Kind: captions
Language: en
you can't have permanent war without
fiat
and i also think
there's a case to be made that you can't
really have fiat without war
the following is a conversation with
safety in a moose one of the central and
most impactful economists philosophers
and educators in the world of bitcoin
he's an austrian economist an anarchist
and the author of the bitcoin standard
and the new book the fiat standard
safety does not mince words in his
criticism of economists and humans in
general with whom he disagrees for
example paul krugman who is a
neo-mckenzie economist and a previous
guest at this podcast
safety's opinions are strong and often
controversial
i do push back in this conversation
playing devil's advocate or trying to
steal man each side but as always i do
so in the service of exploring the rich
space of ideas that safety has about
human nature and human civilization
i trust the intelligence of you the
listener to come to your own conclusions
that is the burden of being a free
thinking human
it is on each of us individually to dive
into this chaos of ideas and from that
chaos discover long lasting universal
wisdom to live by
this is the lex friedman podcast to
support it please check out our sponsors
in the description
and now dear friends here's safety and
moose
let's start with a big question
what is money and what is the role of
money in the history of human
civilization money is a medium of
exchange the thing that defines money is
that it is a good that you don't buy for
its own sake because you want to consume
it itself or because you want to
employ it in the production of other
goods which is what capital goods are so
we have consumption goods we have
capital goods money is distinct from
those two because it is a good that is
acquired purely to be exchanged later on
for other goods so
it's not something that you acquire for
its own sake you acquire it so that you
can then later on exchange it and that's
a market good
that's a market good like all other
goods you know it's uh you you acquire
food because you eat it you acquire a
car to move you around you acquire money
so that you can exchange it for other
goods
and that's something that um many people
have a hard time grasping of the concept
of money as a market could but it is a
market good just like all others
and the importance of it is that it
allows us to trade it allows us to
develop
to develop the division of labor which
would not be possible at any kind of
sophisticated level without money so
if um you know if we live in a small
society of 10 people then think about
all the things that we can make all the
things that we can produce
if we're only 10 people isolated from
the world there's only very few things
that we can make and therefore
um we can exchange those things directly
with one another but as
you know if we get
in contact with other
societies that have more people then the
opportunities for specialization
increase you know if there's 10 people
the only thing that you can make is
the very basics you need for your
survival but if you're part of an
economy of 10
million people there's much more room
for specialization you can make a car
you can make a house that's very
sophisticated and that relies on the
division of labor that relies on you
specializing in doing one tiny little
thing
which is not what you consume you know
you can and you trade that thing for all
the things that you consume so
as the economy becomes more
sophisticated and involves more people
and currently we're all part of a of an
economy of almost eight billion people
um each one of us produces one tiny
little thing and they exchange that
thing
for all the things that they want and so
because we specialize we become more
productive in doing the thing that we're
good at
so you know there's people out there who
are engineers who are designing
windshields and cars it's a very
specialized thing they sell windshield
design to mercedes-benz
and then from that you know that
windshield design is
added on to millions of cars around the
world and from that they're able to get
enough money to meet all of their needs
so the division of labor is enhanced
enormously with money because without
money it's very difficult to be able to
exchange
a large number of goods it's very
difficult to have a sophisticated
economy with a large degree of
specialization because
it's very difficult to find people who
want the thing that you have and have
the thing that you want we call this the
coincidence of wants
and that's really the problem that money
solves so you make apples and i make
oranges
i'd like to have some of your apples but
you don't want my oranges that's we have
a problem of coincidence of one so what
do i do you want bananas i need to find
somebody who has bananas give them my
oranges take their bananas give you
their bananas and then i take the apples
in that case bananas are a medium of
exchange
so it's natural that a medium exchange
will evolve and will emerge in an
economy as an economy becomes more
sophisticated as we move beyond
10 people and 10 goods it's inevitable
that we're going to come to a situation
where we have the problem of coincidence
of wants
and the way to solve that is to use a
medium of exchange and it can be
anything it can be a banana it can be
food stuff it can be any kind of good
as long as i acquire the good with the
purpose of it passing it on to you not
for the purpose of me consuming it or
using it then that's a medium of
exchange so when we look at the entirety
of human society of millions of billions
of people you think of them just a bunch
of individuals running around
i love the
the term coincidence of wants so each
one of them it's like a stochastic
system
they have desires it's like random
collection of desires some somehow
rooted in our evolutionary history but
mostly random in terms of preference of
banana or apple that kind of thing and
then they also have the capacity
uh for competence and excellence in
particular kind of labor it's like uh
specialization they're able to be like
incredible at a particular set of tasks
so there's a bunch of ants running
around
with consciousness and intelligence and
they have desires and they have
capabilities and then um there's a
coincidence
of both the the wants they have and the
capabilities they have and you wanted to
create a system that kind of um
exchanges those things so when you
imagine
like uh what is a good what is markets
when you imagine a market is like a
hierarchical
system like what do you imagine what is
a market
a market is just the name for the
naturally emergent phenomena of people
voluntarily exchanging things it's at
any scale
at any scale yeah individual it could be
