Economics 101 – 3 of 8 – Capital, Interest, and Profit – Murray N Rothbard

3. Capital, Interest, and Profit

Profit is total revenue minus total costs. Ours is not just a profit system, it is a profit and loss system. Losses are a sign that you wasted land, labor, or capital, yet those who make profits are criticized.

Entrepreneurship is an art not a course you can learn.

Labor earns wages. Land earns rent. Capital earns interest. Confusingly, the word capital means both the machines used to produce goods and the funds available for investment. Bohm-Bawerk answered the question of where interest rates come from.

Time is the key element in the earning of interest. The capitalist who pays out while he waits for the product to be sold before being paid, performs a vital function of paying for land and labor now. The capitalist is rewarded by being paid a discount on labor and land, discounted by the rate of interest. There are all sorts of rates of time preferences.

The third of eight sessions from Murray Rothbard’s Economics 101 series.

A collection of eight speeches and lectures by Murray N. Rothbard, spanning from the 1970s to the early 1990s. He is speaking in a small classroom setting, explaining economics from the ground up, and systematically in the manner of a classic 101 course on the topic—but with a revolutionary approach.

This lecture as a Podcast: http://enemyofthestate.podomatic.com/

Sourced from: https://mises.org/library/economics-101

Source: Economics 101 – 3 of 8 – Capital, Interest, and Profit – Murray N Rothbard – YouTube

http://www.readrothbard.com/economics-101-3-of-8-capital-interest-and-profit-murray-n-rothbard

TRANSCRIPT

00:00
we’ve said before the businessmen are
00:01
aiming to maximize profit but we haven’t
00:04
really gone into the question of not so
00:07
much what profit is or what explains it
00:08
and therefore where justice lies it
00:10
where does proper come from why is there
00:12
profit what are the economic functions
00:14
that it performs etc first profit is
00:18
defined as total revenue minus total
00:20
cost and then if but if we’re just at
00:23
the ratio it’s that over like total
00:26
investment or total investment plus
00:28
we’ll run that we’ll get into more of
00:29
that and do you going along the first
00:32
thing to be done about profit is to
00:34
separate profits and the two very
00:37
different kinds of returns both of which
00:38
are amalgamated into the accounting
00:40
concept of profit in other words what is
00:43
profit on the stat only books of the
00:45
firm really includes two very different
00:48
kinds of returns two very different
00:52
kinds of reasons basically they’re
00:55
separated both separable at the long-run
00:57
profit a short long prior long run
00:59
profit does not mean it only appears in
01:01
a long run it means that this is a long
01:03
run profits of an underlying return
01:06
which capital investment sees as a sort
01:11
of a continuing vector in a day-to-day
01:13
situation so that’s long-run profit
01:15
which is we’ll see hence to the uniform
01:17
– as a system is not uniform a tends to
01:21
a uniformly important distinction and a
01:25
second category short run profit which
01:28
comes from completely different reasons
01:29
that could well be and often is short
01:32
run losses so we have what is called the
01:35
profit and loss system the economy much
01:38
more accurately than so called profit
01:40
system because of course there many
01:41
funds that do make Lawson’s I think for
01:44
example of heroic entrepreneurs happen
01:46
to be my uncle’s who were pharmacy store
01:50
capitalist entrepreneurs back in the 30s
01:52
and they had a chain around I think two
01:55
or three drugstores of the height and
01:57
they’re at imperial career clearly went
02:00
bankrupt
02:01
not just because of the depression over
02:03
there many other form of the doors is a
02:05
not go bankrupt
02:06
anyway they went back pop revealing
02:09
themselves to themselves in the world
02:11
those are interested as lousy
02:12
entrepreneur isn’t he after which they
02:15
enter the ranks of the proletariat and
02:17
quotes in other words became and wage
02:19
earners so enterpreneurs often do suffer
02:23
losses this can easily be seen in one
02:26
form at the preneur chef it’s quite
02:27
obvious namely purchase of stocks and
02:31
commodities where again some people are
02:36
good at the presumption was and we’ll
02:38
see in a minute what the what accounts
02:40
for this the short run profit the whole
02:43
realm of short run profit and loss was
02:46
unknown to 19th century economics there
02:48
are many things when I say that I mean
02:50
all 19th century economist both Lee
02:52
Ricardo and Marx and also the Austrian
02:56
my particular favorites they did not
02:59
analyze they do not explore the realm of
03:01
short-run brought in short run losses
03:03
they are eyes were fixed largely on the
03:05
long run long run considerations on
03:07
so-called equilibrium situations by
03:11
equilibria I don’t mean day-to-day
03:13
equilibrium of moral or on equilibrium
03:15
so-called evenly rotating economy our
03:17
final equilibrium and so they’re
03:19
interested having their eyes on a longer
03:21
or larger picture they tend to do ignore
03:23
short-run considerations they figure
03:25
that will wash out in the long run but
03:28
of course the short-run doesn’t wash out
03:30
there’s always a series of short runs as
03:31
we’ll see to me going along the short
03:33
run is always with us
03:35
there’s always dominant but the 19th
03:38
century economic left us out of the
03:39
picture and therefore left a very
03:41
essential part of the explanation of
03:44
profits and out of their analysis it was
03:48
Frank Knight who the founder of the OVA
03:50
we can call the older Chicago School
03:53
economics University of Chicago cool
03:56
wrote on a famous and brilliant PhD
03:58
thesis is one of the sort of top two or
04:00
three PhD theses in history of economic
04:02
thought risk uncertainty and profit
04:04
which came out in 1921 where Knight
04:07
single-handedly brought the analysis
04:10
short run profit into the picture and
04:12
came up with a correct solution
04:14
he also messed up completely a theory of
04:16
competition that’s another that we get
04:18
to another time and the theory of profit
04:21
however
04:21
Knight came up with the the definitive
04:24
formulation said they didn’t deal with
04:26
long run profits at all he dealt really
04:29
with he dealt with unsatisfactorily but
04:32
really not much at all
04:33
he dealt with us short run and enclosed
04:36
situation what he said was a profit in
04:39
the short run sense arise from
04:41
uncertainty the fact of the world was
04:42
uncertainty the problem is that most
04:45
economists in the past tended to think
04:47
of the world as more or less certain
04:48
than the ways you look at the situation
04:49
say well we more or less know what the
04:52
future is going to hold and for the
04:54
mangos and course and so forth which of
04:58
course leaves out of essential part of
04:59
the picture which is of the world
05:00
uncertain that supplies and demands
05:03
resources values of consumers technology
05:06
all these things are constantly changing
05:07
in a nun for castable manner and they’re
05:11
certainly not subjective precise
05:13
forecasting and therefore we live in a
05:15
world of uncertainty what’s often called
05:17
in popular parlance risk taking and so
05:20
is there’s all of this some people can
05:23
see the future can foretell the future
05:24
in their area better than others some
05:27
people can forecast example the stock
05:29
market again getting back of that better
05:30
than other people quite obviously
05:32
because some people will buy stocks and
05:34
then they go up and other people buy
05:35
stock then they go down this is not
05:38
however a scientific language will
05:41
return to that’s not a scientific
05:42
developed applied science or forecast
05:45
thing if the work would be like
05:47
forecasting the Comets and sort of thing
05:50
instead it’s a high art but there’s an
05:52
involved I don’t your knowledge general
05:54
knowledge also involves detailed insight
05:57
into the market and what’s going on and
05:59
your specific knowledge of concrete
06:01
events which often achieve changing so
06:03
you have to sort of sort of also involve
06:05
hunches and involve the personal
06:08
entrepreneurship of a personal artistry
