Production: Entrepreneurship and Change

0:00This area, the capital interest theory in general, is extremely difficult, alright? So if you're trying to read this and you're like, wow, I just don't get it, I must be dumb, not necessarily, you might be, but it could just be because the material is really difficult, alright? It's literally been called the black hole of economics, and not just in terms of the Austrian School, but just in general, capital and interest theory is extremely difficult. The controversies that raged throughout the 20th century on that, most economists just run from it they say no I don't want to get sucked into that it's just too difficult so but it's important so I'm not saying you need to be an expert in this but it really if you understand what's going on in this chapter you really are in a much better position to understand the real world I mean this I don't want to say it's the essence of Austrian economics but it's extremely important to understand what's going on in this chapter and this really is one of the things like I said in my first talk that distinguishes Austrian

0:57The Theory of Money and Credit

1:27The benefit from learning this material and really understanding it is you'll have a much better appreciation for Boehm-Bawerk and Hayek, that if all you knew of Hayek was the road to serfdom, you could kind of think, he's kind of overrated, but the stuff that Hayek does in Capital Theory is really impressive, his book Pure Theory of Capital in particular is just an incredible illustration of just the guy's mental powers, so I'm not saying everything he does in there is correct or that I agree with it, but as I'm saying, if you think Hayek's really The Theory of Money and Credit

2:27and Capital Theory. So Rothbard is very clear, but again, if you go and look at some of the stuff you get from Hayek, Rothbard has limited amount of space to work with it. So there's things that you can get from Hayek and Boehm-Bawerk that have not, in my opinion, survived. So this is sort of like the, you know, against the Whig theory that I think there are things in Boehm-Bawerk that Mises didn't carry through. One last sort of profitory comment. In case I forget to mention it, in terms of advances in the future, if I'm a young Austrian, what can I do with my career?

3:12I'm not sure, but I think it's possible that somebody who was familiar with quantitative finance that understood the put-call parity and all the things, the Black-Scholes formula, formula, that sort of approach, mean variance, modeling of Wall Street activities, who understood that material and then also read this chapter from Rothbard and could somehow come up with something maybe in between the two. I think there's scope for something along those lines because Rothbard alludes to it. He mentions risks and uncertainty and he says how, you know, actually in the real world There's not just an interest rate and then entrepreneurial profit or loss. There's also this thing about different levels of riskiness. And so anyway, the quantitative finance people, yeah, I think they take it too far and they assume specific functional distributions and things like that.

4:04But they're thinking a lot more, they're taking it a lot further when they say, what if we really want to deal with the fact that there are different levels of risk in different enterprises or if you want to call it uncertainty, you know, I don't want to talk about that issue right now, but the point is Rothbard leaves open huge avenues of potential research and I think current Austrians who are just trying to pick research agendas, they might be able to benefit and then it would also be marketable that you could apply this financial stuff to Austrian theory or capital theory. Okay, so what I'm going to do with the time I have here, I'm going to go through and I'm going to mostly focus on, when I get to that point, those diagrams showing what happens with the original structure of production, how it gets to the one after net savings and investment.

4:53But let me just mention a few things along the way leading up to that point in the chapter. So in the early on, Rothbard says, in the real world then, quality of judgment and accuracy of forecast play an enormous role in the income acquired by capitalists. and so he's what he's saying there again he's contrasting that we've talked about in the last chapter that one way you earn income is for labor services and then also is an interest return just because of the passage of time because of time preference and then you know you can earn it as a labor excuse me as a landowner but then if you think that that was capitalized even that in a sense is is an interest return so that's why he makes the the statement that you might I thought it was a mistake in the beginning of the chapter I'm talking about now where he says the only two types of income in the ERE are interest and wages

5:41and you might have thought what about the rents for landowners but he's including that in interest because if it gets capitalized then it's really the rent for land is also interest. But in the real world there's another category of income and that's entrepreneurial profit and loss and that specifically is due to the ability of someone to to rearrange the structure of production to better serve the consumer's desires than if that entrepreneur hadn't intervened. Or if you suffer a loss, it's because of the opposite, that you made things even worse. The original structure of production was a certain way and it was going to satisfy consumer ends, and then you came in and you tinkered with it and it wasn't a good tinkering. And so you hurt consumers in a market economy, you get penalized for that by suffering a loss.

