondering is that at least in some cases where things that are tradeable on the market, how do you figure that people are going to be reasonable?

10:09in an honest settlement, like that. I don't think there's any scientific way to do that. It's just, what's the point? There's no, I mean, a judge or arbitrator or whatever you want to call it can make some kind of estimate, kind of talking to both parties wherever you want to do it. But there's no scientific, in a sense, precisely accurate way of saying this is worth 50,000 today or something. It's just something, you know, just do it the best way you can. And I don't see any other, there's no other words. So even though the judge or arbitrator might do that, That doesn't mean that you know the person's value scale. That's getting off into the legal field. Yeah, it's going off into the legal theory. Actually, it's just about time to take a break. Do you want to take that one more question? Yeah, well, just one more point. See, what we're doing here, we're talking about there's a science of economics, there's a discipline, there's a theory, and then there's the art, which is applying it.

11:01And scientifically, we could say to define a good like this, we can talk about more of the mission, more of the utility, all this other stuff. Applying it is an art, in the sense that the person who wants to apply it is an historian of a past or a forecaster of the future or an economist analyzing the current situation. You've got to just say, well, I think this is a good, right? In other words, I think ice cream is a good, except for the case of Swensons or whatever. And you sort of make these judgments, but they can be fallible because there's no way to precisely say that it's a good, if you're applying it to the real world. The art of economics requires judgment, entrepreneurship, in a sense. It's not the same sort of precise science as the theoretical structure. So a good, by definition, is what is available for sale.

11:48As soon as somebody wants to make a transaction, it can be something entirely different than what was originally offered. I wouldn't say entirely different. It's just a question of what you're buying in this thing. I'm going to talk to you at 3 o'clock.

12:02This is just an exciting one. We were saying that the difference between what the government thinks your property is worth and what the government thinks your property is worth, right? Well, Robert Kleinlein in one of his stories, he had to input a property tax. And the guy suggested that it's a percentage of the value of the property. The guy suggested that the owner of the property appraised their own property for the tax. There's a gimmick built into it. The gimmick is that anytime the government can buy the property for that price anytime, not even take the taxes. That's monstrous. That's not just money, is it? That's where I heard it. I haven't heard it anywhere else. Yeah, Gordon Tullock, two distinguished public choice theorists, alleged free market people.

12:49I like that he uses negative feedback so it stabilizes his song, the guy tries to cheat the government by putting in too much Let me just give you an anecdote about this. So, Tullock and Alchin came independently to the Mont Pelerin Society meeting, which is a group of relatively free-market economists.

13:34It's very watered down. Everybody to the right of Trudeau can be in it. So, at any rate, Alchean and Tala came up with the theory that this is the perfect tax, this is the voluntary tax, this is the ideal tax, where you get everybody to assess your property tax, assess your property and then pay whatever tax is on it, and if you assess your property at $20, you pay a very low tax, but then the government, you have to sell it to the government until the next person who comes along at that price, If you don't want to sell something that's really expensive to you, you have to set $2 billion on it and then you have to pay 10% or 2% or whatever, $2 billion. So poor professor Hayek is now the Dean of the Oldest Living Austrian Economist.

14:24But in that case, I have this precious library. I love this library. I've got 10,000 books or whatever. And that means in order to save my library, I have to value it $2 million. I have to go to the poor house. And the answer was, who cares about your library? Recible, free market answer, likely blind library. So that's the difference between a property rights approach, whatever, a freedom of choice approach, where you're looking at the technicians trying to maximize government revenue or maximize something. Okay, break? Well, I think we should press on. One thing, I just want to talk to Murray with a break.

15:10I might clarify this as a good question, a homogeneity question. I guess from the point of view of the actor, the consumer or whatever, so that... Murray was asking me, well, what if you have 20 ice cream cones almost the same? are the same, aren't they really different in the sense that one is in a different, occupying a slightly different space, and it's to the left of the other one, but from the point of view of the consumer, it doesn't really care, in other words, I'm a genius, I don't really care which I over-ask people when they get, athletics or whatever, you know, or the story. So again, the whole thing is from the point of view of the actor, the actual person doing all this stuff. It's not from the point of view of molecular physics or objective properties of the entity.