06:09
which some people have and some people
06:11
don’t
06:12
I want to involve it again as seeing
06:14
gaps in the market in other words what
06:16
you have really for the long run
06:18
touching on long-run profits and a
06:20
long-run profit goal tend to be the same
06:22
in other words posing the angel Gabriel
06:24
came down as the earth and I returned to
06:27
the angel Gabriel later on the
06:28
convenient
06:29
convenient hypothesis angel Gabriel
06:32
comes to the earth and freezes
06:33
everything other words they declare the
06:34
freeze much more expensive than the
06:37
mixin freeze and what got 71 he freezes
06:39
all value scale everybody from now on
06:41
will have the same values here all the
06:43
resources are frozen so any copper is
06:46
taken out of the ground remove sort of
06:47
magically be restored all technology is
06:50
frozen given that given the freezing of
06:53
all consumer demands a consumer value
06:54
scales given the freezing of supply so
06:57
an old film Mason dies he magically
07:00
replaced by a young stonemason and so
07:02
forth and so on given this kind of model
07:04
then in a few years what should have is
07:07
the following situation you would have
07:10
example certain industries that say I’m
07:12
making 30% profits others are making
07:14
suffering losses this means if
07:16
capitalists will enter the profitable
07:18
industries and get out of the losing
07:20
industry they do that now to the point
07:21
of you freeze everything you see the
07:23
conclusion of rule is well flood into
07:26
the superior the profit-making
07:27
industries as they flooded of the high
07:29
profit industries production increases
07:31
supply curve shifts to the right the
07:33
price falls costs are bid up wage rates
07:36
raw materials except in that industry
07:39
and you wind up eventually in a couple
07:41
of years let’s say with a uniform profit
07:44
rate what the uniform properly is what
07:45
it comes from we’ll get to later on
07:47
let’s say it’s 8% for the heck of it so
07:50
they’ll get to this uniform 8% and stop
07:53
in the meantime those who’re those firms
07:56
that are now and Lee of a capitalist
07:57
investing early and they’re losing
07:59
industry say the hula hoop industry now
08:01
the hula hoops and Wallace the funk will
08:04
get out of there stop making losses
08:05
move into other profitable industries
08:07
and whatever hula hoop firms exist if
08:10
any doing this but will also be making
08:11
8% might be there’s still a couple of
08:13
horse and buggy manufacturers in every
08:15
big they makes a horse and buggies for
08:18
Central Park or some buggy market
08:20
presumably they’re making the usual
08:22
uniform rate of profit so you wind up
08:24
then freezing if you freeze everything
08:27
you have this magic permanent freeze you
08:29
wind up with a uniform profit rates are
08:31
out the whole system every firm every
08:33
industry to making longer-run normal
08:35
rate of prop and I say well get to later
08:38
what determines long run normal very
08:40
proper why it exists in the first place
08:41
is that the set
08:42
right now we’re focusing on the fact
08:44
that short run profits tend to disappear
08:46
given a freeze no we’re given certainty
08:49
you know that there’s a free if you know
08:51
that the freeze will persist forever
08:52
then you you have certainly what the
08:54
future will lie you know with certainty
08:57
what future consumer demands will be
08:58
what future course will be etc and then
09:01
you make your changes and you wind up
09:03
after six months two years whatever the
09:06
prime period after this time period you
09:09
wind up with an evenly rotating economy
09:12
or everybody’s making every firm is
09:13
making a fake perspex percent or
09:15
whatever the uniform rate is other words
09:17
short run profits and short long losses
09:18
are wiped out obviously the reason we
09:22
have persisting short run profits and
09:25
losses why they keep changing a little
09:26
time fluctuating appearing pumping up
09:29
here and there it’s because we don’t
09:30
have certainty we have uncertainty they
09:32
have changes all the time
09:34
and all of these factors changes in
09:36
consumer values changes and resources
09:38
changes in technology etc so what the
09:41
the function then the profit maker the
09:44
occasion of forecasting function was
09:45
forecasting plus investment I mean
09:47
forecasting move up the bike so to speak
09:49
it’s not just forecasting as an abstract
09:51
sociologist it’s forecasting wasn’t with
09:53
a pocketbook he’s investing money and by
09:56
doing this he’s forecasting what where
09:59
he thinks he’ll make a profit and not
10:00
make a loss this is not determined in
10:02
advance there’s no guarantee he’s not
10:04
gonna make losses there’s no guarantee
10:06
he’ll make high profits
10:08
the only pension is superior forecasting
10:10
there was forecasting better than his
10:12
competitors just as in the stock market
10:15
where it’s clear what happens in
10:16
superior forecasters may have any profit
10:18
mediocre forecasters sort of peg along
10:20
great to even allow these forecasters go
10:23
out of business eventually it makes
10:24
severe Morse’s
10:25
what you have that is the intrapreneur
10:27
in quotes in other words this the
10:29
capitalist as entrepreneur as Undertaker
10:31
so to speak as risk takers uncertainty
10:34
bearer
10:34
gains profits from superior forecasts
10:38
experience forecasting for what the
10:39
period of forecasting and the best ways
10:41
of meeting the most urgent consumer
10:43
demand in other words the superior
10:45
forecasters he looks at the marketing
10:47
these are hot there’s not enough
10:49
whatever it is tungsten production
10:50
what’s that
10:51
if I go into the tungsten business and
10:53
open up a new tungsten mine or produced
10:54
more tungsten or whatever I’ll be able
10:56
to make hard profits because they’re not
10:57
making enough now that satisfy consumer
11:00
demands he might think of a better way
11:03
of producing tungsten new you might
11:05
invent a new process or in his
11:08
brother-in-law might have been a new
11:09
process he finances above him or
11:10
whatever again he sees better than the
11:14
other people better than his competitors
11:15
where there are gaps in the market where
11:17
there are profit opportunities to be
11:19
made and then listen to fill them by
11:22
filling these profit opportunities he is
11:24
increasing consumer welfare because what
11:27
he’s doing is he’s he’s filling these
11:28
gaps and with he’s coming zipping in
11:30
there to take advantage of these high
11:32
profit opportunities thereby directing
11:35
production into those areas where the
11:37
sumers are most urgently demand for the
11:40
resources for the production so in other
11:42
words higher profits are an indicator of
11:46
the superior not only forecasting
11:48
ability but a superior ability and
11:50
satisfying consumer urgent consumer
11:52
needs as quickly as efficiently as
11:54
possible low profits or losses are an
11:57
indicator of having wasted resources
11:59
with being a lousy forecaster that in in
12:02
areas where consumers didn’t either did
12:05
not want the product too much or there’s
12:07
a low demand for it or the rest of an
12:09
inefficient manner so for example this
12:12
only first the government can do because
12:14
the government has no compunction is not
12:16
to suffer losses because the taxpayer
12:17
tough picks up the tab it’s forced to
12:19
pick up the path there’s a famous
12:21
British groundnut in West Africa that 20
12:23
years ago or so when the British
12:25
government invested or of course to
12:28
invest an enormous ecourage of peanuts
12:30
known in England of groundnuts some
12:32
Joker had the idea that the West African
12:34
soil whatever is suitable from peanuts
12:37
is enormous investment all of which went
12:38
down the tubes usually private
12:41
enterpreneurs know do this if they have
12:43
to be very cautious about investing
12:44
correctly which governments don’t the
12:46
other words there’s also its losses are
12:48
an embodiment of malinvestment in other
12:51
words bottom of the faculty guy the
12:52
wasted resources so we have a very
12:55
peculiar situation and another thing I
12:57
should say is that the you know the high
12:59
profit person affirmative earns high
13:01
profits are pointing away to our other
13:03
firm to get in
13:04