a market of two people on an island on
their own it could be eight billion
people across the planet um naturally
emerging
yes this is the thing i think that is uh
very hard for many uh
people who don't have a good
understanding of economics to grasp that
capitalism and markets are not
something that you need a
central planner or a government officer
to make happen
capitalism is just what happens when
people are left to their own devices
it's just our cognitive capacity allows
us to
develop tools that we can use for
production and um that's what we do
that's what humans have been doing since
they started
you know making spears to hunt that's
the first capital good probably so we're
constantly accumulating capital we're
constantly trading with one another we
find an opportunity you know you've got
a lot of oranges i've got a lot of
apples
then i'll take some of yours you'll take
some of mine we're both better off this
is just a naturally emergent thing
and money is what makes it enormously
powerful money money is what allows it
to scale really money is what allows it
to go beyond
small
societies into just something that is
global because with money
again as i was saying earlier you know
all you need to do is specialize in
doing one thing the things you do best
and then you exchange that for money and
you don't have to worry about whether
the other people involved in this
want what you have and have what you
want you just sell it for money to
whoever wants it
and you buy whatever you want from
whoever has it and that's um an enormous
reduction in the mental burden of how a
market economy functions so the first
thing that i would say about money is
that it allows for the division of labor
and it allows for the market system to
grow and the second thing is that money
is a mechanism for storing value into
the future
so
again as humans we develop the capacity
to think
for the future we you know we we make a
spear so that we can hunt and then we
see that it works and then we take it
out of the animal that we hunted it with
and we keep it for the next day's hunt
and then we start making a better spear
and we make a better fishing rod and
then we make a fishing net and we make a
fishing boat
and that's our ability to
think of the future
and as we start building durable goods
we start thinking more and more of the
future we start becoming more and more
future oriented
and that's
really the process of civilization the
process of denying our needs now in
order to think for the future so instead
of spending all of our day on the beach
enjoying ourselves
we take time off from
leisure on the beach and spend some time
making a spear or making a fishing rod
so that our productivity in hunting or
fishing tomorrow is going to be higher
and so that ability to think for the
future
is enhanced by our ability to provide
for the future and we do that with
durable goods but then
money ends up being the best mechanism
for providing for the future because
you the future is uncertain so you know
you can um save your apples and oranges
you can save the spears you can save the
animal that you hunted
but these things um you know first they
rot and they're not very good at holding
on to their value over time but even if
they wear
even if you know have objects that are
durable the problem with them is that
you don't know if you need them
tomorrow or next month or next year
you're not sure if you're going to be
needing them and you might end up not
finding anybody who needs them or
finding somebody who needs them but
doesn't value them much and won't give
you much in exchange
money allows you the optionality of
saving the most liquid good the most
saleable good so it's something that you
can sell tomorrow with the least
uncertainty it has the most liquidity
the most ability to
be sold without a loss in its value so
money is our most advanced technology
and our best technology for moving value
into the future
and so
i think history really i argue this in
all my books is that really history we
see
um we can think of it as a process of
our money gets harder
and so our money is gets better at
holding on to its value for the future
and by harder i mean harder to produce
we we find things that are hard to
produce that are better at holding on to
their value so they hold on to their
value better for the future and that
allows us to plot and plan for the
future that makes the future less
uncertain and that makes us more future
oriented in other words it lowers our
time preference
and the harder the money is the better
it is allowing us to think of the future
so people should know that you've
written the the book bitcoin standard
from 2018
i believe yeah and then a new book
called fiat standard uh the bitcoin
standard just considered kind of the
bible uh in the cryptocurrency space in
the bitcoin space of uh just a very
rigorous systematic explanation of why
bitcoin what is it
why
should it be why is it good so you're
describing in that book and in the new
book
different implementations of the
technology of money
in the new book you talk about
fiat money which is another way to do
money so obviously there's a lot of
different ways to do money and maybe you
haven't discovered the best way to do
money yet our conversation today is how
to do money better um maybe we'll go
back to bananas eventually uh right
very good reasons why we won't well we
can disagree uh we can agree to disagree
on this
now i'm open-minded to the bananas they
uh they're one of the biggest sources of
joy to me when i first came to this
country
is uh eating bananas and so
i'm
maybe money
happiness
perishable happiness will eventually
become
the the best medium of exchange i don't
know open-minded anyway so you mentioned
hard money and soft money says different
ways to do money what is hard money what
is soft money
in the bitcoin standard i present the
argument that money is always whatever
is the hardest thing to make um
historically i think we see many
examples of that so for instance in
prison people use cigarettes as money
because nobody can make cigarettes in
prison
in societies we have the example of yap
island for instance it's an island that
doesn't have any limestone but there's a
nearby island that has a lot of
limestone
and
it's very expensive obviously with
primitive technology to move limestone
from the uh from palau to yap so on yap
limestones were money uh seashells rare
seashells that are not easy to find end
up serving as money in places where
they're rare glass beads were money in
west africa where there was no glass
making technology because they were
imported from abroad and they were very
hard to make
and i think there's a conscious effort
