Good afternoon, and it's a great pleasure to be with you today, and what I'm going to be talking about is the future of broadband. You heard earlier from Blair Levin, who's the man from Washington, D.C., who really understands policy. I'm the guy from Silicon Valley, and I'm going to talk about our view of the world, which is somewhat different. I work at a small organization in Palo Alto, California called the Institute for the Future. We've been around now, I think, 46 years. We're founded in 1968, doing long-range planning and forecasting, and in fact have worked with a number of the people in this room over the years. Our motto is foresight that leads to insight that leads to action, and we see ourselves as in the business of providing the foresight, and we work with our clients to generate the insights, which hopefully will lead to the action, which is their responsibility. As I was preparing this talk, I was thinking about one of the four founders of the Institute. There's a man named Paul Barron who passed away in 2011. He probably has as good a claim as anybody to truly being the person who invented the Internet, probably more than Vice President Al Gore. In 1964, Paul published a paper for the RAND Corporation, which is where he was working, called On Distributed Networks. He began by describing three kinds of network structures, what he called centralized structures, decentralized, and distributed networks. The reason for this is it was actually commissioned by the Air Force who was interested in what kind of a network architecture would survive an enemy attack. A centralized network was vulnerable because it could be taken out from a single point, but a distributed network had no center and therefore was much more robust, but it turned out that that really provided the kind of DNA that really underlies the fundamental architecture of the Internet. And as I'm going to argue, we're going to see this diagram come up later on, is becoming more and more the blueprint for society in the larger sense. So what I'm going to talk about in the few minutes that I have is, first of all, I want to talk about the power of exponential change. And I think that that's a driver that is sort of a challenge for us all to grasp. Then talk a little bit about the evolution of the Internet, the future of broadband, and then go a little bit beyond broadband to say what it all might mean. And then end up with a few suggestions that I hope will be useful. Well, let me start with the question of exponential change. Human beings in general can understand linear change or incremental change. We live with that, but we really have a hard time with the concept of exponential change. Although I think the Qataris probably have an advantage here because they're living in a world of, I think, of exponential change at the moment. But where this idea really came from was Gordon Moore, one of the founders of Intel, who back in 1964 formulated Moore's law, which is really not a law of nature but an observation. And what he observed is that the number of transistors per square inch on an integrated circuit had doubled every year since the integrated circuit had been invented, and he predicted that this would continue to happen in the future, so doubling every year. And in fact, that prediction has turned out to be remarkably true. So if you just look at the math of that, take a number and double it every year, what you get is something that looks like this.  It's 1964 there on the left when he made that observation. And what's interesting is for a long time that line goes along fairly level and then it starts turning up and it goes nearly vertical. And that's where we are now. We're on that upturn of the hockey stick. So we're at the point where at least in terms of the fundamental technologies that are driving us, they're all at that point of these very large numbers. And so let's talk a little bit about what that means. So in terms of raw computing cost, what Moore's law says is that the cost of digital technology is going to keep falling. And in fact, over a 20-year period from 1992 to 2012, the cost of raw computing power fell from $222 per million transistors to 6 cents, which is an improvement of 3,700%. And clearly this enables computing power that's at the very core of the digital infrastructure to get far more powerful. And it also gets tinier and tinier. So these are the things that we're carrying around, I assume probably everybody in this room, carrying around these devices in our pocket, have these things that are beginning to approach the power of supercomputers. Same is true of storage. Over that same 20-year period, the cost of data storage has actually fallen even more sharply from $569 for a gigabyte of data to 3 cents in 2012. And that's a drop of 19,000%. So storage is getting to be almost free. And finally, bandwidth cost performance. The numbers aren't quite as dramatic, but they're in the same direction. Cost fell from $1,200 roughly for 1,000 megabytes per second in 1999 to $23. And this is really what is speeding up the flow of information. So all these are big numbers. Let me give you a concrete example of what this means in practice. And we'll go back to 1956. And that device that's sitting there on that forklift is the world's first hard disk drive. It's the Ramac 350. It was built by IBM to accompany one of its systems. It had something like 24 separate disks in it. It had a total capacity of 5 megabytes. And every time I take a picture with my mobile, it's more than that. The engineers and IBM, by the way, said they could make a hard drive with 10 megabytes capacity, but the salesman said there was no market for it, so 5 megabytes was plenty. And at least for about $3,000 per month. So let's fast forward to 2013. And on the right is something called the Oyan Shadow Drive that you can carry around in your pocket. It's 5.2 ounces, which is one 6,000th of the weight of that Ramac. And if it held even the same amount of data, that'd be kind of amazing, but it has a capacity of a terabyte, which means that it holds 200,000 times more data than that Ramac did. And finally, the Oyan Drive, you can go on Amazon.com right now and buy it for $89.95, unless it's on sale now. It might be less. So the cost of storage on one of these drives is about 6 cents per gigabyte, or a tiny fraction of 1 cent per megabyte. So storage almost free. I'll give you one other quick, one more example. In 1994, Apple Computer, when they're often trying to push the envelope, they released one of the world's first digital cameras. It was called the Quick Take. It had a resolution of 0.3 megapixels. It could store a total of 8 photos. It had no focus, no zoom. There was no way to preview any of the pictures. You had to download it to your computer and then look at them. And I managed to borrow one of these. I was a fairly serious photographer and I was interested in this idea of a digital camera. So I borrowed one, went around and took some pictures and I downloaded it to my computer. And they were terrible. They really sucked to use the technical term. And I went around predicting to all of my friends that digital photography will never replace film. Wrong. I don't think there's any film cameras here today. So here we are in 2013. This is the Sony RX100. It has 20 million pixels. It has a 28 to 100 millimeter zoom lens. It has an LCD screen with a million bytes in it. An ISO rating that goes up to 6400. And it also does video. It does panoramas. And here it is right here. And of course this is an obsolete technology also. This is because nobody really wants a separate camera. It's disappearing inside of our mobile phones and not only will they be soon better than this camera, but it's connected to the world. So I've already, like this morning, sent this audience and sent it back to my kids in California so they're following this event in real time. So that's an example of the way in which technology, in a very short period of time, can start doing things that a few years earlier had seemed impossible. So now let's talk about... Oh, those are the examples of the pictures that you can take on the left. That's what the apple took on the right. And that's actually a zoom, just a small part of one of those pictures. And I promise that's the last picture but I wanted to bring them here. So now let's talk about the evolution of the Internet. So here we are in 1969. This is the full extent of the Internet. It's the first deployment of what then actually was known as ARPANET. There were four nodes, one at Los Angeles, one at the Augmentation Research Center, at Stanford Research Institute, headed by Doug Engelbart, one of the sort of secret heroes of the Information Age, one in Santa Barbara and one at the University of Utah. They were all interconnected with modems on least lines that ran at the breathtaking speed of 50 kilobits per second. And there were, I don't know, 100 people who were on the Internet. And here we are today. I mean, I can't show a map that shows all of the connections, but this is a kind of a heat map. This is actually going over a 24-hour period and the redder the colors are, the more intense the use is. It's a daily pattern. And you can see that wherever there are people and electricity, there is now Internet activity. And certainly the northern tier of the world is extremely hot. India and China are coming along. Africa is still in development, but that's where the next billion or two billion people are likely to come from. And this went from this tiny little thing to taking over the whole world. But another example of how rapidly this world is changing, and it's not just people, but it's the things that the Internet can do. And just go back, just think about going back to January of 2006. So at that point, Facebook was only on college campuses. There was no, none of us had access to it unless we were a student in college. Twitter didn't exist yet. It was created in March of 2006, and it was launched in July of that year. So nobody had ever heard of Twitter, which is running over there. In 2006, Netflix was the largest single customer for first-class mail delivery of the U.S. post office. In that year, they had mailed their billionth DVD. By 2010, they had become the biggest source of Internet traffic in North America in the evening as they moved to streaming service. So that entire business model had shifted. There was no iPhone in 2006. Nobody had ever seen that kind of device before. It was released in 2007, and Android didn't come along until 2008. And so the smartphone was just really not something, you know, the Blackberry was about as far as the technology went. Nobody had ever heard of a MOOC in 2006. Coursera, which was the thing that grew out of the Stanford course that had 160,000 people online, was launched in 2012, and it was been joined quickly by many