this industry in other words if let’s
13:06
say is our firm invest in tungsten the
13:08
big has a high profit in there he’s sort
13:11
of pointing the road and saying look
13:12
here’s an area there’s a big gap in the
13:14
market big and only consumer demands and
13:16
this is a beacon light for other hapless
13:20
other investors to snip in their produce
13:21
more tungsten in the other hand of
13:23
course the guy who loses money and
13:25
peanuts as an indicator and a beacon
13:27
light other capitalists they add up
13:28
peanuts this was not the place to invest
13:31
so therefore the the profit maker of a
13:35
capitalist to earn these profits from
13:38
superior forecasting etc for me an
13:40
enormous social services consumer in
13:42
addition to making profits on his own
13:44
hook and yet we have the peculiar
13:45
situation in the current culture for the
13:48
profit makers bitterly attacked and the
13:50
loss makers slobbered over by by the
13:53
writers and lecturers etc so in other
13:56
words and the current energy christ the
13:58
oil companies have bitterly attacked
14:00
burning high profits instead of saying
14:01
hey this was great thing that you’re
14:03
earning higher profits an indication of
14:05
having of being in an area where
14:07
consumers need more stuff and we hope
14:09
that other people would join you in this
14:11
great endeavor producing more oil
14:13
instead of that we’re attacking the oil
14:15
companies the faculty if they’re making
14:16
profits as a sign that somehow they’re
14:18
evil on the other hand we have other
14:20
companies which are suffering losses
14:21
chronically it’s the Lockheed or Penn
14:23
Central and the government and
14:25
intellectuals feel compelled to rush to
14:27
their defense to subsidize and keep them
14:29
floating forever and thereby for
14:31
subsidizing their custom waste of
14:33
resources waste of land labor and
14:34
capital which would be better used let’s
14:36
say an oil or some other profitable
14:38
industry so we have a peculiar situation
14:40
where the people make losses our weeped
14:43
over and subsidize where if the people
14:45
make profits our calumny ated and
14:47
they’re taxed and profits tax away or
14:49
they’re hobble in all sorts of ways thus
14:52
of course penalizing efficient services
14:55
for the consumer the mass consumer need
14:57
and subsidizing inefficient and crummy
14:59
gear service the consumer needs doesn’t
15:02
make too much sense except the fortune
15:03
if you want to smash the system
15:05
altogether it’s a beautiful way of doing
15:07
it ok so this is the function of
15:10
so-called short run profit there’s a
15:12
marvelous nobody else has picked up on
15:15
this particular but I think there’s a
15:16
marvelous illustration of the function
15:18
of
15:18
the preneur and what the enterpreneur
15:20
does and a great one of the great
15:22
Somerset Maugham movies have appeared
15:24
about 25-30 years ago I forgot whether
15:26
it was trio or quartet when these short
15:28
subject things and one of them was mom’s
15:30
great short story called overture and
15:32
the charming story about this fairly
15:35
elderly fellow with a version other
15:37
words was deacon again our sexton I
15:39
guess with the st. Paul’s Church a small
15:41
Church in London a new pastor comes then
15:44
and want to be you know take the place
15:46
of fishing and rev it up he finds to his
15:48
horror the sweet overtures are
15:49
performing his duties a great diligence
15:51
etc they find out if I can’t read this
15:54
is a terrible thing you’re illiterate
15:55
because well you know what a shame this
15:57
is for the community to have a virtue of
15:59
this great church that can’t read so
16:01
he’s tried to force him to learn how to
16:02
read and write and guy says yes sir I’ll
16:04
try to learn he can’t do it Yeah right
16:05
sorry sir I’m too old
16:07
and so the the pastor kicks him out he
16:11
gives him a terminal leave and he’s
16:12
working a street or a disconsolate and
16:14
here he isn’t fired he’s 55 years old
16:17
whatever he was his morning streaking
16:20
filled me for a cigarette he’s pacing
16:21
and walking down streets of the
16:22
neighborhood looking for it to back in
16:24
his shop can’t find one he’s pacing
16:27
history where is aware that I can shop
16:28
then he gets this idea hey I can’t find
16:30
it back in his shop there are other
16:32
consumers in this area they can’t find
16:34
it I think I’ll take my savings and went
16:36
open one up when she does and does very
16:39
well it makes a very profitable I think
16:42
most around other neighborhoods in
16:43
London looking for other areas where he
16:44
can’t find a cigarette opens up at the
16:47
back in his shop there and it’s pretty
16:48
soon he’s got this big chain at the back
16:50
in his shops he has a lot of money which
16:52
he’s up filling out tucked away and as a
16:54
mattress or some things he finally is
16:55
somebody tells me you should go to open
16:57
up a bank account with them invest for
16:58
unit cetera so use this bank he puffs
17:02
all with money on the Vestas the most
17:04
amount of money in a desk and he said
17:06
like open a bank account such as yes yes
17:07
sir of course and the bank manager gives
17:10
them the forms to fill out and he says
17:12
well just sign your name on this form
17:14
it’s like sorry it makes an X then why
17:16
you’re making an X because like you know
17:17
I can’t read or write
17:19
bank manager looks Hannah astonish me
17:21
says my god man where would you be today
17:23
if you could look you only know how to
17:25
read or write never just I know where
17:27
I’d be a believer juror thing
17:35
this not only shows the edge of
17:37
ownership showing the gap of the mark it
17:39
also shows the reading and writing or
17:40
our PhD or whatever there’s not
17:42
necessarily a royal road at the truffle
17:44
entrepreneurship there Rd lots of
17:49
illiterate millionaires from roaming
17:51
around and do very well
17:52
Lebanese importers know sort of things
17:55
very well you know they can be you’re
17:56
right again this indicate that
17:59
entrepreneurship is an art rather than
18:01
some kind of an educator of science that
18:03
you can work go to school and learn okay
18:07
so I think we can see the profit and
18:10
loss element and profits that the short
18:12
run profit and short run losses see the
18:15
social function that they perform what
18:17
about long run proper time long run
18:19
profits they were the things that were
18:20
focused on making century more non
18:23
profit for reasons which we will come to
18:25
can also be call a rate of interest
18:27
capital earning a rate of interest in
18:30
the long run why is there such first of
18:32
all would there be in long run profits
18:34
some economists have denied this some
18:36
economist claimed that in the file in
18:38
the evenly rotating economy in this
18:39
long-run equilibrium situation profits
18:42
and losses would both be zero obviously
18:44
losses of these zero but nobody’s gonna
18:45
invest they knew they gonna make losses
18:47
that’s pretty clear so if you had a
18:50
world of certainty and you have this
18:51
equilibrium situation nobody would make
18:54
losses but the contention many Karma’s
18:55
they wouldn’t have profits would be zero
18:57
also I denies this and also I think many
19:00
other economists do too there’s another
19:02
thing to be explained here can’t just
19:04
use a night for explanation of
19:06
entrepreneurship and short run profits
19:09
and losses and uncertainty there’s also
19:11
a other stratum of 6% 8% 4% whatever
19:16
they percentage happens to be which will
19:18
tend to exist even in a world of
19:19
certainty even what there is no list
19:21
taken even when you know what the
19:23
demands and costs will be forever and
19:24
the technology forever and ever the
19:26
reason of course were interested in this
19:27
long-run equilibrium model although most
19:30
microeconomics is only interested in
19:32
that the reason why I am interested in
19:34
other so-called Austrian economists are
19:36
interested in the equilibrium model as a
19:38
method of separating long run and short
19:40
run
19:40
trying to figure out the explanations of
19:42
both of them and also to see where the
19:45
economy is tending because even if
19:47
things are not frozen of course there or
19:48
not we can say that while the economy is
19:51
always pending in the direction of this
19:52
