The Marginalist Revolution | Joseph T. Salerno

our first speaker is dr. Joseph Salerno professor at Pace University he's our academic vice president and he's the editor of the quarterly journal Austrian economics his first lecture following fretsaw Holtzman is on the marginalist Revolution professor Salerno okay so we're going to be talking about the marginalist revolution which is really the dawn of the era of modern economics the marginalist revolution and the word is derived from the principle that was discovered during that revolution marginal utility which I will explain but the mortise revolution is a word for the independent and simultaneous discovery of the principle of Margy utility by three individuals in different countries three economists karl menger working in Austria in 1871 William Stanley Jevons in his last name there warned in Australia but I believe a British economist and Leon Vall Ross French Swiss economist these men wrote books in which they expounded the principle of marginal utility now the term large utility didn't come into use until later in the 1880s it was called final utility by Jevons the terms referred to as rarity by Leon well Ross French always have to have sort of fifty fancy terms mangu never even gave expression to it the term he just talked about the principle it was his student Friedrich Weiser who later on called it marginal utility in German I don't know the pronunciation but it's good n is nutsen which was translated into English as more utility the term marginal utility stuck as the term for this principle let me just quickly dispose of Leon ball Ross and William Stanley Jevons both of whom were pretty odd-looking I have pictures of them but I can't show them unfortunately but as you would expect they were mathematical economist so they were odd-looking so Germans and and varas can see the utility as as something as something that could be as a thing that could be added up divided compared between two individuals how much utility do you get from that coke how much utility did you get from the the Paul McCartney concert versus this is consul's I've gone to recent the Rod Stewart concert you know did you get 100 noodles or fifty okay it's okay well so they concede this utility as something that you could manipulate mathematically manipulate that was not mangers approach to utility okay according to manga he believed that utility was simply the importance that individuals attached to concrete units of goods according to how much they improve their welfare or well-being okay so more utility then really referred to the the importance of a good in satisfying individuals human wants utility could not be mathematically manipulated as we'll see it could not be compared between individuals it could not be added up to some total sum that would give you a total social utility all of these things were believed by vol Ross and jebin's okay so I'm going to focus on mangar he is the founder of the Austrian School of Economics the book that he wrote in 1871 which is translated into English as not until the 1950s by the way was it translated but it was translated into English as the principles of economics a very simple very unassuming but a revolutionary book in economics he was a creative genius he had a lot of influences from economists going back to Canty own in the 17th 18th century even further back to the scholastic economist but what the system he created the system of that he created an entire system of economics at least the outlined it was really something new Under the Sun if you listen to a new song you can say well that person was in to inspire the blues that person was influenced by old-fashioned rock and roll but the song itself is an act of creation okay human beings cannot create anything physical in the world okay they can transform matter into different shapes and so on but they can create new ideas okay that is given to us as human beings we have that ability so not only did mango create a new idea the idea of marginal utility but he used it to deduce or expound a whole system of economics which still stands today as sort of the UM the the system within which austrian economics developed let me just read three quotes about mangers achievement by three great historians of thought again I would have put that up him up okay first I'm Joseph Schumpeter who was an Austrian economist by birth but was not a member of the Austrian School of Economics he did he he followed more of all Ross and he himself was a terrible mathematician and really never wrote mathematical economics but he claimed that the the greatest economist who ever lived was Leon Bal Ross and he was uh he thought that math mathematic economics was the method of research for economics so he wrote though about manga manga is nobody's pupil and what he created stands mangers theory of value price and distribution is the best we have up to now you know he wrote that nineteen in the mid 1920s as an obituary for manga okay but it's that that statement is still true today okay of course his system has been developed its theory of price and value Looney von Mises who was a member of the Austrian school obviously wrote what is known as the Austrian School of Economics started in 1871 when karl menger published a slender volume under the title because it gives it in German but principles of economics until the end of the 70s meaning the 1870s there was no Austrian school there was only Carl Menger unquote finally Hayek who was a student of Mises to some extent wrote quote the Austrian schools fundamental ideas belong fully and wholly to choral Menger what is common to the members of the Austrian school what constitutes their peculiarities and provided the foundations for their later