others. And finally, in 2006, clouds were just something you saw in the sky. Amazon Web Services was introduced at the very end of 2006. It now serves over 100,000 companies in 190 countries, and really helped to spark the whole movement of cloud. And I think I've seen data that says now half of the world's computing is now taking place in the cloud. So okay, that's the story of change. So now let's talk a little bit about the future and what it might hold. And given my scenario, what I'm saying is it's really very hard to know what the future will hold. It's going to be full of surprises, but there are some places, as Blair said, there are some places where the future has already arrived. We can look at those. And one of them is in the scientific research world. The National Lambda Rail in the U.S. is an ultra-high-performance network that supports advanced research activities at hundreds of universities and research laboratories across the U.S. It's currently offering connections at 40 gigabits per second, and they're working on moving up to 100 gigabits per second shortly. And what drives it is what they call application-empowered, high-performance e-science projects, high-energy physics, astronomy, earth science, bioinformatics, and environmental sciences. And what they believe is that in the coming decade, e-science is going to require terabit networks, exabyte storage to support distributed peda-ops computing. So, you know, these notions of terabits and exabytes and peda-ops, it's like a whole new language. You know, I think we've already learned about, you know, we've moved from megabytes to gigabytes to terabytes, but now, you know, these next increments, and every one is an increment of a thousand. And I think Robert Pepper probably will talk about some of these numbers and what they mean this afternoon. So, what's going on there? One of the most spectacular uses of the Lambda Rail is a multi-gigabit network known as SAGE, the Scalable Adaptive Graphic Environment, which makes it possible to create wall-size displays of scientific data by tiling arrays of large video monitors that permit users to visualize and interact directly in real time with data in many novel ways. And this is currently being used for scientific research, but I believe that versions of these versatile displays will eventually be found in businesses and homes. And Dr. Pepper told me, oh, if I come down to visit Cisco and Santa Clara, he can show me a commercial prototype that they've already got running, which is a great example of the future usually arrives faster than we expect that it will. Another interesting use of Lambda Rail is CineGrid, which provides ultra-high-speed connections that support digital media exchanges among remote participants. So, for example, you could have a worldwide crew that are editing a movie together in real time with zero lag, an example of what Blair would call high-performance collaboration that can be done seamlessly over the network. So that's the national Lambda Rail in the U.S., but there's a bigger picture, which is the global Lambda integrated facility, GLIF, which spans the world, and it provides a network that makes it possible for scientists around the world to get rapid access to vast amounts of data, for example, from the Large Hadron Collider, which sits in Switzerland and generates enormous amounts of data that can be transported over something like this network. The participants in the GLIF are the National Research and Education Network's N-Rens, and I noticed that part of the broadband plan for Qatar calls for the establishment of a national research and education network in Qatar. And so that means that you will be connected to this global facility. Another development that we can see that's going to change the nature of networking in the near future is what's known as software-defined networks. OpenFlow is a standard for software-defined networks that allows the path of packets through the network to be determined not by hardware, but by software that runs on multiple routers. And so what this means is that we're going to move from a static, essentially one-size-fits-all internet to a more flexible architecture that's controllable by the users themselves to optimize advanced application. And this is going to increase flexibility tremendously, but it also can raise the specter of network fragmentation and even vulcanization if everybody is running their own network. This, by the way, is the architecture that sits inside many of the largest data centers. Internal data centers are entirely run on this kind of architecture, but up till now the public-facing networks are different. Let's go a couple of more examples of the things that are appearing and that I think suggest where the future is going. Innocentive has been described as the eBay for innovation. It's an open platform where companies who have problems that they're struggling to survive can post what they call challenges and invite anybody in the world to offer a solution in exchange for cash rewards. And they've had thousands of problems posted and thousands of problems solved and the basic premise is no matter how many smart people you may have working for your organization or your company, they're more smart people in the world at large. And Innocentive gives you access to them all. Another example that I really like, a brand new company that's in Palo Alto, California, is Declara, which is a kind of a smart social network for organizations that uses machine learning to understand what the capability of the participants are of the network and then matching them up together. The first deployment is among the 280,000 K-12 teachers in Australia that are giving them a platform to share best practices and ideas. And so instead of each teacher in a classroom kind of working on their own, now they'll have access to all of the best experts in their country.  And finally, two weeks ago, IBM announced that Watson, which is the system that they created that went on the quiz show Jeopardy and beat the two human challengers a couple of years ago, kind of a very elaborate stunt, but they've now broadened its capabilities and they announced two weeks ago it's going to be online and anybody can sign up to use this. So instead of thinking of a computer, something that you program essentially at a low level or a high level, you'll be able to go in, you'll ask questions and Watson will answer it. And the people there are suggesting that this is changing the paradigm with which we're going to interact with computers. So again, models for change that really each one can radically change, but that's not all. There's a few more. Google Glass. There are already lots of people walking around my area out in Silicon Valley who are wearing these things that are, and I've tried it on. It's a little bit strange, but you're bringing the internet with you.  It's on your eyeglasses and it'll give you the answer to any question. And again, this is just generation point zero. You think about like 2022, the people who are going to be coming to the World Cup, many of them are going to be wearing the great-great grandson of this device. So it's not just going to be a better phone in their pocket. It's going to be incredibly powerful devices that they're going to be wearing. And what their expectations are for the kind of connectivity they want may be sort of a surprise. One of the things that you're going to be doing is augmented reality. You'll be able to overlay the real world with data. And in fact, one of my colleagues at Institute for the Future says, we'll look back on this era where we walked around in ordinary reality as sort of quaint and outmoded in a few years. We'll just simply expect the data to be there. And I think it's very interesting that Qatar is essentially scanning in 3D the entire country and will have the geo-coded data above ground and below ground that will give you the ability to do this kind of virtual reality very easily. Driverless cars are coming. I was in a parking lot in the little shopping center next to my house a few weeks ago. And there was a guy from Google taking a smoking break outside his Google car. And he just spends the whole day kind of running around on the freeways, getting experience. And I asked him, I said, did he keep his hands on the wheel at all? And he said, near them, near the wheel. And I asked him, was he ever scared? And he said, only by other drivers. So it's working quite well. And I think within a decade that's going to be real. Robots are starting to arrive. This is a little device that sells for under $200 called Autumn. It's a little assistant that provides support for people who are dieting for weight loss. So it's very friendly, very simple, but of course the power comes from its connection. And the news just came out last week that Google is making a very, very large investment in robots that I think is going to be an interesting watch. They haven't said really much about what they're doing other than they're doing it. One week ago, Jeff Bezos, the CEO of Amazon, was on television in the States. And he announced that one of the things that Amazon is playing with are pilotless drones because he wants to be able to fulfill an order within 30 minutes. So you'll order something and within a few minutes this drone will arrive in your backyard and deliver the package. And finally, as I arrived in the airport here, I saw this poster from HSBC that has this campaign about the future. And it says, in the future, exports will not be transported, they'll be transmitted. And at first I had no idea what that meant, but it sounded pretty futuristic. And then Dr. Pepper told me, well, what they're talking about is 3D printing. In other words, if you want to get a part delivered, you don't have to send the physical part, you just will send the blueprint for the part and a local 3D printer will print it out. And what's interesting about all of these applications is this is taking the Internet and now moving it out into the world in kind of autonomous form. So one of the things I think is really happening now is that the Internet is rapidly transforming from a place, a sort of a separate place, cyberspace, that we would go visit for specific purposes to something that's just simply part of our everyday environment, that's going to be in objects, that's going to be projected into the world. So it's going to be a constant companion for us. So now let's move beyond broadband. So given all of this marvelous technology, what does it mean for society? And this is really, I think, the most critical element. I would argue that we're now in the process of moving from a connected world, which is what we're talking about here, to what I would call a hyper-connected world. And what are the implications of that? Well, one of them is my colleague from the Institute