Episode Transcript
[00:00:00] The fiat economist universally chooses to set the printing press to burr while the enlightened elite watch their stock portfolios moon and their debts disappear. The common man is told to be thankful that he was this close to the horror of living in the world where his wages bought more every year and his government respected his private property.
[00:00:26] Imagine how hard it would be for that government to raise debt in such a world. It would have to justify its spending and we cannot have that.
[00:00:39] The best in Bitcoin made Audible I am Guy Swan and this is Bitcoin Audible.
[00:00:58] Foreign.
[00:01:02] What is up guys? Welcome back to Bitcoin Audible this is the guy's take to follow our last piece. Psych.
[00:01:12] I am doing a read.
[00:01:14] Alan Farrington and Sasha Meyers just released another piece and of course within moments I got tagged like four times because as usual it is very entertaining and as usual it is very long and most people want to listen. So we will be postponing the read and in fact this will actually this actually will I think add some depth to the guys take that we're going to do because the this hits two critical economic elements to the pricing and the state or the era that we are in in Bitcoin. Because we just read Bitcoin and the Human Problem and and we are now reading number Go down by Alan and Sasha. And the former is about what the market is actually attempting to price when it comes to Bitcoin and the latter or the one that we are about to get into is about what price discovery actually is and why it's necessarily the case that a hard money will provide better pricing or more precisely and more importantly why a hard money will also always produce a more prosperous, productive and stable society. Which leads us back to the former question of Bitcoin and the human problem that what Bitcoin is being priced on is whether or not it can actually sustain its promise under extreme stress. Because specifically the harder it is a thing is it is usually more brittle, which means that it will not break under immense pressure until the pressure gets just just past what it is able to handle and then it just shatters into a million pieces. And I think it can be fun to unpack how all of this relate is related and kind of where bitcoin is headed in capital markets and the general building and establishing of trust around the globe in the world in the mind's eye of the people and thinking about where the future is going and where the economy is going and technology in general with this astounding and broad deflationary pressures from the context of things getting more affordable and capacity just exploding in every sense of the word.
[00:03:45] It should be fun to unpack both at the same time. So without further ado, let's get into another fantastic piece from Alan Farrington and Sasha Meyers, who we have read dozens of times on this show and you should definitely check out their book Bitcoin is Venice, one of my favorite audiobooks that I have done and this is their latest piece and it is titled Number Go Down Innovation, Capital and Deflation from First Principles by Alan Farrington and Sasha Meyers the central tenet of modern economic theology is that while too much inflation is a plague, too little of it is a catastrophe to be guarded against with every lever of macroeconomic intervention.
[00:04:38] What exactly counts as too much or too little, nobody can say. It remains one of the universe's great mysteries. The alleged perfect rate of inflation was not derived from a fundamental law of nature or from some sophisticated differential equation at the cutting edge of this highly rigorous and not at all pseudo scientific academic discipline. It was simply made up. As a fortunate article put it, the figure's origin is a bit murky, but some reports suggest it simply came from a casual remark made by the New Zealand finance minister back in the late 1980s during a TV interview.
[00:05:13] While slightly more critical attention, Mises.org quotes the minister in question as later remarking that the figure was plucked out of the air to influence the public's expectations.
[00:05:25] When pressed for a reason to fear a world in which things become cheaper, the fiat economist invokes the paradox of thrift. He argues that if a man expects a coat to be cheaper next year, he will choose to freeze today rather than part with his money.
[00:05:41] By this logic, saving is a terminal disease. The only way to keep a citizen active is to set fire to his savings through the quiet arson of inflation, forcing him to spend his money before it goes up in smoke. To the fiat economist, deflation is the economy killer to be fought at all costs. This essay is written to debunk that fallacy.
[00:06:05] In a society that values reality over accounting tricks, the number should go down, and if your money is honest, it will.
[00:06:17] Good deflation? Bad deflation the products of the earth require long and difficult preparations in order to make them suitable for the wants of man.
[00:06:27] A.R.J. turgot, Reflections on the Formation and Distribution of wealth we begin by rescuing the word inflation.
[00:06:36] To the state, inflation is a metaphysical abstraction, an exogenous act of God that simply happens to the economy.
[00:06:44] This is a convenient lie. We must distinguish sharply between cause and symptom.
[00:06:50] Monetary inflation is an act of the state, the deliberate expansion of the money supply.
[00:06:58] Price inflation is the consequence, the inevitable fever that follows the infection.
