The Austrian Theory of Economic Progress | Shawn Ritenour

[00:00:00]Ladies and gentlemen, boys and girls, children of all ages, it is time circle the wagons. Uh I am going to talk to you for the next 45 minutes about the Austrian theory of economic progress. Uh economic progress is one of the main uh themes or topics I should say of macroeconomics.

[00:00:21]uh the Austrian economics does not uh view macroeconomics as a separate set of theories that are mysteriously unrelated to micro. They're not two hermetically sealed uh sets of theory never to be uh connected. Um we understand that all economics is related. um all economic phenomena either what we the profession calls micro or macro is the result of human action and uh so all of the theories that apply to uh microeconomic topics apply to macroeconomic topics and uh that word that I've used already several times is an indication of how we view the distinction between micro and macro and we we view the distinction as topically right so there's certain things that uh micro economics is about, but there are certain things that macroeconomics is about. And the three main topics of macroeconomics would be the purchasing power of money, uh, business cycles and recessions, and then economic progress, economic expansion and development. And so I think it was um uh Roger Garrison talked about if we want to understand business cycles uh we want to he may have actually been quoting Hayek if we want to understand how uh things go wrong we first have to understand how things can go right and so that's kind of what I'm talking about today I'm I don't like being a dismal economist right I'm I'm a happy golucky economist so I'm going to talk about economic progress not economic uh recession um now uh I do want to talk a little bit about I think one of the the benefits of Mises university is not only the learning that you get but also the directions for further investigation and study. So these are the works that I have drawn upon and this is the works these are some of the works that modern Austrian uh theories of economic progress draw upon Bombav's positive theory of capital Mises's of course human action and uh he wrote a couple of essays on this very issue. One is the plight of underdeveloped nations. That's very good. Of course, Rothbart's man economy and state. An excellent book written in 1992 is David Austerfeld's prosperity versus planning. Uh I've I've benefited a lot from the writings of Jesus dodoto his money bank credit and economic cycles as well as his essay dynamic efficiency. Um uh Randy Hulkcom has an excellent book called entrepreneurship and economic progress. And then Suda Shenoi's uh dissertation that was published by the Mises Institute towards a theoretical framework for British international uh and economic uh international economic history is also excellent. It's it's it's a it's a work of history and and parts of it are pretty slowgoing, but um it's it's it's uh it's an excellent work. You can benefit a lot from looking at it. Uh Ben Powell's out of poverty.

[00:03:16]He's a former graduate of Mises University. And then uh uh say a younger guy I want to call him a kid but Victor Espinosa has done a lot of good work on this topic uh one example would be an essay that he published called epistemological problems of development economics so these are all good uh sources for you to draw upon as you consider uh this issue uh more deeply so uh what is uh economic progress uh economic progress economic prosperity is a result of what we call economic expansion and economic development Economic expansion simply means more goods per person. You know, having more houses, uh more cars, more clothes, more more sets of shoes, right? More cans of spam, if you will. Uh more eggs. Um you'll be happy to know I'm ready to go today. I had a winning breakfast of scrambled eggs and sauteed spam. So, it's uh it's it's been a good day so far. Um economic development on the other hand uh is not just more stuff but a greater variety of goods of higher quality right um refrigeration for instance increases the quality and variety of goods available. Automobiles don't just um you know allow us to move it but allows us to move to a lot of different places. It changes the way we live. It allows people for instance to drive from Pennsylvania down to Auburn to be at Mises U. um uh economic uh development would include the production of books, newspapers, electronic media that provided an opportunity to broaden horizons if we want if we want to. Um clearly not everybody using social media is wanting to broaden their horizons, but you you get the point. Um medicine uh and better nutrition lead to longer healthier lives. Um and there is uh so so economic development uh is constituted by a tremendous variety of goods that produce a different quality a better quality of life and and and again we're speaking materially.

[00:05:19]Um now economic progress how do we get this how do we get economic expansion and development? How do we get more goods of greater variety, better quality? We get it through increased productivity. So any theory of economic uh progress has to uh look at the issue of productivity and how do we increase productivity and um there's been quite a bit written even in conventional economics on the issue of productivity.