15:56I hope that clears up a little bit. Well, I'm still thinking you have to look at it as an approximation, because there's no way physically different things can ever be the same and evaluated. Even if the same waitress comes along and ends in a second ice cream cone and so on, it's at a different time. It's a different ice cream cone, he's going to feel different, his thoughts are going to be different at that time as well. It might feel exactly the same, but if we apply it, and apply it to the current old situation as an applied economist, so to speak, then you have to make a judgment level. I agree. You approximate, you say, well, we won't go beneath this level where... We don't have to, because the ice cream is off to others, as long as we try not to.

16:43What I got worked out in between after talking to you is, if I'm sitting at home and I say, I want an ice cream cone, at that point in time, all my ice cream cones are the same. They are all homogeneous units. But I want to walk together, so now, it's now, all the ice cream cones that are within walking distance are homogeneous units. I decided to go north, now it's all those within walking, and so on, and the closer you get to making the exact purchase, is to fewer homogeneous unit there are in the good, until you make that final choice, and now it is not just anyone, it's the one you bought. But perhaps we should get to the purpose of why we're looking to do it that way. And that is that it's a good way to refute government interventionist type of economists who would say that it should cost the same amount of money, in the name of fairness, To mail a letter from Ronald of London, as is this, to mail a letter from Hamilton to St. Louis.

17:37Right. That's what I did. Because they are applying externally a value to it, and it's not the actor that's making the decisions. Right. Well, that's one of the purposes. I don't think it's the only purpose. The first purpose is to have a true body of knowledge, so to speak, to build up an analysis of the economic system. It then turns out, however, that it has political applications, all this stuff, you know, so it's of a dual purpose. At any rate, to press on, given the homogeneous units, let's say, like Boehm-Bawerk, one of the great masters of Austrian economics, I shouldn't really mention who they are. I'm going to begin with Carl Menger, our beloved founder who taught economics at the University of Vienna, And therefore, it's called the Austrian School, wrote his book in, I think, 1871, called The Principles of Economic, just different translations, foundation of economics, whatever.

18:58So this is, he's a great founder of the science. I recommend the book, The Principles of Economics, it's that called. I certainly recommend the book, it's a great book. Robert's book, it's the foundation of the whole cycle. His great student and disciple, Eugen von Boehm-Bawerk, also succeeded in University of Vienna, continued also toward University of Vienna, and wrote his great masterpiece, Capital and Interest, which goes into price theory as well, and also utility and price Theory, and also Discover the Laws of Capital Interest, and wrote from 1880s to about 1914.

19:45There's a different edition to the book, so it's around that period. So von Boehm-Bawerk's famous example is horses. If you know homogeneous horses, what you do with them. I like to use laws that don't make much difference. So you've got a Crusoe here, let me see, he has a set of logs, I don't know, you can say a set of logs, I've probably got some of these units here from this point of view. There's a certain group of logs, I call it the log, just to make it up. And you can use it for, we're assuming here you can use it for many different uses, like the same unit of stuff. and use them for different uses. They have a priority of uses.

20:33Most important, let's say, is cooking tonight's fire, if we can have meat, which is not raw. Cooking, fire, tonight's fire.

20:51So this is the top priority. Second rank, if he has another set of logs, is, I'll say, adding an extension to his law cabinet, or building his law cabinet, whatever.

21:09Third rank might be storing walks to the bar and ice fire. He doesn't have to shove around and take an axe and chop wood to mark, so take a rest on that. So, okay, so you have a little bit of savings here, and cooking tomorrow's fire. And I'm going to add different stuff. Let's say building a fence around this thing so you can have to keep the wolves out or whatever. Building a fence. Of course, different busos might have different order of priorities here already. And fifth, something that you always want to do, which you'll get to eventually, is building a boardwalk so you don't have to have his toes full of sand out of the beach.

21:54So he ranks them, let's say, 1, 2, 3, 4, 5. By the way, an enormous amount of trouble with them, an enormous amount of headaches are incorporated in economics by people claiming they can measure this. So we're going to solve the law in the set A, B, C, and let's look at your graphical order. At any rate, this is strictly ordinal, it's ranking-limitant, priority. And so, now the point is, if he loses one, let's say he has these five sets of laws, they're all layered, ready, you're going to do this first and second, et cetera, et cetera. One washes away, a tidal wave comes and washes away one of the sets of laws.

