Introduction to Economics: Part 3

0:00The consumers want to purchase more than is available. So there's 300,000 pounds available. The consumers want to purchase 500,000 pounds. And suddenly it disappears in their shelf. You can expect it to last a couple of days. By 10 in the morning, it's gone. That's the so-called shortage. So what happens in the market is the shortage disappears very quickly. The businessmen say, hey, it's going very rapidly. I can raise the price. And as they raise the price, the shortage begins to disappear. Finally, they back up. It's a equilibrium point. And this is very fast, and again, because of the motivation, if a price is free to move, the motivation is to make profits and avoid losses. And you get to the price which clears the market, and the supply and demand are exactly equal. Where people want, say, 200,000, 300,000 pounds of features available, people want to buy 300,000 pounds.

0:51Exact clearance of the market. Supply and demand are equilibrated. One of the reasons that we're equilibrium.

1:01And the higher price, the higher the rate of demand, so you have the surplus. The lower price, the higher the rate of the supply, so you have a shortage. And what the free price movement does is wipes out short surpluses and shortages as soon as they appear. You never have on a free market anything like a permanent surplus or a permanent shortage, Anything beyond a couple of days is pretty quick. If you do have a permanent or several permanent shortage, the government is always in there interfering with it. I am the block. All right, so this is sort of an orthodox economist have a similar approach here, except if you notice that this black area is vertical.

1:46The orthodox textbook approaches black areas forward slowly. Oh, my god. Turn it back. The Austrian view is the cycle with verticals, who are dealing with a day-to-day situation. How much is there, and how much are people's, how much is there in the supply, how much are people evaluating, and what way are people evaluating their value scales as to demand. So you have, in other words, things around, resources, goods, various stages of production, and people evaluating those things. Demand and supply, interactive. And these are the only two things that are going to affect price and supply and demand. And again, go, I think, rapidly through these things. Oh, another reason for the word equilibrium is an analogy of physics and physical science is where an equilibrium is something which tends to move toward and tends to go back and go back to it if it's displaced from it because it doesn't stay in this particular spot and go back to it if it's displaced.

2:48So then the question is, and the next question is, is we observe the prices change all the time. How come prices change? Why don't they fix? Why don't they stay frozen forever at this equilibrium point? Obviously because, and only because, either demand changes or supply changes are both. So these are the two ways in which prices can change.

3:15Okay, then we have the familiar thing. I guess everybody knows this, but at any rate, I'll zip through it. Stop me if you want to inject any comment or anything. Let's say the famous case I always think of. Every few years the coffee freezes in Brazil, a big frost, a coffee crop is destroyed or something, half of it disappears. This happened about five years ago, and then there's a big drop in the supply of coffee coming in. So the supply curve shifts to the left. So this means that the old market clearing, let's see, before the last frost, the price of coffee is something like a dollar a pound, something like that. That was the market clearing price before the force. Then the force comes and wipes out at the profit problem.

4:08These are the old prices that don't have market clearing because now the demand is very much greater than supply. Shortage develops and therefore the price zips up to clear it. As it clears it, you wind up with a higher equilibrium price. Another thing that shows is how price performs a so-called rationing function. In other words, there's only a little amount, everything is scarce, there's not enough coffee for everybody to drink 10 cups of coffee every day in the world. And so, somehow it has to be allocated. Somebody's going to get the coffee, somebody isn't. Somebody's going to get a certain amount. How is it allocated? The free market allocates it based on individual choices, preferences. As the supply drops from a million pounds to four feet or five hundred thousand, whatever it was, it's like cut in half, there's two ways of allocating the scarce supply.

4:58You have a government rationing committee, you know, so you, you and you can only drink half of what you drank before. If you drink more than half, if you still drink the same amount, we shoot you, or whatever, you know, more than equivalent. That's one way to do it, totalitarian, evil, inefficient, everything. The free market is allocated smoothly and harmoniously, with each individual assigning his or her own basis. As the coffee price starts going up, those people who love coffee will keep either buying the same amount or cut their purchases a little bit. Others, you know, coffee is sort of marginal. They say, how about I'm shifting to tea, or shifting to cocoa, or Pepsi, or whatever. And that's exactly what happened, by the way. I think in the last coffee for us, people started shifting massively, massively wind up with this kind of higher, lower supply allocated very smoothly to each individual choices at a higher price.