contributions is their acceptance of the teaching of karl menger so in a sense we're all maenge Aryans ok in a very important sense so let's talk a little bit about what economics look like before manga wrote is his path-breaking book the classical the British classical school was a dominant School of Economics during up to the point when when manga wrote the most important members of the British classical schools of course Adam Smith was called misleadingly the founder of economics actually one of his predecessors David Hume Scottish philosopher contributed even a great deal to through classical economics and then there was a new Congress that came after Adam Smith David Ricardo so they were the three principal members and in a sense founders of the British classical School of Economics so let's just go a little bit about their ideas and then how inger what mangers attitude was towards their ideas okay and how he changed them it's wrong to think that despite the word revolution that Menger and and the other marginalist revolutionaries completely got rid of classical economics that's not true Mandor a particular deeply appreciated some of the contributions of the Classical School what he wanted to do is we'll see is is to really give classical ideas a foundation in human wants human choices on individual values and so on so the Classical School one when their important contribution was to observe that low prices aren't random it's not they're not accidents of history they're not just arbitrary this result of arbitrary decisions by big firms big firms don't just set prices okay they do result from an interaction of buyers and sellers on the market they did see that and they also saw more as important that price is regulated production and the allocation of resources okay through demand and supply in the short run in the short run they did believe that demand and supply determine prices okay so just to give you an idea of how prices according to classical school might regulate production they point out that look if the demand for something goes up let's say the demand for oil goes up the price of oil will then rise okay the price will then rise above it above its cost its cost of production so the profit margin will increase when profit margins increase then more firms will want to expand to take advantage of those profit opportunities other firms will enter the business you'll have more people exploring for oil drilling oil wells and so on you'll also have new refineries starting to be built of course it hasn't been one built in the US since 1979 because of government regulations but that's a natural effect of the increased price of oil you would have as a new firms came in though eventually the supply of oil would increase the supply of oil products gasoline and salt would increase and then profits would begin to decline because of the new competition the increased supply profits would eventually decline to the point where you once again had price equal to cost of production plus what we call in what they call the normal profit but we would call the rate of interest okay so the producer now would get a return a basic normal rate of return on his investment okay but in the meantime the prices that would have brought about more resources allocated to the production of oil products Kaycee would have an expansion of the industry and if the man fell demand for SUVs and trucks and so on as we saw a few years back firms that produce these Goods would have suffered losses which would have been a signal to other firms to keep out of that industry the firm's that really industry would either go bankrupt or they would contract or they would change the mix of products towards smaller cars we saw all of that happening with a GM going bankrupt in Chrysler going bankrupt and and Chrysler cutting back on the amount of large cars and beginning to produce smaller cars and so on okay eventually the losses would dissipate there's a supply of SUVs the supply of trucks and so on would decline in relation to demand prices would go up and once again there would be a normal profit being earned okay so that all of this was good okay according to the manga manga remembered thought that this part of the class of contribution was good the problems with the classical contribution were were lie in an area that we might call the long-run also and how they viewed the value of goods so one of the major flaws with that was that they treated Goods as a class okay so they talked about things like bread diamonds coal beef we okay they asked questions like why is it that diamonds have a higher price per let's say weight per pound then bread has profound that confuse them okay that was called the paradox of value very important puzzle in economics it's a paradox because diamonds don't have much of what the class was who called use-value diamonds are mere ornamentation they're conspicuous consumption they're showing other people that you're well-off ok bright on the other hand she keeps human beings alive ok especially the 19th century that was a the main staple of the human diet okay in Europe and elsewhere so why was it that diamonds were per unit weight more expensive than bread okay the classical economists couldn't solve that with their value theory what they did was well but let's restate it with what they said basically was this this was a paradox even though the use value of bread is much higher than diamonds the exchange value or market price of diamonds is much higher than bread that was a paradox so they took it a step further he said well look the economy's just care about exchange value waiting's we just care about explaining price so what I put you to one side we're just going to assume that people