[00:05:45]But as we apply our understanding of uh changes in productivity to economic progress, we need to remember that the economics of prosperity, the economics of pro economics of prosperity requires both analysis and synthesis, right?

[00:06:02]Analysis and synthesis. Um, it requires both analysis and synthesis because economic progress is a historical economic process. It's something that takes place over time, right? And it requires certain things happening at the right place at the right time. And so we need both analysis, what are contributing factors and then synthesis.

[00:06:29]How do these factors work together? And so if you look at analysis and I put that painting there because that painting the title of that painting is analysis. And analysis simply means breaking a complex substance into smaller parts to gain a better understanding of it. Right? So if we have a complex substance or a complex process, we break it down and isolate the different causal factors that are going on that will allow us to understand the whole process. That's what analysis is.

[00:06:57]And uh Misesus actually hints at a general theory of economic progress when investigating and in a section of human action where he's he's looking at and discussing the question, can monetary inflation increase general social welfare? Can monetary inflation bring an increase in uh prosperity? And he says to answer this question, he says, quote, "What is needed is a clarification of the effects of changes in purchasing power on the division of labor, the accumulation of capital, and technological improvement."

[00:07:28]Because he recognizes that those three things, the division of labor, the accumulation of capital, and technological improvement are three important vehicles of economic progress.

[00:07:37]And so if monetary inflation doesn't help develop either of these three, any of these three, or maybe helps one to the to the to the um detriment of the other two, we won't actually get progress. And so um you see then that Mises has identified certain causal factors he calls vehicles of economic uh progress. And then I he also recognizes a fourth. So I would say in my work I identify four vehicles of prosperity.

[00:08:07]One is a market division of labor, two is capital accumulation, three is technological improvement or technological development and four is wise entrepreneurship because all of these things have to be coordinated effectively. Now I would say that the strongest contribution of the economic mainstream conventional economics with respect to economic development theory and growth theory is the analysis identifying many of these sources right it is common in the development literature to find oh um capital is capital formation capital accumulation is crucial for economic development or technological development is the deal it's the whole enchilada with respect to economic growth right But uh where they are weaker is in the area of synthesis.

[00:08:57]Synthesis is defined as the composition or combination of parts or elements so as to form a whole.

[00:09:06]And uh Mises here also is helpful in a passage where he quotes Bombav. And Bomb speaking of business cycle theory how things can go wrong says this. A theory of the trade cycle if it is not to be mere botching can only be written as the last chapter or the last chapter but one of a treatise dealing with all economic problems.

[00:09:32]So we don't start talking about business cycles because we have to understand a lot of economic theory before we get to putting it all together to explain the business cycle theory. And I would argue that the same is true for a theory of economic progress. We must understand how all of the vehicles of prosperity work together in order for an economic order to foster economic expansion and development. We need to understand further the institutions that nurture the vehicles of prosperity and uh economic policies that allow this prosperity to occur. So um in order to understand uh the theory of economic progress we have to understand the concepts of the division of labor and the law of association. We have to understand uh the principles of capital.

[00:10:24]We have to understand entrepreneurship.

[00:10:26]We have to understand uh uh uh trade theory, price theory, economic the importance of economic calculation. We have to understand the negative consequences of interventionism a and inflation. After all of that, then we can put them all together and form a theory of economic progress. And so I would say a major weakness of modern growth theory is that it fails to recognize how each of the vehicles of prosperity are complimementaryary and absolutely must work together in order for economic progress to occur. Uh the mainstream literature generally downplays the market division of labor.

[00:11:01]Uh they may talk a little bit about Adam Smith, but that's about it. Uh there's only one mainstream text that I know of that is devoted to um the market division of labor and the importance of the division of labor and it's so abstract and mathematical it's hardly really relevant for real economic activity. Um most mainstream literature will either elevate capital accumulation or technology as as the explanatory variable for sustained economic growth.