6:29Now what's interesting, the reason I like that quote is that he says the quality of judgment, the accuracy of your forecasts and that's really how you're getting this type of income. And so you won't see that really in other schools of thought very much that the Austrians are fairly unique in that they recognize that in the market economy there is a definite role for someone to play that you know you say to someone, What do you do? I'm a really good singer. What do you do? I'm a good pitcher. And there are certain people in the market, what do they do is they see the future better than other people do and then they go and make money off of it. Some people that sounds very crass, but no, that's crucial. We're in a world of uncertainty and so the people that anticipate the future better than others, that's a very important thing.

7:15And we want to make sure, depending on how much their advantage is, that they're aware of that fact. And so instead of them being a school teacher, if no, they really can anticipate IBM's share price better than anyone else on the planet, maybe that's what they should be doing with their lives, is speculating on the stock market. So the market economy, now they don't have to do that of course, they're free to be a school teacher, but the point is they need to know what am I missing out on, and again in a market economy where people are allowed to keep the fruits of their efforts, that's what would happen. They would know if I went and speculated in the stock market, I think I could make a bunch and actually that's that's really almost the purest form of entrepreneurship in a sense is someone who speculates just when purely financial matters because there if you think oil prices are going to be higher or lower and you think the

8:03markets wrong on that you don't even ever have to actually physically deal with oil you can just go into the futures market and either buy or sell depending on what you think the trend is going to be and then you can get rid of the contract before it matures and so you you've never dealt with anything anything except electronic transactions, and yet you are influencing production if you make profits. We can argue and go through the steps later if you want as to how that is serving consumers. So again, the market economy is really amazing in the fact that the specialization is more of these financial derivatives become available. This ability of people just in terms of pure speculation, their ability to forecast the future better than most other people, and allows them to earn an income and they are certainly performing a service just as the guy who goes and tills the soil is performing a service and that's why he gets paid for it.

8:55And the other point there too is Rothbard says that a profit opportunity means that some factors are underpriced and so what Rothbard has in mind is entrepreneurs buying factors of production, production, waiting for the product to be produced and then selling it and that the return they get exceeds the interest return. And so that's the standard benchmark case and that's why Rothbard's saying also a profit opportunity means factors are underpriced but of course if you thought factors were overpriced and you had sophisticated enough markets where you could short sell things then you could profit from the other way too, that if you thought a stock was overpriced you could short it and then when the price came down you'd earn your profit that way. So, again, in the more general case with modern markets, as long as factors are mispriced, an entrepreneur can profit by speculating one way or the other.

9:49So this leads into another point that Rothbard stresses is that, okay, so first of all, mainstream economists, they almost never talk about economic profits except maybe in an intro micro class when they're trying to get you to see the difference between accounting and economic Profit. But then really that drops out especially at graduate school. I might never have heard the term entrepreneur at NYU except in the Austrian colloquium. I think that's a true statement that they never talk about profit once you get to the level where you're doing general equilibrium theory and everything's in equilibrium. What role would there be for entrepreneurship or profits and losses? But then Rothbard says okay but sometimes they do talk about profit but what you'll never hear The thing that our mainstream economists focus on is the role of loss. That they just talk about profits as if they're natural, and they talk about, well, what's the natural rate of profit?

10:38And so Rothbard is emphasizing that, well, no, that's silly. There's no such thing as a natural rate of profit, because if you think that way, well, then I'm going to ask you, what's the natural rate of loss? And that just sounds crazy. And so it's the same thing with profits, that if there is a profit in an industry, then people flock to it, and it gets competed away just like if there's a loss going on right now in a certain industry, will get out of it, and so the loss disappears. All right, so that's, and it's crucial to understand that that also performs a function, that it's not, that oh yeah, profits are great, and then unfortunately we have to accept losses as well, that no, if losses are being suffered, it's showing that the structure of production is not designed to best satisfy the wants of the consumers, and so the losses are a necessary signal, if you will, to tell entrepreneurs you're messing up,

11:24you gotta reform what you're doing. And another point that he mentions is that the profit and loss, so it's not only that somebody rearranges the structure of production, takes factors from what other people were going to use them for and devotes them somewhere else, and if that's, if the consumers in a broad sense approve of what you did, you earn profits, but, or if you do it and the consumers don't like what you did, you suffer losses, so there's that fact, but on top of it, it's proportionate, so that if you really improve things, then you earn a lot of profit, or if you really screw it up, then you earn a lot of money. And so that's what's, that point's good when you're trying to understand different government programs and they're trying to subsidize things or they're trying to penalize things. And it's really, for example, there's all this talk now about, oh, well, let's come into the oil and commodities markets.