any good that's produce consumers do demand but we're not gonna really analyze it so they didn't analyze the demand side they just basically assumed that there was a demand for these Goods and they focused on the supply side and if you go back to the little outline that I gave you of how the classical school looked at prices regulating production they then then focus on the businessman okay so they never solved the paradox of value all they did was they they put push it to the side they focused on exchange value on determining prices and when they did that they said well prices are determined by the cost of production okay in the long run in the long run as we showed all prices always tend to go back to their cost of production profits disappear as new firms come in on the other hand if there are losses in an industry firms leave the industry closed down go bankrupt supply decreases and losses disappear okay so they said costs of production determines prices in an even more extreme form or korto one of the classical economists said the amount of labour embodied in a good determines prices so Fidel cdtv was a thousand dollars and Ana Retta regular television is $200 then that means that there's five times as much labour embodied in the high-definition television as there is in the the regular regular television okay so in a sense what what they did was to look on value as something that was embodied in a good it was the amount of sweat that the labor that emanated from the labor as he or she worked on the good now they had a problem though there are certain types of goods that old paintings antiques and so on whose prices could not be explained by the course of production so what they had then had to do was to split goods into two classes they had to say well on the one hand there are reproducible goods goods like we goods like diamond things that could be reproduced and it was their prices that would determine by cost of production on the other hand other goods that called scarcity goods antiques various objects of art and so on whose prices were determined by their scarcity okay so for example recently the baseball card with a picture of an old baseball player Honus Wagner I think was like you know five or maybe 1911 something like that sold there were five in the world that were in mint condition okay it sold for one of them so for $600,000 John John Lennon's handwritten lyrics do I am The Walrus which was scribbled on the back of an envelope sold for forty thousand dollars went on eBay okay so the classically confident explained this with their general theory they would have to say well scarcely good okay but remember all goods are scarce and that's why they have prices so what are some of the implications of the classical theory of value and of price first as I said value is inherent in goods there's nothing to do with the human being using the goods its inherent in goods okay it's it's the amount of costs embodied in the good or the amount of labor sweat or labor effort that's embodied in the goods secondly it's the production process that gives the goods value okay it's not the consumer but the production process third they really could not explain than how firms could lose money go out of business and so on I mean they could do it for the short run but ultimately they push the short-run aside they really focus on costs of production they said this is really the determinant of of price so if that's the case you know then how do you have a firm like GM losing thirty billion dollars in in 2008 okay or AIG lost sixty two billion dollars ninety nine billion dollars in 2008 okay obviously the price has to be substantially below the cost for a long period of time for there to be losses like that so you really can't explain profits and losses finally are they they weren't able that they had to concentrate on the businessman okay they couldn't explain demand they couldn't explain consumer values so they concentrated on on the businessman and a myth grew up that economics was just about this fictional character the homo economicus economic man whose only purpose in life was to buy at a low price and sell at a high price so the Marxist ins of so the Socialists nearly socialist before Marx than the Marxist criticized the classical theory because the theory of the money-grubbing merchant who buys low and sells high and they said this is not a true portrayal of human nature okay but in fact the classical theorists did not believe that there was some sort of economic man okay they were trying to explain the prices that they actually observe the reality that people with all different sorts of motors played but they could not cause of their flawed value theory okay so they were wrong with the Socialists or even more wrong in the way they interpreted them okay so now we come to manga manga saw all this and he saw that was unsatisfactory and that it should be changed and before he was an economist he worked as a journalist and he saw that and he covered the markets okay kabbadi market stock market and so on and he noticed how prices fluctuated from day to day or even from hour to hour and he said look this has nothing to do with cost of production there was another explanation here okay so he began to write is a book which was really fly for his own habilitation for his degree that would allow him to teach and he concentrated on value in price theory and his aim was not just to come up with a satisfactory explanation of the real world prices are actually paid but to use that as a foundation for a whole system of economics so let me just give you some one over the quote from the preface of his book which I think sums up what his project was here's what he says exists