5:54Conversely, as the pie goes up, due to a better fertilizer or whatever, better agricultural techniques, In an opposite situation, the old market theory of price is now a surplus. People don't want to buy that much coffee, or whatever. And so in order to induce them to buy more, you have to cut the price. And if you cut the price, why not lower the price? So this accounts for price changes on the supply side. In a free market economy, a capitalist economy, usually the tendency is, for most businesses, is an increase in supply. saw a little bit of a lot. So the tendency is toward falling prices, and for example in the 19th century, which was the great century of the Industrial Revolution, prices fell all the time except during wartime, and why it rose during wartime is another story we'll get to that this evening.

6:57The point is, without any interruptions or exogenous forces coming from the government, prices tend to fall. Dramatic examples are TV, calculators and computers. I was going to say personal computers. Yeah, go on, because I know less about personal computers than anybody in Rome, probably. It's unbelievable, they keep falling every day. The enormous supply increases, productivity increases, the whole thing just explodes. I remember a lower tech example is, when did the hand calculators come out? About 12 years ago or something? Well, that's 10 years ago. Oh yeah, that's 10 years ago. 12 years ago.

7:42So I teach at the engineering university, something like this I guess. And a friend of mine, on the EE department, electrical engineering department, ran it in the elevator. Even though we were high tech, we called ourselves the Engineering Center of Excellence. The elevators never work. Why didn't you have a field trip or something to fix the damn elevator? This is of course too low for them. That's done by other low types. And when they do work, they're very, very slow. Well, you go off seven floors, it takes about ten minutes, you have time for a long nightly conversation in the elevator. So one of those guys in the elevator says, look, I got this magic thing. It's a fantastically new product, and since I know the vice president of this firm, I have a first copy or whatever. It's this magic thing, you hold it in your hand, you press the dots and so the buttons, it multiplies and divides like that, fantastic.

8:32That's only $400. So now we have a much better account of this for $18.

9:10______ 15, but the features have increased. Yeah, right, quality goes up. Of course, again this is homogenous in a sense. You have to consider the unit quality. You can do it with a very different measure of quality obviously. You have to consider if you're comparing prices over time, consider the price per unit quality. And if the calculator is still $18 a day, but you have a much better calculator, there's a really much lower price per unit quality in the calculator. It's TB sets, another example, lower tech, older example. For example, TV sets first came out in 1949, they were $2,000, $7,000 or $8,000 in current money or something, for a crummy set, you couldn't see anything, murky, of course black and white, but also very murky and shadowy and only about two programs on anyway. And also, the first family, one family in each neighborhood had it, so everybody pooped in every night and watched a little brawl or something.

10:04So now you have a situation where you have color telephysology that's for 200 or 300, much infinitely better quality, unbelievable, with cable and everything, you can see everything, it's fantastic. Plus lots of programs with 45 channels or whatever, plus everybody's got about 8 TV sets, including one on the bathroom, just watch TV and everything else. So even people who are certified below the property level are most fair, lots of TV sets. So, I mean, it shows, again, what happens with mass production, tendency to lower prices. Isn't that beautiful? Yeah. So, at any rate, that, so a question you might ask, why do prices keep going up?

10:51In general, let's, I say tonight, we get to the micro part of it. OK, so one other thing here is that where does cost come in this whole thing? The usual doctrine of businessmen, a lot of businessmen, a lot of late persons say that prices are determined by cost in production. This was the Smith and Ricardo basically, so that Marshall and the standard British classical economics and neoclassical coming down in the 1930s or so. If costs are higher, prices will be higher vice versa. And where's the cost in here? You've already gotten the analysis. I haven't spoken about the times we've shifted in demand. I forgot that, but it's pretty clear that if the demand increases, you have an increased price or something.