12:16And if speculators are behaving in a certain way and if we think they're manipulating the price when they ought to be selling, if they're hoarding it and they ought to really be selling for a profit,

12:55So the point is again that people don't talk about profit very much. They almost never talk about loss and then they also don't ever really talk about the fact that it's not just those categories but it's the quantitative amount that's necessary to get entrepreneurs to have the right incentives in terms of doing the thing, to have the right incentives.

13:25If your goal is, how do we motivate the most able, talented people in our society to help the masses? If you were like a socialist or something, or not a socialist, but if you were just some humanitarian, what kind of system could we invent that gets the smartest people, the greediest people, the most ambitious people to devote their lives to improving a lot of the common man? If you just were locked in a room and thought through it, you'd probably come up with the market economy, or you could come up with the market economy, that'd be a good answer. Okay, one little quibble here I have with Rothbard. He says at one point, every entrepreneur believes that the market has underpriced factors. I mean, there's dots in there that he's, I'm shortening it, but his point is that Rothbard is saying, look, in order for somebody to enter the factor markets, buy factors and then hope to transform them and sell a product and earn entrepreneurial profit,

14:19that particular entrepreneur must believe that the market has underpriced And I'm not sure that might be, of course we understand what he's talking about, but I'm just wondering about the case where somebody who's just investing because they want to maintain their money or they want to grow it at interest, that you know, someone who puts their money in a mutual fund or whatever, they're certainly not picking those stocks because they think the market has underpriced those particular stocks. And even if you're not thinking of the stock market just in general, if someone comes into inheritance and has a bunch of money, you know, back in the 1800s, What do I do with this? I don't want you to sit here. I want to earn interest. Maybe his buddy says, oh, why don't you get into the shoe business and buy things. My point is just that I'm not sure if that's necessarily true.

15:07Obviously, if you thought there were underpriced factors, you would tend towards that line if you had money to invest. But it is possible, I think, that somebody could not expect to beat the market as it were. But yet because of their time preferences, they don't want to consume everything in the present, they want to earn interest. And so that's a possible slight mistake or understatement by Rothbard there. Okay, another good point that Rothbard makes is he says profit is a sign of a prior male adjustment. And so if you see firms that are earning lots of profits, people think that's a sign of, you know, something's, I don't know, something's wrong with the world. in the world, and Rothbard says, yes, in a sense that's true, but it's not the people earning the profits, they're the ones fixing it.

15:54So yes, if there are huge profit opportunities and you see some company earning a bunch of money, profit, that in a sense it's correct for us to say, oh wow, you know, things weren't, all wasn't well with the situation, but again, it's why are we getting mad at the companies or the individuals who are doing more than anyone else on the planet what they need to do to address the situation. and just the recent news with the oil companies. I mean, the reason oil is so expensive is because it's appreciating dollar, but also just the fact that demand has risen a lot more the last few years than most people anticipated. And ironically, so who are we mad at? So we don't have as much oil as we really ought to have for our desires. And so who are we mad at? Well, let's get mad at the companies that are out there spending billions of dollars finding more oil because we're really mad that we don't have much oil.

16:43And so we're gonna go punish the people who are the ones doing something about getting more oil for us. So that's what Rothbard's point is there. All right, let me read this quote from Hayek that he talks about on 517. And this was, so this is the bottom of 517 if you've got it. So again, quoting Hayek, and Hayek says, The continuance of the existing degree of capitalistic organization depends, accordingly, on the prices paid and obtained for the product of each stage of production. And these prices are therefore a very real and important factor in determining the direction of production. So that really struck me. Before looking over this last night when I was preparing my remarks, it had never really struck me why did Hayek entitle his book, Prices in Production.