of some people might recognize the the
hardness and the scarcity and choose
this as money but i think what's more
important is just a natural evolutionary
process whereby
people choose all kinds of random things
as money bananas maybe even
but then the people who end up making
these bad choices um don't end up with
any wealth left whereas the people who
store the their wealth in the things
that are hard to make
end up acquiring end up maintaining
their wealth and maybe even increasing
it over time and of course this
culminated in the 19th century in the
end of the 19th century by the basically
the entire planet being on a gold
standard
and what is the gold standard
the gold standard is basically when
money is gold or at least government
currencies backed by gold but the reason
gold became money and not copper not
nickel not bananas is that gold is the
hardest metal in the world and it is the
hardest metal to increase the supply of
and the reason for that is based in
chemistry so
um gold is indestructible you can't
destroy gold in any meaningful sense
it's um it's it's it's been accumulating
stockpiles for thousands of years you
know the gold that was worn by nefertiti
back in ancient egypt is
today um probably in somebody's necklace
or in somebody's gold coin it's still
there so for thousands of years humans
have been digging for gold they dig it
out of the ground they refine it and
then they put it in a jewelry or a coin
and then it just stays there um it gets
melted down into new other forms you
know the jewelry gets turned into coins
or coins get turned into bars
but it's um it's just
stockpiles that are accumulating on the
other hand
every year we get better at our
technology of looking for gold you know
there's more people all over the world
the population increases the technology
improves so we keep finding more and
more gold and we keep making the
stockpiles bigger however
because we're constantly adding to a
stockpile that is not uh being devalued
sorry that it's not being consumed
because there's no way of consuming gold
you can't eat it you can't burn it you
can't it doesn't rust
um because of that we're constantly
adding to a constantly growing stockpile
so if you look at the numbers
you see
over the last 100 years we've got pretty
reliable data on gold production
worldwide we see that pretty much gold
stockpiles increase at around one and a
half to two percent per year every year
so yes we we're making more every year
but
we're making more so we're adding to the
stockpile the stockpile grows more so
every year we're adding only around one
and a half to two percent
compare that to the second
highest the second hardest metal
historically was silver and that
increased historically around maybe five
percent per year or so now it probably
increases something like closer to 30
percent because it's now getting used
extensively in industrial uses so when
you use it in the in industry um you
know when you put silver in a laptop or
in a camera or in a machine
effectively
you are consuming the stockpot because
it's not used as money it's taken out of
the monetary stockpile so over the last
150 years since 1870 in particular and i
discussed this in detail in uh the
bitcoin standard
what happened in 1870 was uh germany won
the franco-prussian war
and germany was on a silver standard but
the value of silvers was declining so
germany did something very smart which
is they took their indemnity from france
in uh silver and gold and used that big
chunk of gold to switch to going on a
gold standard and since then silver's
been collapsing in value
next to gold so back then the price of
an ounce of gold was around 15 ounces of
silver today it's closer to 100 it's
just been declining for the last 150
years
and so because of that because of the
fact that it's lost its monetary role as
people shifted toward gold
the value of silver went down and so it
became economical to use it in more and
more industrial applications so the
stockpile declines and then as a result
uh that
weakens its monetary properties more and
more and more
so that's why by the end of the 19th
century i mean at the beginning of the
19th century gold and silver were money
by the end it was basically only gold
and the countries that were still on a
silver standard china and india in
particular suffered enormously from it
because their money was devaluing very
quickly next to gold and so europeans
would come to china or india were able
to buy things at practically a big
discount
so i hope it's okay if i ask
very simple very basic questions there's
few people
in this world that are good as good as
you are at answering very basic
uh almost ridiculously basic questions
because i think
exploring questions like what is money
is a really great way to uh to think
from first principles to really think
deeply about this world so i really
appreciate you doing that um when you
say standard
what does it mean when you say silver
standard gold standard again with the
basic question
the term really i think was based out of
gold
the first time this came out was the
gold standard because um so i i said
gold was money at the end of the 19th
century but it wasn't just that
everybody was using gold coins and
trading with gold coins because that's
got a problem of um divisibility so
a lot of things are worth less than one
gold coin so how do you buy that thing
and the answer was that you created
monetary instruments that were backed by
gold
and so currencies national currencies
under the gold standard wear specific
units of gold and that's how a gold
standard functioned money was gold but
you had pieces of paper
that were redeemable in gold so you
could go to the central bank you'd give
them the
piece of paper the 100 bill or the 10
bill and they'll give you gold in
exchange and they give you a specific
quantity of gold in exchange effectively
the paper was just the receipt for gold
so the paper exactly represented the
amount of gold exactly that was the plan
that was that was what it's supposed to
do but
arguably we never had a pure
gold standard because the nature of gold
means that the people who are in charge
of the gold
um they have an enormous amount of power
because the gold is concentrated with
them and as long as not everybody shows
up at the same time asking for their
gold then you can make more receipts
than you have gold sure this is there's
always uh shady stuff going on but at
least that's the state of goal is the
receipt should exactly represent the
amount of gold there and also when you
say standard
it means that uh governments
sort of publicly stated that this is
the approved the main way of making
transactions that are monetary so this