[00:11:30]It almost all of it almost all of it ignores entrepreneurship alto together with the exception I would say of William Bal and some uh excellent economic historians uh Joel Moir being one of them. Um uh with that that those exceptions almost the entire um entire profession ignores uh entrepreneurship because they are using these mathematical models that you don't need entrepreneurs to um in the model because we're talking about um worlds of perfect competition etc. So um with all that as a as a preface introduction let's talk about these vehicles. Let's talk about the division of labor. You may remember that there was somebody I think on Monday who lectured on the division of labor and social order. So I don't to go into that in detail. I'm sure you paid very close attention to that lecture.

[00:12:20]But remember that the division of labor is defined as specialization according to efficiency and the law of association that Misesus uh developed from uh the law of comparative advantage that he received from David Ricardo. He says that specializ specializing according to efficiency and cooperative action is more efficient and more productive than isolated action of self-sufficient individuals and again this is almost completely ignored by modern growth theory. So as people, we saw this on Monday, as people specialize according to efficiency, they become relatively more productive and therefore socially they become more productive and as they become more productive, not only uh does society get more things produced, but they're able to consume more, right? And so that is then uh uh the a step towards economic progress uh to economic expansion and development. So that's one vehicle, the market division of labor. The second vehicle is capital accumulation, saving and investment in capital accumulation.

[00:13:21]And so I I would encourage you to think back to Paul Swick's lecture on capital theory that he gave um yesterday. Um capital goods, remember, are produced means of production. They're the tools, the machines, the intermediate goods that are necessary for production to take place. And people use capital goods. Why? Why do people use tools? Why do people use machines? Why do people use factories? Why do people use capital goods?

[00:13:50]They use capital goods because it helps increase their productivity. It helps them achieve their ends more quickly or uh more precisely.

[00:14:03]Um it allows people to produce more output per unit of land and labor. Um in 1830 it is estimated for instance that it took 275 hours to produce 100 bushels of wheat.

[00:14:18]275 man hours of farm labor to produce 100 bushels of wheat. By 1987 that number had dropped to three. In 197 1987 uh the uh FD uh the US uh USDA uh US Department of Agriculture estimated that it took three hours of farm labor to produce 100 bushels of wheat. So we go from 275 hours to produce 100 bushels down to three. That's a significant increase in productivity. Now why how is that possible?

[00:14:51]Is it possible that the farmers in 1987 just worked a whole lot harder than the the farmers in 1830 like the farmers in 1830 just a bunch of lazy goofs that you know farmed you know one quarter of the day and just you know frolicked about in the sun? Probably not. In fact, I bet you in terms of physical exertion, the farmer in 1830 probably exerted themselves harder physically than the farmer in 1987. No, the difference was capital, right? the capital, you have two pictures there, right? The farming in 1830 versus farming in uh 1987 and the capital inensive processes are much more productive. The the the the farming with better tools, better machinery, you can farm a much larger peri uh uh uh amount of land. You can uh get more uh uh uh uh bushels per acre.

[00:15:45]And so with capital goods, you can produce more goods than we're able to produce without capital goods.

[00:15:53]Additionally, you can even produce more goods that you can't have at all without capital goods. Right? Think of goods like your eyeglasses or contact lenses or your smarty phones or an automobile uh or um maybe your water bottle, right?

[00:16:08]Your aluminum can. These are things that cannot be produced at all without capital goods, right? So the accumulation of capital is a great increaser of productivity. And so that's the second vehicle that Mises mentions the market division of labor and uh capital goods and and not just capital goods but the accumulation of capital.

[00:16:30]Now of course as as I'm sure Swick explained to you in order to accumulate capital people must be willing to put off present consumption so that they'll have resources available to invest in the production of capital goods. In other words, they have to be willing to save. And so it requires a a a a a threshold of lower time preference, the lower the lower the less presentoriented people are, the more willing people are to put off present gratification, the more willing they are to save and invest. And if they have more savings, they can devote more resources to accumulate more capital goods, which will increase their productivity. that will raise their uh real incomes and raise their standard of living. People will be able to obtain a larger variety of goods at lower prices thereby achieving more ends.

[00:17:19]Likewise, with more capital investment comes better technology. Because when people invest to purchase new capital goods, they will desire, the entrepreneurs will desire to purchase the capital goods that have the the highest most productive technology that they can afford.