17:36I think most people don't realize if they don't have this view, this Austrian view of the structure of production, you know, that the market prices really do help coordinate things. And so entrepreneurs behave differently depending on what market prices are. So it's not that the entrepreneurs are robotic. I mean the prices don't determine action, but the prices certainly do influence what the entrepreneurs end up doing. And so that's what I think most people don't realize if they don't have this view, They don't have this view, this Austrian view of the structure of production, you know, with the housing bust and all this, the government needs to come in, or whenever there's a recession, the government needs to come in and keep prices at their prior levels. Well, no, I mean, how are people going to rearrange themselves and get into the correct lines of production, adjust to the new realities, if prices aren't allowed to move, to signal to entrepreneurs that this isn't working, this is what needs to happen now?

18:27Okay, so again, that's a very subtle point. I just want to make sure you didn't miss that. And then on 518, Rothbard talks about the paradox of saving, and he refers to, in footnote 6 there, an article by Hayek with the same title. And let me just encourage you, again, this isn't for everybody, but if you are interested in capital theory and you want to see more, This is an excellent article by Hayek that even if you've read Human Action, Man Economy and State, I think if you read this article by Hayek, you would come away understanding the structure of production better than before you read it. And what's going on in there, and maybe in the Q&A, maybe David Gordon might be able to give us the full story, but it's something along the lines of these guys, they had a contest, and they set out the paradox of savings, was, you know, if all of a sudden consumers or individuals in the economy, they save more,

19:27so they spend less on consumption, how can it possibly be that businesses will expand? Because if the final chain in the link of production, if people are spending less down there, well then those businesses are going to, you know, reduce their volume of activity, they're going to buy less from their suppliers and so on. So if consumers in general are spending less, because they're saving more, how could it possibly be anything other than a general recession? And yet we know at the micro level that an individual household, what do you do if you want to consume more and more into the future? If you cut back now and invest those funds and earn interest, then your disposable income can grow over time. And so that was the... And what some of these guys did is they...

20:13My understanding is they literally had a contest where they were going to pay people to say, you know, in our opinion, if you can answer this question or solve this riddle, we'll, I think they're going to give them some financial reward. And in their opinion, nobody answered the question right. And Hayek, in this article, agreed with those guys. And he said, they're right, no one answered it, but now I'm going to. And I don't think Hayek got money for it. But the point is that he was saying this is a very tricky concept, and it's understandable that mainstream economists were sort of duped by the Keynesian Revolution Revolution, because they don't have this appreciation. Without understanding Austrian capital theory, it really would be difficult to get out of the paradox of saving. But once you understand Austrian capital theory, you can see.

21:00And Hayek points out there, and we'll talk about it in a minute. And Hayek just shows, graphically, this is the answer to their question. This is why you could have a lower volume of consumer spending, and yet that can support more investment. and there's no one along the way that's losing money. It's all internally consistent, there's no paradox. Okay, so yeah, why don't we get into that now?

21:32All right, let me, I'll just do them one at a time.

21:38So this is obviously from the study guide. okay let me just make sure this is probably going to be review for most of you but let me make sure we all understand there's a lot going on in these diagrams let me make sure you see all the little bells and whistles okay so first of all again it's the the hundred ounces the bottom that is the amount being spent by consumers on the consumer good and and also let me also So whenever I go look at these things, I haven't seen them in a while, I always get tripped, I'm always off by a level, so if that's happening to you, don't worry, it happens to me too. So let's look up here, so what's happening is this entrepreneur, and I know this is review, but I want to make sure we see this one so that we understand the next one.

22:24This high level, I guess it would be the sixth stage, gives 19 ounces to the land and labor factors, because at this point there's no capital, but there's nothing, it's just all land and labor. gives 19 ounces and they work on something and then a year later sells a capital good, a good in progress, for 20 ounces to somebody else, so that's ideally if we had a bunch of money I would pay a computer programmer to take this thing and turn it into like a neat little presentation on the computer where you could see the capital good ripening as it went down because with these numbers it's kind of hard to picture that we were saying oh a passage of time so that's why it has to earn an interest return but no the reason this The reason why this person here is paying 20 is because that thing is something useful.