I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production by that that he means the the resources and labor and so on not only for the purpose of establishing a price theory based upon reality and placing all price phenomena including interest wages ground rent and so on together under one unified point of view but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood so what he's saying is that a correct theory of price and value is in Fortin in itself but it then also allows us to explain all the other economic phenomena that we observe in the real world okay so what was manga starting point his starting point was that man was at the set man generically speaking was at the centre of economics okay man and his wants so he in some notes that he wrote he made the following statement he says man himself is the beginning and the end of every economy okay meaning the individual was striving to satisfy himself to improve his position to satisfy his wants that individual should be placed at the center of economics and he went on to say our science is the theory of human beings ability to deal with his wants so knows he's not focusing on the businessman he's focusing on whom the consumer okay he also pointed out that when people in the real world attempt to satisfy their wants it's a process which involves cause and effect because we're cells are not ghosts we're not just Minds that float in the air we need property we need real things in order to live and flourish in order to act in order to improve our well-being from our own point of view so the very first line of the text of his book okay very first opening line is all things are subject to the law of cause and effect so we call this price and value theory that Menger developed the causal realist theory of price because it searches for the real causes of economic phenomena in the world around us so it's causal realist there are real causal laws that determine prices that determine interest rates that that determine why things there are such things as housing bubbles and busts and fine two crises all of these things can be deduced from the human striving satisfied wants so that was mangers / overall vision okay every economist every good economist of great economist has a vision before he actually starts writing before he starts about setting out or elaborating the details of his system and that was beggars vision so let's just say a few words about positive fact Menger pointed this out he did look human wants the fact that we're dissatisfied with our situations every moment time we always were always looking for ways to improve our situation that's the cause of economic activity that's the cause of production okay so the subjective wants are the cause of the object objective actions that people take to satisfy their wants including the objective actions taken in a very complex industrial economy such as the US economy today thank all the faculty buildings you see all of the comings and goings to places of employment all the transportation of goods throughout the country all of those things are caused by human wants but on the other hand Menger pointed out once all of those things culminated in the actual consumer goods you automobiles the Big Macs the diamond rings that we also desire those things then caused the satisfaction or fulfillment of our wants and desires ok so there's a two way causality between subjective and the objective subjective wants cause all the objective productive activities that we see but then the fruits of that productive activity or of those productive activities the the final consumer goods cause the satisfaction of our wants so he had what was called Trinities of causation ok he rewrote these as notes to himself again before he began writing his book he wrote ends those are human ends all the things we use to produce goods and then realization meaning the realization of the end product that satisfies us okay he also wrote another tripartite sort of terminology was man start with man then you go to the external world the things that we use okay you know our productive activities and then he the third one was subsistence the things that allow us to subsist in the real world and finally and most plainly he wrote wants give rise to goods which give rise dissatisfaction wants good satisfaction okay after he took this from a very important free-market French economist Frederic Bastiat who that entitled one of his chapters wants efforts satisfaction I'm pretty free got that that Trinity of causation from Basquiat who has been really neglected in economic theory okay he was a great free-market polemicist he wrote great pamphlets in favor of free trade about against government plunder of in favor of special interest groups and so on so he wrote those types of things and people say yeah he's a great polemicist he's a great expose eater of ideas but he wasn't very good at cons well he was a very insightful and he was a very good economist so Langer started the book from the preconditions of a good what is a good okay that was a question that Mangrum set out he said a good has to have three preconditions for a thing in the real world to be a good pass except three preconditions happy for preconditions a handful of sand is not not a good okay a diamonds in your hand is a good something very rare I like the typhoid fungus I guess the fungus on off the bacteria it's very rare but it's not good okay a dime is very rare and it is a good okay so why you know what determines these what things are Goods and what things are not good so manga rolled out the fallout put this up this will working first he said there has to be human lead one second he said there has to be some properties as render the thing capable of being brought into