equilibrium even though we’ll never
19:54
reach it and it’s not a great thing if
19:55
it could reach it was pretty miserable
19:57
that we’ll never reach it it’s a way of
19:59
explaining direction in tendencies in
20:01
the system I like to think the analogy I
20:04
like to use is the dog chasing
20:05
mechanical rabbit and the economy is a
20:07
dog long-run equilibrium this uniform
20:09
rate of profit rival system as a
20:10
mechanical rabbit and in the kind of rap
20:12
is always changing direction in sort of
20:14
unpredictable manner and the economy try
20:16
some the dual tries to follow it it sort
20:18
of lead you to stable explaining the
20:21
tendency in which the economy is going
20:23
but we’ll never reach because the angel
20:25
Gabriel has not come down of fries
20:26
values resources and technology but if
20:29
the angel Gabriel did come out of
20:31
freezer and we would after a couple of
20:32
years wind up in this kind of evenly
20:35
rotating and long-run equilibrium system
20:37
okay so among one of the components then
20:40
we talked about short run profits a
20:43
short run losses forecasting an
20:44
uncertainty what about this other vector
20:48
this other long run proper where does
20:49
that come from what the explanation for
20:51
it cetera it’s that profit the long run
20:53
profit for example the calm Marx was
20:56
attacking as surplus-value as legitimate
20:59
as extracted from workers wages and so
21:02
forth
21:03
to be more specific in the long run
21:06
labour earns wages and wages are
21:08
determined by the marginal productivity
21:10
module revenue products we’ve seen of
21:12
workers lanterns rent which is also
21:15
marginal determined by marginal your
21:17
parks we you can see how that happens
21:18
what about capital where does profits
21:21
come in or where does it belong a lot of
21:22
profit or interest come in well see
21:24
later why is cool interest now the easy
21:28
answer for this the answer the so called
21:30
productivity Theory probably invented by
21:32
NASA was senior aides in the English
21:34
nineteenth century classical economist
21:36
just still in the textbooks by the way
21:39
the easy answer goes as follows
21:41
it comes from this triad which is really
21:43
a legitimate triad of land land labor
21:46
and capital are three kinds of a few
21:48
kinds of factors of production labour
21:49
earns wages and according to the
21:50
marginal productivity lanterns right
21:53
the corns marginal productivity and
21:54
capital in quotes in other words
21:56
machines equipment buildings with all
21:59
these man-made factors of production
22:01
earn profits earned rate of interest
22:04
because of its productivity and they
22:07
usually this sort of productivity
22:08
explanation as well after all the
22:10
capital machines are very productive
22:13
they’re very important in production
22:15
therefore machines have to earn
22:16
something too so therefore that machines
22:19
get this rate of interest rate rate of
22:21
profit and you’ll see for example in
22:23
most textbooks this sort of diagram the
22:26
economists will start with a marginal
22:28
productivity Theory wind up with a sort
22:30
of thing usually in the labor market
22:32
they okay and the y axis is wage rate
22:34
and the x axis there’s purchase of labor
22:38
purchase of the factor hiring and the
22:41
demand for the supply curve in the main
22:43
curve the man for the man curve for
22:46
labour is equal to the marginal revenue
22:48
product marginal productivity then the
22:51
next chapter of the next diagram the
22:53
author says ok the same way capital
22:56
earns interest it’s what I’ve having
22:57
wage rates on the y axis you have
22:58
interest suddenly pops up and then you
23:01
have capital hired or purchase and then
23:05
you have a demand curve for capital or
23:07
maker for machines or whatever which is
23:09
possibly equal to the marginal revenue
23:11
product which then the term of the
23:12
interest rate there’s lots of problems
23:15
with it the first place is a tremendous
23:16
equivocation the word capital there’s
23:18
two different uses of the word capital
23:22
as capital of the funds they are
23:24
available for investment and capital
23:25
good the machines tools buildings trucks
23:29
etcetera etcetera the problem with this
23:31
looks pretty easy look any kind of it
23:33
then wraps the whole thing up and I
23:35
explains property and go on to something
23:36
else the problem here is that interest
23:38
nothing do with wage rates found
23:40
analogous at all the analogous thing for
23:42
capital is the price of the machine or
23:44
the price of a building or whatever the
23:47
waitress come in or other words the
23:49
marginal Akeem also earns its marginal
23:51
revenue product
23:52
it gives it a price if the margin of
23:54
your program machine is let’s say 10,000
23:55
all of the year let’s assume for a while
23:57
for various the simplifying matters and
24:00
nobody buys a machine I’ll get back to
24:01
buying machines right out this Hume
24:03
everybody rents the machine as machine
24:04
producers
24:05
a capitalist who Bruce and other people
24:07
who rent the machine out since humans
24:10
will they’re all rented okay and then
24:11
the marginal revenue productivity let’s
24:13
say it’s ten thousand dollars a year a
24:14
question that is why is it not
24:17
but the capitalist who permits the
24:19
machine why does they have to pay ten
24:21
thousand dollars for it in other words
24:23
this should be ten thousand dollars here
24:25
on the intersection point we should wind
24:28
up with the price of the machine because
24:29
I thought in fact it isn’t the point is
24:32
in fact it is lower than ten thousand
24:34
price of the machine is about say nine
24:35
cents which means that the guy who rents
24:37
the machine for the capitalist arrest is
24:38
a machine from the producer earns a ten
24:41
percent let’s say interest rate even
24:43
less than that let’s say 10 percent is
24:45
it simple something like 10 percent the
24:47
question then to be discovered you say
24:49
in other words the marginal productivity
24:51
theory doesn’t explain interest the
24:53
existence of interest or a long-run
24:54
profits at all what it explains is the
24:58
existence of a price for a machine that
25:00
you have to pay a certain number at so
25:02
where does it just come in it doesn’t
25:03
the answer it doesn’t come in yet so the
25:05
productivity Theory has there’s not an
25:07
explanation at all or the interest rate
25:09
so then the thing to be explained is why
25:12
is there why is it why is not the price
25:14
bit up to ten thousand why is it only in
25:16
say nine thousand I need 100 and then
25:18
the capitalist and earning 10% in the
25:22
same way wages and ranchland rats are
25:25
also discounted and very similar way so
25:27
that we wind up with with wages and roll
25:30
and rents all this counter by an
25:32
interest rate by let’s say 10% it could
25:35
be 6% and all the times of the interest
25:36
rate happens to be so then the question
25:38
is how come permeating the system we
25:41
have a an interest return for capitalist
25:43
totally apart from for camping from
25:45
risk-taking or rest of it why is it
25:47
wages and land rent and capital and
25:51
machinery are not bid up to that full
25:53
marginal revenue product put another way
25:56
call Mark pointed out that the labor had
25:59
to pay a surplus
26:00
have the payer of this profit rate the
26:03
capitalist one of the answers to this is
26:05
well yes that’s true then the other hand
26:07
also land has to pay profit rate and
26:09
machines have to pay it you wind up with
26:11
this discount going all the way across
26:13
the board then the question is why is it
26:15
differently willing to pay it so they
26:16
obviously are why is it that the market
26:18
winds up
26:19
and free-market winds up with a sort of
26:21
payment being made the court
26:23
exploitation etcetera doesn’t really
26:24
answer the question obviously and also
26:26
we find out of the productivity theory
26:29
doesn’t answer it either what we had is
26:31
that the answers to the Marxian or the
26:33
other tax alone profit were not
26:35
satisfactory throughout the 19th century
26:37
the answer finally came was one of the
26:40
greatest economist history of economic
26:42
thought organs from Boombah there can
26:44
have great work capital n interests
26:45
which payments as a combination of the
26:47
older Austrian school in the middle