11:42If the demand drops, you have a lower price. And this, by the way, determines these future resources. I should get into that before I get to costs. If given the money supply, the man can only, if somebody's out there printing money all the time, which is what's happening in real life, then all demand curves will rise, because everybody's got more money in their pocket, and so every person will pay more money for the same, will buy more at a given price. So you have a general floating upward demand curves. Aside from that, without that entering a picture, if the amount of money is fixed, you don't have this constant printing money, people have a certain amount of income, if they buy more on one thing, they have to buy less on something else, so demand curves will tend to shift around, and according to consumer preferences and values, which change, you know, unpredictably, anyway, so.

12:45The standard example back in the 1930s was that people shift from pork to beef So they get more affluent, which is still true. Somehow pork is considered low-type. And so it's like those people get higher living standards. They tend to shift from pork to beef. They have a portion, and then they buy shifts. So then you have the pork market to beef market. And then, that one or any moral condemnation or food And what you have initially is a demand meaning how much people pay them to give them the price.

13:39Nobody knows exactly what it is, by the way. It's another key point that Austrian always make. The textbooks always say, here's the man curve, here's the cost curve, and you grind out how much will be produced, and nobody knows what they are in the real world. Businessmen and entrepreneurs, in the uncertain world of entrepreneurship, try to estimate, try to find out what the man curve is and what the costs are. It's one of the key differences between Austrian economics and the Maurrasians, who are now dominating the economics profession. And it says there on the textbooks, given the demand curve, given the cost curve, this isn't how much will be produced in generally the Ludwig you haven't gotten to yet. But the point is, given the whom, nobody knows it, it's not given at all. The market is a process of trying to find out what's going on, and hopefully learning and adjusting the changes and so forth and so on.

14:24It's a very, very different kind of approach. OK, so then there's a higher price for beef and a lower price for pork, initially, in reaction, because, again, at the old price, people don't want to buy as much pork, surplus piles up, so the price has to fall, so people will be induced to buy the same amount of pork as they did before. The beef market, again, more people want to buy beef at any given price, so the price of beef has to go up to eliminate this transitory shortage.

15:05Other more modern examples, since World War II, there's been a big shift in consumer preference from red wine to white wine. California wine, enormous shift, so that the, part of these California wines are not very big because California reds are not too hot, California whites are just as good as French whites, so as the, as preferences shifted from red to white, the old age, you're only supposed to drink white with fish and chicken, now people drink white with everything, so that means the California whites don't become very big, so the demand curve for white wine goes up, the demand curve for red wine goes down, also it's happened with the tremendous shift in alcohol preferences, This is out of bourbon, for example, into vodka. So 1940 already back vodka, except for a few Russian emigres. And nowadays, vodka is enormous.

15:51So there's a big shift. And they're both the same toward the so-called lightness. I guess heavy drinks until the light breaks. So again, you have an increase in the mangrove for vodka, the mangrove for bourbon. Now, what happens then, and this brings us out of production, driving away the lightness. So far, I've been talking about the given supply line, how much is available. If we haven't talked about yet, who decides how much is going to be available? Who decides there's going to be 200,000 pounds of peaches today? Or a million loaves of Wonder Bread, or whatever? Well, producers have decided, you know, five years ago, two years ago, ten years ago, depending on what kind of technology and how long it takes to produce stuff. They decide on the basis of expectations, expected demand, what they think the demand will be, what they think the price will be, what they think the cost will be. Sometimes they're right, sometimes they're wrong.

16:36Those who are right make profits, those who are wrong suffer losses. So, what happens here is that the case of, let's say, red wine and white wine, it's more interesting if we're going to be... Here, there's the white people, and they say, well, you know, they see that there's a big increase in the amount of white wine, drop in the amount of red wine. They have to figure out whether it's going to be permanent or not. Is it transitory? Will it only last a couple of months because, I don't know, Kennedy likes white wine or whatever? They have to make a decision whether it will be semi-permanent or transitory. They make the decision, let's say the science will be permanent, they turn out to be right, they start retooling, if they're smart, if they will be able to survive.