causal connection with the satisfaction of the need meaning simply that thing must satisfy need third he wrote that human knowledge of this causal connection human beings must know that the thing at hand has the ability to satisfy their need so human knowledge of the proposition to and finally he wrote you must have the command of the thing sufficient to direct it to the satisfaction of the need so you must control the thing okay there's a bit as well means pointed out later on there's a problem with that it looks good at first sight but the point is that people use and purchase and pay high prices for things that do not satisfy their needs you know we know about quack medicines that people use that do not satisfy that does not bring about satisfaction of their needs okay there are many things that have you know throughout history that turns out really had no causal connection with satisfying the need so what Mises said was these two should be combined or should be replace with simply the human belief or opinion that a thing has a causal connection with the satisfaction of a need okay all you have to have is the human being who's acting believe that this thing will satisfy their wants okay many of us make mistakes we go to we go to a let's say a restaurant there's a number of menu choices we choose one dish that we anticipate will satisfy ourselves and be something that we we um desire and that will in fact realize the satisfaction of our want for a really good meal but at the end we see Jesus shouldn't forgotten it was awful okay or even our choice of restaurants we might regret because the lousy service all right so anyway it doesn't have to be true that the thing was satisfy you need for you to pay a price for it okay it's just that you have to have a belief or an opinion beforehand that that's the case okay so that that's important so those are the preconditions of a good now keep in mind that goods are elements of the external world according to manga they're elements of the external world that we use to satisfy our wants but we have to transform them no we can't we don't create anything we don't create let's say a Big Mac hamburger okay all over the process of production things are transformed from let's say a cow to chop me let's say a warehouse or and then finally to do the cooked good that you actually consume okay so the the point is that there's always transformation going on in the production process so we take this a step further manga went on to say look well that's what that's what those preconditions are necessary for thing to be good but what about an economic good okay an economic good Banger said is something that fulfills all of those conditions but which is insufficient in quantity to satisfy all human wants for it okay so now we can start to explain certain things air keeps us alive okay yet air is not a good there's not an economic good okay no one pays a price for air in a normal situation some of it if within 15 infants emphysema may pay a price to have air okay someone who's going to is going to dive go diving may pay a price for air an astronaut will have to pay a price for air because that's that that's air air is scarce under the under the water or in outer space or for someone whose lungs aren't functioning properly okay so they're willing to pay a price for because it's scarce but in all situation airs in scarce so air has air is not an economic good okay nor is something that's very rare like the malaria fungus it's very rare okay but we're thankful it's rare because it doesn't fulfill a human need okay so anything that is not a good either is not scarce or it fails to beat one of those conditions for example oil wasn't thought to be a good for a long time when a farmers found coming up on their land they just thought it was waste okay this was before there any tech lot technology had developed at the point where we recognized oil as something that could be transformed and culturally into consumer goods okay so now manga was ready to solve the paradox of value okay so how do you do it he did it by asking a very insightful question he said look he said if something is a good it has to be scarce okay if it scarce what would happen if we lose a unit of it okay well what would happen if one unit of that good were absent if one unit of that good was a quit was absent then some want would would go unfulfilled right and as we'll show you in a moment this was his principal of larger utility it would result in less satisfaction than if that unit was present so what in a nun seeing this principal or law of marginal utility mega use something like the following example is book okay he assumed that there was this fictional character Robinson Crusoe who's shipwrecked on an island really only just had his labor and and the natural resources on the island to keep himself alive and to satisfy his wants okay and the rocket crystal example is a very good example to explain the basics of a value of price theory okay even though it's been scoffed at in the history of economic for especially by socialists so what Nega posited was what he called the scale of needs today we call a scale of values he says let's assume that this person has a supply of wheat okay that he was able to transform the resources on the island into a wheat harvest so let's assume that he has a supply of wheat or some other kind of grain and that this is the needs that he has he ranks them now according to manga and the Austrians people's wants are ranked in they're important in the importance of their satisfaction and so on let me just get through the six ones here okay so the most important want for say a bushel or a let's say a sack of wheat banger used the term sack of week and let's say he has