[00:17:39]And so usually, and it's a common place, it's it's not apppedically true, but usually when uh an entrepreneur uh uh has to replace a capital that's worn out, they'll replace it with a capital good that's just not it's not just another capital good, but it's a capital good that's more productive because it's a higher level of technology. [snorts] So as production patterns change to satisfy our preferences, economic progress is sustainable as people save and invest in higher stages of um uh and more capital goods lengthening the structural production because this is a result of a process of subjective preference changes. In other words, as people adopt lower time preferences, no one's forcing them into lower time preference. They're doing this voluntarily. If they decrease their level of consumption, they're doing it voluntarily.

[00:18:36]It's not being forced. It's not being forced upon the economic system, right?

[00:18:40]We get the business cycle when it's sort of forced on the system or or the system's led astray by artificially low interest rates, right? But in this situation if people increase their savings voluntarily there is nothing contradictory about this adjustment of the production structure there's nothing there's nothing unsustain this is a process that is completely sustainable this is not an inflationary boom this is uh sewing the seeds of sustainable economic progress.

[00:19:12]Now, if the process is stimulated through credit expansion and monetary inflation, as you've already heard in the lecture about the business cycle, that's not sustainable and that that boom will be a process of selfreversing bust, right? Uh there will be losers, right?

[00:19:31]But saving and investment allows for capital formation that allows for economic progress that is is sustainable. It's not artificial.

[00:19:42]It's real. Right now, saving and investment in capital formation actually also is somewhat downplayed as a contributor to economic progress in most uh conventional modern growth theory.

[00:19:57]Most growth theory has has adopted uh the solo growth model uh by Robert Solo and an economist that worked about the same time named Swan. And both of them modeled the entire macroeconomy as one giant shortrun production function. The entire economy just fits in one shortrun production function. And of course in the short run there's diminishing returns to capital. And so they argue that if you continue to increase and increase and increase investment in capital at some point uh your capital investment is going to hit diminishing returns and you're going to get to a point where we've maxed out.

[00:20:37]And once we get to that point, we max out the uh total product that we get from capital investment. Any further increases in capital investment, any increase any further increase in the Keynesian eye or the uh neocclassical K will lead to a decrease in productivity.

[00:20:57]And so they argue understandably that increases in saving investment then um cannot provide sustainable increases in economic progress because of diminish returns to capital. Right?

[00:21:12]Um again I think this it's this conclusion is largely model driven driven by models that are not fully reflective of reality. Right? Um, it is true if we do nothing but save and invest in particular types of capital goods, we're going to run into trouble, right? The good news is that tends not to happen in a market economy because there's somebody else that's that that's keeping making sure that this doesn't happen. But I don't want to want to let the cat out of the bag yet. Um, because before we get to that cat, we have to talk about a third vehicle of prosperity and that is technology.

[00:21:51]Technology is the knowledge regarding how to do something. It's the knowledge of how we can use particular means to achieve particular ends. Right? It's the knowledge that if I have three eggs and an ounce of cheddar cheese and 2 ounces of diced sauteed spam, I can make a beautiful, glorious breakfast. Right?

[00:22:18]That's technology. That's technology.

[00:22:20]this knowledge of how to do something.

[00:22:22]Rothbart at one point calls it a recipe.

[00:22:24]Knowledge technology is like a recipe.

[00:22:25]It's it's a knowledge of how to do things. Now, uh technological advance then would be uh increases in our knowledge about how to do things, right?

[00:22:34]And and particularly for it to be helpful for us, it's an increase in the knowledge of how to do things we want to do. Right. Right. The things we want to do. And so um that technological advance the increases in knowledge of how to do things can advance economic progress in three ways.