17:22They start increasing the production of white wine and reducing the production of red wine, or increasing the production of beef, reducing the production of pork. Fork A different technological unit, so some things take two weeks to be tooled, some things take ten years, it depends on what you're producing. But what happens is over time you'll have an increase in the shift of the supply line to the right here. The response of the higher profits expected to be made because of the increased demand wind up with something like this. So in the long run you wind up with a price somewhere in between and greater production of white wine. And the red line starts shifting out of it as the supply lines keep going to the left. You wind up somewhere in between over here. And this is a long-run response to changes in demand.

18:14So what happens is that this indicates one thing, for example, how production is the response of the anticipator, expected demand, or consumer. The consumer is the driver of the engine. Producers are very anxious to figure out what consumers are going to buy next year, 10 years from now, whatever. And they move into the situation, if they think consumers are the one that will want white wine heavily, they'll move into that, they'll move out of red wine. If they're mistaken, they lose money. If they're correct, they make money, make profits, and lose money if they don't. Usually on the market, entrepreneurs tend to be pretty good at it, because otherwise they go bankrupt and drop out. It's a sort of law of survival of the fittest. So if you're... It doesn't necessarily happen, sometimes we make a lot of boo-boos, but basically, the tendency is for successful forecasters and entrepreneurs to do well and they might remain in the market and for unsuccessful ones to drop out.

19:04At any rate, if you take the locus of any given shift in demand, hypothetically, take this intersection, the lower right intersection, and you'll get a line like that. This is the textbook supply curve, forward-sloping supply curve. The reason why Austrianists stress the vertical supply curve is because the longer supply curve is totally different. It doesn't belong in the same diagram, because time is involved here. It needs three dimensions. There are different things, like apples and peaches. The demand curve is instantaneous. It's a freeze-frame situation. At any given day, how much will be bought at different prices? And nobody knows exactly what they are, but we do know it's falling, that's what we know.

19:50We know that people, consumers, buy less at a higher price and more at a lower price. Supply curve at any given day is instantaneous, there it is, the stuff is there, 300,000 features. Over the long run, this is how much will be evoked for the man curve to keep shifting, and prices such and such is how much will be supplied in the long run by white line manufacturers, vice versa. So that's, and this thing is philosophically sloppy too, that forward sloping, backward sloping. Two different things involved, see, the Austrian position focuses on the, not only does it have the correct axes for the correct time period, the Austrian position focuses on people subjectively evaluating goods and services which are there, ready for sale.

20:38This thing focuses on really nothing, so it doesn't focus on any of that. It becomes mechanical, it becomes mechanistic, I'm just removed from actual action. So that's the name of it. I've been talking about it for an hour now. Anybody have any comments or questions? Yeah, I was just sort of glancing at your book, and you have a vertical supply curve diagram. Right next, you have a positive supply curve diagram. We have a lot of- That's the locus. We have a whole bunch of little ones. But that's useful, too. It's just a different- Yeah, it's useful to show that, yeah, If you pay a higher price, you'll get more in the long run. More will be produced in the long run. It's not two or four for Rembrandts. That's why Rembrandts are fixed, frozen forever. Nobody produces any more Rembrandts. Rembrandts are dead. Unless you have a perfect forger.

21:30One of the other faults of that type is that the demand curve crosses the supply curve, mislabeled as the supply curve. It doesn't allow for the different situations that you find in some markets that are much more volatile. In a lot of things, you have other ways that the price is determined. The main thing is you have unique items. And in a unique item, if I don't have any great time preference, an upper bound on what I'm willing to pay is what I think I could produce another item for given time of the same sort. The lower bound on what I'm willing to pay is my value of a nice return over future value, present value of future cash flow given the savings I have given to everybody by an apartment building.

22:30I'm probably unwilling to pay more than what I think I could put a similar apartment building up for. On the other hand, I'm at least willing to pay a price that the cash flow will give me a, say, 20% return on my money, so I have some balance on it. And then I also look at what similar credit abilities have been bought for, but I think there's other measures of what you're willing to buy and pay. Most of these things that you're talking about, the red wine, white wine, the beef, pork, are fairly non-business-like decisions.