five sacks that he's harvesting so the first was to use it to bake bread just to stay alive so bread for life the second was bread for health okay with one sack of wheat transformed into bread he'd barely be able to just stay alive but he wouldn't have much vitality might have had much ability to do various activities to allow himself to flourish so bread for health so the second sack would be devoted to that the third would be to keep himself alive for next here he would use 1/3 to plant wheat for the following year's harvest so seed for next harvest fourth is seed for to fill the feed for form animals okay so good news he's going to use the wheat to feed form animals so that he can have milk and dairy products so he's domesticated some some cattle and and let's say chicken so so so this is going to give him eggs and milk and so on cheese the fifth walk is for he's lonely he's kind of bored so he's gonna he's going to ferment it I think meander he was whisky I'll use vodka to solid vodkas enter okay and if he had a six since he is lonely there are some parrots there he would train a parrot to talk to him okay so to feed feed pets okay and I'd say the way down 20 watts okay after the 20th Watts we don't want the wisdom he would have no more need for we so at that point wouldn't be a good but he only has five okay he only has five so it is scarce it is an economic good he believes that in fact it can satisfy these wants so he has these five sacks how we allocate them what we'll use them for well obviously he'll use them for his five most important ones okay so manga pointed that out it uses the five most important wants he would manufacture vodka he would he would bake bread okay and so on now let's just sit down here's where manga is is his important question the question was this what value does each sack of we've have how much value does a sack of wheat have okay is it the value that I attach to satisfying my most important want or some average of all the wants okay and he said the solutions this question comes to the answer comes in answering the in question the question is which want which satisfaction would I do without if one of those sacks were lost let's say some rodents break into the barn where the five sacks or sitting okay right before he starts using them and one night eats this sack okay they eat the second sack they devour it so he's only left with four sacks so manga then posed that question which satisfaction does he do without what's the answer the fifth the fifth so the value of each sack okay each single sack is equal to what the value of that sack that satisfies the lowest-ranked want that the supply is capable of serving okay this level of satisfaction is utility the last want is the marginal one hence value commander is equal to marginal utility meaning the satisfaction or utility derived from the marginal wants the lowest rank want that he would be able to satisfy and hence we have a theory of the band the Moores of units of a good that you have okay lets you had a sixth one what would happen what happens the value of the good if you had a sixth one he'd now use a sixth one domesticating feet apparent right so now the value has gone from what the fifth one to the sixth this one is lost which one what value does he lose the value attaches to the sixth a factor of six one okay if he had 22 sacks what's the value of each sack there's no conceivable use for more than 20 facts zero there's no value it's a free good it's like air okay wouldn't care what happens okay just like a stream running by if there's a stream that runs by his um little abode we're little a hot that he has built ah and there's more than uh what would fill all daily wants then all conceivable wants then water is not a good it's not an economic good it has no value just as if he had twenty five sacks of wheat it would have no value but the point is now he's lost the unit so what what has happened to the value goes up now if he loses one he loses the greater satisfaction than before so that's the law of water utility the more units of a good that an individual has the lower the value of the good is not just of the additional unit for what of all units the less of a good you have a few of the units of a good you have the more the higher the value that's the law of large utility and that explains the man that explains that that in order for you to be induced or entice into buying more units of a good what has to happen to the price will buy war CDs if the price is two dollars than we would if the price is ten dollars why because the additional CDs have a lower and lower value okay if you look on them as interchangeable alright and that's a solution to the paradox of value so anger then said here is a solution may be able to tell you but the solution is the following why is it then that diamonds have a higher price then then bread or water if you will sometimes call the water diamond paradox but it's easier to use bread why would that be the case because in a normal situation water is much more abundant and its margin utility and its value is therefore lower than the margin utility and value of diamonds and you can easily see how that can be switched around just play someone an imagined imaginary experiment place in a desert who hasn't had water for a few days and he meets and maybe he has a diamond ring or a few gem quality diamonds in his pocket and someone has a gallon of water what do you make the exchange yeah of course he would because at that point where water is extremely scarce water has a higher margin utility and therefore a higher value it serves a higher want than even the first diamond okay but that's not the case in a normal situation so that Menger solve solve the order of