[00:22:53]First, it provides us more productive capital goods. Right? There's a difference between the productivity of a fork if you're trying to whisk some eggs to uh make an omelette or or to make a a glorious flowerless chocolate cake. Um, you can use a fork, you can use a whisk, you can use a hand mixer, you could use a KitchenAid standup mixer, which is I recommend for most most household kitchens, or you can use this industrial strength mixer that could mix way more than a household would need, right? Um, all of those are things that you can use to to to whip eggs, but they are different levels of technology. And so as we move beyond the fork to the whisk to the beater to the standup mixer that those were that's advances in technology right advances in technology and so technology technological advance can increase our productivity by providing us more or allowing us to obtain more productive capital goods. But that's not the only type of techn technological advance there is. There's also more productive arrangements of production processes. There are different ways that we can produce things. Um I mentioned in my lecture on the division of labor, um when when when Smith is talking about the uh the division of tasks with making the pin in the pin factory, he's really talking largely about a technological advance. a technological advance from individual people producing every part, you know, producing the pen, doing every specific task to turning turning the production process into an assembly line production where people are specializing in doing uh a certain thing day in day out. My dad uh for 20 years was part of uh an industrial division of labor within a meat packing plant. And when he had to move from a beef plant because it was sold to another company to a pork plant, he got the job of being the tongue trimmer, right? The tongue trimmer. And he was the person that was assigned to trim the spit glands off of the pork tongues as they came down the chute. And he had to trim four spit glands off of a pork tongue every 1.5 seconds a pork tongue was coming down and that's all he did, right? And that's all he need. That's all they needed to if if imagine how how productive would he be in the pork process if he would he would be the one that have to like kill the pig and then skin the pig and then cut all the parts of the pig up and then somehow get finally get the tongue and then to trim it. he he would not be able to produce pork, processed pork nearly as fast as uh he was able to help the production process by being just one cog in the pork producing machine. So, so more productive arrangements of the production processes also help um advance productivity. Uh the photo here is uh you probably recognize Walmart.

[00:26:01]Walmart uh was very innovative in how they did a number of things which allowed them to uh to compete against other retailers, other discount retailers. And one way they did this was their warehousing arrangement. It's called crossdocking. In fact, there's case studies written about Walmart's crossing now. Um what they did is that they they developed they they designed their warehouses in such a way that merchandise containers that were put on trucks would come into their distribution centers and then they would immediately be loaded and unloaded and reloaded on trucks headed out to their retail stores. So they they significantly minimize the amount of time their merchandise is sitting in a warehouse taking up space. they they they they minimized the time between when they were receiving merchandise from their vendors and they were getting out to stores for customers who wanted to buy those products. And by doing that, it significantly reduced their costs which helped them to compete significantly. And so um one way technology increases our productivity is simply by people learning and developing uh more productive arrangements of the production process. And then finally of course another way technology uh uh uh helps um economic progress is through improvement technological improvement in consumer goods. Now here we think of think of telecommunications. Um the picture on on the left there is an old crank phone very similar to the phone that my grandparents have uh that we now have in our in our dining room.

[00:27:38]was the only it's really the family heirloom and uh it was one of the it was the crank phone you talk with the hand thing like this and you speak into the front speaker most of the time you're on a party line so anybody at the if you were bored you could just pick up the phone and listen to what the neighborhood gossip and you get it firsthand from these people um but everybody would have their own signal their own bell signal and so if if my my my folks if it was short short and along that say okay that's that's the written hour phone you'd pick it up and you talk on that well of course we don't have phones like that now. Um uh when I was your age, back when I was your age, uh we had we had that like a one in the middle. It was a push button phone.

[00:28:17]There's a push button phones and with with the tones and those were fun because you could you could pick up the phone, you could play a little tune on it if you wanted to. Um, I think uh if I remember right, I saw a um oh, it was some type of show where Al Gore played uh Dixie, the song of Dixie, the opening lines of Dixie on on this on the push button phone. But anyway, that was big stuff because in between you there was a rotary phone, right? You had to you had to crank it and then and then crank it again and do that for seven or 10 uh numbers. So, the pushbone phone was much better. But now, of course, we got the smarty phone, right?

[00:28:53]It's your phone in your hand. And it's not even just a phone, right? It's maybe it's not even primarily a phone. It's a texter. It's a music player. It's a little a streaming device. It's um uh a camera, right? And so we had significant improvement, technological improvement in these consumer goods that that that help facilitate economic progress for the consumer, right? And so three important vehicles of economic progress is the market division of labor, capital formation and capital accumulation and technological advance. But but and now we get to the cat. We're going to let the cat of the bag. Uh the the fourth vehicle that is almost completely ignored by conventional economics is entrepreneurship. the entrepreneur. Um, economic progress takes place in a complex economic order. I mean, if we're going to allow for the increase in development of the market division of labor where everybody is specializing according to efficiency, meaning they are producing not mainly for themselves but for other people, that makes the whole production process more complicated.