23:17They're decisions, what do I do with my money? I've got to eat some tonight, so let's flip a coin. Who cares whether I eat beef or pork? It's just sort of... There are decisions that are made on the sort of spur-of-the-moment thing. Why the spur-of-the-moment? It might be or might not. Well, it's maybe from the aspect of the consumer, but certainly not from the aspect of the seller or the producer or the port. You've got to anticipate. The demand, the swing is seems to me, right now, over the long run, I would hope that if the producers are rationing, then the price of production does, in a sense, determine the supply.

24:06One other point that really bothered me. Why did you say that Austrian economists aren't valuable to business, or that there aren't jobs for them in business. It seems to me that what business should want is a rational view of the world. and two of the best possible tools that they can have for predicting future events. And if your view of the world is correct, then presumably it is also better than other views of the world of predicting future events, therefore you should be valuable to this.

25:00more so than somebody that's incorrect and badly bad. But economists can say, and economics, a few more economists can say the following. If the demand for white wine goes up, such things will happen. Price will go up and then more people, if entrepreneurs anticipate it and they think it's permanent and it is permanent, there will be more production. But we don't know what the white wine price is. We don't have to think about the demand for white wine. We have a formal set of tools here, and I don't think the entrepreneur needs that. I mean, he knows that in a stick of land anyway, he knows that if people pay more for it, he won't be more profitable going into it. What we're doing is essentially analyzing individual actions and entrepreneurial action. The Austrian economists are now invaluable in the sense of the business map because of government intervention.

25:49We can predict the results of government intervention, they can. If you totally free market, we have no role at all. Now we can say, look, if there's price control, things are going to be a shortage, or if the money's flying, there's going to be inflation. I didn't even buy that, because in a totally free market, you've got to keep it that way. Yeah, of course. So, therefore, there's the education... Oh, yeah. No, no, no. We always have an educational function. I'm just saying, as a business, if you're employed by IBM or something, an economist, right now, it's really... Well, I mean, really employed, but it looks ridiculous. It seems to me the problem is that businessmen would rather have somebody who says he can predict, even if he predicts wrong, than an Austrian who says, I can't predict, so he can't do anything.

26:39Our discussion last night about altruism versus greed and grab and all that jazz. Right now, though, economists are employed in general in business to set a given pattern and then advise government on how to put that in place, isn't that how they're working? In general, very general. For example, you take an industry like, what industry could I use? Well, accounting. We have some accounting room. take an industry like the accounting practice and an economist would say okay if all people were required to file income tax returns in a certain way then we would provide the service of filling out income tax returns for them we would limit the number of people who came into the market and so on and so forth and they start with this given model and then conspire to or try to achieve the regulation that will put that model in place Is that how economists work in the business world now?

27:45In general. I'm going to cry. Let's go this way. Economists have certain functions. I'm not a business economist, but I know some. First of all, they write speeches for their Chairman of the Board of Presidents. That's an important function. Usually, his speeches are pretty good. If you look at business, a friend of mine used to be an economist. He used to work for Businessweek. The business writer, for different corporations, he says, these features are great, they also have a core free market, and actions are totally different for the same people. But the business speech is usually pretty good, so that's one thing economists do, they write speeches. But it's also a sort of PR function. We have an economist too and he does something such and it looks good to the public.

28:35The stockholders, there's also a problem with stockholders' suits, there's lots of stockholders' suits, stockholders' suing them in the management. And so the manager says, yeah, they cover their rear, so to speak. We made this decision, we had a fleet of top PhDs who were going to advise us on this. It's another function. All of us have a certain, you know, begins to take on the mentions of a racket. There was an article in the regional magazine called The Detectives Press, it was a type of look out of the technocrats at the time, people were training the university to be like us.