diamond paradox that had troubled economics for so long by focusing on individual the individual wants and analyzing goods in units now that's what he didn't he did he did not say what is all the bread what is all the wheat worth the robin crusoe that's a meaningless question doesn't mean anything okay what is a unit of wheat what is the value of a unit we to Robinson Crusoe that is a meaningful question that's a quote that's a question that leads us to this analysis okay not another another example of this the application of the Walmart utility which I give my undergraduates is let's say your family has three cars okay so it's one for the primary breadwinner in the family one for let's say the mom has a part-time job and those household errands and then one for junior okay and all of course are pretty much interchangeable okay so let's say that the old man cracks up his car one day okay who goes without the car junior the lowest more utility okay so now but now what happens is the value of the remaining cars of that family they go up it was now more important stupenda want depends on it well one other little puzzle that you can just look at to see if you understand the law which I'll quickly give you is this applies not just the one but the many goods but I'll just put two Goods up here if you understand alone let's say there's a former my the following scale of ones first second third fourth fifth okay and so on but now we've talked about two different goods goods that are not interchangeable that did not satisfy the same ones but you can still rank them against one another when you go into Walmart or go into a Best Buy or any to any store you go into there are many different items there and you have certain amount of money that you want to spend uh you'll always compare the goods against one another so there's always a unitary value scale everything you do any given resource that you have you will allocate a month a lot of different wants okay which include wants that could be only satisfied by goods that are that are different from one another so first let's just say this guy make it simple he has three horses and two calves okay and the horses can be ridden they can be used to do work pull plows and so on but they can't give milk they can't give dairy products the cows on the other hand can't really be written they can't be used to work around the forum they can only yield dairy products so there are different goods so you have h1 first horse h2 the second horse let's say the first horse is for plowing is filled okay the second horse makes it even easier for the plow the field so we'd also use if you have a second horse for plowing what you rank third is the first cow which would give you milk milk to a family the second Cal will provide enough milk that you can now make cheese and butter and the fifth horse will be for pleasure riding so 83 I'm sorry third horse a pleasure riding ok the barns on fire you can only get four animals out with four hours of you get out which I will do leave behind you leave you leave the horse behind even though yeah I know the horse person here they're dumb animals but anyway even though a horse serves the most important one the point is the value of horses because of the more utility is lower than the value of cows why because you value cheese and butter more than you do pleasure riding that's it that's the reason but now once once that occurs once you lose that horse ok what happens to the values of horses and cows which is more valuable now horses are more valuable because you value the horse and use as a second for ploughing the second horse - cheese and butter ok so again that shows that the value attached to Goods depends on the scarcity and they'll skip well scarcities chains like if you can with water and diamonds then your values will change someone had to hand off a quick question yeah yeah I didn't you're absolutely right if the fifth force had more value in exchange then cheese and butter then I would have reversed that ok but we're assuming that he doesn't okay but you're absolutely right about that ok ok now let me just talk about ya angered not only um derived and elaborated this world marginal utility which then gives you the demand ok and put that together with supply and you get price down thank Menger never really fully talked about develop a full price theory he's developed a theory of exchange but his book is only an introduction but what he did the second thing that he wanted to do was to ask how if the festival schools wall if the cost of production didn't determine price it was really the other way around how do we find out how to determine the prices on the market of the inputs ok that is the prices of labor the prices of of capital goods and various types of natural resources here manga used caused an effect again was an effect theory he used what we call or he develop what we call a theory of imputation basically manga reversed the causality of the Classical School so let me just put up a little diagram that Menger you never really drew it but he had he he described it verbally let's say you have you want to produce bread so there's different stages they have to transform the wheat and actually there's more stages than this because you actually have to build the tools for forming all right so you have you start with wheat then you combine the wheat with the labor of the Miller and so on and you mill the wheat into flour then you take the flour combine it with the bakers labor and so on and you get bread wholesale bread then you then you ship the bread to the retailer using other means of production including trucks and so on truck drivers labor and you get bread at retail and finally here's a consumer the consumer wants