is the money this is this is the
official money that you should be using
if you live in this country yes although
i would say it's more like the other way
around it's not that the government's uh
established gold as money it's more like
the
it's more like gold gave the governments
the credibility for their currencies so
governments were not
the ones that made gold money gold has
been money before states were invented
um states if you have a government and
you'd like to have some legitimacy and
you'd like to be able to deal with other
governments on an equal footing you had
to go by the gold standard you had to
have a currency that was redeemable in
gold so that you could trade with the
rest of the world so that people could
um in your country use that currency um
so it's it's it's not that governments
were choosing gold it's more like they
were
having to adapt their own currencies to
gold in order to give their currencies
credibility so there's a dance there
though because if they had to
then why did they switch away from it
after
so there is a dance where the
government's
you know the people
pressure so first of all the the
the basic characteristics of the hard
money
pressures the governments and the people
in terms of what should be used then the
people based on their community the
network effects the way they
the the narratives they tell each other
all that kind of stuff they pressure the
governments to uh take on a particular
money and then the governments
um you know they like power they like
control all those kinds of things they
pressure the people until different
kinds of narratives so there's a dance
going on in this evolution of what
technology to use for a monetary system
so it's i the reason i
it i don't know if governments had to
because they clearly didn't have to
because they eventually moved away from
it
so it but there was pressure probably
yeah but i mean even after they moved
away from it you know central banks
until today they still hold a lot of
gold reserves in fact if you look at
1914 when they when the world really
went off the gold standard
the amount of gold reserves held by
central banks was a tiny fraction of
what it was as time went on central
banks accumulated more and more gold
what ended up happening is they
prevented their citizens from using the
gold but they continued to use it so
gold continued to be money up until 1971
because
effectively the world was on a dollar
standard and the dollars were backed by
gold but then after 1971 even then you
know central banks continue to
accumulate gold because
why would you as a central central bank
want to accumulate pieces of paper
effectively or credit liabilities of
another central bank that can produce
them infinitely
and it's it's it's a lesson that's
becoming uh more and more obvious to
governments today you know as we see u.s
sanctions taking say russian reserves or
afghanistan reserves
and this is why you know we see china
and russia have accumulated a lot of
gold over the last 10 20 years so just
to
return to the question of
definitions so what is hard money versus
soft money yes so hard i mean it's a
relative thing but the hardness refers
to the difficulty of producing more
units of the money supply so an easy
money would be a money that is um
relatively easy to make so you can
increase the supply by 10 20 30 40 50 or
something like that so pretty much all
commodities all market commodities other
than gold and silver
they're easy money and they're not
suitable as a monetary medium because
they're being consumed so if you look at
on in the bitcoin standard i mentioned
this metric called the stock to flow
ratio which is the ratio of the annual
production the flow
to the stockpile the existing stockpiles
if you look at all the other metals
they're easy money because they're being
consumed so think about how much
stockpiles of copper there are in the
world today so copper companies
obviously have some stockpiles of copper
major copper consumers will have
stockpiles of copper but the vast
majority of copper is essentially on a
on a conveyor belt of production
from the mine straight to the uh
consumer good that it's being used for
so
the existing stockpiles are roughly in
the range of
one year's production if you take all of
the companies i i don't have exact
statistics
it's very difficult to get these but you
know it's roughly in the same range like
if copper production were to stop
completely today
we'll have about a year's production
stored in various places
so that makes copper terrible money
because if you started using copper as
money and this is why you know a lot of
people say well money is a collective
illusion money is a
social construct um if we all agree that
something is money then something is
money i think it's completely clueless
and it's usually marxists who believe
this so obviously no understanding of
economics it's completely clueless
because even if everybody in society
decided we wanted to make copper as
money even if we all decided to
collectively
take part in this hallucination or
illusion
it would not make copper money it would
just make everybody who decides to take
part in this hallucination poor that's
it it would make copper miners rich it
would make all of the people who chose
copper as money poor and copper would
not be money it can't work because what
happens is because of the fact that the
stockpiles are so small if you buy you
know even if you get the 1 000 richest
people in the world all the world's
billionaires
they get together they all
dump all of the money that they have all
the stocks all the bonds all the
gold all of the bitcoin everything that
they own they dump it and they buy
copper with it what's gonna happen price
of copper is gonna go up a lot
but what's gonna stop copper miners from
flooding the market with even more
copper than what the billionaires bought
nothing they're going to dump all of
that
extra copper production if the price of
copper is going to go up so you know
there will be a lot more copper mining
than all the other metals a lot of
you know nickel companies and gold
miners are going to switch to focusing
on copper
and then we're going to dump an enormous
amount of copper on the market the value
of copper is going to crash
and the people who chose copper as money
are just going to end up with large
warehouses of very cheap rusting metal
so that's a brilliant description and
that that kind of pushes towards gold
where the
um stock to flow ratio i guess you would
say is 1.5 to 2 like you mentioned
earlier well that would be like the
inverse of the stock to flow that's the
supply growth rate so the stock to flow
is the inverse it's around 60.