29:20Now, by the way, the worst example is the Economic Council of Canada, which is the bank president's idea, you know, he's the head of the big companies, and they're appointed, like, guess who the president is, and they call his people economists. Well, if you look at the forecasting, it's a big profession now, the enormous amount of money is made up of economic forecasting. The forecast, if you look at the forecast, they all say about the same things. You know, GNP is going to be, listen, inflation rate, unemployment rate, and such and such. Usually they're wrong. Matter of fact, there are people who judge, there are economists who estimate, who analyze forecasts, they've been doing that for quite a while now.

30:05How good are they? Every survey has ever made a forecast. They totally flop a rule. In other words, as a matter of fact, if you simply take a ruler... This is time, right? 1972, 1980s, whatever. If you take whatever statistic you're drawing back, and it's been going like that, if you simply draw a ruler and extrapolate trend, you do better than high-speed computer models than you can metric forecasts, on the average. Better! So, of course, you can't charge $500,000 for a corporation to take a ruler and go online, right? So, and they say, and the Wall Street Journal every once in a while talks about the parallels of forecasting, and they had one, I think, last about six months ago.

30:51They're complaining about, gee, we can do pretty well when trends don't change. The problem is to predict when the trend goes down or up. We haven't been able to detect that yet. So of course, that's the whole point. The problem is the forecast changes in the trend. You can't do it. Abysmal. And the forecast is almost always the same in a very small range. The reason is that nobody wants to be different from the other guys. The thing is it's like running in packs. If you're hired by a corporation or if you're, they're forecasting companies, data, I forget the name, data resourcing, just a corporate or something, auto-exit is the biggest one.

31:37If you're hired by companies that forecast, if you're wrong, and most of them are wrong, if you're wrong in tax, they say, oh geez, the state of the art, I couldn't help it, right? Everybody was wrong, only top economists were wrong, it's the way life is. But if you're way out of line, if you say inflation would be 2%, the other guy would say 8%, it's 8%, then you're at the end, finished. You're way out of line with everybody else for your turkey. So if you're all rolling together, no individual person can be blamed. So as a result, they all, first of all, interact with each other all the time. It was the same model as in the lab, it was long. So they wind up in a very similar range, the difference is very small. There's also one interesting problem with this thing, which has troubled me for a while, is that they have investment forecasters and all that, but they're always wrong.

32:26There's investment newsletters, which do forecasting of stocks and commodities and all that. Take, for example, Elliot Jane White, one of the most famous, who's been consistently wrong now for about 20 years, way wrong. I can predict the Dow Jones average is going down to 1,500 in six months. Six months in a row, it's still about 1,000. Why doesn't he lose all of his customers? That's an interesting question. It seems to me that what the left is called, the state is called market failure, only in market forecasting business. So, well, I was walking around asking people about this, people in the business and so forth. They admitted this, that people make millions from consistently wrong forecasts. So what's up here? Well, it turns out, one of the answers is, well, you get loose suckers coming in.

33:14That's not really good enough, it's not very satisfying because the market is supposed to work so that better people wind up as forecasters. Well it turns out, and the answer to the given which I think is correct is, essentially forecasting of that sort, especially not for business that prefer individuals with buying market letters, is really consumer good. It's not really, the purpose is not to find out, not the forecast, that's why nobody checks up on the forecast, nobody cares if you're wrong six months later. They enjoy reading the forecast, they enjoy listening to the guys say there's going to be a depression in six months, there's going to be wild inflation in six months. That's the enjoyment, it's consumer good. This is the way, they don't care whether he's right or not, they just like the hero. It's printed material. It's like a showmanship, if you notice the guys really make a lot of money, those who are very showman like this guy.

34:06Joe Granville, he goes in a whole act, and so it's like show inches, like watching entertainment, and once I realize that, then my troubles are over, I realize it's not a market failure, it's just a crazy market. So that shows you what economics is all about. If I may say something, that there is no need for economists, like there is no need for psychiatrists. People like to go to psychiatrists because they want to talk to somebody. They want to listen to economists in business because it is nice to hear. Nobody takes them seriously, especially, but it's nice to have a long-range planning committee for the next 20 years, because you know, it doesn't matter what they do, but the whole difference is simply that Austrian economists and the classical, basically, British-based economists, the English, that the Austrian, being Austrians, coming from middle Europe, they don't take them so seriously, this is, and they don't have this scholastic seriousness, this academism, and this is, Why they can't come to that conclusion, and I think this is the nature of the Austrian economy,