26:49
1880s
26:50
there’s only bon viveur really sort of
26:52
copper riveted the explanation it came
26:55
up with Lee will the answer to this
26:57
whole puzzling question of where
26:58
long-run profits come from our interest
27:00
rates come from one way of introducing
27:02
American solution is that you rent out
27:05
the Machine and you produce it over a
27:08
year and you get your own 10% or 6% or
27:11
whatever the key thing wrapped up in
27:13
this whole thing of time in other words
27:14
time is a key element in the earning of
27:16
interest where to put it another way
27:18
part of the marketing critique he said
27:21
well it’s true the capital goods are
27:23
productive they’re very important
27:25
however capital goods are themselves
27:26
produced they don’t drop from the sky
27:28
that I’m self produced by land labor and
27:30
capital if you push the whole thing back
27:32
logically capital drops out and you’re
27:34
left with only labor and land and what
27:36
Mark said is that therefore labor should
27:39
get the entire income are in a product
27:42
of course if you add since he ignore
27:43
land what you’d have to do first of all
27:45
as I have land into the picture they
27:46
labor and land she got the old product
27:48
and then you have to say well our old
27:49
product takes a long time with time in
27:52
some way enters then you wind up instead
27:53
of saying is market of the capital goods
27:55
they’re frozen labor or embodiment
27:57
frozen body method labor which to modify
27:58
that say first place okay first choice
28:00
we have to include in labor management
28:01
and entrepreneurship decision-making
28:05
governorship in the in the short run
28:06
uncertainty so in other words a
28:09
president of General Motors would also
28:10
be a laborer and second of all aside
28:12
from that but land that’s also a frozen
28:14
land and it’s also a frozen time and
28:16
then we’ll see that the key to the long
28:19
run rate of profit is precisely this
28:21
whole time consideration a so called
28:23
time preference before we get into more
28:25
into that I want to put on the board a
28:28
great diagram which is has dropped out
28:30
of current economics the so called
28:32
structure produc
28:33
concept which bon viveur equestrian
28:35
school introduced to the world Orthodox
28:38
economics today capitalist is feed it as
28:40
a one big block the homogeneous lump and
28:43
so there’s all sorts of measurement
28:45
supposedly measurements of capital
28:47
output ratio and so for and so on and
28:49
the statements that all you need
28:51
increase production is more capital
28:52
which leads to things for example like
28:54
the government investing underdeveloped
28:56
country you say government investment in
28:57
a steel mill when they haven’t got the
29:00
road take the steel or four have got any
29:01
of the other stuff it just got the steel
29:03
mill we thought with consumption and the
29:07
lowest level humor let’s say spend 100
29:10
billion dollars during urine and retail
29:13
stores so you have a hundred billion
29:15
dollars going from the consumer to the
29:18
first stage of production which is the
29:19
retail industry designate this by a bar
29:22
one hundred billion is the length of the
29:25
the bottom so money is going up this far
29:29
and with money is going from a consumers
29:30
to the retailers and good the wall
29:32
courts are going down from the retailers
29:34
to the consumer that’s the first bar
29:36
okay the retailers now have 100 billion
29:39
in their pockets and what they’re gonna
29:40
do with it well most of it of course
29:42
those are the wholesalers the boiler
29:44
inventory it’s what’s right but a
29:45
certain amount gets likened the law to
29:48
the people in the retail industry let’s
29:50
say 10 billion so 10 billion goes off to
29:54
the function as income in other words to
29:58
wages land rent interest and profits so
30:03
we have a hundred then going to the
30:06
retail industry 10 billion guy gets
30:07
siphoned off and the other ninety
30:09
billion those are the hosts they are now
30:11
I have another bar the wholesale bar
30:12
which is however shorter or the ten
30:15
billion dollars or more even siphon off
30:16
the same thing that happens to the
30:18
wholesaler is a retailer wholesaler
30:21
wholesaler is siphon off another 10
30:22
billion let’s say an 80 billion goes to
30:25
the jobbers to get their inventory and
30:27
once again you have 10 billion going to
30:29
wages land rent interested profits in
30:32
the wholesale industries and then we go
30:35
to the jabbers 280 billion goes to says
30:38
90 billion and 80 billion and we keep on
30:41
going we got the manufacturing as a
30:42
mining and farm
30:44
and we keep on going and each stage your
30:45
production money gets hired off until
30:48
finally logically you wind up with all
30:50
the money going to personal income this
30:54
is the structure of production this is
30:55
this latter kind of effect well all the
30:58
things happening a first place 100
31:00
billion gets hired off the a 100 billion
31:02
in personal income then a consumers the
31:06
wager earners land owners the capital
31:09
essence uh drastic take the hundred
31:10
billion we might say even invest it but
31:14
let’s say for a minute uh they just
31:15
spend it again then the so called
31:17
circular flow then and the dollars gets
31:20
turned over as they go on up a ladder I
31:23
have the structure production as a
31:25
capital of system advances as more and
31:27
more capital gets invested more and more
31:30
the structure becomes higher and higher
31:32
and here we have asanuma structure of
31:34
capital which keeps increasing and we’ll
31:36
see when we get the business cycle
31:38
theory how this can be used very very
31:39
readily to explain business cycles what
31:42
happens why the business cycle occurs
31:43
and so forth the point is all this money
31:46
gets high off an income and this of
31:48
course endorses of the marketing end
31:49
point of the extent yes is true each
31:52
stage of the way is produced like other
31:54
stages and you wind up with all the
31:55
income all the 100 billion gets
31:57
exhausted by that each step of the way
32:00
so there’s no X no net profit accruing
32:03
the capital machine producers per se
32:06
with all gets washed off in the labor
32:08
land rent so the interest in profit
32:11
can’t be explained early that’s still
32:13
unexplainable on this diagram again you
32:16
can’t explain it wasn’t profit like the
32:18
purely productivity kind of explanation
32:20
so what is the explanation well as I
32:22
said it’s time explanation each stage of
32:24
the game takes time how does time enter
32:27
the picture well it goes like this
32:30
the function of the capitalists again
32:34
this is not talking about the manager or
32:35
the entrepreneur talking about the pure
32:37
capital function the pure supplying of
32:39
capital function of the capitalist is
32:41
with
32:41
he saves up money from previous profits
32:44
or previous income or whatever
32:45
capitalist pays out money and pays money
32:48
out to existing producers existing
32:51
workers and landowners
32:53
while they’re producing in other words
32:56
let’s see
32:56
toriel capitalist and it certainly
32:58
logically is no reason on the free
33:00
market why can’t have a world or
33:02
producers coops of workers and
33:05
landowners co-op so fewer workers coops
33:07
or whatever which have no capital
33:09
function at all there’s no capitalist so
33:11
just everybody gets together this are
33:13
they can produce an automobile or
33:14
whatever supposing they do why has this
33:17
not flourished in the free market
33:18
because it’s certainly in the free
33:20
market there are no laws repressing this
33:23
kind of producers co-op or deuces car
33:25
has always been abysmal failures they’ve
33:27
ever succeeded worth of darn major
33:30
reason is very simple
33:32
we’re going to say they’re out the bills
33:34
punks sooner or thereafter though I
33:36
won’t be able to produce oil deals or
33:38
whatever well take them quite a while to
33:40
do it in other words the workers all get
33:41
together and they work on this thing
33:42
they get on the land known as a set
33:44
ground they get the raw material let’s
33:45
say thinking let’s say three years five
33:47
years or whatever producing automobiles
33:48
five years they ain’t getting paid
33:50
they’re hoping that they’ll be able to