60. got it but let me push back on uh
somebody who likes human psychology let
me push back on the collective
hallucination
uh and the illusion so that's for copper
but what about paper money
uh
that you know that that's not you can't
smoke it you can't eat it it's just it's
supposed to represent it's supposed to
just be the medium of exchanging and
[Music]
in that sense
what role
does collective hallucination play in
the effectiveness of money exactly zero
because all of the paper money first of
all there's never been an instance and
again um
this is uh flies in the face of a lot of
what a lot of people like to think about
money
there's never been an instance where a
government came out and said all right
we're printing out these pieces of paper
use them as money this one is worth 10
apples or use it for buying things and
here's the piece of paper this has never
happened
they've always
taken
fiat money paper money
all of these
things were always born out of fraud
initially it was a receipt for gold and
then they told you uh well you know you
don't need the gold anyway and you have
to use this and then if you don't use it
we throw you in jail
and then so first of all it doesn't um
it it ca you can't enforce this thing so
it's never really just happened and it's
never been hallucinated into existence
um people can hallucinate this kind of
nonsense in uh writing textbooks and
books and uh in academia but in the real
world people don't hallucinate uh money
people are very careful about what they
put their money in for people listening
we're gonna have fun in this
conversation because you're like you
already said marxist
fraud hallucination just because we use
these words doesn't mean they're true
but they're fun to talk about so you you
have a strong certainty about the way
you talk which i think is
fun
um but allow me in my dumb self to push
back to play devil's advocate and i'll
actually ask you sometimes to play
devil's advocate if possible because
you're smarter than me and all this
stuff so if we we want the smartest
devil's advocate possible
and i'm certainly not that but anyway so
but nevertheless we are currently
on the fiat standard
so
money
does
have
value
paper money
and the reason it has values because we
believe it has value to what degree if
we put the hallucination word aside
the belief that something is worth value
is actually
value and is the thing that helps money
work
because you're saying it's fraud
and the belief
is almost valueless but how much value
can we quantify the value of the belief
the collective belief i should say like
all economics is subjective i i consider
myself an austrian school economist and
the starting point of all austrian
economics is that all value is
subjective
so
[Music]
obviously you know value only exists
because humans choose to make the
valuation however um the economic
reality of the way that money works
means that it's just the technology like
all others and so
if we for me when people say well if we
hallucinate that this thing can be money
then it'll be money if we can
hallucinate bananas to be money then
we'll leave money for me it's like
saying well if we hallucinate the
bananas can be spaceships there'll be
spaceships i mean you can call them
spaceships if you want but a banana is
not going to get you to the moon with it
nevertheless
that's true there's so you're drawing a
big distinction between physical reality
and the space of belief but it seems
like so much power
of human civilization
uh so much destruction so much
creativity creation happens in in our
minds
so absolutely everything does happen in
the mind you're not going to get to the
moon but you might still have a
significant impact on human civilization
if a lot of people believe a thing
true but um economic reality exists in a
way in which your beliefs are rewarded
when they match up with economic
reactions reality and they're punished
when they don't so if you ride a banana
jump off a cliff thinking you're going
to get to the moon
you know and that solves the problem of
people thinking the bananas are
spaceships by killing people who think
that bananas are spaceships and i think
to go back to your question on in terms
of paper monies so yes even though you
know ignoring the
um
the original sin of the creation of fiat
money and ignoring everything that
happened before 1971 all right well here
we are people are using well it's not
really paper money and we should say
like
fiat money is predominantly credit so
like the it's also digital currency so
more than 90 percent of dollars
are digital less than 10 percent of
dollars are physical so it is a digital
currency and all over the world all
these governments are using digital
currencies effectively with some
physical manifestations in paper
but yet even within these
currencies it's still the same analysis
and i discussed this in chapter four of
the bitcoin standard you look at
government monies you see that the
currencies that have held on to their
value the ones that have the biggest
value the ones that play the biggest
role in global trade the ones that are
used as currency reserves all over the
world are the ones that have the lowest
supply growth rate
the ones that grow
whose central banks are the least
inflationary
and on the other hand the ones that
whose supply is more inflationary
similar to copper end up failing you
look at lebanon venezuela zimbabwe these
are currencies whose supply increases
very quickly
and therefore
their value collapses whereas the dollar
the swiss franc the euro
the british pound the japanese yen they
increase at a much lower rate in general
than the uh than these terrible
currencies and that's why
all over the world you see people are
looking to get more dollars and more of