[00:29:59]And so in that process of production, the sources, the vehicles of prosperity must work together in an integrated fashion.

[00:30:10]Right? And they do so only to the extent that they're coordinated by the economic decision maker. And in the market economy, that economic decision maker is the entrepreneur, right? The undertaker, right? The undertaker of production. And Jesus dodto characterized economic progress as a process of dynamic efficiency. Dynamic efficiency. Now I want to be careful here because in the mainstream conventional economic literature there is a term and a concept of dynamic efficiency. But that again is simply the idea that okay we are paro optimal at time t and then we will also achieve efficiency at time t plus one.

[00:30:56]How are we going to do it? We don't know. We don't care. But it's going to happen, right? Uh that's I mean that that I'm that's that's probably petting with a little bit of a broad brush and a little bit of uh sarcasm, but not as much as you think. uh and and and so it the dynamic efficiency is simply taking the outcome of time t the outcome of time t plus one and and really moving from equilibrium point to equilibrium point with with very little if any interest in how do we get from one equilibrium point to the next right it's dynamic efficiency just means are we able to be efficient over time right that's not what doto means doto understands that in the real economy in which we live which is the only economy for which we want to really develop a theory of economic progress. Who I mean, in some sense, how what what does it really matter if we have an elegant mathematical model that doesn't speak to reality? It might be great math and it might be fun to do if you're mathematically inclined, but but the the the beauty of Austrian economics is that Austrian economics begins with realistic human action and then develops theories that are realistic and relevant for the world in which we live, which is a world of scarcity and uncertainty and and and and a world in which production takes time. Now given that querto recognizes and and I mean it's not he's not the only one he's not oh he recognize that when we engage in production the entrepreneur has to make forecasts because the future's uncertain and because of that does is there ever a case where all the entrepreneurs get it right so that nobody earns losses no there's always going to be entrepreneurs that uh forecast more correctly than others and others forecast less correctly than others. And those that forecast more correctly than others will earn profits and those others will earn losses or at least not as great a profits. And there are some people that just forecast completely incorrectly and they earn losses, right?

[00:32:49]They'll be losers.

[00:32:51]And that's always going to happen. So there's never a case where in the real economy, everybody produces just right to get us to some type of ideal uh optimal solution without losses.

[00:33:07]That does not mean that we can't enjoy economic progress. For us to enjoy economic progress, as Misesus notes, we just have to have a situation where there are more profits than losses.

[00:33:17]And Porto Dotto recognizes that that in a dynamic changing world, if we have the right institutions and policies, that those right institutions can can can nurture entrepreneurs to utilize the right capital goods to specialize in producing the right things in the market division of labor to using the appropriate technology so that there are more profits and losses. and we are able to enjoy economic progress even even though there are some losses. And that's his conception of economic of dynamic efficiency. And so dynamic efficiency occurs to the extent that production the market division of labor, capital accumulation and technological advance work together for the purpose of increasing the quantity and quality of goods desired by and available to household consumption. That's dynamic efficiency. And all of this productiv productive activity within the market division of labor within the capital structure at different levels of technology are coordinated by entrepreneurs who make a myriad of specific decisions regarding specific processes of production of specific goods at specific times in specific places. That's a whole lot of specificity.

[00:34:38]uh economic progress is enjoyed as its sources, its vehicles developed together as an economic order and this is precisely what does happen in a free society.

[00:34:51]All the production the economic order requires entrepreneurial judgment. All the production right uh Mises refers to the entrepreneur as the driving force of production the driving force behind the market economy.

