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[Assistant] I said that I did not like to leave my mother, on which he suggested that I should go home to her every weekend, and he offered me a hundred a year, which was certainly splendid pay.


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[Assistant] So it ended by my accepting, and I went down to Chiltern Grange about six miles from Farnham.


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[Assistant] Mr. Carruthers was a widower, but he had engaged a lady housekeeper. A very respectable elderly person called Mrs. Dixon to look after his establishment.


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[Assistant] The child was a dear and everything promised well.


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[Assistant] Mr. Carruthers was very kind and very musical, and we had most pleasant evenings together.


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[Assistant] Every weekend I went home to my mother in town. The first floor in my happiness was the arrival of the red moustached Mr. Woodley.


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[Assistant] He came for a visit of a week, and oh, it seemed three months to me. He was a dreadful person.


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[Assistant] A bully to everyone else, but to me something infinitely worse.


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[Assistant] He made odious love to me, boasted of his wealth, said that if I married him I could have the finest diamonds in London.


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[Assistant] And finally, when I would have nothing to do with him, he seized me in his arms one day after dinner—he was hideously strong—and swore that he would not let me go until I had kissed him.


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[Assistant] Mr. Carruthers came in and tore him from me, on which he turned upon his own host, knocking him down and cutting his face open. That was the end of his visit, as you can imagine. Mr. Carruthers apologized to me next day.


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[Assistant] And assured me that I should never be exposed to such an insult again. I have not seen Mr Woodley since.


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[Assistant] And now, Mr. Holmes, I come at last to the special thing which has caused me to ask your advice today.


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[Assistant] You must know that every Saturday afternoon I ride on my bicycle to Farnham Station in order to get the 1222 to town.


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[Assistant] The road from Chiltern Grange is a lonely one, and at one spot it is particularly so, for it lies for over a mile between Charlington Heath upon one side and the woods which lie around Charlington Hall upon the other.


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[Assistant] You could not find a more lonely tract of road anywhere.


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[Assistant] And it is quite rare to meet so much as a cart or a peasant until you reach the high road near Crookesbury Hill.


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[Assistant] Two weeks ago I was passing this place when I chanced to look over my shoulder, and about two hundred yards behind me I saw a man, also on a bicycle.


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[Assistant] He seemed to be a middle-aged man with a short dark beard.


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[Assistant] I looked back before I reached Farnham, but the man was gone, so I thought no more about it.


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[Assistant] But you can imagine how surprised I was, Mr. Holmes, when on my return on the Monday I saw the same man on the same stretch of road.


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[Assistant] My astonishment was increased when the incident occurred again, exactly as before on the following Saturday and Monday.


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[Assistant] He always kept his distance and he did not molest me in any way. But still it certainly was very odd.


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[Assistant] I mentioned it to Mr Carruthers, who seemed interested in what I said, and told me that he had ordered a horse and trap, so that in future I should not pass over those lonely roads without some companion. The horse and trap were to have come this week.


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[Assistant] But for some reason they were not delivered, and again I had to cycle to the station. That was this morning.


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[Assistant] You can think that I looked out when I came to Charlington Heath.


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[Assistant] And there, sure enough, was the man exactly as he had been the two weeks before.


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[Assistant] He always kept so far from me that I could not clearly see his face but it was certainly someone whom I did not know.


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[Assistant] He was dressed in a dark suit with a cloth cap.


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[Assistant] The only thing about his face that I could clearly see was his dark beard.


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[Assistant] Today I was not alarmed, but I was filled with curiosity, and I determined to find out who he was and what he wanted.


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[Assistant] There is a sharp turning of the road and I pedalled very quickly round this and then I stopped and waited.


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[Assistant] I expected him to shoot round and past me before he could stop, but he never appeared.


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[Assistant] Then I went back and looked around the corner. I could see a mile of road, but he was not on it.


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[Assistant] To make it more extraordinary, there was no side road at this point down which he could have gone. Holmes chuckled and rubbed his hands.


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[Assistant] This case certainly presents some features of its own," said he.


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[Assistant] How much time elapsed between your turning the corner and your discovery that the road was clear? Two or three minutes. Then he could not have retreated down the road, and you say that there are no side roads. None.


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[Assistant] Then he certainly took a footpath on one side or the other.


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[Assistant] It could not have been on the side of the heath, or I should have seen him.


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[Assistant] So, by the process of exclusion, we arrive at the fact that he made his way toward Charlington Hall, which, as I understand, is situated in its own grounds on one side of the road. Anything else?


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[Assistant] Nothing, Mr. Holmes, save that I was so perplexed that I felt I should not be happy until I had seen you and had your advice. Holmes sat in silence for some little time.


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[Assistant] Where is the gentleman to whom you are engaged? he asked at last.


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[Assistant] Oh, it may be a mere fancy of mine, but it had seemed to me sometimes that my employer, Mr. Carruthers, takes a great deal of interest in me. We are thrown rather together. I play his accompaniments in the evening. He has never said anything. He is a perfect gentleman. But a girl always knows. Ha! Holmes looked grave. What does he do for a living? He is a rich man.


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[Assistant] Well, at least he is fairly well to do, but he goes into the city two or three times a week.


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[Assistant] He is deeply interested in South African gold shares.


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[Assistant] You will let me know any fresh development, Miss Smith. I am very busy just now, but I will find time to make some inquiries into your case. In the meantime, take no step without letting me know. Good-bye, and I trust that we shall have nothing but good news from you.


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[Assistant] It is part of the settled order of nature that such a girl should have followers," said Holmes. He pulled at his meditative pipe.


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[Assistant] But for choice not on bicycles in lonely country roads, some secretive lover beyond all doubt, but there are curious and suggestive details about the case, Watson, that he should appear only at that point.


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[Assistant] Exactly. Our first effort must be to find who are the tenants of Charlington Hall


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[Assistant] Then again, how about the connection between Carruthers and Woodley, since they appear to be men of such a different type.


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[Assistant] How came they both to be so keen upon looking up Ralph Smith's relations?


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[Assistant] One more point. What sort of a menage is it which pays double the market price for a governess but does not keep a horse although six miles from the station? Odd, Watson, very odd. You'll go down? No, my dear fellow, you will go down.


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[Assistant] This may be some trifling intrigue, and I cannot break my other important research for the sake of it.


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[Assistant] On Monday you will arrive early at Farnham. You will conceal yourself near Charlington Heath. You will observe these facts for yourself, and act as your own judgment advisers.


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[Assistant] Then, having enquired as to the occupants of the hall, you will come back to me and report.


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[Assistant] And now, Watson, not another word of the matter until we have a few solid stepping-stones on which we may hope to get across to our solution.


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[Assistant] We had ascertained from the lady that she went down upon the Monday by the train which leaves Waterloo at 9.50. So I started early and caught the 9.13.


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[Assistant] At Farnham Station I had no difficulty in being directed to Charlington Heath. It was impossible to mistake the scene of the young lady's adventure, for the road runs between the open heath on one side and an old yew hedge upon the other, surrounding a park which is studded with magnificent trees.


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[Assistant] There was a main gateway of a lichen-studded stone, each side-pillar surmounted by mouldering heraldic emblems, but besides the central carriage drive I observed several points where there were gaps in the hedge and paths leading through them.


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[Assistant] The house was invisible from the road, but the surroundings all spoke of gloom and decay.


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[Assistant] The heath was covered with golden patches of flowering gorse, gleaming magnificently in the light of the bright spring sunshine.


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[Assistant] Behind one of these clumps I took up my position so as to command both the gateway of the hall and a long stretch of the road upon either side.


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[Assistant] It had been deserted when I left it, but now I saw a cyclist riding down it from the opposite direction to that in which I had come. He was clad in a dark suit, and I saw that he had a black beard.


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[Assistant] On reaching the end of the Charlington grounds he sprang from his machine and led it through a gap in the hedge, disappearing from my view.


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[Assistant] A quarter of an hour passed, and then a second cyclist appeared. This time it was the young lady coming from the station.


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[Assistant] I saw her look about her as she came to the charlington hedge.


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[Assistant] An instant later the man emerged from his hiding place, sprang upon his cycle, and followed her.


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[Assistant] In all the broad landscape those were the only moving figures, the graceful girl sitting very straight upon her machine,


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[Assistant] And the man behind her bending low over his handlebar with a curiously furtive suggestion in every movement. She looked back at him and slowed her pace. He slowed also. She stopped. He at one stopped too. Keeping two hundred yards behind her.


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[Assistant] Her next movement was as unexpected as it was spirited.


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[Assistant] She suddenly whisked her wheels round and dashed straight at him.