for the Future, Marina Gorbis, has written a book called The Nature of the Future when she talks about what she calls a social-structed world. She means that individuals or small groups are able to harness the power of technology to join together in new ways and provide an array of new products and new services in ways that were simply impossible. I think the Khan Academy is a great example of that one man with a video camera and a pen who was trying to teach some math problems to his niece in a few states away ended up creating a global resource now that's changing the nature of education everywhere. And these new kinds of enterprises, again, what we're seeing is these diagrams, which we saw 50 years ago from Paul Barron, now really representing the way in which individuals relate and in which structures are created. Another example, another group that's studying this new world that's being created by broadband internet is called the Deloitte Center for the Edge, again located in Silicon Valley. It's headed by John Hegel and John Seeley Brown, the former director of Xerox PARC, and one of their most recent studies looks at how exponential change in technology leads to what they call exponential innovation. They also have talked about something they call the big shift. And I'm going to show you a picture and if you walk away with anything from my talk, I think this picture is probably the most important. And it's pretty simple. It's the shift from stocks to flows of knowledge. So if we think about the 20th century, this was the knowledge century where we would accumulate and we would build up stocks of knowledge and then we would be able to exploit them. Think of patent portfolios. Think about companies with great intellectual property, companies that have reached economies of scale and have been able to turn out and mass produce goods to the world, but in a world of constant and accelerating change, those stocks of knowledge decay so rapidly that you can't exploit them over time. In certain fields, technical fields in school, students who are in college for four years by the time they graduate, half of what they learn may be obsolete. And so there's no choice but to engage in a world of continued learning. So we have to move, they would argue, from a world of scalable efficiencies, the path to success in the 20th century, to pursue scalable learning, which enables everyone to become better, faster by actively participating in networks, both internal and external, and have opportunities to take on and deal with really challenging problems. So that innovation, which we think about in the world of products and services, is great, but we also need innovation in our institutions to evolve to work in this new world. Now I'll just give you a couple of quick examples of what I mean by this transition from stocks to flows. Consider Encyclopedia Britannica. It's great work of accumulation of man's knowledge, first published in 1768, published continuously until 2012 when the company that published it announced that was the last print edition of the Encyclopedia Britannica. And why? Well, it was something called Wikipedia that came along, crowdsourced online Encyclopedia that turns out that people kind of look down on until they realized it's much larger, it's much more up to date, and even more importantly, totally transparent because on every page you not only get the information but there's a tab up on the top called Talk. And if you click on that tab, you see all of the discussions that go into the making of that entry so that you're not only given the information, you're given the story that's behind it. Another example of moving from stocks to flows. Education used to be something that happened inside a school, and that happens to be the high school in Denver, Colorado where I got my high school education and it was a great place. But, you know, today, education no longer is confined to the walls of a school. We are now creating what John Sealy Brown calls Learning Networks with an infrastructure that can unite not only the schools but museums, after-school programs, homes, and online resources, and the schools just really become one more node in a learner's learning network. And it's really the learner, him or herself, who can be at the center of their own education and pursue whatever interests them and takes them on. One last example, you know, it's a great institution of our newspapers which package the world up and would deliver to us every 24 hours. Now it's seeming increasingly anachronistic. You know, we have 24-hour news, CNN, Al Jazeera, but, you know, increasingly we have Twitter feeds so that you don't need the newspaper at all. We have direct reports from the world from the people who are participating in it. So we're, you know, moving, again, from stocks of knowledge to flows. And so the issue is really one of participation. So that's the opportunity. Here's the challenge, though. You know, technological change is exponential and it's happening very fast. But social change, business change, and particularly political change happen more slowly. And this is, I think, this phenomenon accounts for the reason that Blair explained that the most important sentence in the national broadband plan that he created is that the plan is in beta and always will be because it's going to have to keep changing. So let me end up with a few suggestions I hope will be useful to you. A couple of things that I think it would be good to do, some things maybe not to do. One of the things not to do is what the U.S. just tried to do with healthcare.gov. I don't know if this disaster has made its way around the world, but it's been an enormous embarrassment for millions of people. And I happen to think that the product they're offering is absolutely incredibly important and valuable. I mean, to extend healthcare coverage to millions of people, U.S. being one of the few countries that doesn't provide this for everybody, but the implementation, as Blair said, got messed up royally. And, you know, an example of trying to use very old 20th century, if not 19th century processes to build something that was a disaster. You know, a better example, one that I really like is something called the Direct Project that was also done by the federal government. For over a decade, the government has been pursuing something called the National Health Information Network, NHIN, which is a vast, very elaborate, very ambitious infrastructure to connect all the healthcare systems. And they progressed very slowly. And the only reason you haven't heard about it is because there was no mandate for it to ever have a deadline. But in 2010, a small group of entrepreneurs, both inside and outside of government, decided they were going to try a different approach. Rather than trying to develop a set of specifications, issue a contract, and then run the contract, what they did was to set some very high level goals, set up a public wiki, and then invite anybody who wanted to participate to come in and help them design the product. And within less than a year, they had attracted, first of all, about 65 major players in the U.S. to take part. Within less than a year, the project moved from a discussion of goals to creation and testing of a prototype to its initial rollout, and now it's being taken up as very limited, modest goals. But it's been a tremendous success. And it was an example of how government can function entrepreneurially. Another example, I think, of what to do is in Mexico City earlier this year, they set up something called the Laboratorio para la Ciudad, or the Laboratory for the City. It's an experimental program whose goal is to foster civic innovation and urban creativity. For example, they partnered with Code for America, which is a program to recruit young people to help governments to create Code for Mexico City. And they asked for proposals to solve city problems. They got applications from some 250 young people who wanted to work for city government, and now they've put them in a room and they're working on all kinds of interesting applications. Another example of a good thing to do, Google Fiber a couple of years ago went to Kansas City and said they were going to wire up the whole city with gigabit speed fiber, which is great. And then the city responded by saying that this was a wonderful gift, but that they needed to do strategic thinking among the citizens to figure out how to make use of it. Another great example of what to do. This is one of my favorite places in New York City. It's a storefront in the Chelsea neighborhood of Manhattan called Senior Planet, and it's a showcase for cutting-edge technology for senior citizens. And so seniors are invited in to play with the technology. They can take workshops and classes in the back room, and every time they have a sign up for classes there's a line that goes out the door. And a final example, if you're trying to cultivate innovation in Qatar, it's very appealing to think of it like agriculture. You prepare the soil, you plant the seeds, you till the ground, you fertilize it, and the wonderful crops will come up. But that's really not how innovation happens. It doesn't really work that way. There's really another model, and it looks more like this. It's two young entrepreneurs in Silicon Valley have argued that it's really like a rainforest, not a farm.  It's very hard to tell the weeds from the seeds. But, you know, when Facebook started it didn't look any more promising than any other of a thousand startups which didn't go anywhere. So, you know, if you want to really cultivate innovation you have to do things like create a culture that will support it. There's a long conversation about what that involves. But that's a discussion for another time. Let me just end with a final thought. So two very different views of the future. And the first view comes from that great American philosopher Garfield the Cat, who is the hero of a comic strip. And Garfield's a rather sedentary, pleasure-loving character. But he has a lot of interesting thoughts. So in this strip his owner, named John, is looking at Garfield, who's in a characteristic pose. And he's saying to Garfield, you know, we can't do anything about the past. But then he says, we can do something about the future. And Garfield lies there and he thinks, it sounds like a lot of effort to me. He says, I think I'm going to like the future just the way it's going to be. So, you know, if that's your view, life is simple. On the other hand, there's another philosophy that I like better that has been attributed to Peter Drucker. And that is the best way to predict the future is to invent it. And I think, you know, Qatar has a wonderful opportunity now to invent its future. And so I want to wish you fair winds and calm seas and a wonderful future as you move into it. Thank you.