33:53
solo it on wheels when they get on the
33:54
market now sizing the risk function
33:56
which we’ll get to we got back to in a
33:57
minute everybody understand the risk
33:59
function I think pretty law it’s a pure
34:01
time problem here so are waiting in
34:04
other words the sheer problem having a
34:06
wait five years out getting paid so the
34:08
money comes rolling in fine I’m
34:11
concerned I would not be able to last
34:12
more than a couple of weeks without
34:15
payment and I think for most people this
34:17
is true also what function of the
34:19
capitalist reforms here’s a very very
34:21
vital function for the producers the
34:24
workers and landowners it gives the
34:25
money now while they’re working every
34:28
week or every month so they don’t have
34:30
to wait five years until the automobiles
34:32
produced who waits the capitalist waits
34:34
in other words the capitalist takes on
34:36
the weighting function and then at the
34:39
end of the six months of the five years
34:40
whatever the period of production
34:41
happens to be for that particular
34:42
product the capitalist sells the car and
34:46
gets them and gets the revenue and it
34:47
gets what did he get for this
34:49
how is he rewarded for this he’s
34:50
rewarded by the interest rate that was
34:52
rewarded by the rate of time preference
34:54
so he is performing extremely important
34:57
to my whole function function which
34:59
everybody should love they really
35:01
thought about it
35:02
the enables them to get money now
35:03
instead of having to wait for a five
35:05
year
35:05
that’s all the money pours in for this
35:08
service they pay the capital as a
35:09
discount you have to modify this again
35:12
are you left find in the textbooks
35:14
unfortunately you have to modify the
35:16
marginal productivity theory to say
35:17
labor and land and all the other
35:20
products yet not their marginal revenue
35:23
product but their marginal revenue
35:24
product discounted by the rate of
35:25
interest so the rate of interest is a
35:28
rate of long-run profit is a willing
35:30
exchange see since we realize in
35:33
contrast to the Marxist on the free
35:35
market exchanges are voluntary we have
35:37
to be some sort of function that this
35:38
capitalist process is reaping for this
35:41
discount they’re getting the function is
35:43
precisely handing out money now instead
35:46
of having one of the producers having
35:47
rate for it to put it another way this
35:50
is a time preference change or a time
35:52
market very very similar mattifying
35:54
economically analytically identical to
35:56
the to the credit debt exchange what’s
35:59
happening with hapless hires workers for
36:02
example Templars who save up money
36:04
previously have wasn’t paying out money
36:06
now he’s paying out a present good the
36:09
word money is the present good money is
36:11
something which could be used at any
36:12
time in the present any time a person
36:14
who wants to you can spend it so this is
36:16
a so-called present good workers and
36:18
landowners etc producers in general are
36:23
getting the money now and exchange for
36:25
this the capitalist is receiving future
36:28
good in other words he’s expecting he’s
36:30
receiving a future income from a car or
36:34
whatever so in other words he is Jania
36:37
present good for future good and here we
36:40
get to the primordial universal fact of
36:42
time preference again boom barbaric or
36:44
the first one who really government
36:46
analyse time preference meaning you
36:49
remember the old motto a bird in the
36:51
hand is worth two in the bush where the
36:53
prime preference motto said a bird in
36:55
the hand is worth more than one bird in
36:56
the bush forget about two in the bush
36:58
the point is that a present good is
37:01
worth more than the expectation of the
37:03
future good now different people on
37:05
different groups and different societies
37:06
have different rates of time preference
37:08
some people are very high time
37:09
preference for example myself just
37:13
before the next paycheck ROI is a very
37:15
high rate of time preference we’re going
37:16
to
37:17
to borrow at high rate for the three
37:20
days or whatever it is my money runs out
37:22
as my bad management takes over that’s
37:25
the high rate of time forever and then
37:26
there are low rates as high fives the
37:27
people who have great foresight and plan
37:29
ahead to the future and so for and so on
37:31
so there also is a different rates of
37:33
time for effort just as with other
37:35
marketing utilities there were all sorts
37:36
of value scales in society there are all
37:38
sorts of value scales for hula hoops and
37:40
firm don’t ups and whatever in a similar
37:44
way there are also the value scales and
37:46
relative market utilities for time these
37:48
time preference get all intermixed enik
37:51
and in the time market which spreads
37:54
throughout the whole system which
37:55
results in one single or tendency toward
37:58
one single rate of time preference which
38:00
is the resultant of all these individual
38:02
time preferences just as the price of
38:04
hula hoops on the market as a result of
38:06
all of the marginal utility value scales
38:08
for hula hoops so if everybody has a
38:11
low-rated time preference you’ll have a
38:12
low rate of interest a little rate of
38:14
discount everybody has a very high rate
38:16
of time preference you have a very high
38:17
rate of this cap
38:18
this is analytically the same thing as a
38:21
credit transaction the credit
38:23
transaction if I bought a hundred
38:25
dollars for my friendly local pawn
38:27
broker or whatever the creditor pays out
38:32
perfect money it’s a 100 dollars present
38:36
good to the debtor he’s getting some the
38:40
debtor say from me and I owe you a claim
38:43
on some future good there was money in
38:45
the future say a year from now and
38:47
instead of paying $100 back I’m gonna
38:50
pay more than that I’m paying off $108
38:52
eighty percent rate of interest why am i
38:55
willing to pay a hundred eight why is he
38:56
charged eight percent why am I willing
38:58
to pay it for the same reasons because
39:00
both of us in a society in general
39:02
places this premium on time so that in
39:05
this situation worth more to me to
39:07
borrow now it’s worth more than the
39:09
eight percent so I will borrow he has
39:12
lower time preference as I’ve got in
39:13
other words within this 8% framework so
39:16
he lends money to make the point that is
39:19
for both of us and society then in
39:21
general values president does more than
39:24
future good values $100 now much more
39:27
than the present value of $100 a year
39:29
from now and therefore and the charge
39:32
the the rate will be set accordingly on
39:34
the market now sometimes the rate will
39:35
be lower if everybody’s first year of
39:38
more foresight of the rate might shift
39:39
to 4% school or 4% or whatever other
39:42
times I might rise 20% but whatever the
39:45
rate is determined by the social more
39:47
time preferences of only individuals in
39:50
a society when when for example a Mises
39:52
Luiz want me to used to give as a year
39:55
1000 approached most Christians that are
39:59
total patients a Bible was the year 1000
40:01
Jesus would return the earth and the
40:02
whole world will come to an end we have
40:03
the king of heaven on earth for
40:04
millennia almost view and so as you get
40:07
to 998 AD a 999 ad when most people
40:11
expected the world will come in on the
40:12
year a thousand nobody is very anxious
40:15
to lend money for 3 year period after
40:17
that you know be returning 1000 C ad it
40:21
won’t be of much use so there’s all the
40:23
interest rates began to go up there
40:24
people really expect the world coming in
40:26
interest rate will start going up to
40:27
infinity they really effective that so
40:30
as you get very close to the point of
40:32
day of Armageddon the interest rates
40:33
would zoom up to ten thousand percent a
40:35
day or whatever would be this would be a
40:37
type reference rate function of the
40:40
capitalist is very similar to the
40:41
function of the creditor capitalist is
40:43
supplying present good just a further
40:45
supplying president good and instead of
40:47
receiving a fixed debt in return he’s
40:50
getting in another kind of a future good
40:51
he’s getting a car when it’s going to
40:53
come off the assembly was gonna be he’ll