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[Assistant] He was as quick as she, however, and darted off in desperate flight.


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[Assistant] Presently she came back up the road again, her head haughtily in the air, not deigning to take any further notice of her silent attendant. He had turned also.


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[Assistant] And still kept his distance until the curve of the road hid them from my sight


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[Assistant] I remained in my hiding place, and it was well that I did so.


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[Assistant] For presently, the man reappeared, cycling slowly back.


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[Assistant] He turned in at the hall gates and dismounted from his machine.


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[Assistant] For some minutes I could see him standing among the trees. His hands were raised, and he seemed to be settling his neck-tie.


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[Assistant] Then he mounted his cycle and rode away from me down the drive towards the hall.


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[Assistant] I ran across the heath and peered through the trees. Far away I could catch glimpses of the old grey building with its bristling Tudor chimneys, but the drive ran through a dense shrubbery, and I saw no more of my man.


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[Assistant] However, it seemed to me that I had done a fairly good morning's work, and I walked back in high spirits to Farnham.


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[Assistant] The local house agent could tell me nothing about Charlington Hall, and referred me to a well-known firm in Pall Mall. There I halted on my way home, and met with courtesy from the representative.


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[Assistant] No, I could not have Charlington Hall for the summer. I was just too late. It had been let about a month ago. Mr. Williamson was the name of the tenant. He was a respectable elderly gentleman.


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[Assistant] The polite agent was afraid he could say no more, as the affairs of his clients were not matters which he could discuss.


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[Assistant] Mr. Sherlock Holmes listened with attention to the long report which I was able to present to him that evening, but it did not elicit that word of curt praise which I had hoped for and should have valued.


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[Assistant] On the contrary, his austere face was even more severe than usual as he commented upon the things that I had done and the things that I had not.


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[Assistant] Your hiding place, my dear Watson, was very faulty.


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[Assistant] You should have been behind the hedge. Then you would have had a close view of this interesting


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[Assistant] As it is, you are some hundreds of yards away and can tell me even less than Miss Smith.


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[Assistant] She thinks she does not know the man. I am convinced she does. Why otherwise should he be so desperately anxious that she should not get so near him as to see his features?


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[Assistant] You describe him as bending over the handlebar. Concealment again, you see. You really have done remarkably badly.


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[Assistant] He returns to the house, and you want to find out who he is. You come to a London house agent? What should I have done? I cried with some heat.


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[Assistant] Gone to the nearest public house. That is the centre of country gossip.


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[Assistant] They would have told you every name from the master to the scullery maid. Williamson?


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[Assistant] It conveys nothing to my mind. If he is an elderly man, he is not this active cyclist who sprints away from that young lady's athletic pursuit. What have we gained from your expedition?


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[Assistant] The knowledge that the girl's story is true—I never doubted it—that there is a connection between the cyclist and the hall—I never doubted that either—that the hall is tenanted by Williamson—who's the better for that?


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[Assistant] Well, well, my dear sir, don't look so depressed.


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[Assistant] We can do little more until next Saturday, and in the meantime I may make one or two inquiries myself.


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[Assistant] Next morning we had a note from Miss Smith recounting shortly and accurately the very incidents which I had seen, but the pith of the letter lay in the postscript.


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[Assistant] I am sure that you will respect my confidence, Mr Holmes, when I tell you that my place here has become difficult, owing to the fact that my employer has proposed marriage to me.


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[Assistant] I am convinced that his feelings are most deep and most honorable.


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[Assistant] At the same time, my promise is of course given.


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[Assistant] He took my refusal very seriously but also very gently.


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[Assistant] You can understand however that the situation is a little strained.


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[Assistant] Our young friend seems to be getting into deep waters," said Holmes thoughtfully as he finished the letter.


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[Assistant] The case certainly presents more features of interest and more possibility of development than I had originally thought.


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[Assistant] I should be none the worse for a quiet, peaceful day in the country, and I am inclined to run down this afternoon and test one or two theories which I have formed.


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[Assistant] Holmes's quiet day in the country had a singular termination, for he arrived at Baker Street late in the evening with a cut lip and a discoloured lump upon his forehead, besides a general air of dissipation which would have made his own person the fitting object of a Scotland yard investigation.


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[Assistant] He was immensely tickled by his own adventures, and laughed heartily as he recounted them.


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[Assistant] I get so little active exercise that it is always a treat," said he. You are aware that I have some proficiency in the good old British sport of boxing. Occasionally it is of service. Today, for example, I should have come to very ignominious grief without it. I begged him to tell me what had occurred.


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[Assistant] I found that country pub which I had already recommended to your notice, and there I made my discreet inquiries. I was in the bar, and the garrulous landlord was giving me all that I wanted.


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[Assistant] Williamson is a white-bearded man, and he lives alone, with a small staff of servants at the hall.


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[Assistant] There is some rumour that he is or has been a clergyman, but one or two incidents of his short residence at the hall struck me as peculiarly un-Ecclesiastical.


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[Assistant] I have already made some inquiries at a clerical agency, and they tell me that there was a man of that name in orders, whose career has been a singularly dark one.


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[Assistant] The landlord further informed me that there are usually weekend visitors—a warm lot, sir, at the hall, and especially one gentleman with a red moustache, Mr. Woodley by name, who is always there


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[Assistant] We had got as far as this when who should walk in but the gentleman himself, who had been drinking his beer in the tap-room, and had heard the whole conversation.


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[Assistant] Who was I? What did I want? What did I mean by asking questions?


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[Assistant] He had a fine flow of language and his adjectives were very vigorous


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[Assistant] He ended a string of abuse by a vicious backhander which I failed to entirely avoid. The next few minutes were delicious. It was a straight left against the slogging ruffian


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[Assistant] I emerged as you see me. Mr. Woodley went home in a cart. So ended my country trip, and it must be confessed that, however enjoyable, my day on the Surrey border has not been much more profitable than your own. The Thursday brought us another letter from our client.


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[Assistant] You will not be surprised, Mr Holmes," said she, to hear that I am leaving Mr Carruthers' employment.


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[Assistant] Even the high pay cannot reconcile me to the discomforts of my situation.


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[Assistant] On Saturday I came up to town and I do not intend to return.


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[Assistant] Mr Carruthers has got a trap, and so the dangers of the lonely road, if there were any dangers, are now over. As to the special cause of my leaving,


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[Assistant] It is not merely the strange situation with Mr Carruthers.


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[Assistant] But it is the reappearance of that odious man, Mr Woodley. He was always hideous.


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[Assistant] But he looks more awful than ever now, for he appears to have had an accident and he is much disfigured.


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[Assistant] I saw him out of the window, but I am glad to say that I did not meet him.


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[Assistant] He had a long talk with Mr Carruthers, who seemed much excited afterwards.


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[Assistant] Woodley must be staying in the neighbourhood, for he did not sleep here, and yet I caught a glimpse of him again this morning, slinking about in the shrubbery.


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[Assistant] I would soon have a savage wild animal loose about the place. I loathe and fear him more than I can say.


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[Assistant] How can Mr Caruthers endure such a creature for a moment? However, all my troubles will be over on Saturday.


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[Assistant] There is some deep intrigue going on round that little woman, and it is our duty to see that no one molests her upon that last journey.


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[Assistant] I think, Watson, that we must spare time to run down together on Saturday morning and make sure that this curious and inclusive investigation has no untoward ending.


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[Assistant] I confess that I had not up to now taken a very serious view of the case, which had seemed to me rather grotesque and bizarre than dangerous.


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[Assistant] As a man should lie and wait for, and follow a very handsome woman, is no unheard of thing.


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[Assistant] And if he had so little audacity that he had not only dared not address her, but even fled from her approach, he was not a very formidable assailant.


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[Assistant] The ruffian Woodley was a very different person, but, except on one occasion, he had not molested our client, and now he visited the house of Carruthers without intruding upon her presence.


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[Assistant] The man on the bicycle was doubtless a member of those weekend parties at the hall of which the publican had spoken.


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[Assistant] It was the severity of Holmes's manner, and the fact that he slipped a revolver into his pocket before leaving our rooms, which impressed me with the feeling that tragedy might prove to lurk behind this curious train of events.


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[Assistant] A rainy night had been followed by a glorious morning, and the heath-covered countryside, with the glowing plumps of flowering gorse, seemed all the more beautiful to eyes which were weary of the duns and drabs and slate greys of London.


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[Assistant] Holmes and I walked along the broad sandy road, inhaling the fresh morning air, and rejoicing in the music of the birds and the fresh breath of the spring.