We thought to ourselves, you know, what would be better than having a fantastic villa up in the hills only 20 minutes away and everybody can come here and enjoy the best that the south of France has to offer. We're at a huge villa with a resort-sized pool and 1200 people that have responded that they wanted to be here. And it's a great way to meet people and reconnect to people that you've known from previous roles and in previous lifetimes. It's very social and it's kind of nice to get away from the more corporate, formal atmosphere of Cairns Main Festival. It fuels conversation standing around a vessel of water, I think, with beers. I've definitely been seeing a lot of the educational sessions which have been pretty inspiring, but as a marketer it's really awesome to come and see all the activations that brands are doing. So whether it's on the water, on the beach, in villas, I think a mix of everything. Like any major industry event, and this has become a really major industry event, it's more about the networking and more about how much ground you can cover in a short period of time. We're meeting a cross-section of different worlds here. We've got creative mix of technology, mix of data and investors and all sorts of different types of people.  I think everybody just wants to come and hang out by the pool and the cross-ed is hot and sweaty and you can come here and relax. It's just an amazing experience as a marketer and something I think as an industry we should be really proud of. What you're able to get when somebody might have had a one or two more glasses of rosé than they probably should have had is a real authentic answer to a question which normally they probably wouldn't give. It looks like a lot of partying on the surface, underneath that is a very efficient use of time, which is appropriate because in the end what Captify is all about is how do you more efficiently use your media dollars.


If you balance a 16-wheeler upright on its end, I guess it would be some sort of semi-stable equilibrium. Sometimes, when I discover a new concept, I begin seeing it in all sorts of interesting places. The checkout line at the supermarket, the user interface for a certain app on my phone. It's amazing how one lens can allow you to understand so much about the world, or at least to think about it in new and helpful ways. For example, in many functions, there's an ultimate maximum value, but there may also be smaller peaks, places where, if you couldn't see enough of the function, you might think we're the max. That's relatively boring, as far as mathematics is concerned. But the concept of the local maximum describes many interesting phenomena, and has been bouncing around in my head recently, coloring how I think about certain things. What kind of things? Part one, algorithms. This is my much-abused, hard-working robot vacuum cleaner. As you can see, he's particularly obsessed with cleaning this very small space under my cheap IKEA chair. Almost every time I run him through my apartment, he'll do a decent job tidying the entryway in the kitchen, then he'll find his way to this spot and just clean it incessantly until I come over and free him. The algorithms he uses to navigate are very simple and usually very efficient at covering the full extent of the space he has to clean, but if you feed this specific geometry into them, they just bounce around inside it aimlessly for hours. The space under the IKEA chair is a local maximum for the robot's navigation algorithms. The ultimate goal of the algorithms is to vacuum as much floor space as possible, and they're normally fantastic at doing that, but when they reach this location, every other direction the robot might go seems like a losing proposition compared to this tiny section of carpet. Local maximum are an issue for any software designed to maximize some variable, collectively called hill climbing algorithms because they climb the hill of a function to arrive at its peak. If you imagine a program trying to crawl along this function to get to the highest possible value, depending on how far it's willing to explore a downward trend, it may get stuck on this little hill here, failing to recognize the much larger mountain over there. Local maximum are a real problem for these sorts of search algorithms, which are used in many different fields, software, finance, anywhere that finding the optimum or largest value of a function is useful. Speaking of which, Part 2, Local Maxima in Science. Local Maxima aren't restricted to the simulations that scientists sometimes use to model the universe. The same phenomenon can be observed in the universe itself. We've discussed the most well-known example of this in Episode 85, Evolution. There are many simple mechanisms which would be massively advantageous for any organism which managed to evolve them. Mechanisms which appear nowhere in the incredibly diverse landscape of life on this planet. The reason we don't see animals zipping around on wheels instead of legs, or plants that harvest different wavelengths of light with more energy is because evolution is a sort of hill climbing algorithm, one which has identified local maxima of survival and replication and doesn't allow wide departures from those maxima. There's no incomplete version of a wheel which is better for locomotion than a leg, even a leg that isn't very good. Any organism that developed some mutation in the direction of a wheel would suck compared to its legged brethren. It'd get hunted down faster by predators. It'd be less adept at chasing down prey or searching for sustenance. It'd likely be selected for extinction in a hot second, forced out of the game by other non-wheeled organisms, never having the time to really develop that wheel thing enough to be competitive. Another way to think about local maxima is in the context of energy and equilibria. If you flip this graph upside down, we can imagine it as a series of valleys of different depths. If you drop a ball into some terrain that looks like this, it'll roll around and eventually come to rest. It might drop to the lowest point, but it might also come to rest in this little divot. This is a semi-stable equilibrium point. If you nudge the ball a little in either direction, it'll return to this low spot. If you were to push it hard enough, however, it would find its way out of the pocket and continue on down to the lowest energy state. Hill climbing, valley rolling, local max, local min, tomato, tomata. When you start talking about energy states and equilibria, you really throw the door open to a very broad application of this idea. Physics, chemistry, just about every field has an example of a semi-stable equilibrium that has the potential to become a runaway reaction, given a hard enough push. If you think about it, everything that's flammable sort of exists in a local minimum energy state. And if you're ever brave enough to check out the Wikipedia page for false vacuum, maybe the whole universe is. It's not always a bad thing. Part 3, local maxima in culture. Cumulative cultural evolution theory posits a ratchet-like hill climbing process of culture where good ideas are communicated through generations and honed over time, becoming more and more useful, a stochastic process with selection for adaptive traits. It's not the craziest theory I've heard. The results of cultural experimentation are passed on through tradition, transmitting centuries of trial and error in a body of custom that often goes unquestioned, sometimes persisting for long periods of time without any clear understanding of how our particular custom works, or even what it's for.  Because it raises the CO2 concentration of your blood, triggering an asphyxiation reaction which circumvents the normal diaphragm control system. We didn't even know what carbon dioxide was before the 1700s, and you probably didn't know the specific reason that holding your breath helps with hiccups, but you still do it, as your ancestors have for millennia. If you're a cook, you probably use a dozen such tidbits of cultural know-how every time you step into the kitchen without even thinking, from how to hold a knife to salting pasta water. Do it wrong, and you're apt to get an earful from whoever's nearby about the proper way to do things. As with our other examples, cultures are prone to local maxima. Traditions and memes that have long outlived their usefulness, but continue to reward compliance and punish deviation. Just about everyone agrees that it would be better for the US to transition to the metric system, yet doing so would cost some very rich companies a lot of money and annoy a lot of crotchety people. So, here we are. We can imagine how amazing it would be for the whole world to use the same standard units and fasteners and everything else. We can envision how simple and wonderful it would be, but to get there, it would have to get worse before it got better, so it's not going to happen. Part four, local maxima in human psychology. Some say that those who don't study history are doomed to repeat it, but the reality of the situation is actually much less rosy. Even those who study history manage to screw up in very much the same ways as their predecessors. As well and good to be a free thinker, we need people to question the prevailing cultural wisdom, regardless of the stigma associated with being a deviant. But trying to work everything out from first principles isn't just a question of reinventing the wheel. It incurs the risk of falling into well-trodden local maxima of human psychology. Self-reinforcing ideologies that are shaped in a way attractive to the human psyche that we've only managed to escape with a great deal of collective hard work and careful consideration. That is, through the hill climbing mechanism of culture. Reject the prevailing cultural wisdom and, well, flat earth conspiracy theories have gained quite a following in recent years and have been roundly mocked for holding backwards beliefs. But reading the flatter society's wiki, it seems that those who subscribe to the idea see themselves as free-thinking skeptics, valuing experimental evidence and careful considerations of facts that are available, refusing to accept the unthinking cultural dogma of around earth when they clearly see evidence to the contrary. Racist and sexist retrace the same longest-proven arguments about supposedly fundamental differences between types of humans, convinced that they're just asking hard questions that are too spicy for today's easily offended PC culture, even though those ideas lost scientific credibility decades ago. Anti-vaxxers refuse to accept the prevailing medical consensus and raise the alarm that vaccines may cause autism again and again, demanding that someone in the scientific community rigorously investigate the effects of so many vaccinations on children. You know, like the hundreds of studies which have found no such link, but you know, this time for real. The trick is, these are self-reinforcing paradigms. They provide seemingly intuitive explanations for phenomena and discount more commonplace explanations as myths for unthinking sheeple. When you've found a whole cluster of beliefs that seem to reinforce and validate each other, alternate explanations will automatically fail in comparison because they can't address every facet of the paradigm simultaneously. If you're trying to convince someone that the earth is round, merely showing them a video of a rocket launch isn't sufficient. They have defensible reasons to doubt that evidence, lenses distort images, and it doesn't explain any of the other reasons that they believe. The deviation in flight path of Flight UA 270, the result of the Bedford level experiment, or their subjective experience of a seemingly flat planet. To overcome the inertia of a local maximum, you have to explain all these phenomena better than the flat earth paradigm all at once. And to be honest, people don't usually afford the attention span necessary to get pushed towards a higher global maximum. If you refuse to trust the wisdom of the crowd pulling you that direction, it's technically possible you'll find something even higher. Maybe your hill climbing algorithm really is better than cultures. Maybe trying to reason from first principles will shake you loose at the errors of your ancestors. Or maybe you'll get stranded on a local maximum that culture has tried before and surpassed, vacuuming over the same square of carpet over and over. At least he seems happy.  