[00:35:04]The entrepreneur is the one that directs the scarce resources to specific uses to specific production. And they have an incentive in the market price system to direct those resources to the production of goods that are valued the most because those are the goods that going to reap him or her the most profit. So economic progress also occurs through innovation. And the entrepreneur has an an incentive to innovate, to find the most productive way, the the most productive uh uh production process to find goods that have the uh quality characteristics most in demand by people given their cost of production.

[00:35:45]So the entrepreneurs have the incentive to produce most efficiently. They have the incentive to produce new and different products in new and different ways.

[00:35:56]and waste of capital is possible because production decisions in the present are based on the forecast of uncertain future market conditions. I'm sure this is probably just a review of what you heard from uh Dr. uh Dr. Klene about entrepreneurship. If a producer forecasts incorrectly, he will use his capital making something people do not want and will not be able to sell his output at a price that will cover his costs. He will be a loser. And if he doesn't change his course, uh like um like um George Bailey said to old Uncle Billy, it's going to be bankruptcy and scandal and prison, right? It might not be prison, but it'll be bankruptcy and scandal, right? Entrepreneurs need to use something to direct production in more productive ways. And they need to use this thing called economic calculation. Right? if they are to coordinate economic order by directing factors of production toward their most highly valued uses. And again, this is important because entrepreneurship, entrepreneurial judgments have many margins. Um, and this can be illustrated a couple ways. One way is just this quotation from a book uh the the unfinished novel by Fcott Fitzgerald called The Love of the Last Tycoon. And it's about a film mogul. And it was loosely uh based on I don't know how loosely it might be not that loosely based on Irving Thalberg who was the boy wonder behind MGM uh this MGM studio in the 1930s. And in this uh this this part of the book Cecilia Brady who's the narrator of the novel she says quote you can take Hollywood for granted like I did or you can dismiss it with the contempt we reserve for what we don't understand.

[00:37:39]It can be understood too, but only dimly and in flashes. Not a halfozen men have ever been able to keep the whole equation of pictures in their heads. End quote. Now what she means by that or what Sicily Brady or Fitzgerald by way of Brady u means the whole equation of pictures in their heads meaning the entire production process of what it takes to produce a motion picture in terms of the script writing the casting the directing the the filming the editing the marketing the uh production process of the film the exhibiting the theaters there's only a handful of people that that are successful movie entrepreneurs reneurs because not everybody is that gifted, right? Well, in terms of what really is the margins that that are at play, think about this.

[00:38:30]Entrepreneurs have to make decisions about product type, product quality, product location.

[00:38:39]They have to make decisions about the scale of operation, the time of ability, when is the product going to be available for sale, the anticipated price buyers are willing to pay. Are they going to be willing to pay $10 more or $10 less. They need to make uh decisions about capital investment, right? How intensive should their capital process be, their production process be? Um how durable should their capital goods be? Right? Do we want to make to to say buy a silicon spatula?

[00:39:11]will seem to last forever, but it's going to cost a bit more. Or do we want to use a uh if we're making a if we're at a dessert shop, do we want a cheap, flimsy uh spatula that's real cheap, but it's probably going to we're going to have to replace it in probably a year's time, right? Those are decisions you have to make. How specific do we want the capital goods to be? Do we want capital goods that can do this job sort of but can do a lot of other jobs or do we want to invest in a capital capital good that does this specific task great but can't do anything else right that's that's a decision that entrepreneurs have to make uh so they have to determine about the intensity of capital investment the durability of the capital goods the specificity of the capital goods the quantity of the capital goods how many capital goods do we want to purchase and invest in right now and then of course the entrepreneur also has to decisions about um technology.

[00:40:02]What consumer goods characteristics do we want? How good does the camera need to be in our smarty phone, right? How how um how how much RAM does it have to be in in the smarty phone, etc., etc. How many apps do we have to pile onto it? Um what what type of production techniques, right? Do we want a crossing warehouse system or a normal uh warehouse system? Do we want artisal bread or mass-produced bread?

[00:40:28]um R&D the entrepreneur has to decide how much research and development do we want to invest in do we want to do R&D in-house or do we want to do it I don't say outouse but we want to do it uh outsource want to outsource our uh R&D right those are all productive decisions an entrepreneur has to make and here is where we see the importance of proper synthesis we cannot in fact neatly separate the different sources of economic progress us from one another and find the single key that explains it all. It's not oh just only the market division of labor or oh it's only capital accumulation or it's only technological advance or oh no oh it's only really good entrepreneurship.