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[Assistant] From a rise of the road on the shoulder of Crookesbury Hill we could see the grim hall bristling out from amidst the ancient oaks, which, old as they were, were still younger than the building which they surrounded.


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[Assistant] Holmes pointed down the long tract of road which wound a reddish-yellow band between the brown of the heath and the budding green of the woods. Far away, a black dot, we could see a vehicle moving in our direction. Holmes gave an exclamation of impatience.


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[Assistant] I have given a margin of half an hour," said he. If that is her trap she must be making for the earlier train.


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[Assistant] I fear, Watson, that she will be past Charlington before we can possibly meet her.


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[Assistant] From the instant that we passed the rise we could no longer see the vehicle, but we hastened onward at such a pace that my sedentary life began to tell upon me, and I was compelled to fall behind.


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[Assistant] Holmes, however, was always in training, for he had inexhaustible stores of nervous energy upon which to draw.


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[Assistant] His springy step never slowed until suddenly when he was a hundred yards in front of me he halted, and I saw him throw up his hand with a gesture of grief and despair.


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[Assistant] At the same instant an empty dog cart, the horse cantering, the reins trailing, appeared round the curve of the road and rattled swiftly towards us.


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[Assistant] FOOL! I was not to allow for that earlier train.


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[Assistant] It's abduction, Watson. Abduction. Murder. Heaven knows what. Block the road. Stop the horse. That's right. Now jump in and let us see if I can repair the consequence of my own blunder.


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[Assistant] We had sprung into the dog cart, and Holmes, after turning the horse, gave it a sharp cut with the whip, and we flew back along the road.


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[Assistant] As we turned the curve, the whole stretch of road between the hall and the heath was opened up. I grasped Holmes's arm.


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[Assistant] A solitary cyclist was coming towards us. His head was down and his shoulders rounded as he put every ounce of energy that he possessed on to the pedals. He was flying like a racer.


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[Assistant] Suddenly he raised his bearded face, saw us close to him, and pulled up, springing from his machine.


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[Assistant] That coal-black beard was in singular contrast to eyes were as bright as if he had a fever. He stared at us and at the dog-cart. Then a look of amazement came over his face.


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[Assistant] Stop there! he shouted, holding his bicycle to block our road.


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[Assistant] Holmes threw the reins into my lap and sprang down from the cart. You're the man we want to see.


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[Assistant] Where is Miss Violet Smith? he said in his quick, clear way.


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[Assistant] That's what I'm asking you. You're in her dog cart. You ought to know where she is.


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[Assistant] We met the dog cart on the road. There was no one in it. We drove back to help the young lady.


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[Assistant] Good Lord! Good Lord! What shall I do?" cried the stranger, in an ecstasy of despair. They've got her, that hell-hound Woodley and the back-guard Parson. Come, man, come. If you really are, friend, stand by me, and we'll save her, if I have to leave my carcass in Charlington Wood.


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[Assistant] He ran distractedly, his pistol in his hand towards a gap in the hedge. Holmes followed him, and I, leaving the horse grazing beside the road, followed Holmes.


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[Assistant] It was a young fellow, about seventeen, dressed like an osler, with leather cords and gaiters.


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[Assistant] He lay upon his back, his knees drawn up, a terrible cut upon his head. He was insensible, but alive.


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[Assistant] A glance at his wound told me that it had not penetrated the bone.


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[Assistant] That's Peter the Groom, cried the stranger. He drove her. The beasts have pulled him off and clubbed him. Let him lie. We can't do him any good, but we may save her from that worse fate that can befall a woman.


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[Assistant] He ran frantically down the path which wound among the trees.


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[Assistant] We had reached the shrubbery which surrounded the house when Holmes pulled up.


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[Assistant] They didn't go to the house. Here are their marks on the left, here beside the laurel bushes. Ah, I said so.


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[Assistant] As he spoke, a woman's shrill scream, a scream which vibrated with a frenzy of horror, burst from the thick green plump of bushes in front of us.


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[Assistant] It ended suddenly on its highest note with a choke and a gurgle.


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[Assistant] This way, this way, they're in the bowling alley," cried the stranger, darting through the bushes.


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[Assistant] Ah, the cowardly dogs. Follow me, gentlemen. Too late, too late, by the living jingo.


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[Assistant] We had broken suddenly into a lovely glade of greenswad surrounded by ancient trees.


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[Assistant] On the farther side of it, under the shadow of a mighty oak, there stood a singular group of three people.


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[Assistant] One was a woman, our client, drooping and faint, a handkerchief round her mouth.


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[Assistant] Opposite her stood a brutal, heavy-faced, red-moustached young man, his gated legs parted wide, one arm a kimbo, the other waving a riding-crop, his whole attitude suggestive of triumphant bravado.


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[Assistant] Between them an elderly gray-bearded man, wearing a short surplice over a light tweed suit, had evidently just completed the wedding service, for he pocketed his prayer-book as we appeared and slapped the sinister bridegroom upon the back in jovial congratulation. "'They're married,' I gasped. "'Come on!' cried our guide.


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[Assistant] He rushed across the glade, Holmes and I at his heels.


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[Assistant] As we approached, the lady staggered against the trunk of the tree for support.


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[Assistant] Williamson, the ex-clergyman, bowed to us with mock politeness, and the bully Woodley advanced with a shout of brutal and exultant laughter.


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[Assistant] You can take your beard off, Bob," said he. I know you right enough. Well, you and your pals have just come in time for me to be able to introduce you to Mrs. Woodley.


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[Assistant] Our guide's answer was a singular one. He snatched off the dark beard which had disguised him and threw it on the ground, disclosing a long, sallow, clean-shaven face below it.


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[Assistant] Then he raised his revolver and covered the young ruffian who was advancing upon him with his dangerous riding-crop swinging in his hand.


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[Assistant] Yes," said our ally, I am Bob Carruthers, and I'll see this woman right it if I had to swing for it.


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[Assistant] I told you what I'd do if you molested her, and by the Lord I'll be as good as my word.


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[Assistant] His revolver cracked, and I saw the blood spurt from the front of Woodley's waistcoat. He spun round with a scream, and fell upon his back, his hideous red face turning suddenly to a dreadful mottled pallor.


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[Assistant] The old man, still clad in his surplus, burst into such a string of foul oaths as I have never heard, and pulled out a revolver of his own.


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[Assistant] But before he could raise it, he was looking down the barrel of Holmes' weapon.


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[Assistant] Thank you. You, Carruthers, give me that revolver. We'll have no more violence. Come, hand it over. Who are you, then? My name's Sherlock Holmes. Good Lord! You've heard of me, I see.


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[Assistant] I will represent the official police until their arrival. Here you—he shouted to a frightened groom who had appeared at the edge of the glade—come here.


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[Assistant] Until he comes I must detain you all under my personal custody.


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[Assistant] The strong masterful personality of Holmes dominated the tragic scene, and all were equally puppets in his hands. Williamson and Carruthers found themselves carrying the wounded Woodley into the house, and I gave my arm to the frightened girl.


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[Assistant] The injured man was laid on his bed, and at Holmes's request I examined him. I carried my report to where he sat in the old tapestry-hung dining-room with his two prisoners before him. He will live, said I. What? cried Carruthers, springing out of his chair.


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[Assistant] I'll go upstairs and finish him off first. Do you tell me that that angel is to be tied to roaring Jack Woodley for life?


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[Assistant] You need not concern yourself about that," said Holmes. There are two very good reasons why she should, under no circumstances, be his wife. In the first place, we are very safe in questioning Mr. Williamson's right to solemnise a marriage.


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[Assistant] I have been ordained, cried the old rascal, and also unfrocked. Once a clergyman, always a clergyman.


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[Assistant] We had a license for the marriage. I have it here in my pocket.


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[Assistant] Then you got it by trick. But in any case, a forced marriage is no marriage. But it is a very serious felony, as you will discover before you are finished.


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[Assistant] You'll have time to think the point out during the next ten years or so, unless I'm mistaken. As to you, Carruthers, you would have done better to keep your pistol in your pocket.


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[Assistant] I begin to think so, Mr. Holmes, but when I thought of all the precaution I had taken to shield this girl—for I loved her, Mr. Holmes, and it is the only time that ever I knew what love was—it fairly drove me mad to think that she was in the power of the greatest brute and bully in South Africa.


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[Assistant] A man whose name is a holy terror from Kimberley to Johannesburg.


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[Assistant] Why, Mr. Holmes, you will hardly believe it, but ever since that girl has been in my employment I never once let her go past this house where I knew the rascals were lurking without following her on my bicycle, just to see that she came to no harm.