22:39Which use is he going to give up? He's obviously going to give up his lowest ranking use. He's not going to give this up. He has only four sets of five that he originally had. He's going to give up the boardwalk while he waits for it, before he gets another set in a couple of weeks or something like that. So, he gives up then, he has five sets of logs, and he gives up, his supply is five, supply being defined as your stock amount available of homogeneous units, looks good. His supply is five, and so he gives up, he loses one of these logs, he doesn't give up, He gives off the least important use to him, which is the fifth. So on the other hand, he's got only two sets of logs, and one washes away or loses it. He can give up the second set of logs and keep the first one. So we conclude from this, that the more logs he's got, the lower the rank of value

23:31in terms of any one set of logs. In other words, he's got 10 logs, he only has to give up the 10th usage, right? Who knows about it? It's building a little birdhouse, or something like that. So what you do for that thing is law of diminishing marginal utility, which was discovered in different ways by Menger, and Ball-Ross, and Jevons, the third neglected figure. And about the same period, which is the law of diminishing marginal utility.

24:07which says that the greater the supply of a good, the lower the value of each unit and of course conversely the lower the supply of a good the greater the supply of a good,

24:37And the greater the value of each unit, just the other side of the coin. And it's called admission margin utility, or valueless call utility. And the word marginal comes in as reference to a unit. I'll go into that a little bit as to why this comes in. But anyway, marginal means at the margin. You're considering the next group of logs, what to do with it. You're considering the next portion of ice cream, whether to buy it or not. So people act in the real world in terms of units. So it's been called the law of diminishing the market utility.

25:19One of the important reasons for this is this. Before Adam Smith, the founder of economics really wasn't. It was a whole other schtick.

25:31I'm so sure you've all heard the name. Anyway, Adam Smith wrote his famous Wealth of Nation in 1776, the Scotsman. And for various reasons, which we still look pretty sure about, but can guess at, Smith, instead of founding economics, rolled economics back, or economics took a big step backward after the Wealth of Nation. French, various French economists, for example, and scholastic, evil scholastic economists on the continent had already discovered almost this wealth of marginal utility. If they hadn't gotten to the margin part, they'd have gotten everything else pretty well set, mainly that the rate of the supply would go to, the less the value would be, they didn't get terms of units so much, but that's really just the last cornerstone, the last stone in the edifice. So before Smith, the general of this figure, the value of a good on the market, the price of a good on the market is determined by the utility and the supply, how much is available, how much people will evaluate the supply, and then if you have greater supply, you value less.

26:30Smith himself, Smith's teachers, Scotland Hutchison, Francis Hutchison, also had the same view, and Smith himself in his previous writings 20 years before that, unpublished lectures, also had. I guess it wasn't ancient, it takes like 200 years backward. He says, we can't figure out the famous diamond bread paradox, the diamond water paradox. This is some sort of paradox of value invented by Smith. And like most paradoxes, it's a false problem. The paradox of value is this. Look, he says, we have bread. Bread is a stack of life. It's extremely useful. People die without it. It's tremendously useful. It's philosophically magnificent. And yet, you look at the market, it's very cheap.

27:16$0.20 a loaf of bread wasn't those days. And the other thing, so you have bread, which has a high use value. Red high-use land, and then you have diamonds. Diamonds are a frippery. This is very important, by the way, and why this occurred. Smith was a devout Calvinist-Presbyterian, tended to be against consumption anyway. Diamonds are frippery. Yeah, it's sinful. And here's a simple line that has no use whatsoever. It actually says that diamonds have zero use value, almost zero. And yet, diamonds are very expensive.