[00:07:05] By defining inflation solely as the rise in prices, the central banker shifts the blame from the printing press to consumer expectations, the greedy merchant, or the disrupted supply chain. Without a proper understanding of the cause, no solution is possible.
[00:07:25] The fiat mind also relies on the myth of the price level, a statistical concoction that attempts to average the price of a haircut in a ton of steel into a single, supposedly meaningful figure. What is the average temperature on Earth? What is the average length of a piece of string? The mind boggles. There is no general price, only opportunity costs and individuals making choices based on their own subjective valuations across an unfathomable and ever changing range of options.
[00:07:57] To claim that this aggregate can be managed through central planning is to suffer from a profound case of physics envy and despotism, or both.
[00:08:07] It is to treat a network of autonomous individuals as if they were gas particles in a sealed chamber.
[00:08:14] No entrepreneurs can act on intuition and anticipation of future conditions, not on the rigid rationality of a computer model. As the Nobel Prize winning physicist Muriel Mann remarked, think how hard physics would be if particles could think.
[00:08:31] Indeed, think how easy economics would be if people could not, and you will have the bulk of fiat economics.
[00:08:39] This brings us to our core contention.
[00:08:42] Long term price deflation is not an exogenous malady emanating from Vibey sentiments. It is an endogenous process of human progress.
[00:08:54] It is what happens when entrepreneurs, self appointed and answerable only to their customers, risk capital to discover more efficient ways to marshal resources.
[00:09:05] When an entrepreneur successfully innovates, she offers superior, cheaper or entirely novel products for a given investment. In other words, she frees up resources by consuming less to make more.
[00:09:18] Less for more is the heart of the flywheel. Economic returns.
[00:09:25] Far from being a problem, this number going down is the force that drives economic progress. It is the steady mastery of nature and technique that converts a luxury into a necessity. The fiat economist lives in perpetual dread of the deflationary spiral. Most popular discussions conflate two very different kinds of deflation. That distinction, and an account of the mechanics of each, is central to our argument.
[00:09:54] Good deflation is when prices fall because entrepreneurs find ways to produce more or better output with the same input.
[00:10:02] Bad deflation is the fall in prices during a credit unwind. In that case, defaults rise, the credit binge ends, and everyone scrambles for liquidity. In such an environment, falling prices are a symptom of balance sheet stress and broader institutional failure, not evidence that making things cheaper is destructive. Because bad deflation follows a credit unwind, fiat economists get the causality backwards. They conclude that printing money will avert hardship, not seeing that it was money printing that created the capital misallocation and balance sheet fragility in the first place.
[00:10:45] Good and bad deflation can be difficult to distinguish, but they are not the same animal.
[00:10:50] One is the dividend of competence. The other is the penance of hubris, because the fiat economist cannot distinguish between them. He concludes that economic progress itself is a systemic danger. The paradox of thrift becomes the fear that progress might slow the engine down. And since that engine has already been corrupted by fiat thinking, it is imagined to be forever on the verge of collapse.
[00:11:17] So the consumer is coerced into action, told he must spend now because his money is a melting ice cube. The result is a frantic, hollow kind of prosperity demand, born not of a genuine need, but of a desperate attempt to outrun the decline of the currency.
[00:11:35] Two marginally more sophisticated variants of the fiat worry exist. One is that debt contractions are nominal, meaning that if prices and wages fall while debts stay fixed, the real debt burden rises.
[00:11:49] The result is a large wealth transfer to debt holders at the worst possible time. Another common refrain is that wages are sticky. Firms cannot or will not cut nominal wages quickly enough and instead lay people off. We agree that neither sounds especially pleasant, but notice what they imply. The central problem is not that prices fall because people can make things more efficiently, but that indebtedness and institutional rigidities are dangerous. In a downturn, a society can vilify falling prices, or it can correctly identify the danger of building its entire economic system on fragile, nominal promises.
[00:12:27] Choosing is left as an exercise for the reader.
[00:12:31] The fiat economist universally chooses to set the printing press to brrr while the enlightened elite watch their stock portfolios moon and their debts disappear. The common man is told to be thankful that he was this close to the horror of living in a world where his wa brought more every year and his government respected his private property. Imagine how hard it would be for that government to raise debt in such a world. It would have to justify its spending. We cannot have that.
[00:13:02] Once we free ourselves from fiat methodology, we find that the only meaningful stimulus is the liberation of capital through innovation. With sound money and free markets, the number should go down.