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[Assistant] I kept my distance from her, and I wore a beard so that she should not recognize me, for she is a good and high spirited girl, and she wouldn't have stayed in my employment long if she had thought that I was following her about the country roads. Why didn't you tell her of her danger?


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[Assistant] Because then, again, she would have left me, and I couldn't bear to face that.


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[Assistant] Even if she couldn't love me, it was a great deal to me just to see her dainty form about the house and to hear the sound of her voice.


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[Assistant] Well," said I, you call that love, Mr Carruthers, but I should call it selfishness. Maybe the two things go together.


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[Assistant] Anyhow, I couldn't let her go. Besides with this crowd about, it was well that she should have someone near to look after her.


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[Assistant] Then, when the cable came, I knew they were bound to make a move. What cable?" Carruthers took a telegram from his pocket.


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[Assistant] I think I see how things worked, and I can understand how this message would, as you say, bring them to a head, but while you wait you might tell me what you can.


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[Assistant] The old reprobate with a surplus burst into a volley of bad language.


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[Assistant] Bye Heavens! said he. If you squeal on us, Bob Carruthers, I'll serve you as you serve Jack Woodley. You can bleat about the girl to your heart's content, for that's your own affair. But if you round on your pals to this plainclothes copper, it'll be the worst day's work that ever you did.


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[Assistant] Your reverence need not be excited," said Holmes, lighting a cigarette.


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[Assistant] The case is clear enough against you, and all I ask is a few details for my private


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[Assistant] However, if there's any difficulty in your telling me, I'll do the talking, and then you will see how far you have a chance of holding back your secrets. In the first place, three of you came from South Africa on this game—you, Williamson, you, Carruthers, and Woodley.


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[Assistant] "'Lie number one,' said the old man. "'I never saw either of them until two months ago, and I've never been in Africa in my life. So you can put that in your pipe and smoke it, Mr. Busybody Holmes?' "'What he says is true,' said Carruthers.


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[Assistant] Well, well, two of you came over. His reverence is our own home-made article.


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[Assistant] You had known Ralph Smith in South Africa. You had reason to believe he would not live long.


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[Assistant] You found out that his niece would inherit his fortune. How's that, eh?" Carruthers nodded, and Williamson swore.


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[Assistant] She was next of kin, no doubt, and you were aware that the old fellow would make no will. Couldn't read or write, said Carruthers.


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[Assistant] So you came over, the two of you, and hunted up the girl. The idea was that one of you was to marry her and the other have a share of the plunder.


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[Assistant] For some reason Woodley was chosen as the husband. Why was that? We played cards for her on the voyage, and he won.


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[Assistant] I see. You got the young lady into your service, and there Woodley was to do the courting.


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[Assistant] She recognised the drunken brute that he was, and would have nothing to do with him.


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[Assistant] Meanwhile, your arrangement was rather upset by the fact that you had yourself fallen in love with the lady. You could no longer bear the idea of this ruffian owning her. No, by George I couldn't.


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[Assistant] There was a quarrel between you. He left you in a rage and began to make his own plans independently of you.


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[Assistant] It strikes me, Williamson, there isn't very much that we can tell this gentleman," cried Carruthers with a bitter laugh.


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[Assistant] Yes, we quarrelled, and he knocked me down. I am level with him on that, anyhow. Then I lost sight of him. That was when he picked up with this outcast padre here. I found that they had set up housekeeping together at this place on the line that she had to pass for the station.


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[Assistant] I kept my eye on her after that, for I knew there was some devilry in the wind.


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[Assistant] I saw them from time to time for I was anxious to know what they were after.


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[Assistant] Two days ago, Woodley came up to my house with this cable which showed that Ralph Smith was dead.


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[Assistant] He asked me if I would stand by the bargain. I said I would not.


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[Assistant] He asked me if I would marry the girl myself and give him a share. I said I would willingly do so, but that she would not have me.


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[Assistant] He said, Let us get her married first, and after a week or two she may see things of it different.


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[Assistant] I said, I'd have nothing to do with violence. So he went off cursing like the foul-mouthed blackguard that he was, and swearing that he wouldn't have it yet.


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[Assistant] She'd got a start, however, and before I could catch her the mischief was done.


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[Assistant] The first thing I knew about it was when I saw you two gentlemen driving back in a dog cart.


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[Assistant] Holmes rose and tossed the end of his cigarette into the grate.


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[Assistant] I've been very obtuse, Watson," said he. When in your report you said that you had seen the cyclist as you thought arranged his neck-tie in the shrubbery, that alone should have told me all.


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[Assistant] However, we may congratulate ourselves upon a curious and, in some respects, a unique case.


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[Assistant] I perceive three of the county constabulary in the drive, and I am glad to see that the little osler is able to keep pace with them, so it is likely that neither he nor the interesting bridegroom will be permanently damaged by their morning's adventures.


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[Assistant] I think, Watson, that in your medical capacity you might wait upon Miss Smith and tell her that if she is sufficiently recovered we shall be happy to escort her to her mother's home.


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[Assistant] If she is not quite convalescent, you will find that a hint that we were about to telegraph to a young electrician in the Midlands would probably complete the cure.


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[Assistant] As to you, Mr. Carruthers, I think that you have done what you could do to make amends for your share in an evil plot. There is my card, sir, and if my evidence can be of help in your trial, it shall be at your disposal.


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[Assistant] In the world of our incessant activity, it has often been difficult for me, as the reader has probably observed, to round off my narratives, and to give those final details which the curious might expect.


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[Assistant] Each case has been the prelude to another, and the crisis once over the actors have passed forever out of our busy lives.


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[Assistant] I find, however, a short note at the end of my manuscript dealing with this case, in which I have put it upon record that Miss Violet Smith did indeed inherit a large fortune


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[Assistant] And that she is now the wife of Cyril Morton, the senior partner of Morton and Kennedy, the famous Westminster electricians.


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[Assistant] Williamson and Woodley were both tried for abduction and assault, the former getting seven years, the latter ten. Of the fate of Carruthers I have no record.


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[Assistant] But I am sure that his assault was not viewed very gravely by the court, since Woodley had the reputation of being a most dangerous ruffian, and I think that a few months were sufficient to satisfy the demands of justice.


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[Assistant] End of The Adventure of the Solitary Cyclist


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[Assistant] It's, it's going. I'm gonna head out though. Pete, call for some backup. We're just-


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[Assistant] I'm sure there's some spider stuff I can be doing. I can give you some privacy.


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[Assistant] Ma. Look, you had me about the loan.


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[Assistant] Where's Mr. Sumida? Oh, he just left. Something about going on vacation?


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[Assistant] Oh man. I can't watch this. But I also can't look away.


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[Assistant] Dude, you being Spider-Man must be so hard keeping a job.


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[Assistant] Alright, let's get started. Uhm, today we're gonna continue our discussion of factor markets. Uh, if you recall last Monday, we started talking about the labor market. Uh, and we talked about how workers make the decision between work and leisure.


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[Assistant] And we talked about the implications for setting the wage rate in the labor market.


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[Assistant] What I want to do today is return to that labor market equilibrium and talk about the important case of the minimum wage. So today I want to talk about the labor market equilibrium.


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[Assistant] And how it's affected by the minimum wage. Because it's an interesting case which


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[Assistant] It allows us to introduce some complications to how we think about the labor market. So let's go back.


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[Assistant] And think about the labor market. So let's go to figure 16-1. Okay.


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[Assistant] The labor market, like any other market, has a price and a quantity. The quantity is the amount of labor supplied. That's on the x-axis. The price is the wage. That's on the y-axis. The supply curve that's upward sloping.


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[Assistant] Typically we'll assume an upward sloping supply curve, but as we discussed last time, that doesn't have to be true.


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[Assistant] Okay, if income effects dominate substitution effects, which I very well may.


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[Assistant] You could actually have a backward bending or downward sloping supply curve.


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[Assistant] Okay, so we talked about that last time. Having taught that interesting case, typically we'll assume supply is upward sloping or at least not, not backwards bending, not downward sloping. Okay, but remember that's an assumption.


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[Assistant] So this upward sloping supply curve is not necessarily as obvious as a downward sloping demand curve is. Downward sloping demand will almost always exist unless there's a weird gif in good. Whereas upward sloping supply is a little more questionable.


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[Assistant] So we have the equilibrium, and we have this equilibrium at L1 workers at a wage W1.


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[Assistant] So now we know where this comes from. So basically, going all the way back to producer theory, we just gave you a W.


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[Assistant] Now we're telling you where the W comes from. We're telling you where the wage comes from that you then plug into the firm's optimization, uh, for them to produce, produce goods. Now.