these harder currencies than the easier
ones so i think this analysis of
the hardness of the money and the ease
of money is
pretty well supported empirically
so like you said
you're at least in part or in whole
consider yourself an austrian economist
so
you're perhaps a great person to ask
about the basics
what is austrian economics what is
kenzian economic how do you compare the
two
what should people know some interest
what are
interesting defining characteristics to
you about these schools yeah
so austrian economics the way that i
said austrian economics is economics
it's um it we call it austrian economics
because economics has been hijacked by a
bunch of frauds really people who are
wrong
well it's much worse than wrong by
people who are just essentially
propagandists for inflation right um so
it's like your opinion man
all right
yeah well that's also like your opinion
man yeah but
that's true well i also talked to paul
krugman on this podcast so he's uh
the o speaks enough but he is uh he's
one of the people that is perhaps most
harshly criticized by folks
in
austrian economics perspective and vice
versa which is a fascinating intention
yeah he's um he's done a great job as an
actor who plays an economist on tv and
the internet
so anyway uh now tell me what you really
think no but so the basics of what is
austrian economics what is the what
perspective does it take in the world
yeah so i mean austrian economics really
is
uh the continuation of a tradition that
it goes back to the ancient greeks of
studying economics historically it's
really just
economics and that has evolved over time
and the
um
the establishment of the austrian school
per se came in 1871 150 years ago when
karl menger the father of the school
wrote a book called principles of
economics
and essentially invented marginal
analysis which is a big deal in
economics marginal analysis is the idea
that in economics individuals carry out
decisions at the margin that it's um
when you when you make choice you're not
making it for instance if you're making
a choice between uh what should i spend
my money on you're not making a choice
whether it is
um this thing is
object a or b which one is more valuable
for me in general which one is more
valuable for me for the rest of my life
you're choosing about the next unit
right now
at this point at this stage and if you
analyze economic decision making at the
margin it makes a lot more sense and you
can understand why people decide and
make the decisions that they do
whereas if you
don't apply marginal analysis things
don't make sense
the key thing that marginal analysis
helps us solve is what is called the
water diamond paradox
so you will die without water we all
need water and yet water is dirt cheap
whereas diamonds are
extremely superfluous nobody needs them
nobody's going to live or die because
they have a diamond and yet they're
extremely expensive so why is it that as
human beings we pay
maybe say a dollar a liter
for water whereas we pay thousands of
dollars for a few grams of diamonds
why is this the case do we value water
less than diamond
the answer is no but at the margin
where we are right now you live in a
place where water is very abundant
because cities are only built in places
where water is abundant
and um
you're only making a choice about the
next unit of water and so water is
extremely abundant and you're choosing
about whether to spend the next
unit of money on water the valuation
that you give to water given that you
have a lot of water at home
and then you live in a place that has
abundant water
is pretty low to the marginal unit
but it's very high for water overall so
if i asked you
how much would you spend for
water in general you know how much would
you
pay for water for all of your life it
would be a lot higher than diamonds if i
told you you can only have water or
diamonds for the rest of your life you
choose water obviously
but you nobody's ever had to make that
choice you only make your choices at the
margin
so at the margin where we are modern
civilization we have an abundance of
water that's why we have civilization
and diamonds are very rare and scarce
and um
people are only buying you know you buy
your first diamond when you're going to
get married and you give it to your wife
and that's it's going to be the first
few grams of diamond that she's ever
going to giving my wife water
smart move you should definitely give
her bitcoin instead of diamonds i tell
my wife i occasionally remind her what
uh what we how many bitcoin we could
have had if i bought her bitcoin with
the price of the diamond what's the
downside of by the way diamonds for from
the analysis of like gold and so on
that's a great question um
arguably diamonds are scam
[Laughter]
because they became popular as a thing
in uh marriage
after gold was banned after gold
ownership was banned in the us in the
1930s and in many places around the
world so before that you'd give gold and
the reason you'd give gold in a dowry in
uh wedding
is because you know it wasn't just that
it's pretty and shiny it's because it's
money and so um you know you die and
your wife can take the gold and she can
live off of it um it's it's a
demonstration that you're giving her
something valuable
and that's because nobody can make a lot
more gold that has the high stock to
flow ratio but then they banned gold
ownership or they allowed people to only
own very tiny quantities of gold and
that's when the diamond industry stepped
in and marketed diamonds as um
you know the thing that you need to give
but the problem with it is of course
that diamonds aren't
like gold they're not very hard to
make more of and the reason we have
scarcity in diamonds is really
artificial there's a there's effectively