23:09It's a capital good that he says, yeah, I'll pay 20 ounces of gold for that. So it's not that he cares about the time preference of the capitalist from the prior stage. He's paying 20 ounces of gold for this thing. This guy who's paying 20 for this, it's not that he even needs to know what land and labor went into it. He could know that, but he doesn't need to know that. So again, this is a little bit abstract and it would be helpful when you're thinking through this So you can really picture that as the good is moving down, I mean it is physically being transformed step by step so it's not just the mere passage of time. These land and labor factors are doing stuff to this thing to turn it into the eventual consumer good that's worth 100 ounces of gold. Okay, so the 19 ounces there go to these land and labor factors and again so that you know some worker, somebody says hey what do you do for a living?

23:58So I take raw material from the land and I transform it into whatever the capital good is and then the guy goes and sells it for 20 ounces of gold. And so that's what they do and those people get, and some landowners also, they're selling the materials, the virgin materials that are being used to create this capital good from scratch. And again, that's what they get their income. So that's 19 ounces every period going to those two groups of people. And then the period later when this entrepreneur sells it for 20, that's where that one is coming from, right? He put out 19, a year later was then able to sell it for 20, and so the interest return on the invested 19 was one ounce, okay? And then again, the interest right there, you're earning a return of one for an investment of 19, it's a little bit more than 5%, 5%, but it's because of rounding, that Rothbard is trying to get around 5% for these things.

24:55Okay, and then I'll just do a couple more. The next stage, what happens to the guy at this stage pays 20 for the good in progress that kept a little bit from somebody else, then he hires 8 ounces of, again, raw inputs and other workers to work on this thing that he just paid 24, and then also for the additional And so he spends a total of $28. He invests a total of $28. That process takes a time period, whether it's a year or whatever the period is, and then he sells it for $30. And so then his net return is $2 on the investment of $28. And so that's how it unfolds. So you see here these vertical lines. This $83 is $19 plus $8 plus $13 plus $12.

25:41This 83 is 19 plus 8 plus 13 plus 12 plus 16 plus 15 okay so that's that's what's going on there and this 17 is the sum of all these ones going off the side and the 17 plus 83 is 100 so that's not coincidental that that's all you know makes sense it needs to be like that the other thing I wanted this with this note I want to make sure I didn't forget to tell you is we're tending to think of in the Evenly Rotating Economy, once it all settles down and the system keeps repeating itself so that, you know, every period the stuff all shifts forward one and then these guys who are getting 19 take the virgin material and the raw labor and create a new one to enter the pipeline up here and then every period the consumers are unloading the finished good from the bottom and consuming it and so every period this stuff shifts down one. But before that can happen, if you first started this from scratch,

26:40This process, you would have to wait six years or six time periods for it to happen. Originally, you would have to spend the 19, get this thing, and then buy eight units more of land and labor and then sell it for 30 the next period. So it would take six periods just for the first amount of the consumer good to come off the line for consumers to get. Another tangential point, if you want to, if you're interested in seeing that intermediate adjustment process, that what happens when you go from one stationary state, then there's more net saving and investment, and you end up in a new stationary state, but we're just looking at snapshots after the adjustment has happened, what if I wanted to look at the intermediate process, like what does the consumer do for those six periods, okay, we We only spend $80 now, we're investing $20, and what happens down here is after everything is settled down again, but what happens in the intermediate six or seven periods when you're waiting for the results of that higher investment.

27:53If you want to see an analysis like that, actually, so first of all, higher pure theory of capital, But a very short statement of it is actually in Paul Samuelson's article of summing up. So I mentioned the last talk that, believe it or not, Paul Samuelson really understands. He thinks it's wrong, but he came up with this really clever mathematical example with numbers that were very convenient, nice round numbers to show, to illustrate what would happen during the adjustment process. So again, it's a very clever little result. I disagree with Samuelson's conclusions, of course, But if you like this sort of thing, like I said, Samuelson actually came with a pretty good one to show the intermediate steps. So this here, I'm just showing you a possible steady state if you want to talk a bit like that after we've adjusted to the new amount of gross investment.