What examples of local maxima can you think of? Please leave a comment below and let me know what you think. And speaking of maxima, 20,000 subscribers. Yup. I'm planning on doing some sort of Google hangout session where we can do Q&A or just talk for a while. So if you're interested in that, keep an eye on this channel and on Twitter, Facebook, Instagram. Thank you very much for watching. Don't forget to subscribe while I share. And don't stop thunking.


Okay, I've been teaching long enough to learn that any time there's a lull then then I start so Doesn't matter if we're on time or or not So let me just mention Where we're going to go in this in this talk And what we want to do is integrate this discussion of the theory of interest into our previous Discussion on yesterday on the theory of price So again one of the advantage of the Austrian approach is that everything is integrated from The foundation right all builds on this realistic foundation of the human Persons and human condition of action and and so on So yesterday when we talked about price theory we left two issues Untouched and one of these issues you heard a talk on by dr. Engelhardt Yesterday and this was on money So we didn't make any attempt in talking about price theory to talk about the price of money One of the great achievements of Ludwig von Mises Was the very first book that he wrote and published in 1912 theory of money and credit And he showed how to apply This approach of preferences and demand and supply to money To also explain the price of money the purchasing power of money And so we so that gap has been filled hopefully and Already which leaves us with one other issue that we did not address in talking about price theory yet And this is the element of time So all we talked about on Monday and all that dr. Engelhardt talked about with money on Monday It was what in finance we might call the spot price of Goods The actual cash exchange prices here and now in markets. That's what we talked about But most of you know that In addition to spot prices for goods there are also forward prices and then their derivative markets, right futures and Options and swaps that derive from the forward price And the forward price then introduces us to the temporal aspect of action and So that we haven't yet discussed and and so we want to we want to broach that Topic in this in this talk and then integrate again this discussion The of time And then interest of course refers to the inter temporal dimension of things Prices we want to integrate this with our price theory Now we'll proceed in in three steps First we just want to talk as we did on Monday just about fundamentals about the there we remember we talked about the fundamentals of Human action is purposeful behavior and we concentrated on the finite nature of the human person right, so we have ends But our means are limited We're finite beings. We can't just Will our ends to be attained? We make this distinction between ends and means and then we design action by employing the means to attain the ends and when we do this the satisfaction of our ends is typically Not perfect and and only temporary and then we have to act some more right? We have to act again and value and and so on so action continues on in our lives In in this talk now we want to concentrate on another fundamental character of the human person That human persons are temporal We're finite temporal beings. We exist in time, right? So we can also imagine infinite eternal beings Who wouldn't engage in human action the way we do so we're temporal and this is what we want to concentrate on? So let's again talk about what is fundamental then about our existence in time as human beings And then we'll talk about the second step the two valuations that we make with respect to time and Then the third thing we'll do is talk about the theory of interest so that that comes in in the natural sequence Okay, so here are some of the basic principles of time the first thing we want to highlight is that The the time at which we make a decision to act and the realization of our end are never synchronous The realization of our end at the moment we decide to act is always in the future to us So there's never a synchronous character in time of those two things It follows. This was the one point that we made about temporal existence on monday It follows that When we make a valuation about one end being Suitable for us to pursue in action We can only anticipate the value of the realization of that end at the moment that we're deciding to act It's only in anticipation Notice we stress this because all of the important principles of entrepreneurship and Profit and loss and so on all of these important features of human life stem from that fact Those of you who are familiar with the neoclassical economics know that in neoclassical economics, they don't have this realistic human element of time When they when they put time into their models, it's just like a time to the physicist It's just a variable, right over which something is moving or you know action Markets are moving or something. It's just a it's just a placeholder so to speak It's just click click click time passes. But for us as human beings time is much more robust It has meaning to us Uh a very important meaning that again if our theory doesn't incorporate we We don't have a very robust theory. We sort of reduced it to Certain elements that aren't false on the face of it, but aren't very helpful in understanding human Human action and so that's where we begin Now my definitions here of these concepts. I'm just following mesas in human action So if you've read human action, you've seen these definitions Mesa says one fundamental aspect of time for us as persons engaged in action is the period of production The reason this is important the period of production is it's a choice variable We can decide between different production processes that take more or less time And therefore the period of what he calls the working time the stages of production Let's say you want to build an automobile and you start by mining iron out of the ground and then You know shipping the iron to a steel mill and then making steel and then In another step of production you form a Body panels for the car and then in the final step of production. You have an assembly Factory where all the parts of the car are put together. So there's a certain time Structure to this production. There's working time involved, right? And we could imagine that each production process we could arrange in a technological way that would either link them out the time of production Or shrink it So there are various You know automobile production processes that are more hand And labor intensive and less capital intensive And they typically take a longer period of time. It's a choice variable for us. And so it's relevant The the working time and then there could be also maturing time There could be the time between the end of the production The physical production of the thing and then the beginning of consumption So the classic case of this would be a wine Production So you grow the grapes right and then you harvest and Then you make the wine and then it sits As a physical good you're done with production so to speak and you're done putting inputs into production But you have this maturing time The same thing could happen by the way with automobiles The automobiles are produced. They're shipped to a dealer. They sit on the dealer lot There's a marketing period, right? There's a maturing period where you're trying to find a Synergy between the consumers and and what you produced So so this is always involved in in action as well And then there's the duration of serviceableness of the good that's been produced There's the durability of the good that's been produced And again, the reason this is important for us as human beings is because we we can choose We can make cars that are more durable And we can make cars that are less durable And the production process for a less durable car might be cheaper The resource use the opportunity cost might be lower and so we might have a market for that with people whose wealth is You know not as great right the middle class and then for the rich We might make cars that are much more durable and feature laden and so on and so forth This is a choice variable. And so it's relevant for our action to think we have to think about Our production of things with respect to these these elements There's also the period of provision the period of provision is a is a planning horizon It's the time horizon over which we plan action And again, this is a choice variable for us All right, so we could we could think out like some of you're thinking about going to grad school and so you're planning out Right the four years or maybe it's going to be five or you're thinking about you know, what the career paths are beyond that and Right you you're planning out over decades. Maybe even Those of you who have small children, you know, you've come to the realization you can plan for things after you're dead Right we can have intentions to accomplish certain ends In other people's lives after we've left this world So this is important to us, right? It's relevant and therefore it's a it's a praxeological concept. It's a it's