[00:13:16] The temporal logic of pricing, administration, and technology all economic activity is carried out through time. Every individual economic process occupies a certain time, and all linkages between economic processes necessarily involve Longer or shorter periods of time.
[00:13:38] FA Hayek Money, Capital and Fluctuations Fiat economics treats time as inconvenient friction. In the hallowed halls of neoclassical theory, time does not exist. There is no equilibrium. The market has achieved a Pareto optimal stasis via the Walrasian auctioneer's Tatanman, yielding a price vector of 0 aggregate excess demand.
[00:14:05] Every atomistic utility maximizer has aligned his marginal rate of substitution with the price ratio, while firms reach a profit maximizing zenith where marginal cost is perfectly aligned with marginal revenue. Perfection. As Michael Fassbender might say, it is a beautiful but dead world. The invisible hand has stopped twitching and all bow to the glorious general equilibrium. But if the equilibrium is absolute, why does anything ever happen? If all information is already priced in, how has anybody ever successfully invested?
[00:14:41] The answer is that the neoclassical model describes an idealized and hypothetical destination while ignoring the real and uncertain journey. It ignores the entrepreneur, the actor who operates not in a frozen out of time model, but in the messy world unfolding at every instant. An assuming stasis. Mainstream economics obscures the guiding light of entrepreneurs returns.
[00:15:05] Prices are set in time, not in equilibrium. Cash is spent today in the hope that uncertain cash flows will return to the entrepreneur and her investors later.
[00:15:16] That is a decent layman's account of returns and close enough for present purposes. Misunderstanding returns has serious consequences because returns are the mechanism by which most real prices arise in the first place.
[00:15:29] By abstracting away time, neoclassical economics collapses a crucial dimension and blinds itself to a process at the heart of markets. It assumes firms maximizing profits when it should be looking at entrepreneurs experimenting to earn attractive returns.
[00:15:49] To start with, we must recognize that prices are set by producers and accepted or rejected by consumers.
[00:15:57] So what is a producer trying to do when setting a price? The answer is simple. Maximize long term returns.
[00:16:04] In the real world, prices are discovered by entrepreneurs under uncertainty. Every worthwhile entrepreneurial venture is a bet on an unknown and unknowable future. There is no Walrasian auctioneer, only trial and error with the unforgiving feedback of profit and loss on investment.
[00:16:24] This is because all production has costs, and in almost all circumstances those costs come before any hope of revenue. Any productive enterprise therefore requires a base of capital rather than somehow operating, selling and generating a return. Ex nilo. Investment always precedes production, and production always precedes profit. Real resources are scarce and real capital is scarce too. It follows that speculative opportunities to crystallize liquid capital into productive assets compete for sources of liquid capital, that is money.
[00:17:06] Since money is homogenous in this pre crystallized state, its providers are not trying to maximize profits in the abstract, but profit per unit of committed liquid capital per unit of time returns. Profit is a number. Returns are a relationship between money and time.
[00:17:24] An entrepreneur does not merely want to make money, she wants to make money relative to the capital committed.
[00:17:32] We would encourage special attention to the dimension of returns one over time. Whereas the dimension of profits is dollars and the year on year increase in profits is a dimensionless ratio, returns are a true growth rate.
[00:17:50] Keep that in mind when a fiat economist tells you the economy grew. Oh, it grew, did it? It generated a positive return on reinvested capital.
[00:18:00] Um, no revenue went up. That's not growth.
[00:18:05] Um, nice chatting with you as always.
[00:18:08] Money is the economic stem cell. It is pure undifferentiated potential. It is perfectly liquid and perfectly fungible. It when you hold money, you are holding what can be thought of as a claim on the future output of the economic network in which the money is used.
[00:18:27] Investment is the process of crystallization and differentiation. When an entrepreneur jumps off the monetary network, they are differentiating stem cells into organs. They take liquid potential and freeze it into a specific solid form. A bridge, a factory, or a decade of R and D for a life saving drug. The more specific the organ, the riskier the crystallization and the higher the sought after return.
[00:18:57] As with seemingly every idea your humble authors have spent months or years pondering. It turns out Thomas Sowell captured its essence in two paragraphs from Basic Economics. Call it Sal's Law.