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[Assistant] Let's imagine that we add a minimum wage. So let's go to figure 16-2. So this is a regulation.


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[Assistant] Which says that you're not allowed to pay workers below some minimum level.


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[Assistant] And let's say we set that minimum wage at the level W2, above the market wage W1.


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[Assistant] Quick question. What would happen if we passed the law and set a minimum wage that was below W1? So it would be a regulation which insisted you couldn't pay workers.


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[Assistant] Below W2, but W2 is below W1. What would that do to the labor market?


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[Assistant] Nothing. And here's the key point. Labor markets in economics will always endeavor to avoid government regulations as, if they can.


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[Assistant] So if a government regulation is not binding, it won't matter. Markets will just avoid it.


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[Assistant] Okay? So the interesting case is only where the minimum wage is binding. As in the figure, figure 16-2. Okay?


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[Assistant] So what happens, well if you set minimum wage, minimum wage at W2,


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[Assistant] Workers at that high wage would love to work a lot. That's a high wage, they're high in the supply curve. They would like to work L sub S hours.


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[Assistant] Firms however, if forced to pay a high-wage W-2,


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[Assistant] So if you're gonna raise the wage you have to pay workers, unless that affects the market price, I'm gonna need to have a higher marginal product of labor, right?


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[Assistant] The demand equation was I set the wage equal to the marginal product of labor times the price.


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[Assistant] Well, if the price hasn't changed with the minimum wage going in, I'm gonna need a high, if the wage is forced up by the minimum wage, I'm gonna need a higher marginal product of labor. How do I get a higher marginal product of labor? By hiring less workers. Because the marginal product of labor is diminishing. So if you're gonna force me to pay a higher wage,


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[Assistant] You're gonna force me to only hire workers until the point where the marginal product of labor justifies the higher wage, which means I'm gonna hire fewer workers. So, firms demand only L sub D.


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[Assistant] What does this do to welfare? We can see before the minimum wage was in place, the market featured a


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[Assistant] A consumer surplus, now here consumers are firms, right, but there was a consumer surplus of A plus B plus C.


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[Assistant] That is, firms were willing to pay what was on the demand curve.


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[Assistant] They only had to pay W1, so their surplus was A plus B plus C.


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[Assistant] For workers, we're willing to work at a wage that's given by the supply curve S sub 1.


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[Assistant] They were paid at W sub 1, so they got a surplus of D plus E.


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[Assistant] So here the firms get the consumer surplus, the workers get the producer surplus, because the workers are now the producers. Now let's say you roll in and set a minimum wage. Well, two things have happened.


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[Assistant] One thing is, you then transfer some resources to workers. That's the area B.


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[Assistant] You've taken the area B that firms used to get and now workers get it. That's the idea. You want to make workers better off. So you've transferred to workers the area B.


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[Assistant] On the other hand, you've created a deadweight loss of the area C plus E.


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[Assistant] Deadweight loss of the year C++. Because now there are fewer jobs. There are workers who would happily work.


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[Assistant] At the wage, at a higher wage who are not being allowed to work by the limited demand that comes from minimum wage. Okay?


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[Assistant] So the bottom line is, you end up with fewer workers,


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[Assistant] A higher wage and ambiguous welfare implications. Clearly social welfare goes down.


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[Assistant] Whether worker welfare goes up or not depends a bit on the size of area B versus the size of area E.


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[Assistant] Okay, it's not clear if worker surplus goes up or not. It depends on the size of B versus E. In this diagram, workers are a net better off, but it doesn't have to be true. What's clear is that social welfare has gone down.


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[Assistant] Because the number, because remember as I talked about the cheap, the shortcut I talked about, we talked about oligopoly, is roughly speaking, welfare is proportional to the quantity in the market.


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[Assistant] Okay, essentially the further you deviate from the perfectly competitive quantity, the bigger the deadweight loss. So that's what happens when you put in the minimum wage. Questions about that? Okay?


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[Assistant] Well that seems pretty straightforward, and that's what I learned growing up as a kid in economics class. Uhm, but then, uh, some empirical economists, some very famous empirical economists, started doing a series of articles that actually studied, gee, what happens if minimum wage does change?


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[Assistant] They did things like, for example, comparing what happened when New Jersey raised its minimum wage, but the state of Pennsylvania next door did not. And they looked at fast food workers in New Jersey, where the minimum wage went up, compared to fast food workers in Pennsylvania, where the minimum wage didn't go up.


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[Assistant] And what they found was there was no difference in employment.


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[Assistant] That jobs didn't fall in New Jersey, even though the minimum wage went up.


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[Assistant] Okay, and a series of follow-on studies continue to find that actually higher minimum wages didn't seem to cause jobs to fall. Which is sort of directly in contradiction with its graph.


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[Assistant] So what's going on? That led to sort of big questioning and revision. It's kind of, what's going on in these markets that leads to that?


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[Assistant] And there's really three possibilities for what's going on.


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[Assistant] Possibility one is that the minimum wage wasn't binding.


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[Assistant] Maybe New Jersey's sedimentary wage below the market wage.


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[Assistant] But actually, empirically, that's not true. We can look at what workers were paid before the minimum wage. It was well below where the minimum wage was set for restaurant workers that were studied in that most famous study. Okay? So this is not true. The minimum wage was binding.


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[Assistant] There's a second possibility that's absolutely consistent with this, with a perfectly competitive market.


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[Assistant] The price that the firm charges goes up, but in a perfectly competitive labor market, that still wouldn't happen.


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[Assistant] Okay, you, you, you would still, you might see some price adjustment, but you'd still see some adjustment of the marginal product of labor. But what else about this diagram? Yeaah.


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[Assistant] The firms, the firms actually, you're close, it'd be the, the workers supply of labor is perfectly inelastic. It's the right idea. If workers are perfectly inelastic in their supply of labor, then the same amount of workers will work no matter what the wage.


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[Assistant] So basically, you're just gonna essentially, uhm, you're just gonna essentially end up. You'd also, you'd also, in fact, that's a good point, you'd also get inelastic demand, the same thing. The supplier demand is inelastic.


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[Assistant] You'll end up, if your supplier demand is inelastic, you'll end up with no effect of a minimum wage.


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[Assistant] So that's another possibility. But in fact, we've done a lot of studies, so you could have inelastic.


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[Assistant] But in fact, we've done lots of studies of supply and demand in these markets, and that's not true.


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[Assistant] Demand, remember supply was largely elastic for men, but it was somewhat elastic for women.


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[Assistant] And these low-income markets have a good mix of men and women working in them.


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[Assistant] Uh, demand has been shown to be somewhat elastic. So it's not, neither supply and demand is very elastic, but they're sufficiently elastic that it rules out as zero.


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[Assistant] So the third possibility, and the one economists have focused on, is that we're not in a competitive labor market. They've focused on a non-competitive


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[Assistant] Just like we dis- we discuss non-competitive markets for goods with monopoly and oligopoly, you can have non-competitive markets for labor. Okay? It's the basic same idea. Okay?


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[Assistant] So now, let's look at, so when we thought about, let's go back and think about perfect competition, the basics of perfect competition.


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[Assistant] We thought about perfect competition. The basic idea was remember I talked about laying out a bunch of rugs in a bizarre, in a market.


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[Assistant] Where you could literally shop costlessly across all the people selling their little fake Eiffel Towers.


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[Assistant] Little statue of Apple Power, so you could perfectly shop. It was easy to go from carpet to carpet. There was full information, the prices were posted.


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[Assistant] And so basically what you ended up with was perfectly elastic demand facing any given firm.


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[Assistant] Any given firm, if they tried to charge one cent more for their Eiffel Tower, no one would buy it. If they charged one cent less, they'd immediately run out. Okay, everyone would buy it.


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[Assistant] Well, when we are modeling labor markets, I discussed this last time, but not very well, so I want to come back to it.


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[Assistant] When we're modeling labor markets, we're thinking about the same feature of perfect competition.


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[Assistant] But here, it's not consumers perfectly competing over, it's not consumers shopping over where to buy their goods. It's workers shopping over where to work.


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[Assistant] It's workers saying, gee, in a perfectly competitive labor market, the idea is, I know what I could earn at any firm. And I could easily shop across firms to see where I'm going to work.


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[Assistant] So if any firm tried to pay me one cent less than the market wage, I'd never work there.


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[Assistant] In figure 16-4, which we actually showed in the last lecture. Remember the last lecture?


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[Assistant] I taught, I was focused on this downward sloping demand curve, but I sort of casually threw in this flat labor supply curve and sort of botched explaining it. Now I'm explaining it, hopefully more clearly. Which is, to any given firm, the labor supply curve is perfectly elastic.