an important logical feature of of action And then we get to the The point that is most important for interest theory Which is this distinction that we make between sooner and later Now here again, I'll rely on mesis's phraseology You can't really improve on his Genius in these respects. So he says this he says Time as we experience time as human beings time is an irreversible flux But you have to love that phrase right an irreversible flux And what he's trying to get across and once you hear that of course it should ring a bell with you But what he's trying to point out is that time is not like means It's not like labor or or let's say capital funding or Land or something where we can accumulate a bunch of it and then expend it all at once on an action That's not time isn't like that We don't we don't like accumulate a hundred days and then expend it all at once in a single action Time is an irreversible flux. It just moves. It just marches on right And therefore we we we can't allocate time like a means it isn't a means It it's it's something in which our action is taking place But it's not a means to us And the and so the relevant concept as mesis goes on to say is between Sooner in time and later in time the reason this is relevant to us is because again, it's a choice variable We can choose to take an action sooner in time or we can take the action later in time How will we choose between taking it sooner and taking it later? We'll choose according to the way that we value those those alternatives And this is what uh, we would call economizing an action with respect to time We economize our action with respect to time by choosing when to take the action So for several different actions, uh, when we take it Matters for the value that accrues to us when when we act Just to give you a mundane example of this. Well, it's mundane to you. It's actually quite important to me Sublime I might add My uh, my wife and I have our wedding anniversary on november 17th Now i'm not going to go to her tomorrow and say honey, let's uh celebrate our wedding anniversary You know that it does be like No, of course you might be married to someone where they would think that highly romantic and it would be but the point is it It changes the value Of it when we take the action We'll change the value of it even if our action is exactly the same even if we plan the exactly the same event And so the timing of our action matters to us It's a choice variable again and and this is uh, this is one of the ways in which we value with respect to time Okay, so let's turn to that question Um The question i'll put it this way the timing of an action So as we said already the value of a good uh, or an action with a good can vary at different moments in time And because it can vary at different moments in time, we'll take account of that It doesn't mean we'll always take the action at the moment at which its value seems to be the greatest because that might involve cost Ancillary costs, right? And so the net benefit may not be as great But we'll take account of it. That's the point. We'll uh, we'll incorporate it into our decision This element of different value that can accrue to a good Now here we're speaking about consumer and producer goods So a consumption good like a Like a dozen roses that I might give to my wife our anniversary a consumption good like that can Vary in value depending on when I deliver the roses Or to take a you know an economic example We could think about the oil market So when oil is supplied on the market and you know bought and sold on the market Its price might be different The price of oil in the spot market today might be 70 dollars a barrel But it might be that the forward price in six months is a hundred Or it could be 50 or it could right? And so obviously if you have these differences in value at different moments in time The economizing thing to do is to move the supply of the good to where its value is higher where its price is higher And it says that's what would happen the speculators would be doing this in the market This is where forward prices and derivatives come from So just like with any other Arbitraging activity where we take a good from where it's lower valued and supply it to where it's higher valued Anytime we do this kind of you know people are engaged in this kind of activity The marginal value of the good will come together So if it were true that the forward price of oil was $100 six months forward and the spot price today was 70 that difference wouldn't last very long Because the producers of oil today would simply withdraw the supply and hold on to it And then supply it with the anticipation of supplying it six months forward Or or a speculator would buy it today if the entrepreneurs are too dull to see this And then and then hold it off the market and supply it in the future But the very act of doing this of reducing the supply in the present and increasing it in the future brings the prices together And that's how we know that allocation has been The economize that the profit has been earned so Here the timing of action is no different in that sense Then all all of the pricing activity that we talked about again on monday or the other discussions that you've had already about production and allocation Okay, so let me for those of you who aren't Up to speed on this. Let me just give you a definition of a forward price So some of you may never heard of this before A forward price is when two parties today make an agreement to exchange a good At a stipulated a date in the future at a price they agree upon today So the six month forward price for oil we have traders today saying You know getting together and saying I'll sell you oil at a hundred dollars a barrel Six months from now and the other guys is yes. Yes. I'll I agree to that trade Now obviously just like any other trade that trade would only be mutually beneficial if the two parties have different preferences Right the they must think differently about how the future is going to work out So the one person who's selling the oil at a hundred dollars a barrel In this forward contract six months from today Thinks that the actual price is That's a better price than the actual spot price will be six months from today But the person buying at at a hundred dollars a barrel thinks that's cheap right compared to what the spot price will be Six months from today they have as we say reverse preferences And so they can make a mutually advantageous trade and so this is where we get forward prices And we mentioned already then the efficient temporal allocation of goods So this is the first way in which we value Our actions with respect to time And the second way is what we call in Economic analysis time preference And as I alluded to already this refers to the distinction between sooner and later Now in order to tease out this principle Just like we did with the laws of utility on monday. We have to uh make a satyr's paribus Assumption we have to stipulate something right so remember when we did this on monday and we talked about the laws of utility we said Suppose we have caruso and he chooses a unit of coconut consumption of two coconuts And then he has different ends to which he can put two coconut unit of size He can drink the coconuts or he would also use two coconuts to eat the coconut meat and So on and so forth. These are stipulations right that isn't always true in action that you know Units are like this or the people choose in this way But hopefully you can see right away that in uh in markets units actually do come in equally serviceable amounts A gallon of gasoline 87 octane same as every other A gallon or a barrel of oil of this particular grade same as every other barrel of oil and so on and so forth So this uh, it's a realistic uh stipulation that that applies in the real world And so we could do the same thing or we're doing the same thing When we talk about time preference time preference is The preference a person has for a given satisfaction sooner as opposed to the same satisfaction later It's again as a satyrus paribus Deduction that we make from the distinction between sooner and later by the way, hopefully you can see that that just is When I say this it just uh rings true to you Just like when I say the second law of utility the second law of utility is that more of a good is preferred to less Hopefully when I say that it's just yeah, okay. I see that a good is scarce, right? So more of it has to be preferred to less because I can accomplish more Um with more of the good than I came with less of the good So that has to be true, right? It has to follow out logically Hopefully it seems just as obvious to you that the sooner satisfaction of a given end Is preferred to a later satisfaction of the same amount, right or the same the same character However, you want to stipulate this it just seems so But for those of you who are somewhat skeptical of this Let me provide you then with the logical implications That mesis again rehearses these in human action the logical implications if we assume that that's not true What if we assume that people always prefer a Future satisfaction a later satisfaction to a sooner or present satisfaction Well, hopefully you can see right away that if that were true then a person would never consume Because right now they prefer to consume, you know and get this satisfaction in the future But when that future moment arrives, they'll also still prefer the future, right? That that seems problematic. We know that people in fact do act The other logical alternative would be what if we don't care Between sooner and later. What if we're we have no preference? What if we treat them equally? Then what what follows from that well as mesis points out what follows from that is because we prefer more of a good to less If we didn't have a preference for sooner over later Then we would start right now on the longest most productive production processes we can technologically imagine We'd forego any shorter Production processes that weren't more productive And engage only in the longest ones possible But this again is is precisely the opposite of what we do What we actually do is we engage in the shortest most productive production processes First and then exhaust those and then we go to the longer more productive production processes Right, so you can imagine again a kind of stylistic example of this. Yeah Adam and Eve kicked out of the garden and you know instead of just uh, you know hunting and You know gathering and doing these primitive sorts of production processes they they they hit upon the notion of you know building a Aframed house They can conceive you know cut you know knocking down trees and cutting them up and so on and so forth So I had to have to build saws first and so on and so they set upon those production processes because that would be so much more Valuable to them than just you know grubbing On the ground and sleeping under the stars and in the rain and snow and so on No, of course. They don't do this. They they set upon the shortest most productive production processes just again like we do today So This this is the idea that mesis has in mind here Okay, let me also mention that Just like preference time preference cannot be shown false by examples Again mesis takes a few of these just to illustrate But let me start with an example of preference just to show you again That the logic the power of the logic involved in this And this is an example I give to my students at gross city college Suppose we have a person and this is to be a fairly common experience.  