40:54
be able to sell it
40:55
he’s getting the ownership of the car
40:57
whenever eventually emerges so both
41:00
cases an economic function is the same
41:03
what the capitalist is doing then and
41:05
the real world performing two functions
41:07
when he’s performing the short run a
41:08
function of hopefully successful
41:10
entrepreneurship and a forecasting
41:12
forecasting changing future trends and
41:15
meeting consumer demands in the future
41:18
for me ephedrine Oriya on certain
41:20
assumption and to is performing as a
41:22
percent functions performing this time
41:24
function of supplying cousin goes and
41:27
taking on a burden of waiting for the
41:29
future for this as I say the worker is
41:31
happy given the
41:33
sent at least they might think there and
41:35
I they’re listening so many Marxist the
41:37
point is an action they are happy to do
41:39
it otherwise they wouldn’t be doing it
41:40
otherwise would be forming workers
41:42
co-ops so the two reasons we can say why
41:45
workers co-ops a fail produced one
41:47
because most workers don’t have the
41:50
money to start in to pay themselves out
41:52
and want to wait for five years before
41:53
they get paid and to we they don’t want
41:55
to take on the risks of losing all their
41:57
money they want to take on the
41:58
uncertainty risks both of which the
42:01
capitalist assumes both the uncertainty
42:03
bearing and the waiting burden so that
42:08
we have a selective sort of process with
42:10
the hapless entrepreneurs tended be
42:12
those who are most able to do both of
42:14
these things wait and forecast the
42:17
future so now we see a vision sort of
42:21
speak of the of economic system looming
42:24
up where the tumour those prices are
42:26
determined by values and consumers human
42:29
value scales minor marginal utility and
42:31
the law of diminishing marginal utility
42:33
producers goods prices in other words
42:36
wages land rents machines machines etc
42:39
are determined by the marginal revenue
42:41
product the marginal productivity set by
42:43
the marginal productivity and going
42:46
through this whole system discounting
42:47
all the marginal productivity whenever
42:49
this time involved is the rate of
42:51
interest or rate of time preference
42:53
where the capitalist earns the discount
42:56
so say Bom Bom rack was the one who
42:59
clean up this problem there’s another
43:01
similar problem in addition to the
43:03
Marxian problem which Hornswoggle
43:06
eventually lay low catholic scholastic
43:08
philosophers catholics graphic
43:10
philosophers not only in the Middle Ages
43:12
but also much later than that in the
43:14
late sixteenth seventeenth century but
43:16
extremely brilliant social analysts and
43:18
also autonomous and they analyzed first
43:21
of all one of the reasons why this
43:22
hasn’t been discovered until about
43:23
twenty years ago but they all wrote in
43:25
latin and you know how many people real
43:27
anton now nobody reads them and nobody
43:29
read them for a long long time and it
43:32
turns out of in book twelve there’s some
43:35
more Theologica or something here’s a
43:36
very sophisticated analysis of the
43:38
market they understood much about the
43:40
market as a matter of fact they almost
43:41
discovered Margie Antillean quite
43:43
do it I almost came up to that point but
43:45
the one thing that they completely
43:47
flubbed Amish later discredit of them
43:49
and that was they couldn’t understand
43:51
they can understand about risks they’re
43:53
gonna stand why people would be list
43:54
baring you got a profit they can
43:56
understand about making money in a risky
43:59
investment they can understand that but
44:01
all sorts of stuff about profits they
44:02
can never understand about time
44:03
preference they can never understand the
44:06
legitimacy of charging interest rate on
44:08
all fewer consumer alone so they call
44:11
this usury their analysis was well
44:14
taking from Aristotle which they were
44:16
very good heiress of ten years they said
44:17
well why are thoughtless does the money
44:18
is a dead thing you can’t eat money or
44:20
whatever you can’t really can’t dig the
44:23
ground with it etc it’s not moral it’s
44:25
sinful with charge any interest
44:27
whatsoever on a pure loan and they call
44:30
that usury now we think of usury now is
44:32
that somebody charging twenty or twenty
44:33
eight percent per day interest but
44:36
usually the technical definition of
44:37
usury as any interest whatsoever because
44:39
it smoothly the philosophical problem
44:42
the plastics had and so the church
44:45
taking off from this condemned usury for
44:48
almost pulled by the nineteen middle of
44:50
19th century itself now this is a very
44:52
problem with the walnut method if you
44:54
say that all this isn’t illegal and
44:56
immoral everybody that are saudi evading
44:58
it even very good catholic start evading
45:00
it so they start discovering scholastic
45:03
philosophers themselves would ratify all
45:05
sorts of devious ways of getting around
45:07
this prohibition there all sorts of
45:09
things like forward market and foreign
45:10
exchange those of exchanges maneuver in
45:13
such a way you’d be charging interest
45:14
with not not saying
45:15
pretending it’s only a foreign exchange
45:17
market and also the very sophisticated
45:20
devices the church itself annette loan
45:22
money charge interest was there for
45:24
engaging the sin of usury so this whole
45:26
usury thing the spread of the leak the
45:28
economic analysis of the Scholastic’s
45:30
was partly responsible for the decay of
45:33
scholastic philosophy in general the
45:35
problem was that never discovered time
45:36
permits so they didn’t have bon viveur
45:38
around to come around several hundred
45:41
years later and clear up the problem
45:42
problem in other words being that guess
45:45
you are performing a function by lending
45:46
out money you’re giving so many money
45:48
now and return for future money in other
45:50
words you’re giving them a present good
45:52
you pay or
45:53
at times preferences are to have money
45:55
now instead of in the future this is
45:57
just as important of any other service
45:59
there was nothing wrong with charging
46:00
interest on it
46:01
whoever as I say that they hadn’t done
46:03
they didn’t ever discovered of that the
46:06
other thing I should say here about
46:08
wages and land rent the theory of rent
46:11
which again was covered by Frank Federer
46:13
is one of my favorite economist Austrian
46:16
school economists the Princeton Cornell
46:17
me 20 years at 20th century who built on
46:22
bomba vark time preference to purify the
46:25
time preference theory when bobert
46:26
kicked out the productivity stuff i’ve
46:29
been talking about more clearly above
46:31
operated because we’ve all reached end
46:33
of the fudge alberto the end now also
46:35
another interesting theory of rent mark
46:38
saying and while actual lint is not just
46:40
land rent what really is it’s very
46:42
similar to the renting out so the words
46:44
it’s running in the common sense view
46:45
event of renting a tuxedo or writing a
46:47
house instead of buying it we have two
46:49
different things here less then becomes
46:51
a charge for a service per unit time
46:54
rent per hour and per month than per
46:56
year etcetera in english classical
46:59
economics and the old lays in england
47:01
very few people aristocratic families
47:03
didn’t sell land the only right to do
47:04
that and you think of land only in terms
47:06
of rent what really happens is that
47:09
every good in service every labor and
47:11
wages land and rent
47:13
scenes and so forth so on every
47:14
productive factor earns a product
47:17
productivity per unit time
47:19
and this is their it’s rent in other
47:21
words the machine is worth ten thousand
47:23
all over the years can i get ten
47:24
thousand dollars a year in rent minus
47:26
the rate of interest this kind of other
47:27
elements this let’s say nine thousand if
47:29
it’s a 10% rate and so rinse then and
47:32
permeate the economy not just for land
47:35
for everything we can then look on wages
47:37
is also a rent our labor ourselves as
47:39
services per unit time he doesn’t sell
47:41
them his body except under slavery
47:44
absent an accenting slavery then you can
47:48
only rent yourself out can’t sell
47:49
yourself and so wages are also on rent
47:52
you don’t have only really two forms in