28:02They're valued very highly on the market. One diamond costs $10,000. This is a paradox. How come red high use value, low exchange value? The price on the market, how much will it exchange? And yet, diamonds of zero used to, almost zero used to happen. Negos were used to happen and have a very high exchange value. He said he couldn't solve this, and therefore, he just drops out. He says, this is it. And his analysis of consumption and consumers drop out. Classical economics between Smith, Ricardo, and Mill in Great Britain, they don't talk about consumers, but they can't figure it out. It's a paradox. It's a peculiarity of the market. strange anomaly or whatever, so this of course leaves total hostage open to socialists or leftists later on, we'll see.

28:53Veblen, in many ways more aggravating than Marx even, four star Veblen, said look, coins the idea that there's two kinds of production, production for use and production for profit. There's production for profit, you can go for exchange values and market values, and there's production for use where you're really producing what people really use and need. This sets out the dichotomy between use and market, or exchange rate, which is extremely pernicious, politically and socially. What was the resolution of the paradox? The predecessors of this method essentially arrived at this. Basically it's this, we don't, in the real world, this is again the Austrian approach, it looks at the individual, the acting individual, how he or she chooses.

29:41We don't choose classes of goods. We don't sit around as philosophers and say, which is more important to mankind, bread or diamonds? And then others choose between them. Bread is better. That's not the sort of choice we could front of it on the market. If indeed the Angel Gabriel came down, this is one of my Angel Gabriel examples. If the Angel Gabriel came down and said, Earthlings, you know, gathered all the Earthlings together for TV or something, First things, you're now presented with a choice. I now present you with this choice. From now on, you have to give up either all the bread in the world now and forever, or also all the diamonds in the world now and forever. And probably most of us will say, let's give up diamonds. Oh well, bread is more useful in this philosophic sense of a whole class of thoughts. But we're not confronted with that kind of a choice. The choice we're confronted with on the market is, how much should we pay for a loaf of bread? How much should we pay for a diamond?

30:31So, in the market, in other words, we make marginal choices of units, which is where the marginal unit thing comes in. And so, what happens is that, okay, you've got the law of diminishing marginal utility, it so happens in this world that there's a lot of bread around, okay? There's millions of loaves of bread, wonder bread, silver cup, kind of copper-ish form, except there's a rye, copper nickel, et cetera. Okay, so we have a diagram, a simple diagram. Look at this. We have marginal utility or whatever value and quantity in the x-axis. And we have a, we might start off, we have only one loaf of bread that might not have much. Now, some might not be enormous, excuse me, might be enormous.

31:18Still in all, you wind up with quantity so big that you wind up with a fairly low exchange value with any given loaf. They have an enormous supply, 10 million loads, whatever it is, of bread. Therefore, each person, the value of each load is fairly small. On the other hand, diamonds might be, if you had only one diamond in the world versus one piece of loaf of bread, you might choose loaf of bread. There's so few diamonds around, very scarce, but then you have something like that, so we're up here. And so that one carat of diamonds was, of course, worth a lot more to higher value on the market than the loaf of bread. So the relative scarcity becomes the key to the whole situation. Once you look at the acting individuals on the market, rather than consider them as a holistic, philosophic class, then you can solve the paradox.

32:10And the mystery of why Smith himself has sort of seen the light the funniest before. I think part of it is this Presbyterian outlook But somehow this frippery should be somehow higher value and more useful. OK, so we're looking at another way of other things, for example, water. Water, I wouldn't say it's free, but it's more or less so low in value for so much of it that you're going to go to the fountain and get water. You're going to have to pay for each glass, each cup, because it's extremely abundant out here somewhere. However, if you're walking across the Libyan desert And you have one canteen. One cup is an enormous thing, extremely important. It pays $2 million, your whole life savings in one cup.

32:58It pays zero or next to nothing for one cup here. So because the amount available to you is extremely small and way up in your utility scale, the marginal utility scale. So the relative scarcity becomes a key thing here. And so the value on the market, which is the exchange value, which is the price becomes determined by two forces of work here. One is the amount available at any given time, the supply, the price on the y-axis now, and quantity of the good on the x-axis. And the supply of a good, conceptually, we don't know exactly what it is, it could be anything, but conceptually we could find out.