He wants to you know, he understands. Oh, this is terrible for my health in the long run And you know, it's kind of annoying to other people, right? I'm doing this and then blowing the smoke and they hate that and but like I just can't stop or whatever You know excuse he gives to this And then and then and then here's the question does this guy prefer to smoke And the answer that economists give is yes indeed he prefers to smoke How do we know this or what do we mean when we say that he prefers to smoke? Because his preference is always consistent with his action this idea of demonstrated preference, right? Preference is just that that valuing choice that we make between what we value more highly and what we value less highly It we're just using the word this way in other words And so you can't you can't say that uh, you know This this guy who's smoking does not prefer to smoke Right, then you're using preference in an ambiguous way. That's not the way economists use the word preference And so the same sort of logic applies to time preference. It's very difficult to come up with the counter examples Mises gives three possible counter examples in human action He says suppose we have a guy who has a theater ticket for friday night And then he meets a friend And his friend has a ticket to another theater production also for friday night And the guy who has the theater ticket says oh, I wish that ticket were for saturday See, I prefer the future good, right? I wish that I wish it was not a present good But a future good and as mises points out this is not is not a counter to time preference, right? This is just again the problem of uh scarcity We can't do we can't do two actions synchronously because we're finite beings And so uh, they're mutually exclusive. We choose one over the other right and we always have to give up the one The other case seems a little bit more difficult, but actually again, it's quite uh Easy to resolve logically. This is the famous example of ice in the winter and ice in the summer So we have a person who in the winter says I prefer ice in the summer But you see again, uh Satyrus is not paribus here, right? You've changed the stipulation doesn't hold you're not getting the same satisfaction in the in the in the present as the compared to the future because Having ice in the summer allows you to do all sorts of more enjoyable things that you wouldn't dare do in the winter At least not in pennsylvania You know sitting out on the veranda and sipping iced tea, right? Yeah, you can do that. So so I prefer the ice in the summer of course I do because The conditions under which I'm going to consume in at that moment in time are more valuable This hopefully this rings a bell. This is the timing of an action, right? Of course, I want ice in In the summer because I can do things with it that are much more beneficial than I can do with ice in the winter And this is not a violation of time preference And then the third case he gives is of the miser So the miser, right who just hoards money all the it's a scrooge mcduck Horns up all his coins and swims in them In his vault or whatever And you know never expands and as mises points out. Well, yeah, the miser has Very low time preference Maybe he doesn't do much consumption in the present. He says most of his Wealth, but he doesn't have zero time preference or whatever negative time preference would mean He still has a preference for sooner. It's just that he has very very low time preferences. We say In economics so again these don't seem to be very Effective counter examples So now from from these considerations, we'll move on then to the discussion of the rate of interest And here We're going to talk we're going to use this terminology We're going to talk about what we'll call the pure rate of interest and the pure rate of interest is the Premium that people place because of their time preference on the present So it's the premium that people place On the present or sooner as opposed to later the future This is how we define the pure rate of interest Okay, so here's the schematic. Here's the logical schematic of how the argument runs out And I've superimposed This with some of what we did on monday So again to show you the integration of how we integrate interest theory into price theory So this top Line is what we talked about on monday for consumer goods. We have preferences that people have And then because the buyers and the sellers have reverse preference they can Both gain in trade and so they Those who want the good more urgently demand it And those who have it who desire to keep it less urgently supply it And then the market clearing price for the consumer good emerges. So we get the price of the consumer good It's exactly the same logical structure for time preference. We have people with different time preferences Some like the miser have low time preference And some have a very urgent Present gratification that they want to satisfy They have what we call high time preference And so the high time preference person is willing to pay The low time preference person a premium at which they can Both gain For the lending of the present money and then the payback in the future And so this is The second line and we call that interest rate the pure rate of interest because it depends on nothing but time preference At the end of the talk, we'll get to the other factors that influence Interest rates, but but at this point we want to talk just about time preference And then the integration comes in in the bottom part of the chart And and again, we talked a little bit about this on monday The the prices of consumer goods generate revenue. So this is the marginal revenue product For the producer of the good. So whatever this consumer good is, let's say it's smartphones or whatever the iPhone 10 that we used in is in our example on monday Selling the the price Which it sold generates revenue for apple And so that's the marginal revenue and then the product part the marginal revenue product the mrp The product part is the physical production Of the producer good Remember, we use the example of a tech worker So the tech worker has a certain physical productivity in the production process generate, you know with this team He generates a certain physical product a new innovative 3d feature on the phone or whatever and then and then consumers value that to a certain extent and then that generates Marginal revenue product and then the interest rate gives us the discount So that's the d part in d mrp That comes from the interest rate So the entrepreneurs demand for a factor of production if he pays in advance If he fronts the money to the worker paying the worker, you know every month as you go along But the worker is producing something that's not going to be sold for you until next year Well, then the entrepreneur has to earn interest on that on that loan right on that implicit loan that he's making And so he discounts the wage He's only willing to pay The marginal revenue product discounted by the rate of interest because he could take his funds that he saved up in The past and just lend them out on credit markets and earn the rate of interest He doesn't have to engage in production to earn a rate of return Now you can earn this in the credit markets And then there's the opportunity cost of the worker right and these two factors then determine the price of producer goods So again, this fills a gap that we that we left on monday Okay, so now the next step we want to we want to look at these arrows just like we did again on monday for the top line We want to look at the causal arrows How do preferences lead to demand and supply for Present money. How does the demand and supply for present money lead to the interest rate? Now one very important this is critical And there's a lot of discussion about this in the literature for those of you who are in the The graduate seminar That they'll do on thursday. We'll talk quite a bit about this point, but here I just want to introduce it So you're aware of it So here's my here's again the definition of the pure pure rate of interest It's the premium on the present or we could say the discount of the future as we just went through But this comes about in the form of intertemporal trade of money So money actually has two prices. It has a spot price An exchange price right now the purchasing power of money right now as we exchange it and it has an intertemporal price Present money is traded for future money Goods also have two prices. They have a spot price the price today the cash price that you would pay to buy it today And they have forward prices You notice people do not make loans in kind There are no loans in apples or in You know lug nuts or in machine parts or things of this sort Because if you made a loan in in goods Then when the future came The actual market value of the good could be radically different Depending upon the timing issue right depending upon the demand and supply conditions Timing It's consumptive value or productive value could be wildly different And so people don't do this instead. They make their intertemporal trades only in money This is because money is the medium of exchange the general medium of exchange And so it it's not subject to the vagaries of Value from changing conditions of consumption and production Every dollar always has an interchangeable Value in the market with respect to its use as a medium of exchange If I have a hundred dollars today, you know in cash, I'm Perfectly happy to trade it for a hundred dollars Somebody else has right five twenties for five twenties But nobody would trade six twenties for five twenties today, right? They're perfectly interchangeable or as we we say the Money is the is the unit of economic calculation and economic calculation covers all possible configurations of calculating Across persons across places across time And so people naturally gravitate toward money when they make loans And not goods So that's an important Point and again a lot can be said more can be said about this, but we'll we'll leave it at that Okay, so here's how we go from preferences to demand For present money and supply of present money So in the left hand column, I've