[00:19:11] A supermarket chain in a capitalist economy can be very successful charging prices that allow about a penny of clear profit on each dollar of sales. Because several cash registers are usually bringing in money simultaneously all day long. In a big supermarket, those pennies can add up to a very substantial annual rate of return on the supermarket chain's investment, while adding very little to what the customer pays. If the entire contents of a store get sold out in about two weeks, then that penny on a dollar becomes more like a quarter on the dollar over the course of a year when that same dollar comes back to be reused 25 more times and later. As a historical case study quote, One of the keys to the rise of dominance of the A and P grocery chain in the 1920s was a conscious decision by the company management to cut profit margins on sales in order to increase the profit rate on investment. With the new and lower prices made possible by selling with lower profits per item, AP was able to attract greatly increased numbers of customers, making far more total profit. Because of the Increased volume of sales, making a profit of only a few cents on the dollar on sales. But with the inventory turning over nearly 30 times a year, AP's profit rate on investment soared.
[00:20:27] It is worth lingering on time a little longer.
[00:20:31] Virtually no productive process is instant.
[00:20:35] All take time. The process of crystallizing money into productive assets takes time. The process of producing, bringing to market, selling, and recycling monetary gains takes time. And most subtly, but perhaps Most importantly, recouping 100% of the capital committed usually takes a very long time and may never happen in full.
[00:20:56] Once crystallized as a productive asset, the goal is typically to operate the asset for years, not Somehow both depreciated 100% and return 100%.
[00:21:07] All such numbers are arbitrary in the abstract and set in practice by market forces. But a 5% nominal return requires 20 years just to recoup the initial investment, never mind to produce an economic return, assuming the assets generating that return even last that long.
[00:21:27] One could argue that as the environment of accumulated capital grows deeper and more complex, the bar for competition rises with it. And entrepreneurs can only think in terms of returns rather than immediate profits, if they hope to compete at all. They cannot compete without increasingly roundabout capital allocations, as Eugen von Baum Bawverk famously put it, and they cannot finance those allocations without long time horizons.
[00:21:53] A simple entrepreneurial action might be a quick arbitrage. We see apples trading at different prices in two markets. We buy low and sell high. We crystallize our money into apples, walk them over to the next market, and sell them back into liquid money for a profit. We incur risk in the process.
[00:22:13] Perhaps the price changes before we arrive, and it takes time. But the risk adjusted return on the capital invested in apples over the time required to complete the transaction is worth it. Notice, too, that this action driven by returns, affects prices. By moving cheaper apples into the expensive market, we narrow the spread. We should keep exploiting this money glitch until the two prices converge, once transportation and other costs are taken into account.
[00:22:44] That is the practical sense in which entrepreneurs are price messengers.
[00:22:49] But simple arbitrage can only take us so far. Over time, entrepreneurs discover more organizationally complex and more intuitively speculative ways of satisfying people's wants.
[00:23:01] This time, perhaps, we buy apples, turn them into pies, and sell those pies a few days later. That takes longer and requires capital equipment, like an oven, which someone had to make. And someone had to build the factory that made the oven, and someone had to open the mine that produced the metal that made the oven that made the pie. We are now selling, and everybody involved in all of this had to eat, perhaps apples.
[00:23:27] Think how deep the rabbit hole goes. Modern commercial society is built on astonishingly long and roundabout capital investments that can take years to pay off. And here paying off simply means getting back on the money network of pure potential. A pharmaceutical company might spend 10 years on RD and another 10 years selling the resulting product before it earns a satisfactory return on the initial investment.
[00:23:56] That is 20 years between jumping off the money network and getting back on all this, only to jump right off again in pursuit of another entrepreneurial journey. The roundaboutness of Dutch lithography giant ASML's returns is barely comprehensible. And so we see that per unit of time is just as important as per unit of committed capital.
[00:24:21] Per unit of committed capital, because money is homogeneous and liquid, whereas productive assets are heterogeneous and illiquid per unit of time, because the process of transformation not only takes time but commits the capital provider to an extended period of heterogeneous exposure. To reiterate, then, producers care about profit per unit of committed capital per unit of time returns.
[00:24:52] So we ask once again, what does a producer decide with respect to prices in order to maximize returns?
[00:25:02] There are several candidate answers, all intention.
[00:25:06] There is no single correct answer. Balancing what follows is the essence of entrepreneurship, intuiting future consumer behavior and future market conditions.
[00:25:18] Keeping in mind that producers are almost always in some degree of competition with others selling similar, if not identical goods or services, there is always a temptation to lower prices and draw customers away from rivals. Obviously this can harm returns, so prices cannot be lowered to zero. But equally, while returns can on paper be pushed arbitrarily higher by raising prices that assumes the same quantity of sales, it will not be higher prices mean fewer sales as consumers go to competitors instead.