28:45OK, so here what's going on, let me stress this is not this is just one possibility. So this is consistent with the numbers Rothbard talks about in the book, but there's no reason that you say, oh, if consumers all of a sudden who used to spend $100 now spend $80, this is what the new structure of production is going to look like. That, no, you can't say that you don't know, but this is just an example of what it could look like, all right? And in particular, you'll see that 1.6 is kind of funny. And you may say, well, why did I pick that number? Well it was just because there's a lot of different things that had to be true that these numbers all had to be a certain way to work out like I knew this had to be 80 I knew gross investment had to be what was it 418 ounces and things like that you knew that this number plus this number had to add up to 80 so there's a lot of things that had to be true and they're also I wanted there to be seven steps step seven stages and I wanted the interest rate the spread between each stage to be less than 5% because we had to show a lower interest so there's

29:49There's a lot of things and so I wrote out this, you know, the things that had to be true and I could solve it and so my brother's getting a PhD in math so I asked him how the heck do you solve this thing and he showed me how you did it and you know these were the best numbers I could come up with and like I said I just said well I wish I didn't have that weird 1.6 in there because it's so much lower than the other ones but that was the best I could do so again the point is there's nothing magical about these numbers this is just to try to show you what it might look like with specific numbers in there so again just very quickly You'll see what's going on here. You'll see that there's an extra layer now, that there's now a longer structure of production. And so you'll see this solves the paradox of savings. How could it be if all of a sudden they restrict consumption to 80 ounces?

30:37Wouldn't all these people be going out of business? Well, no. Look at this diagram and tell me who's losing money here. There's no problem, and as Hayek points out in that article, The Paradox of Saving, it's because if you're not picturing producers earning returns in this fashion, then yeah, it really doesn't make sense if the people at the end of the chain are spending less. Isn't that just going to have ramifications throughout the economy, and so everyone's going to earn less over time, and no, there's no reason for that to be the case. Now it's true, as Rothbard points out, the monetary returns are lower in the sense of the nominal returns but again, production is going to actually be higher now because goods are invested in a longer, or as von Boehm-Bawerk said, a more roundabout production process.

31:27One last point about why these tables are kind of neat is if you want to say, well, what's the interest return to the capitalists? One way to do it, so this 10.1, one way to figure that out is to just sum up these numbers. But another way to do it is to multiply the gross investment by the interest rate. And so you would know the interest rate by saying, okay, you know, this guy spent 17 and they turned around and sold it for 17.5, so it's 0.5 divided by 17. It's roughly, I think it's 3%, right? Is that what I said? Yeah. Okay, so you could deduce the, so if I just handed you this chart, you could figure out what the interest rate was in this economy. And then, like I say, it also works out. It's not a coincidence that if you multiply the interest rate by the gross investment, that is the sum of these numbers.

32:18Okay, so these are pretty neat little diagrams. There's a lot packed into them and they all fit together. and again just a contribution of Rothbard to boil down something very difficult into a neat little diagram like this. Okay, let me take that off so you're not mesmerized by it. Let me see what time we got. Okay, I'll just go about five more minutes and then I'll open it up for Q&A. Let me say a word about Boehm-Bawerk. I think you're going to find that if you go and read von Boehm-Bawerk in the original, I think Mises dismisses him too easily or too quickly in human action. For those of you who have read the critique there, I'm not saying that von Boehm-Bawerk's theory is a good one and that we ought to embrace it, but I'm just saying that Mises seems to think he gave him a knockout blow in two sentences and it really wasn't.

33:13I think von Boehm-Bawerk would just say, yeah, that's exactly what I just said, what you're talking about. in any event let me just mention that now in terms of roundaboutness because Rothbard talks about this and he's arguing that it's really an unfortunate choice of terminology let me just explain again why did Boehm-Bawerk pick that word he obviously didn't pick the English word but you know what I mean because he was thinking look there's different ways you can you can produce something so if I want to let's say I have a cottage somewhere and there's a The stream that's a football field length away, 100 yards away, and I want to get the water from the stream to my cottage, well, there's different ways I can do it. And what do I have to work with? Well, I have my labor, and then I'm in a forest. There's all sorts of natural raw materials there.