33:51Two million loaves of wonder bread, 100,000 pounds of peaches, whatever. We have demand of evaluation determined by the law of dimension of our utility so that at looking at the rate of the supply, The less, the lower will be the valuation, the lower will be the price. There's also a common sense way of looking at this thing, of course. You don't want to look at the long-admission marginal utility and how you arrive at it. At a higher price, less will be purchased. At a lower price, more will be purchased. It's saying a similar thing. It's exactly the same way of looking at it. So this is the example of a man curve. It's how much will be purchased and then given a price, either by one person or by an aggregate by old people in the market, old consumers, To sum up, if you have five consumers thinking about whether to buy Wonder Bread, and conceptually, they arrive at each individual's demand curve, how much they've paid it, buying it at a given price.

34:53And some person might be a marginal Wonder Bread person who will only buy it if it gets down to $0.50 a loaf. Somebody else might be a fanatic who will buy it if it's up to $10 a loaf. The so-called falling demand curve for any good. These are the two forces which determine any prices, any product, any good or service on the market. These are the only two forces that determine demand for it, how much would be purchased at any given point, and the supply of it, which is the amount available. This gives us our famous demand-supply curves. I haven't talked about Friday because it would probably take too long. In my courses, I supposed to bring in Friday and focus on Friday Exchange.

35:42That's important, but I'll just leap a little bit here. Although we can say in this sense about Exchange, I think it's important to say, before we get a lot of price further, The whole market is like a latticework, it's like a spiderweb or a latticework of millions of different unit exchanges. So we have me buying this paper, let's say, and so I'm exchanging 30 cents, the New York And in this case, where both parties benefit, like for, there are two values here that are involved here actually.

36:36There's me, and I rank three cents. I rank New York Times higher than three cents. I put this in parenthesis because I haven't gotten yet. This is me just before I buy the paper. I'm looking at this thing as if I would be better off, psychically better off, of a higher utility, whatever you want to call it, if I spend the $0.30 on the New York Times, because I value the New York Times higher, more highly than I value the $0.30. On the other hand, the news dealer is precisely the opposite situation. He valued the 30 cents, which he hasn't gotten yet, more highly than the New York Times.

37:21He's got a ton of New York Times. It's not his problem. He wants to get money for it. So we then have here an exchange. This is a unit exchange. Both parties are better off. As we complete the exchange, which is a transfer of ownership of an exchange, it's sort of like buying a house, except they have a notarized V and all that. And you don't have to do that, that goes. Give him the $0.30, he gives you the times. That's it. You don't have to have a lawyer, a fleet of companies intervening with this. OK, so I'm better off on a higher utility point, or whatever you want to call it. I'm better off by getting the New York Times. He's benefiting by getting the $0.30. Mutually beneficial exchange, both parties to it go higher on their value scales. They both achieve a couple more of their goals.

38:08And so what we have here, the conditions for a successful exchange are two people. There are two people involved here. And two commodities, two goods. In this case, it's two people, me and you. Two goods, so $0.30 in New York Times. And we exchange these two things with both that are off. The free market is a latticework. Millions of these exchanges are going on all the time. So, if somebody works for IBM, let's say, you're selling your labor service to IBM, you're getting money, you prefer getting money, not selling labor service, they prefer getting labor service and keeping the money. So in each set of cases, there are two people on the case of IBM, a group of people represented by a corporation, and making these exchanges. In each case, each person is better off, each entity is better off.

39:01So we have a situation with the free market, even with that, the efficiency of the free market and all the rest of it. At each step of the way, each person is maximizing, getting better and better, higher utility at each step of the transaction. In case of Crusoe and Fight, each one is better off by exchange, fish for meat or whatever the exchange is. So, we already have here, so we need that for successful exchange, the reverse inequality of values of the two people. What we need is for me to evaluate the two things differently than him. If both of us prefer 30 cents New York Times, we don't base it for a transaction. I have to prefer the New York Times to 30 cents. If I have the same relative value scale as he's got, we don't make any deal.

39:50So what you have to find for any exchange is a reverse inequality of value of values.