got a one person who has these preferences We're assuming and again, we'll get to this at the very end But we're assuming that the purchasing power of money does not change We'll we'll get to that what happens if it does we'll get to that later So a thousand dollars today is preferred over a thousand in one year because of time preference But there is some amount of money in one year that this person would be willing to Accept in exchange for a thousand today And in my stipulation, it's eleven hundred dollars So if someone were to come along to this person and say I'll pay you eleven hundred dollars One year from today if you give me a thousand today those preferences say this person would take that trade They would prefer that Now the person on the right hand side person b Places a much larger premium on the present In order to bid away a thousand dollars from person b Someone would have to pay three hundred dollars right a year from now So we say person a has lower time preference the premium Person a requires is smaller or lower and person b has higher time preference He's much more urgent demand for the thousand dollars in the present So the two of them Could then get together and make a mutually advantageous trade at into any pure interest rate between 10 percent and 29 percent right Person b would prefer to get the twelve hundred dollars today as opposed to let's say I mean a thousand today as opposed to twelve fifty Let's say a year from today So he'd be willing to pay twelve fifty to person a person a ranks twelve fifty up here So person a is happy to get twelve fifty a year from today and give up his thousand today That that's where the interest rate comes from the pure rate of interest right just from this mutually advantageous trade Just like the price of any good comes from the mutually advantageous trade when two persons have reverse preferences Okay, so now what about the market? Well, we'll skip over the details of this because we can't cover this on monday, right So in a market, we've got a whole bunch of different people with a whole spectrum of preferences across all these people And so when they meet in markets, they gravitate toward exchanging at the market clearing price So that all of their preferences will be satisfied just like we had explained on monday And so here we call this the time market. This is all the trade of present money Uh for future money and then the interest rate is is set by people or Gravitates Toward this point where all of the lenders can find a borrower and all of the borrowers can find a lender That's the only rate at which this this happens Okay, so that's again the ground that we covered already Now just to just to summarize this part Time preferences then determine Both elements of the market Just like preferences In general determine both the price of a good and the quantity of it traded Time preference determines both the market clearing rate of interest the market rate of interest And the amount of lending and borrowing that goes on there's nothing except time preference behind Um The these these phenomena in the market of prices and quantities traded Now it is true that Uh, it And I didn't stress this on monday, but it is true that uh, economists Austrian economists Recognize that preferences themselves are influenced by the circumstances in which we act But there is no scientific relationship between the circumstances in which we act and the formulation of the valuations in our minds By which we choose one thing over another We we're just at a loss to know scientifically To give an account of this right And so that's why we start logically with preferences But but you shouldn't think that we're just uh stipulating that people have preferences. We're not saying that We're saying that you have real people like you and me In real set of circumstances and we go to the gas station today and we buy gasoline That that's what we're talking about or you know, you go to uh A pnc bank and take out a student loan to to enter college It's that that we're speaking about you do that because your preferences are such and such within the circumstances of your own life Um, so to highlight that point and then the last point on this slide that I will make is that um For the purpose of economic calculation that the entrepreneur is going to engage in the time market allows the entrepreneur to have either present money or Some amount of money in the future that these two are made equivalent By being able to lend and borrow and so in in my Simple example the future money is calculated as the present money or present value Times this term one plus the rate of interest So if I have a thousand dollars and I lend it out on interest for a year at 25 percent I'll have 1250 dollars at the end of a year That that of course is called compounding But if I'm if I'm an entrepreneur and I'm investing a thousand dollars in a production process with the anticipation of getting 1250 dollars a year from today I can know that those two sums are also equivalent right I can either have a thousand dollars today because of credit markets or I can have 1250 dollars in a year So if I if I'm producing and selling something a year from now I know exactly what it's what that future money is worth In the market as present money And so the entrepreneur can now compare all of the future revenues that he's going to receive the Through production to present money that he's expending in order to set in motion production processes for that to occur It's quite again a remarkable result And then we want to talk about components of the time market The time market is made up of two Major components. There are two ways in which present money could trade for future money One we call the credit markets and in credit markets, there's a contractual arrangement That's made between the lender and the borrower And so present money is lent under contract and then the borrower is Again under contract an enforceable contract to pay back the stipulated funds in the future And then we can further break down credit markets into consumer loans and producer loans And then we can further break down consumer loans into the different types, right? The mortgage loans and auto loans and general merchandise loans and so on and the same with producer loans triple-a corporate bonds A junk bonds and so on and so forth And then the second part of the The time market is the capital structure And the capital structure is what we've been explaining all along Where entrepreneurs are engaged in production by fronting money to the owners of the factors of production They pay their workers on an ongoing basis. They buy their materials Right the auto company buys the parts and then symbols the car and then sells the car six months later they're lending Paying upfront money not under contract but implicitly With the intention of getting future money back when they sell the product and that investment commands a rate of interest One last point about this producer loans By the way all end up in the capital structure So producer loans are not an independent part of the time market They have no causal Importance in explaining the time market time market is explained just by our demand for consumer loans and the entrepreneurs demand for Factors of production And that's it I point this out because the neoclassical theory of the interest rate Is the supply and demand for producer loans Just that right so again, you can see a pretty Distinct contrast between the austrian approach and the approach of the neoclassical school Now let's I'm getting to the end so of my time. So let me Mention one other aspect of the time market And this is the arbitrage we've mentioned arbitrage before This is the arbitrage that would take place to create Uniformity of the pure rate of interest across all loans So suppose to the contrary suppose we had consumer loans here in the left panel and the interest rate was very low at point a and we had loans implicit loans in the production processes that Entrepreneurs were making where they were earning very sizable rates of return Then what would happen, of course, is that the capitalists who Supply the funding Would shift their supply out of the low interest rate loans moving back to point b And into the high interest rate loans again until those interest rates came together And so we see even though we don't necessarily see the same interest rates across all loans empirically We know that the pure rate of interest is actually being equated Underneath that right we don't even though we don't see it empirically And so the last thing i'll say then on that point is that this is just another example of the Robust explanatory nature of the austrian approach What we're really trying to explain is the unseen meaning of action Right in addition to the empirical Features of it we can explain the actual meaning of it to human persons Whereas again our neoclassical friends explain only the empirical Okay, thank you very much


Hello, I'm Mike McKee, the Bishop of the North Texas Conference in the Iowa Methodist Church. The prophet Isaiah writes in the 43rd chapter, the 19th verse of these words, I am making a way in the desert, paths in the wilderness. The theme for this year's annual conference has changed. It is now building the bridge together. The date is still the same, September 18th and 19th. And this announcement is, first of all, to tell you that we will be doing that virtually. That we will not be able to gather together in the sanctuary of St. Andrew United Methodist Church because we want to do no harm. We do not want to harm anybody because we've gathered together during this time of pandemic. But there's something else we need to do. That is, we need to celebrate the kind of ministry that so many of you have done first in terms of the worship online and the way in which you've continued to be the church even though you've not been able to come together physically. The church is not closed. We've just changed the way in which we do church. And God has led us to that and I'm deeply grateful for the clergy and laity who've been leaders and have done that courageous work. But there's another piece and that is over the last few months that we have been reminded once again about the racism that persists not only in our country and in our communities, but yes, sometimes even in our churches. And I'm deeply grateful to the clergy and laity who've spoken out and looking for ways in which to engage about what it means that together we build a bridge together. So annual conference will be a time of remembering what has happened, what we will do then and about the building of the bridge that we will do together. But not just us, but with the spirit of the living God. So I look forward to seeing you on September 18th and 19th virtually and I continue to pray for your ministry and affirm that which you do. God bless you.