35:29that they don't take them so seriously, and they see that there are an amount of uncertainty, that everything is relative, I am judging the values through my own judgment, there is no objective values, there are no definitions like goods which you are looking, because what is it? Every item, the end, every item in that definition is relative, through my own judgement. So they come to the final conclusion that the economy, by the Austrians who invented the psychiatry, they came in also with the same conclusions. And it is exactly the same Viennese intellectual who in the Viennese coffee house had nothing else to do after playing chess to go into economic theory or to go into psychiatry. Some became Freud, the other became Menger.

36:20But one thing is involved here also. In Austrian theory, all economic laws are qualitative and not quantitative. We know that if the price falls, more people will buy it, more will be purchased, and more will be assorted. There's no economic law that tells you how much the price will fall, what the shape of the man curve is, what the price will be next week, and so forth. And it's considered, and this is really, I guess, a real important philosophical point about Austrian method, which is, as I was telling you earlier today, it's much more, we're much more in a minority nowadays, the free market, the sort of, a lot of free market economists, they're not as consistent as the Austrians are, but they're more or less so semi-free market economists now. So the real minority we're really in is methodological and philosophical.

37:08They can't stand the fact we say there's no such thing as quantitative rules. You can't predict the future quantitatively. You can't say a price of corn is going to be such-and-such in six weeks, ten years from now or something. And so those people who believe that there are, you can have quantitative logic and say, no, no, the man curve is 0.3 times or whatever, are really determinists. They really think that you can sort of determine the future, but it doesn't pretty well. Human action doesn't change. People are like objects or molecules. Therefore, you can therefore chart them like you can chart molecules. That's what physics, they're quantitative laws, right? It's how the missile will fall as it's being shot. And these people tended to think, and it's something in modern scientific methods, so-called modern scientific methods, something in the idea that people can be treated just like objects or molecules, and then chart their course and determine everything they're going to do.

38:03So that's a key difference, and that's why Austrian is very much in the minority, and that reason alone is very interesting. Most hard scientists, so to speak, in economics, I think they're hard scientists, want to get the prestige of physics and mathematics, which is real science, can't stand them, they just go bananas. That's an important, very important point. So, because now, so-called social sciences, or sciences of human action, Mises would put it, it's now considered, the only real science is math and numbers and all that, that's what science is, And that's how you build the atom bomb or whatever, and that still is a very dominant profession. So that's it. Who's your point? By the way, I can't resist this. There's nothing to do with the point.

38:51I'm talking about old Vienna. Mises used to be full of great anecdotes about old Vienna. He was my mentor and he lived there for all his life until the 1930s. And so one time he was walking down the street and the logical positivists were then digging in Vienna. So, Max Schuyler, who was an distinguished German economist, German philosopher, was walking down the streets of Vienna with Mises, and he said, tell me, Lew, how is it, why is it, what is there on the climate of Vienna that produces all these damn logical positivists? Mises took a little shrug and said, well, he said, well, Max, there are six million people in Vienna, three million people in Vienna, they're only total logical positivists, they can't be the climate. Anyway, that's a typical Misesian anecdote.

39:44One thing about forecasting, I can't resist this one too, is the outside economists, again, always try to say, criticizing the market, saying there should have been more steel produced, or there should have been less of that produced, more of that. And Mises' response was always, why don't they go and produce it, because the market's fed, there's a hole in the market. As entrepreneurs, they should go out there and fill the gap. And on forecasting, he would say, oh, people, for example, still claim they can predict the stock market, commodity market, to a T, that system. Well, if they really could do it, they wouldn't be wasting their time producing newsletters, they'd be making $2 trillion. and one time I saw a TV show where a talk show panel or something was a panel of forecasters or sports forecasters, people predicting baseball and basketball and all that and the host was talking about forecasting and each of them putting out weekly letters and finally the talk show host by an accident stumbled into a key question and said, well first he said, yes, do people bet on their own predictions?