[00:25:53] Exactly how many fewer is the essence of entrepreneurial judgment. Contrary to fiat economist logic, there is no such actual thing as a demand curve sitting out there in the world. There is only the producer's intuition about how consumers will respond.
[00:26:11] There is a subtle but critical distinction between the fact that some best possible outcome exists and the claim that anyone can deduce how to achieve it.
[00:26:21] Armen Alchian put the point well in uncertainty, evolution and economic theory, the meaningfulness of maximum profits as a realized outcome is perfectly consistent with the meaninglessness of profit maximization as a criterion for selecting among alternative lines of action.
[00:26:42] Consider a baker deciding how to price a new loaf. She could charge £3 and sell 200 a day, or £4 and sell 100 or 2£50 and sell 300, but exhaust her staff.
[00:26:57] One of these paths, or perhaps some option she hasn't considered, would yield the highest return on her capital.
[00:27:05] That optimum exists in principle, but she cannot calculate her way to it because the outcome depends on the subjective preferences of hundreds of people she has never met, the pricing decisions of competitors she cannot observe in real time, and much more besides. She can only try something, watch what happens, and adjust. This is not a failure of her rationality. It is the nature of the problem.
[00:27:33] Fiat economists, seduced by the quantifiability of profit, mistake the existence of a theoretical maximum for the existence of a method to find it. They then build models that assume the method has already been applied and wonder why reality keeps misbehaving.
[00:27:49] There is also, once again, the component of time. The producer cannot sit around indefinitely waiting to discover the perfect price. Even if that were possible, which it is not, by the time she found it, it would already be wrong to return to the physical dynamics of returns. If in scenario A, we sell our widget for X dollars, and in scenario B we sit around pontificating about the perfect price, only to sell it later for the same X dollars, our returns in scenario A are by definition higher.
[00:28:20] Time is valuable not as a hand wavy slogan, but in a very real and fundamental sense.
[00:28:26] The production process increasingly crystallizes value into more definite forms, culminating in inventory waiting to be sold. The producer therefore has some desired period over which sales should occur so that liquid capital can be recycled into the production process.
[00:28:45] With that in mind, we can give our first concrete relative to whatever time period is desired. If inventory is selling too slowly, the producer should lower prices to move it faster. If inventory is selling too quickly, the producer should raise prices to capture more immediate profit. The latter is a good problem to have, but it is still a problem from the standpoint of inadequately maximized returns. In either case, the producer is responding to what she believes are market signals. If sales are too slow, perhaps a competitor has a lower price and consumers are going there. If sales are too fast, perhaps the market is not yet saturated and higher prices will improve returns without slowing throughput beyond the producer's desired cycle. Note that in either case, the producer is both responding to market signals and creating them.
[00:29:46] Lower prices may reduce returns across the market and push marginal capital into other industries. Higher returns, conversely, attract capital. Here, all entrepreneurial decision making is, in the end, capital seeking returns, even when it presents itself in some more concrete form, several degrees removed. The entrepreneurial process just described has a fortunate long term innovation.
[00:30:16] In the short term, entrepreneurs decide how to price inventory that has already been produced but not yet sold. That is all the consumer directly sees, and from the entrepreneur's perspective, it is the immediate point of the exercise.
[00:30:30] But production assets exist on a spectrum of heterogeneity and liquidity, and over horizons longer than the ideal stock turn window, the producer faces a different what actually drives returns?
[00:30:46] In the broadest terms, the answer is creating more output with the same inputs. Competitive pressure at the point of sale makes that unavoidable wherever competition exists at all.
[00:31:01] To make that more concrete, a producer hoping to maximize returns, whether by increasing them in the absence of competition or preserving them under competition, has only three broad create products and cycle inventory faster, raise prices, or lower costs.
[00:31:22] Create products and cycle inventory faster is really another way of saying sell more, but with the emphasis on time rather than quantity. Selling the same amount in a shorter period is functionally equivalent to selling more in a fixed period.
[00:31:35] Most strategies are combinations of these three. The simplest option is that if returns are already attractive enough, the producer can allocate more capital to the same enterprise. This need not require faster turnover, higher prices, or lower costs. It may counterfactually simply reflect the absence of enough pressure to force any of those changes. The opportunity appears to be there. Competitors do not seem to be taking it. She may as well take it herself.
[00:32:06] Sales and marketing can be understood as attempts to cycle inventory faster, raise prices, or both.