are satisfied the sooner purchases the bread okay what the classical school said was the price of the bread was determined so production goes this way production goes this way from mega-cool the higher order Goods higher order goods are goods that they're further away from the consumer to lower order goods we would take a closer and closer to consumer until you come to the final order okay which is the reach is the the consumers good the bread so here so the classical school unthinkingly said well production goes this way so value goes this way the high price of the week causes the price of the flour to be what it is and the price of the flour and all the things that are come the bakers labor causes the price of bread purchased by the wholesaler to be what it is and so on so the consumer pays the accumulated cost of production okay so value value and production went this way well of course this is wrong yes production goes this way but remember mangers causality it's two way causality banger says what causes people to harvest the wheat and and and and to a mill the wheat into flour and so on what causes is the value consumers attached to it so mangers said value is imputed this is a theory evaluator of imputation values imputed backwards okay the reason why bread has a price is because it causes the satisfaction of human wants the reason why the wholesale bread has a price is because it causes the production along with other labor and so on of the retail price there's a causal connection the reason why flour has a value is only because it's a causal connection between flour and the baked bread and the reason why week has value is because there's a connection a causal connection between we okay you combine the wheat with other four other factors of production with labor and so on and you transform into flour so the only reason why the higher stage Goods higher order Goods have values because what the final consumer goods have value and the only reason why that has value is because consumers put a value on it okay it was a willing to give other valuable things in it to purchase this so that's the theory of imputation now what what what mangers said what we can we can see how the implications of this and one implication this is called mangers law the fact that values imputed backwards or upwards production comes down words but value computed backwards one example I I often use the class is two one one is sort of the drums okay so the poppy fields or very very valuable poppy growing fields in Afghanistan and Colombia and so on okay where drugs come from now what would happen to the value of those fields Menger you tobacco by the way if consumer values change and people really thought and a believe that that drugs really don't satisfy any of their wants and in fact so from moral reasons or health reasons that they were going to avoid them completely so all Americans became anti drug what would happen to the value of all of those stages of production including the final stage the poppy fields or the highest stage will go to zero and let's take legit illegitimate good illegal good the example I use is the movie witness which Harrison Ford starred in which took place in the Amish country in southeastern Pennsylvania and the Amish or call the playing people because they don't believe in any sort of ostentatious display in their clothing they don't even have buttons they use little hooks the clasp there their clothing well obviously the Amish are not a fiction article diamonds they don't you they don't wear any jewelry what if all Americans adopted those get that scale of values what would happen to the value of a diamond mine what would happen to the salary of these highly skilled gem dealers go to zero so it's as a French economist once put it off a philosopher Conde Ock in 1776 you wrote a poem he said men pearls are not expensive because men have to die for them and that takes a lot of time and effort spent men died for them because they're so valuable so let's the reverse I take pearls yeah so your pearls come from oysters so why would you take all the time and effort and undergo the danger to die for pearls if in fact it's not even worn for it so pearls wouldn't have any value okay it's now if someone then despite that dole for pearls with those pearls be worth anything no he'd suffer loss he tried to sell no one want to buy them okay if people didn't think pearls were a good job I've got about one minute left I didn't wanted to just quickly mention manga actually figured out also what not only the fact that all of these Goods would be that that the we would have this the value that consumers attached to bread and we're forgetting about interest for a moment so if this whole stock of bread was worth a million dollars then the wheat would be worth a million dollars okay actually worth less because of the interest on the time that takes to produce the final bread but the wheat and everything else that produced the flour will be worth a millions would be a million but Menger actually came up with an explanation using what's called marginal productivity theory to explain how what the price of each individual labor capital good and so on would be okay he gave the general principle call the law of marginal utility but I don't think I have time to explain that okay I'll stop there Thanks

Channel: misesmedia

Views: 7,839

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Keywords: Joseph, T., Salerno, Ludwig, von, Mises, Institute, University, 2010, Marginalist, Revolution, Austrian, Economics, Liberty, Property, Peace, Freedom, Supply, Demand, Paradox, subjective, ordinal, value, utility, Carl, Menger

Id: k5sgWFrAwnw

Length: 59min 17sec (3557 seconds)

Published: Wed Aug 11 2010