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[Assistant] If that firm, because workers can perfectly shop across job opportunities, so if that firm tried to pay less, they'd get no workers. So they faced a perfectly elastic supply of labor. But in reality,


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[Assistant] Just like in reality, there's no such thing as a perfectly competitive product market.


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[Assistant] In reality, there's no thing as a perfectly competitive labor market. In fact, we can't shop easily across all possible jobs and know what every job could pay.


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[Assistant] And the fact that we can't means that firms on the labor market side will have market power.


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[Assistant] Just like we talked about monopolists and oligopolists having market power over consumers through barriers to entry.


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[Assistant] Firms may be able to get away with paying you less than what you might earn elsewhere.


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[Assistant] Because you just go work somewhere else. But now if McDonald's wants to pay you less than you might get at Wendy's, but it's hard to go find out what Wendy's gonna pay you. You have to go a distance down the road and you have to ask them and you're sort of shy and it's embarrassing.


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[Assistant] Then McDonald's might be able to get away with paying you less than you might earn at Wendy's.


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[Assistant] Okay? So this is very much peril to monopoly. In fact, we call this a monopsony.


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[Assistant] Although actually it's not a rocking chair because it comes in the box with the rockers off it and it arrived in my office so it's sort of a short chair and my wife's five foot.


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[Assistant] And she always complains how chairs are too big for her. So she sat and she's like, this is the perfect chair for me. So now I have a non-rocking rocking chair in my office that she sits in. But anyway, uhm,


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[Assistant] I've been at MIT for 25 years. It's gonna be really hard for me to move.


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[Assistant] I like my house, I like my colleagues, I like my friends.


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[Assistant] Kind of, I like my view out the window. It's gonna be kind of hard for me to move.


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[Assistant] Moreover, it'd be pretty hard for me to figure out what I'd get paid if I moved. I can't like, go to other universities and say, hey, what would you pay me if you hired me? Okay, that'd be kinda awkward.


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[Assistant] Okay, I can't really ask my colleagues what they make, that's kind of awkward. So at the end of the day, MIT has market power over me. Because I don't really want to move, and I can't really figure out what I'd get paid if I did move.


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[Assistant] And MIT will exploit that market power over me by paying me less than I might earn elsewhere. Okay? And we know this is a fact.


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[Assistant] Cause when, in academia, the only way to get a raise is to go get an offer from someone else.


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[Assistant] Okay, and have them say how much more they'll pay you and then you take that to your boss and they say match this.


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[Assistant] But if you're not willing to do this, as I'm frankly MIT knows not willing to do, then MIT can essentially underpay me.


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[Assistant] Okay, so basically, and any responsible profit maximizing or even non-profit employer will exploit this market power and they'll pay me less than my market wage.


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[Assistant] Okay, and that means that MIT will earn surplus on me. Okay, in a perfectly competitive labor market,


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[Assistant] The firm earns no surplus on the worker. They pay the worker their marginal revenue product. So if you go to this figure, what am I paying the worker? What I'm paying them is exactly their marginal revenue product.


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[Assistant] Just like in a competitive market for the goods, a firm is selling, uhm, at exactly their marginal cost. So just like a firm makes no surplus in a perfectly competitive, uh, goods market,


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[Assistant] A firm hiring workers makes no surplus in a perfectly competitive labor market. But in a monopsony market...


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[Assistant] The questions about how that market works. I'm not going to do all the math and graphs. It's all the same as monopoly, just flipping demands, supply curves, the pain in the ass. I'm not going to do it. I just want you guys to understand the intuition.


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[Assistant] So please, since I went through this just into other questions about this or how it works.


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[Assistant] Okay, now let's take this per- non-competitive labor market and let's throw in a minimum wage. Well, as before,


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[Assistant] If the minimum wage is below what the firm was already paying, there's no effect. So let's assume it's a binding minimum wage. Okay? Now, let's say the binding minimum wage is above


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[Assistant] What my true market wage would be. What my wage would be in the perfectly competitive market. So in a perfectly competitive market, my wage would equal my marginal revenue product of labor. Right? That's comp- that's in a competitive market.


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[Assistant] In this non-competitive market, my wage is below my marginal revenue product of labor.


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[Assistant] Firms are exploiting me because I can't effectively shop for a better job. I don't want to or it's hard to do so. Okay?


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[Assistant] Now, in this non-competitive market, if we set a minimum wage that's higher than the marginal revenue product of labor,


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[Assistant] Once that marginal wage is higher than the marginal product of labor, it's just like a competitive firm. Okay?


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[Assistant] So it's not that interesting. The interesting case is what if the minimum wage comes in, and it's above the wage I make, but below the marginal product revenue product of labor.


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[Assistant] So let's say in McDonald's, someone working there yields a larger revenue product of labor of $10, but they're only being paid $7.


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[Assistant] Let's say you roll in minimum wage of nine dollars. So above what they're being paid now, but below their actual marginal revenue product of labor. Will the firm fire that worker?


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[Assistant] They're still making, they're still making surplus, which is, as long as the marginal revenue product of labor is bigger than the wage, they love that worker. Okay? So before, so let's, let's write down the, let's write down the numbers in the example.


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[Assistant] So imagine my margin revenue product of labor at McDonald's is 10, but my wage is 7.


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[Assistant] Okay, and then you come and you set a minimum wage of nine.


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[Assistant] Well, ten is still greater than nine, so the firm has no desire to fire me. So all you've done is just given me money. And where'd that money come from?


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[Assistant] So all you've done is shifted the surplus from, you've shifted producer surplus to consumer, I'm sorry, consumer surplus, consumers of the firms, to producer surplus, the workers.


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[Assistant] So when a monopsony market, a minimum wage is, is, doesn't cause dead weight loss, it just sifts surplus around. And that's a really important outcome.


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[Assistant] Because that once again says the government isn't always bad here.


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[Assistant] Okay, this is just like, if you want to think about this graphically, go back to exactly the analysis we did of regulating monopolies.


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[Assistant] Remember we talked about regulating monopolies? We talked about if a regulator comes in and sets a price above the monop- uh, uh, and sets a, uhm, sets a price below the monopoly price, but above the competitive price, it reduced the deadweight loss of monopoly.


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[Assistant] It's the same thing if you set a minimum wage above the market wage, but below the marginal revenue product of labor.


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[Assistant] Then you simply transfer surplus to workers without causing deadweight loss.


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[Assistant] Now that raised the question, of course, is the minimum wage in between the wage and the marginal rate of product of labor?


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[Assistant] Well, we don't know, but let's go back to the studies that motivated this. The very fact that the minimum wage doesn't seem to cause unemployment suggests we are hitting the sweet spot.


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[Assistant] That we're basically managing with minimum wage policy at least to date to essentially just find a way without the government spending any money to shift resources from businesses to workers. So what does this mean?


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[Assistant] Well, it means that around the level of current minimum wages, we can raise the minimum wage by a small amount pretty costlessly.


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[Assistant] So in some sense, the existence is the important thing about empirical economics.


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[Assistant] You only learn the answer in the range that you study it. So, for example, there have been studies that have looked at what happens if you have a $10 minimum wage, and those show no unemployment.


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[Assistant] There haven't been studies that show what happens if you have a $15 minimum wage.


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[Assistant] Now Seattle just actually put in a $15 minimum wage about two years ago.


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[Assistant] So we actually can run the experiment. The early evidence is the Seattle $15 minimum wage did lower employment.


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[Assistant] Well that's, that's the other question is how could you increase, so you tell me, how could you increase the competitiveness of a labor market?


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[Assistant] Has a day every year they call Envy Day.


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[Assistant] Which was yesterday, I believe, where they literally can go online and look up anybody's income in Norway. They literally make public every single person's tax return.


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[Assistant] And Norway. And you can go online and look at what everybody makes. That would do it. Okay? So you can provide more information.


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[Assistant] You could make it easier to move between jobs. For example, there's a lot of restrictions on our labor market, like non-compete clauses.


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[Assistant] Which say that if you work for one firm, you can't ever go work for another firm in that industry for x years.


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[Assistant] Okay, that makes it hard, that gives some monopsony power to firms.


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[Assistant] Et cetera. So we could do things which try to loosen the flow of the labor market.


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[Assistant] And that would, that would, uh, close this gap between wage and marginal product of labor.


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[Assistant] Was that basically, uhm, employment fell a small amount and a bunch of workers made a bunch more money.


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[Assistant] So is that good or bad? Well, it depends. If you're one of the people who lost their job, it's really bad. If you're one of the workers who got a raise up to $15 an hour, it's good.