a monopoly of diamond producers they
restrict the supply
and um it's a pretty dirty business and
the way that they do it is you know all
the um all of the talk about
blood diamonds is a way for them to
ensure their monopoly so
um
if you're part of the monopoly of
diamond producers then doesn't matter
how many people get killed producing
your diamonds if you're out of the
monopoly then human rights organizations
descend on you
and call for shutting you down for
selling blood diamonds and they're also
restricting the production of artificial
dimes this is the other thing you can
make artificial diamond you can't make
artificial gold
so they restrict the production of
artificial diamond and they try and um
insist that you know you shouldn't take
artificial diamonds but they're
indistinguishable from real diamonds so
it's an artificial scarcity and i think
there's going to come a point at some
point that this monopoly is going to
break and a lot of people are going to
be left with uh
essentially uh
highly devalued uh jewelry i'm going to
take this segment of the podcast when
i'm getting married i'm going to send it
and then instead you're getting
uh water or bitcoin yes and water and
bitcoin is all you need so so marginal
analysis guessing and the margin
is the thing that allows you to most
accurately capture human nature the
actual day-to-day decisions that we
humans make
yeah that's really revolutionized
economics so 1870 and that's um that was
menger's
work
and then um he had a student um agent
bombard who developed um capital theory
and then he had a student ludwig von
mises who
is arguably the most important economist
ever and he developed a theory of money
and um he wrote a book in 1912 called
the theory of money and credit
and then in the 40s he wrote human
action which is
a big treatise on economics and i think
this is um this is the correct tradition
of economics and before uh world war one
this was just known as economics and
then
um after what happened in world war one
and i discussed this in detail in the
fiat standard is that the bank of
england essentially went off gold
and tried to pass off their own credit
as being as good as gold
in order to finance the war
and incidentally here
this is part of the history that is not
discussed often you know this is
presented as an innovation
um later on
they needed essentially a propaganda
school that would justify what they did
and
later on it's presented as oh hey we
realized that gold was not good and now
look we've built this thing
that is better than goldware now the
government can just print money whenever
it wants and now
um gold money is not an issue anymore
which is extremely idiotic because the
whole point of money is that it's not
easy to make if it's easy to make it's
not money anymore it's just destroying
the entire
function of money and we've seen that
happen extensively in the 20th century
after countries went off the gold
standard
so essentially keynesian economics is
just inflation apologia it's just
propaganda to justify inflationism and
it's
profoundly nonsensical it's built on the
idea that if you just make more money
you can stimulate economic production
and of course this is very self-serving
to the central banks and to the banks
and to the governments who promote this
nonsense
and this is also very pervasive if
you've had the misfortune of studying at
a university over the last century you
were taught keynesian garbage economics
you were taught that
if there is a problem in the economy the
way to fix it is that the government
prints money the government lowers the
interest rate and then
that
leads to more economic production which
is completely nonsensical so
so you're
again for the listener you're using
strong words you know push back just to
uh find
uh to please devil the devil's advocate
to hopefully one day arrive at the truth
so
just because it's in the interest of the
central banks and the government
the interests and the models of
keynesian economics and the government
are aligned doesn't mean they're wrong
so let's let's give them a chance
so the conventional wisdom
perhaps economics wisdom is that
inflation is good
uh in moderation as it encourages
spending but too much is bad because
you know it completely devalues destroys
people's savings so a little bit of
inflation is good to stimulate spending
um
and
i mean i suppose this is one of the
things that's supported by uh kenzi in
economics
basically the whole point of keynesian
economics is to try and find
an endless array of explanations to
explain why inflation is a good thing
well it could the chicken and the egg so
that's that's the cynical take yeah this
is a propaganda machine to solve the
government's narrative
the less cynical take is this a bunch of
economists who are telling who um
who figured out this thing and it
happens to be good for banks and
governments and just because it's good
for them doesn't mean and it justifies
the existence of government and uh your
basic
i don't think it's your basic assumption
but a foundational principle of your
thought is that a lot of government is
not a good thing
your first gut instinct
government bad
like i mentioned i lived next door to
michael malus who probably beats you on
the intensity
and how quickly he says government bad
so
so but there you know there's a
potential argument for government good
go some government is good maybe a lot
of government is good maybe we need a
lot of centralized management
for resource allocation and so on
because we humans specialize we're too
busy and so on so there's an argument
for that uh that exists
you probably disagree with any possible
argument in that side but anyway so why
is that idea yeah of kensington
economics wrong i'm going to focus for
this on the uh