47:54
a world of certainty there only two
47:56
forms of income is rent to an interest
47:57
in other words every productive factor
47:59
earns and rent
48:00
whether it’s labor or land or capital
48:03
goods and then finally the capitalist
48:05
earns
48:06
which is the rate of high preference and
48:08
rate of interest and then of course in
48:10
the world of uncertainty we have profits
48:12
and losses short run profits and short
48:14
run morsels so that rent then becomes
48:17
the universal kind of productive income
48:19
and which everybody in a sense earns we
48:22
can see this is one of the problems that
48:24
you haven’t really analyzed economics of
48:26
slavery slavery is a fascinating
48:27
institution from an economic point of
48:29
view how could I want to restore it for
48:32
that for that reason because under
48:35
slavery for example the South sometimes
48:37
plays were so low sometimes ever rented
48:38
out so there was a slave then became a
48:41
slave master treated the slavers any
48:44
other capital and so the slave was often
48:47
rented at other capitalists seasonally
48:49
or whatever okay so we’ve explained
48:51
consumer goods prices we’ve explained
48:54
profits wages rent marginal productivity
48:57
interest time preferences cetera and
48:59
even in short run profits there’s one
49:01
thing left to go really in this
49:03
explanation we’ve explained a little
49:04
price of labor or a level price of land
49:07
or a local price of machine but not the
49:08
price of a whole good where does that
49:09
come from
49:10
there’s only is some sort of
49:12
relationship in the slave the slave
49:14
could be rented out to say for a
49:15
thousand dollars a year the sale price
49:18
of the slave must have some relationship
49:19
it was marginal product a thousand
49:21
dollars a year similarly if a house can
49:23
be rented out for ten thousand and you
49:24
know the price of the house let’s have
49:26
some relation to this annual rental
49:28
price as indeed of course it does
49:31
well the next thing that is the price of
49:33
the whole good which is also cold very
49:37
confusingly I must submit the capital
49:39
value of a good reason of course why
49:41
this is confusing we’re already using
49:43
capital only two other sentence we’ve
49:46
been talking about capital is a capital
49:48
good as a produced factor production
49:49
machinery buildings except the capital
49:52
value applies not just of that applies
49:53
everything price of land that applies to
49:55
people under slavery applies to anything
49:57
which can be owned what’s the capital
50:00
value of a house or a machine or
50:03
whatever well the first approximation is
50:06
will be the summer of expected future
50:08
return or in our terminology expecting
50:11
the future rent players to have a
50:14
machine which you should think you can
50:15
rent out for ten thousand dollars a year
50:16
and as a 10-year life so
50:20
10,000 to expect the return now $10,000
50:24
over ten years the total return of
50:27
$100,000 so therefore you might think
50:30
the capital value if you’re going to
50:32
sell a machine you’ll be able to get on
50:34
the market a hundred thousand dollars
50:35
because that’s how much the guy will get
50:37
in return that’s the first approximation
50:39
however of course it’s wrong reason why
50:42
it’s wrong is because you have to
50:43
discount they expect the future returns
50:45
by watt by the rate of interest so you
50:47
have the discounted son you have this
50:49
machine you’re thinking about buying
50:51
this machine you know that after ten
50:52
years we’ll give you $100,000 let’s say
50:54
you know that you’re a value that you
50:56
place on a 10th year of $10,000 a lot
50:58
less than them today’s has out no and
51:01
the this cow that you’ll charge it to
51:03
consider estimated at is the rate of
51:06
interest going pump reference rate
51:08
ongoing rate of interest let’s say it’s
51:10
10 percent to make it simple that case
51:12
you get let’s say you’re getting the
51:14
money in there just make it in the first
51:16
year your total thumb that will be
51:19
charged on the market the more
51:20
equilibrium price of the machine as a
51:22
total sale value because it has no us
51:26
not ten thousand but ten thousand this
51:28
kind of I’d say 10 percent say nine
51:30
thousand and then the second years ten
51:32
thousand be discounted by that plus
51:33
another 10 percent optimally eating one
51:35
hundred seventy three hundred and fifty
51:39
you wind up that $100,000 with something
51:41
like fifty six thousand whatever it you
51:43
can have it up so the point is the price
51:47
of the whole good will be this kind of
51:49
sum of expected future returns or
51:51
prospective future arrests and then when
51:53
you buy this machine and then yourself
51:55
rent it out or yourself use it doesn’t
51:58
matter you will be getting a 10% you’ll
52:00
be getting this uniform rate of interest
52:02
instead of the other guy has it now
52:05
anyway it was a half if you buy a house
52:07
and rent it out for 20 years the price
52:10
won’t be bid up to the hundred thousand
52:11
of the two hundred thousand wherever
52:12
it’ll be that – our rate of interest so
52:15
when you buy the house at the lower
52:16
price you will get you’ll have a room
52:19
for the ten percent return per year know
52:21
whatever the interest return happens to
52:23
be this process by the way of summing up
52:26
this kind of this kind of future returns
52:28
into a present value is called
52:30
capitalization capitalizing selected
52:33
future returns and it will present some
52:35
that’s pretty obvious if we didn’t have
52:37
capitalization land for example wouldn’t
52:40
be able to be sold at all with land is
52:42
permanent he moved for favia 42nd Street
52:44
will always be there because the fixed
52:46
part of the earth sort of an atom bomb
52:49
explosion from there always bees in here
52:50
so we can expect that land is perpetual
52:53
verbing some sort of perpetual return if
52:55
the expect that land will bring you
52:57
$10,000 return forever website without
53:00
an interest rate this can you ever be
53:01
able to sell it because the price of the
53:03
instrument so I can sell something in a
53:04
different price obviously the point then
53:06
is that you so land because the
53:09
expectation of getting $10,000 a year
53:11
3000 AD is and doesn’t loom very large
53:13
and your consciousness is this County
53:15
about very heavily it means almost
53:17
nothing you did sound a sort of
53:18
asymptotic relationship where it’s
53:19
virtually zero and this sum becomes the
53:22
amount that you’ll June willing to sell
53:24
it for and the amount the other guy’s
53:25
willing to buy it for so in equilibrium
53:27
the market price of the entire thing
53:31
whether it’s a slave under slavery or
53:33
machine or a land or aggregations of
53:37
these safer well tend to be this kind of
53:39
somewhat effective future rents or
53:41
expected future returns the formula for
53:44
a perpetual resource the lights other
53:46
thing is incident such as land there’s a
53:48
simple formula for this which sort of
53:49
illustrates the the capital value C is
53:52
equal to are the annual rent of the
53:54
annual rate of return divided by the
53:56
rate of interest so if the annual return
53:59
of the thousand dollars a year the rate
54:01
of interest
54:01
ten percent capital value will be
54:04
exactly now we’ve see this happening all
54:06
the time by the way and in stock market
54:08
point is that the as a returns increase
54:11
increased returns have increased the
54:13
capital value and vice versa the capital
54:15
value of anything is proportionate to
54:17
the return your return expected annual
54:20
return in diversity proportion of the
54:22
rate of interest or the rate of interest
54:23
goes up to tenth the lower the general
54:26
the capital value of everything and
54:28
we’ll see how the surprise of a
54:29
conservation and why copper miners will
54:31
produce a certain amount now and wait
54:33
for next ten years to produce the rest
54:35
of it etc I think we have enough looks
54:38
like sure etc I think we have enough
54:40
looks like sure etc I think we have
54:43
enough
54:43
looks like sure etc
54:45
I think we have enough look like sure
54:47
etc I think we have enough look like
54:50
sure etc I think we have enough let’s
54:53
like sure

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