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[Assistant] How do you weigh them against each other? That's exactly what we'll talk about in a couple lectures.


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[Assistant] This kind of, once we start talking about normative economics, about is the policy good or bad, there's typically trade-offs, and this is a classic example. What we're learning here is, is the minimum wage in the range we are now, right now the federal minimum wage at $7.25, okay, could, the evidence suggests it could easily rise without causing that trade-off.


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[Assistant] The evidence is we could increase the federal minimum wage by some non-trivial amount, nine, up to, at least up to nine or ten dollars, without causing much of a trade-off. But once you get too far ahead of that, there starts to be a trade-off. Question about that, yeaah.


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[Assistant] Uh, Massachusetts is at 11, but we're, uh, pretty unusual. We're, we're one of the higher ones. The number of states at 725 is the minimum wage. Okay?


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[Assistant] So, and the evidence seems to be from states like Massachusetts and others, which are in the sort of $10, $11 range, it doesn't seem to lower employment. Seems like we could clearly, we'd be safe raising that federal minimum wage, we would simply be transferring resources, uh, and not causing unemployment. Yeah.


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[Assistant] If it's a competitive output market, that shouldn't happen.


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[Assistant] Right? Because in a competitive output market, uhm, uh, well no, marginal cost goes up. It's not clear. It's not clear whether that would happen or not. And the evidence is that is unclear.


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[Assistant] Uh, whether high end wage causes higher prices or whether it just comes out of profits, we don't know yet. Okay?


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[Assistant] Alright, so that's what I want to say about labor markets. Now I want to move on and talk about capital markets.


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[Assistant] Now, as confusing as our discussion of labor markets was, that's easy compared to capital markets. Capital markets are a lot harder to understand.


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[Assistant] And that's because capital itself, labor is something you get your hands around. It's the time you spend at work.


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[Assistant] Capital is this sort of amorphous thing that I've kept sort of pushing off defining, so I'll define it now.


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[Assistant] We should talk about capital as this vague collection of buildings and machines, the other stuff that goes into production. Okay?


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[Assistant] And we know where labor comes from. It comes from our work. But where does capital come from? Well, capital is a harder concept, but there's one unifying thread that all elements of capital have.


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[Assistant] Which is they represent the diversion of current consumption towards future consumption.


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[Assistant] Capital is about diverting consuming today towards consuming in the future.


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[Assistant] Okay? In fact, the original concept of capital came from farmers.


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[Assistant] Farmers every year, when they would, uh, pick their, pick their grain, they had a choice. They could eat all the grain, or they could save some to plant for next year's grain. Now the more they saved, the more they'd have next year. But the less they'd have today.


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[Assistant] So farmers face the trade off consumption today, literally consumption today or consumption next year. That's capital. That's what we mean by capital. In other words, in today's market economy, the link is not that direct, but it's the same basic idea that firms have a choice. Firms and their investors have a choice. They can take what they make and eat it now, or they can invest it in having more in the future. Okay.


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[Assistant] We're not gonna think about capital as physical capital. We're gonna think about capital as financial capital. What links all types of capital is their financial aspect.


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[Assistant] What links machines and buildings is all the aspect that by putting money into them today, you have less you can spend on fun stuff today, but more you'll be able to spend tomorrow. And it's this financial aspect that links all forms of capital.


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[Assistant] Now how do firms get the money to invest in machines and buildings and stuff like that? They get it through going to the capital market. Where do firms get this money that they invest? They get it through going to the capital market.


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[Assistant] Okay, which is basically the pool of money that firms can draw on to make their investments.


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[Assistant] So think of it literally as I'm a firm, I want to build a building and buy a machine, I literally go over and there's a big pool of money, and I have to take the money out of there to go buy my machine or build my building. Okay? And where does the money in that pool come from?


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[Assistant] It comes from household savings decisions.


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[Assistant] So the capital market is a market where the demand for capital comes from workers, from firms' interest in investing and having more in the future.


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[Assistant] The supply of capital comes from people's decisions to save.


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[Assistant] And essentially, the money firms use to buy stuff is borrowed from people. And that's the bottom line of how capital markets work. So just as the firm, the amount, the supply of labor


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[Assistant] That determines how many workers a firm can hire, comes from your decision of how hard to work.


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[Assistant] The supply of capital that determines how many machines a firm can buy comes from your decision of how hard to save. Okay? So let's look at figure 16-5, equilibrium in capital markets. Okay?


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[Assistant] We have, let's start with the demand. We already talked last lecture, demand for capital. The demand for capital comes from the marginal revenue product of capital.


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[Assistant] It's a marginal product of the next machine, so the demand comes from the marginal product of the next machine times the price the firm can get for its output, which is the marginal revenue product of capital.


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[Assistant] So it's the same logic as for labor. There's nothing interesting there. Same logic as for labor. Okay? The supply is what's more interesting here. Where does supply come from?


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[Assistant] The supply comes from household savings. How much money is around for firms to actually


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[Assistant] Get. To get these machines. And how do they get it? They borrow.


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[Assistant] And what do they borrow at? They borrow at the interest rate i.


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[Assistant] The idea is, think of literally a marketplace in the center of town. Downtown Boston, Haymarket. There's like this marketplace, and a firm comes and says, I need to borrow money to buy a machine.


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[Assistant] And a person's there with their savings, and they say, well I loan you some money, what interest rate are you going to give me? And that's the market for capital.


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[Assistant] So where the supply of capital meets the demand of capital, yields the interest rate.


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[Assistant] So basically what this means is that the interest rate is higher.


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[Assistant] What that means is, I have to pay people back more to borrow their money. So an interest rate of 10%.


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[Assistant] If I borrow $10 from you, I pay you back $1.10 next period.


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[Assistant] Okay, if I borrow $10, pay back $1.10 next period. If this rates 20%, if I borrow $10, if I borrow $1, I'm sorry.


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[Assistant] If I borrow a dollar from you, I pay a dollar 10 next period. If I have 20% and I borrow a dollar, I pay back a dollar 20 next period.


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[Assistant] Et cetera. Okay? So basically, that is essentially how the transaction works. And the key point here is the reason the supply curve is upward sloping.


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[Assistant] Is the more you're willing to pay me for my money, the more I'm willing to lend you.


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[Assistant] So if you come to me and say, give me a dollar, and next year I'll give you back a dollar, I'm like, I don't know, why would I do that?


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[Assistant] Say, give me a dollar, make sure I'll give you back a dollar ten. You're like, okay, now I'm interested. Dollar twenty, I'm very interested. Dollar fifty, for sure. Little I just give you my money, make sure I get back fifty percent more, why not?


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[Assistant] Okay, so basically the higher the interest rate, the more I'm willing to loan the firm, and therefore you get an upward sloping supply curve. Okay?


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[Assistant] Now, of course in reality, people don't actually, don't sit in Haymarket downtown Boston and give money to firms. In reality, this transaction happens through, uh, capital markets.


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[Assistant] I could literally go and the firm could say, I, General Motors,


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[Assistant] I'm issuing a bond, this is through bond, issuing a bond, and the way that bond works is I promise that for every dollar you spend buying my bond, you'll get 1 plus i dollars back, uh, at the end. Okay, or next year, say. Depends on how long the bond is.


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[Assistant] So literally you're loaning the money to the firm by buying, you're buying their promise to pay you back.


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[Assistant] Now, a second way you can loan money to the firm is through investing in their equity. You can buy their stock.


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[Assistant] The way this works is GM says to you, buy a piece of me.


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[Assistant] And you'll get paid back, not some fixed interest rate, but you get paid back according to how well GM does. So with corporate debt, I get paid back something that's predetermined. When I buy stock or equity, I don't get back a predetermined amount.


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[Assistant] I get back something that depends on how well the company does. But it's the same basic idea. I'm giving the company some money today in return for my getting more money, I hope, tomorrow. That's the diversion of consumption from today to tomorrow. And the third thing I could do is I could put it in the bank. Now how is that loaned to companies? Because the bank then loans it to companies. Why do banks say they'll pay you interest on your money?


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[Assistant] Okay, why do banks say, why do banks go crazy? I'll give you one. It used to be interesting. Now it's 1%, 2%. When I was a kid it was like 10%, 12%.


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[Assistant] We'll give you lots of money and we'll talk later about why it was so much higher when I was a kid.


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[Assistant] Okay, why are banks so eager to do that? It's not out of the goodness of their heart. It's because when you give them dollars, they turn around and loan them, they add a bunch to the interest rate and loan them out to firms. So as dollars you're loaning, you're giving to banks and they're paying you 2% interest, they're loaning to firms at 6%. Okay, and that's why bankers are rich.