40:55Oh, of course we do. We believe in you. We convince you wholeheartedly, and we bet on you and you're usually right. Yes, yes, we're right 98% of the time or something. And he says, then it hits the post, he says, well, in that case, you're missing me making millions of dollars, why are you wasting your time putting it in the newsletter? And the guy, he's never heard the question before, baseball forecasters, I swear he said it, he said, well, I think it's important to give this information to the public. I thought it was an altruistic thing. I'm like, no, I'm not discriminated by that. So anyway, I thought it was a little point of my point of forecasting theory. So, I guess we have the course now, which we haven't really touched on enough before.

41:47There's a tremendous difference in course theory between Austrian and everybody else, Orthodox. The classical and neoclassical view is that in the long run, at least, in the long run, prices tend to equal cost of production. The theory is something like this. Well, if you have an industry with 8% or 20% profits, another industry with 2% profits, people tend to move out of an industry with low profits or losses, move into the industry with high profits and get equalization. So you wind up with more or less equal profit rates across the board, zero profit rate, depending on the theory you're dealing with, and prices then equaling across the production throughout.

42:32So in the long run, as Marshall was famous, two blades of a scissor. Well, it's true in the short run that somehow they thought it was somehow unimportant, the real world is unimportant. It's true in day-to-day life, utility determines price, et cetera, and the supply line, the vertical supply line. The long run is really cost of the determinant. The long run is the famous metaphor of Alfred Marshall. Alfred Marshall, by the way, was the heir of Smith and McCarroll. The importance of Marshall was that he brought back McCarroll after McCarroll was more or less dead in the water. in other words, the theory of what was out.

43:20And Marshall has brought it back with tremendous prestige because he was at Cambridge University, writing in 1890, whatever, 1820s, 18s. So Marshall's famous metaphor was, well, it's like waves of the ocean. If you look at it in day-to-day prices, the height of the wave, particular wave, but in the long run, the price is going to be the level of the ocean, since the ocean is more important than the individual wave. So this sets the thing so that economists then get interested only in the long run, which never exists, for the reason we're going to, and not in the short run or the immediate day-to-day thing, which, of course, does exist. In the long run, prices are going to be equal in cost of production, or determined by the cost of production, worse than that.

44:05The Austrian view of cost is very different. The Austrian view is that the only cost, there's no such thing as a real cost, some kind of objective cost, which is out there, In the case of me buying a newspaper, the price of the newspaper is the value to me. When I give up, it's $0.30. The cost to me is $0.30 for a newspaper. More importantly, if you have the choice of saying, where do I spend this evening or something, and you say, well, and that's why I'm at this particular meeting, I'll say next evening, and you say, well, you haven't. I can go to movie A, movie B, go to party A, party B, I can read book A, book B, I have about ten choices, let's say.

44:53And you decide to allocate your time to movie A, I think that's the most important one, my value scale, you don't have to make a big thing out of me, because you don't have to spend a lot of time on that, but you can spend some time on it. Okay, I'm going to movie A and that's pretty good, I'm the director or whatever, star. The cost of going to movie A is you consider the prices as money, but you also consider it, probably more so, as what you give up for it, which is probably movie B, which you don't go to. You sacrifice movie B and go to movie A instead. So the cost of going to movie A in that sense is movie B. In other cases, like if the value scale is newspaper 30 cents and the cost is 30 cents. In other words, the cost of doing something, of taking any action, making any sort of choice, is the highest value of what you give up.

45:42You give up 10 different things. The highest one is your cost. Okay, so to conclude from this, cost is subjective to each individual. Only the individual knows the cost of what it was actually. Nobody else can know it objectively. No economist, no government bureau, no statistician knows your cost. I mean, you can see the guy went to a movie. You can say, well, he gave up. He spent $5. Not necessarily the cost, because he might have gone to the second movie down the corner, which was also $5. In other words, put it in here. Take a value scale and movie A, movie B, and $5. In this situation, the course of going to movie A is not the final, but higher than that is the second movie you give up.