money idea the idea that a little bit of
inflation is good
um the idea here i mean the criticism
is that without inflation people
wouldn't spend and then the economy
would come to a grinding halt
and that's nonsensical because people
spend not because they want to keep this
magical monster called the economy going
people spend because they need to
consume because you know that's how we
live that's how we survive you need to
eat you need shelter you need clothes to
keep you warm
and as technology advances the
capabilities of the things that we can
do with our um
with our time increases and so we want
to buy more things so people buy things
because people want to consume there's a
limitless desire to consume you know
that there's no
there's no uh shortage of reasons for
people to consume whether it's food or
ferraris or
uh
private jets people just always want to
buy more can i interrupt just really
quick what about the fear about the
uncertainty of the future where they
might want to they might want to
uh
buy things but they're really afraid
because it seems like there's a lot like
a pandemic going on or whatever it is
that's good so so fear of uncertainty is
yeah but can you have too much fear
here's the thing what i was saying is i
was making the point that
we don't need to be motivated to consume
like we have the insatiable desire to
consume everybody would like to have
more of all kinds of things everybody
would like to have a bigger house well
not everybody some people have a big
enough house but everybody would like a
house everybody would like a car jet
all kinds of things you know electronics
machines
so we don't need a desire to consume but
of course the limit on how much we
consume is
opportunity cost
why don't you buy a ferrari well because
that's really expensive and it would
mean that you know well maybe you do
have a ferrari but i mean most people
don't buy ferrari because
it's too expensive they don't they can't
afford it they'd have to work too hard
to get it
um and if they do get it it might mean
that you know they can't afford their
house anymore so we have to economize
that's a good thing and we have to also
think of the future and so humans
consume that we don't need more
motivation to consume we have to deal
with the economic reality of the things
that limit us from consuming more
so
what keynesians present is that when
there is a problem in the economy like
there was after world war one
the problem is always
a result caused by the inflation
and what the keynesian hucksters do is
that they look at the inflation
at the consequences of inflation and
blame it on people not spending enough
when people are doing the rational thing
you know the money is
the so there was inflation caused
an unsustainable boom it caused the
recession and now a lot of people lost
their jobs and they don't have enough
money to go out and spend
frivolously so they save for the future
the future is uncertain that's a good
thing you know that's how you fix things
you begin the recovery by well you know
you lost some wealth so you spend less
like if you you know if your business
goes bust if you lose your job
it's natural and smart that you stop
spending money on the frivolous things
that you used to spend
and you save it for the future you
invest in something else you get a new
job and then once you've recovered you
start spending more this is this is very
sane and very good and it's it's the way
to recovery
but
essentially the keynesians have used
this as a justification for more
inflation
because inflation is an addiction once
the government gets down the path of
spending money to solve its problems
then
every problem looks like it can be
solved by more inflation and so
this is where keynesian economics comes
in and of course the keynesian economics
is based on the work of keynes which
came in the 1930s
and this is the key point like
it's portrayed in the textbook as if
it's just this this scientific
breakthrough that you know somebody in
the 1930s this genius came about and
realized that oh
we don't actually need gold we don't
need hard money we can actually just
print all the money
and in reality of course it was just the
very thin flimsy idiotic justification
for what governments were already doing
for 20 years they'd already gone off the
gold standard
and they'd gone through 20 years in
which they were lying to their
population telling their population
we're still on a gold standard but you
know
there are problems caused by various
random things but don't worry we're
going to be going back on the gold
standard 20 years later after they went
off the gold standard they come up with
this
justification for why oh actually the
gold standard was bad and and and this
is a really pernicious thing about it is
the problems that were caused by us
going off the gold standard
were
caused by the gold standard and we're
going to fix them by going off the gold
standard even more just because
government is lying and it's shady and
it does these kinds of things doesn't
mean kenzie and economics is wrong so
just because i wanted to separate a few
things you said
it could very well be very wrong
and they could indeed be hucksters all
of these colorful such colorful language
uh i love you deeply for this this this
is fun yeah but i mean you know it's not
like somebody like krugman doesn't use
this kind of language when discussing
austrians it's just that when actors
like him use it it's presented as if it
is um legitimate because he's you know
he's part of the major shows
[Laughter]
so
the case they make and the criticism uh
kenzians make of austrian economics and
the case to make for kensington
economics is it's based on empirical
evidence
so
uh austrian economists are pie in the
sky theorists about
like how huma