34:01And the issue is, well, how do I get water into my cottage? That's the consumption that I'm aiming for. And so a very direct method, it would be I go down to the stream and I just cut my hands and pick the water up like that. So that's not roundabout, that's very direct, but of course the volume of water per unit of my labor input is very low. And so then Boehm-Bawerk wants to say, but instead of doing that, why don't I adopt a more roundabout approach? Instead of directly going for what I want, what if I use my labor and I go and I find a coconut and then I cut it open and I hollow it out. So now I have this thing that's like a bowl, and then I go down and scoop up the water that way, surely I'm going to, you can see that the physical quantity of water per unit of my labor input is going to be much higher that way.

34:54Okay, so the reason he's calling it roundabout is that if someone saw me grabbing a coconut and said, what are you doing? And I said, oh, because I'm really thirsty. Well, they might think I was going to drink the coconut milk, but okay, you know what I mean. So anyway, that's why he calls it roundabout. And then of course, you know, if you really wanted to get a lot of water per unit of your labor input, you would go and first create a shovel and you would dig a trench from your cabin to the stream. And then, you know, you would do all sorts of things that I have no idea. I would die if I were put in the woods right now. So I don't know exactly what you would do. But I know somebody who is more resourceful than I am would figure out a way to get water from the stream into their cottage. and they would, and so the point is, what is this, the superior productivity of roundabout production processes,

35:42specifically what it is, it's a purely physical concept and he's saying, if you want to look at how many gallons or how many liters of water per unit of my labor input do I get, clearly you could, you see that I get more, if I do the more roundabout processes, But of course, they're further in the future, that it takes me time to go and hollow out the coconut or it takes me time to build the shovel, to dig the trench. So if I really need water, if somebody's dying of thirst in my cabin, I'm not going to go find a coconut. I'm going to run to the stream and run back and forth ten times. But the point is, if I want to increase my standard of living over time, I'm going to adopt these other processes. So it's that insight. That's why Boehm-Bawerk thinks saving and investing in capital goods enhances the productivity of our labor.

36:32So that's where he's coming from. That's the way he views it. And that's why Austrians think that capital goods, in a sense, really are just embodiments of inputs of labor and land and then the time savings. One last thing, and then I'll stop, is this issue of, Rothbard makes a big point about, if there's, let me find it specifically, so I mentioned it, there's the last point in the study guide chapter, Okay, yeah, so he says that in any equilibrium situation, net saving is zero by definition, since net saving means a change in the level of growth saving over the previous period of time.

37:25Alright, and he uses that a lot, and it's also tied into his argument about why net saving and investment go hand in hand with a progressing economy and vice versa. If you're in a graduate economics program, this is going to trip you up and you're not going to understand it because in a mainstream program, when they talk about net saving and gross investment and things like that, what they have in mind is you have a capital stock and then every period some of it's going to depreciate and so you need to invest at least the amount to offset the depreciation just to maintain the capital stock from period to period. and then if you invest more than that, that's net investment and that's going to expand the capital stock and so that's the way the mainstream is thinking about it and that doesn't dovetail with what Rothbard's talking about it and for example you could in a mainstream solo growth model or something you can

38:22certainly have net investment over time and it's an equilibrium situation everybody sees it coming and there's no profits being earned and it's the the Capital stock expands over time and I think, if you want to say, why are they coming to such different conclusions? I mean, they're, given their definitions, they're both valid, but I think the reason Rothbard thinks of it this way, in a, you know, solo thought of it the different way, is mainstream economists tend to think of capital as fixed capital. They're picturing a machine that, you know, sits in the factory and is useful for 10 years and then it wears out and then you have to buy a new machine. And so, if you've got 100 machines, you know, every year you've got to buy 10 more or else your machines are going to dwindle over time.

39:10That's the way a mainstream economist is thinking of it. Whereas Austrians tend to think of, I'm going to think about gross investment in capital, they're thinking of the goods in process moving down the pipeline. and so there every period you need to go buy more flour if you're a baker it's not that all right so I got you that's maybe a good way to think about the mainstream economist is picturing the oven in the bakery and that you have to put aside money for the depreciation fund whereas the Austrian tends to think of the raw material inputs and how you have to replenish them every period and if some period you just decide you know what I got was money from selling bread I'm not going to buy any flour then the process comes to a standstill all right So I think that's partly why they adopt different definitions of what does net saving mean.