40:05Because values are subjective, they're ordinal, they're value scales upon each individual. Now again, once you stake this, it might seem self-evident, but this already wipes out a huge amount of economics, the history of economic thought. It's been wiped off with books. It's like all great discoveries or inventions. They're only self-evident after you look at them, or even state it. Before that, it's not so self-evident. So what happens is that, for example, if you take Karl Marx's Das Kapital, a very interesting book, you don't have to read more than the first two pages, because the prime fallacy of the thing is in the first couple of pages. I'm not saying it shouldn't be the rest of it, but if you're a man of the kids, you can go ahead and do it.

40:50But time fallacy, which is true of most economic fallacy, most fallacies are in the assumptions of the first couple of papers. The rest is spinning out. So, he still wants all this fallacy. There's an exchange. He doesn't use a newspaper. Whatever. He says two things in exchange for each other. Let's say 30 cents for New York Times, or one pound of bread for two dozen eggs, So, because they exchange for each other, he says they must be equal in value. So, then he says, okay, what is there about fish and horses or whatever, to get back beyond money, let's say fish and horses or eggs and butter or whatever, eggs and horses or whatever, What is there in these two products, if one is equal to the other, what is there to make them equal in value?

41:46And he looks and says, well, it can't be weight, weight is totally different, it can't be volume, volume is totally different. And he winds up the quantity of labor hours embodied in the two products. That's, of course, also the second crazy solution. But the point is, the whole problem is posing correctly because they're not equal in value. It wouldn't be exchange if they were equal in value. The basis for any exchange in the world, if they're really equal, why bother going to the cost of finding the other guy and exchanging? It's like saying, if I have a nickel, and you have a nickel, and it's numismatically the same thing, so they're both the same data set, there's no point in me going out and exchanging the nickel for your nickel. There must be some bizarre personal reason. Generally, there's no reason, just the pain in the neck, it's a waste of what is now called transaction costs, so no point to it.

42:35So exchanges are, if these two things were really equal, there wouldn't be exchange at all of equal in value, so exchange requires this double inequality, so we can toss out the whole thing, the rest of Marxism can be tossed out just on that basis alone, so the other labor quantity, labor on the rest of the stuff goes into it. So a less extreme version of the classical economy, Smith and Ricardo, had a less extreme, well they actually had some of that too, Marx, in many ways, Marx was a sort of a consistent Ricardian, Smithian, carrying this thing with his argument of inclusion. One variant of Smith and Ricardo has the quantity of labor hours, looking for some way to, how do you embody this, what's the physical thing that embodies this value? Another less extreme variant, coming later on from Marshall, was the cost of production, cost of production must be the same, the same quantity of labor pain, there's all sorts of ways of looking at this.

43:31They're all fallacious because they're not equal in length. So that's another example of how these things seem to be recognized, seem to be very simple and have important consequences. Getting back to price determination, supply and demand become the two determinants of price, and then become, and this is not just Austrian, this is generally accepted, so I'm going completely into this thing, but anyway, well there's a variant here which is Austrian, the market price, the day-to-day market price, The whole market equilibrium price, unfortunately, because there's another equilibrium which is on sound, so it's, again, it's very confusing.

44:19The day-to-day market price will be, will tend to be, very quickly, the intersection point, supply curve, supply line, demand curve. This will be what prices will be, very, the day-to-day market equilibrium. I don't know if I have to go into this, or if you're probably going to look at this, do you all know it? Raise your hands if you don't know it. Those who don't know it already, raise their hands. Everybody knows it. Okay. What are we supposed to know? Well, why it is that the market price will be in it for a million or so. I'll go very quickly on this. If the price is higher than this, if this is peaches, let's say, and peaches are 60 cents a pound, I don't know what peaches are all 60 cents a pound, that's the equilibrium price.

45:05If the price is higher, then people will only buy much less than the 200,000 pounds available, 150,000 pounds. This will be an unsold surplus. Because anything a businessman hates is buying something and not having it be sold, or nobody buying it. Unsold surplus piles up. In order to eliminate the unsold surplus, this unwanted thing of these things piling up, which you're not selling, You cut your price, as you cut the price, more is purchased, and finally, lo and behold, you get down to the equilibrium price, there's no more unsold surplus. So the tendency on the market then is to wipe out very quickly unsold surpluses. All you need to do is for businessmen to prefer to make money and not lose money.

45:52It's called profit and loss motive. To make money and not to lose it.