[00:41:13]No, all of these four vehicles must work together for economic progress to occur.

[00:41:18]And this is the thing I think that's missed, one of the most important things that's missed by the mainstream literature. A highly developed division of labor is important, but it would be impossible without the accumulation and use of capital goods because people need specialized capital goods to be able to specialize in particular lines of production. Likewise, the entrepreneur must invest real capital in the production process. There is no propertyless entrepreneur that doesn't do anything except forecast. You can forecast all day long, but if you don't have capitals to use, you're forecasting just, you know, into the wind. And so entrepreneurs must invest real capital and direct real resources in the production process. At the same time, capital per se never guarantees economic progress either. Um, a famous little quip [snorts] by Mises, capital does not beget profit. Capital does not beget profit. Capital to begget profit must be wisely utilized. It must be used in ways that are profitable. So we have to have entrepreneurship there as well. And if entrepreneurs in forecasting uh the future market conditions large losses will be reaped which I've already talked about. Uh additionally for technology to be productive it must be bound up in actual capital goods. So it requires investment.

[00:42:41]Um just the knowledge of how to do something doesn't help you do it unless you have the capital goods that allows you to put that technology to work.

[00:42:51]Um this is another important point that Misesus makes and then Rothbart emphasizes as well because of the non-excludability of public technical knowledge because once knowledge is out there it's out there. You can't put the knowledge genie back into the bottle.

[00:43:06]It is not a lack of technology that explains the plight of less developed countries. It's a lack of capital.

[00:43:14]It's the lack of capital that limits a nation's prosperity. Because in order to put technology to work, you need the capital goods that embodies that technology. And so if you don't have the requisite saving and investment in tech in in capital goods, all the technology in the world is not going to benefit you. So the problem of the less developed countries is not enough technology. It's the problem is not enough capital.

[00:43:41]Um also Misus notes that technological improvement in one industry provides for economic progress in other industries as well. It's sort of a in some sense foreshadowing endogenous growth theory.

[00:43:55]The indogenous growth theory focuses on uh like externalities, exter external um knowledge spillovers. Mises just notes that because people who may be formerly employed in an industry that benefits from technological advance that th those workers and certain workers and capital are no longer needed to the same extent there. those resources will be freed up to be used in other lines of production that allows entrepreneurs in those other lines of production to increase production as well. So as one people entrepreneurs in one industry benefit from utilizing certain technologies that will free up resources to be used in other areas. So we don't just get increase in production the lines in those lines using the new technology, we get increases in production in these other lines as well. And of course technology must be utilized economically which requires entrepreneurship. So economic progress is a process of dynamic efficiency. It is the happy consequence of an expanding highly developed division of labor taking advantage of an increasing longer capital structure embodying better more advanced technology wisely invested and organized by entrepreneurs.

[00:45:12]And for that to happen, we need an environment that supports these things.

[00:45:17]And that environment, it's no surprise, is an environment of private property and sound money.

[00:45:25]Private property and sound money. Uh if we're going to have voluntary exchange that allows for the market division of labor, we have to have private property.

[00:45:33]You can't exchange what you don't own.

[00:45:35]If we want entrepreneurs to effectively use market prices to calculate profit and loss to wisely utilize all the capital and technology, those prices need to be the result of voluntary exchange because only voluntary exchange prices are manifestations of people's subjective values. And only when that happens is the profit and loss calculations incurring entrepreneurs to actually produce goods that people really want, thereby providing real economic pro progress. So we when the government intervenes and uh uh uh in the money supply and then then causes prices to be different than what they would be from some people's subjective values. Uh unound money will lead entrepreneurs astray and that leads us to where we don't want to go. recession and bust where if we keep things free that allows for these vehicles to um operate as smoothly and as beneficially as possible. Nothing's perfect, but allows for the most uh dynamic efficiency that we have a hopes of enjoying. And uh there's more to be said, but I'm out of time. So, thank you very much. Have a great day. [applause]