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[Assistant] Okay, so basically the reason a bank exists is because it's a way corporate debt and equity markets are hard and complicated.


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[Assistant] It's much easier to put your money in a bank. You put your money in a bank, but when you put your money in a bank, you're essentially loaning it to companies. That's essentially what you're doing. So through these mechanisms,


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[Assistant] We have a capital market, where essentially, by my putting money away,


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[Assistant] And diverting from today's consumption, I'm willing to affirm they'll produce more and they'll pay me back more in the future. Okay? Questions about that?


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[Assistant] Okay, so let's talk about where the supply curve comes from. We know where the demand curve comes from. It just simply comes from the marginal revenue product of capital.


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[Assistant] Where does supply curve come from? The supply curve comes from what we call intertemporal choice.


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[Assistant] Economists like, as I said, economists like pulling fancy names on things that makes us, helps us get paid more money. Okay, it just means choosing over time. Okay, intertemporal choice.


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[Assistant] International choice is essentially about how do you decide how much to save? What's going to determine that?


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[Assistant] It's gonna be your decision of how much you value money today versus valuing money tomorrow. Okay?


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[Assistant] So for ease, let's imagine I'm considering two periods, this year versus next year.


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[Assistant] When I talk about periods, I'm only talking about days and years and whatever. We don't, it's the basic logic about now versus the future. Whether I say days or years doesn't really matter.


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[Assistant] You know, right now. The point is I'm just talking about today versus the future. So let's talk about this year versus next year.


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[Assistant] And let's imagine prices aren't gonna change. I'll come back to prices next lecture. Let's imagine price of goods aren't gonna go up. There's no inflation in this economy. Okay, which is roughly true today. Okay. And let's suppose I'm gonna take next year off to care for my children.


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[Assistant] Lord knows why I'd want to do that when their youngest one's 19, but imagine I...


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[Assistant] They still need my care. Okay. So, let's say I take next that this example gets dated. Let's say I take next year off to care for my children.


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[Assistant] Okay, so I'm gonna work this year for 80k, next year I'm gonna take off unpaid. So I have a couple of choices. I could work this year,


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[Assistant] Earn my 80k, spend my 80k, and have nothing next year to live on.


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[Assistant] I could work this year and eat nothing and save it all out of 80k to live on or some combination in between. And we could illish, but the key difference is every dollar that I don't consume this year


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[Assistant] That I save to consume next year earns interest.


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[Assistant] And that's where the trade-off comes. So let's look at figure 16-6.


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[Assistant] I face, this is a familiar looking optimization diagram.


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[Assistant] Now my optimization is not over pizza versus cookies.


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[Assistant] But my optimization is over consumption this period versus consumption next period. This is a bit mind-blowing, okay? We're a little science fiction here, right?


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[Assistant] Okay, when I'm not talking about choosing between two goods, like leisure and consumption,


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[Assistant] Or cookies and pizza. Now we're at about two time periods.


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[Assistant] Consumption today versus consumption tomorrow. But that's the key thing about the tools we learn with Consumer Choice. Those tools are incredibly powerful. You just need to shove your problem into that framework.


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[Assistant] And here's where we're going to shove our problem into this framework. The problem we're facing is how to decide how much to save.


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[Assistant] Well, savings is a bad, just like labor's a bad. What do we do when we have a bad to model? We don't model the bad, we model the complementary good.


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[Assistant] So our choice is, how much do I consume today?


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[Assistant] How much do I, my choice is how much am I going to consume today? And how much am I going to save? Okay?


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[Assistant] Well, saving is a bad, but the compliment is, but the other way to think about it is how much you consume today versus how much you might consume tomorrow.


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[Assistant] Then that's two goods, and I can model them against each other.


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[Assistant] And that's what I do in figure 16-6. I model consumption today versus consumption next year. So here's my choices. As I said, if I consume everything today, I'm at the X intercept at 80,000. I have 80,000 to consume today, nothing next year. If I consume everything next year,


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[Assistant] What do I get? Well, let's say the interest rate is 10%.


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[Assistant] What that means is then I'll have $88,000 next year.


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[Assistant] Why we'll have more next year? Because by saving, I earned interest.


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[Assistant] By diverting my consumption to the future, I earn interest. At 10%, that means I would have $88,000 next year. So my budget constraint is aligned with the slope minus 1 plus i.


[User] Please transcribe this text

[Assistant] My budget constraint is aligned with the slope minus 1 plus i. In other words, the price of consumption today, in terms of consumption tomorrow, is minus 1 plus i. Okay? Let me think about it, let me say that again, it's really confusing. Okay? The price of consuming today, instead of consuming tomorrow, assuming no inflation, so prices are the same in the market, is minus 1 plus i. Think about that.


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[Assistant] In the labor case, what did we say was the price of leisure? What was the price of leisure? Someone raise their hand and tell me. In the labor, yeaah. The wages, why?


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[Assistant] Right, so by that same logic, can you tell me why is the price of consuming today 1 plus i?


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[Assistant] Exactly. The opportunity cost. Remember, we are an annoying discipline. We're the dismal science. We're telling you, hey, enjoy that cookie, but by the way, if you weren't eating that cookie, you could have one plus i cookies tomorrow.


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[Assistant] Okay, so just like we nag you for sitting around watching TV, we nag you for eating today. By saying, hey, the more you consume today, the less you can have tomorrow.


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[Assistant] And in fact, that trade-off is that for every cookie you consume today, you forgo 1 plus i cookies tomorrow.


[User] Please transcribe this text

[Assistant] Okay, so that's the budget constraint. The slope is the opportunity cost of consuming today in terms of tomorrow's consumption or next year's consumption. Okay, which is one plus i. That's the slope of the budget constraint, it's the opportunity cost.


[User] Please transcribe this text

[Assistant] And then, then we say, okay, well that's the opportunity cost, that's the budgetary, well how do I decide? Well then, we know how to make these decisions, which is go to utility function. You can write down a utility function, which is a function of C1 and C2.


[User] Please transcribe this text

[Assistant] Now, what is C? C is all my pizza and cookies, but we're sort of aggregating it up. Just like our utility function last time was a function of leisure and consumption. Okay, we said consumption was the sort of bundle of goods you eat.


[User] Please transcribe this text

[Assistant] And leisure is this thing. Now we're saying, okay, our utility function now is a function of this trade-off. Now, you might say, wait a second, how can both those be utility functions? The answer is you have some meta-utility function that includes consumption today, tomorrow, leisure, pizza, cookies, etc. But we can sort of think about this in sequential steps. First we decide


[User] Please transcribe this text

[Assistant] How are we going to split our income? Then we can decide how much, what to spend on each period. Then you can do a separate consumer maximization decision. But our first question, simply, how am I going to split my income?


[User] Please transcribe this text

[Assistant] Well that's gonna be a function of my taste for consumption this period versus next period.


[User] Please transcribe this text

[Assistant] Now what happens in this scenario when the interest rate goes up? What do you, what do you think happens? The interest rate goes up.


[User] Please transcribe this text

[Assistant] Right, so what do you think you should, do you think you'll, what do you think will happen to your consumption? Consumption pattern. Yeah.


[User] Please transcribe this text

[Assistant] Spend less today and save more, because we're rewarded. And why is that not necessarily true? Yeah.


[User] Please transcribe this text

[Assistant] Because of what two effects? Income and substitution effects.


[User] Please transcribe this text

[Assistant] You gave exactly the intuition that the substitution effect hit you.


[User] Please transcribe this text

[Assistant] The substitution effect is exactly right. If the price of, if the interest rate goes up, that's like the price of consumption today going up.


[User] Please transcribe this text

[Assistant] And if the price of something goes up, the substance effect says you do less of it. But if the interest rate goes up, you're richer.


[User] Please transcribe this text

[Assistant] And if you're rich, you do more of everything, including consuming today.


[User] Please transcribe this text

[Assistant] The income effect goes the other way. It's like labor. Once again, it's why income and substance effects, why we bothered telling you so.


[User] Please transcribe this text

[Assistant] Now imagine the interest rate doubles to 20%. Okay? Now imagine the interest rate doubles. As you said, that pivots the budget constraint upwards.


[User] Please transcribe this text

[Assistant] You could still consume only 80,000 this year, but now for every dollar you save, you get $1.20 next year.


[User] Please transcribe this text

[Assistant] Okay, that has two effects on your decision. The substitution effect we get by drawing an imaginary budget constraint that's the dashed line, tangent to the original indifference curve, but at the new slope.


[User] Please transcribe this text

[Assistant] By definition, that means you consume less today.