[00:32:13] Marketing may broaden the market by making potential customers aware of a product they would otherwise have ignored, thereby increasing sales over a given period. Or it may aim to create a perception of quality that allows the producer to raise prices or, counterfactually not to cut them when otherwise she would have had to.
[00:32:33] RD is typically aimed either at lowering costs by discovering cheaper ways to operate productive assets, or at creating better or entirely new products that serves to lower costs, sell more product, or cycle inventory faster.
[00:32:51] Everything described so far in this section can be subsumed under investment or, if the reader prefers a more elevated phrase, capital accumulation.
[00:33:02] Returns are maximized by investing in innovation, either by opening new markets or creating new products.
[00:33:11] Note, too, that investing is necessarily speculative. Expanding production by allocating more capital to the same assets assumes that a larger market exists at the same return, generating prices, and that competitors will not chase those returns hard enough to drive them below whatever rate is deemed attractive. Sales, marketing, and brand building are likewise uncertain. They may work, they may not. You can have a hunch, but you cannot know until you try, and even then you may not really Know R and D is even more obviously experimental. It makes no sense to speak of just discovering newer, better products or just making things cheaper, as though these outcomes were sitting on a shelf waiting to be collected. You cannot know they will work until you try, but neither do you try at random. The effort follows from an informed hunch about technology and administration with only slight overgeneralization. Long run cost declines are almost always the product of new technology or new methods of business administration, or both.
[00:34:19] This tacit knowledge is arguably the entire crux of entrepreneurship.
[00:34:25] It cannot be known in the abstract or centrally or macroscopically.
[00:34:31] It cannot even be articulated macroscopically, never mind discovered.
[00:34:37] Nor can it be guessed or arrived at by a random walk through concept space. Nor can it be hit upon by investing in absolutely everything. Because resources, and hence capital are scarce. Entrepreneurs, intelligently and pro socially allocating capital in search of returns drive all production and hence all wealth creation.
[00:35:02] This iterative process is little more than another way of describing price discovery. Every day entrepreneurs discover how many goods can be made, what they can be sold for, and whether that justifies the capital outlay. This activity is radically uncertain. As Frank Knight defined it in his 1921 book Risk, Uncertainty and Profit, uncertainty must be taken, in a sense radically distinct from the familiar notion of risk, from which it has never been properly separated. It will appear that a measurable uncertainty, or risk proper, is so far different from an unmeasurable one that it is not, in effect, an uncertainty at all.
[00:35:43] There is no base rate when inventing something genuinely new. These are acts of creation, just as almost every economic action is, since we never step into the same river twice. Of course, not all price discovery is equally uncertain. When you buy ice cream at the supermarket because you think you might enjoy it later that week, you are taking a tiny bet about the future. You may change your mind and decide it is time for a diet. But the stakes are low. When Elon Musk risks bankruptcy to disrupt the economics of space travel, we witness extreme price discovery in extreme form, which is why it is rewarded so extravagantly.
[00:36:27] Dynamic Capital allocation, the concept of production as a process in time is not specifically Austrian. It is just the same concept as underlies the work of the British classical economists. And it is indeed older, still older by far than Adam Smith. It is the typical businessman's viewpoint nowadays, the accountant's viewpoint and in the old days the merchant's viewpoint.
[00:36:51] John Hicks Capital and Time so far so sensible entrepreneurs try to maximize returns under competitive pressure on prices in the short term and under competitive pressure to Innovate in the long term. So what exactly are the fiat economists supposed to object to? At first glance, not much. But this is where we hit the first fork in the road.
[00:37:16] The mainstream economist will insist that if this process of innovation driven price declines becomes general, generally understood, people will simply wait for things to get better before they consume, aggregate demand will fall and all hell will supposedly break loose.
[00:37:35] Consider the supposed problem in the abstract. If you are hungry and you know apples will be 2% cheaper next year, will you wait a year? Of course not. Because you would die and you would prefer not to die. There's nothing irrational about that. We can broaden beyond such a dramatic example. Would you ever delay a purchase because you knew it was going to be cheaper? Here the matter becomes more interesting. For some things, perhaps you would. We need not pretend nobody ever delays discretionary consumption. Or put differently, there is a sliver of truth in the so called paradox of thrift. Nobody's time preference is zero. You cannot only produce and never consume. You need to eat, to be clothed, to have shelter, and so on up Maslow's hierarchy as relative abundance allows. To illustrate this, let us entertain the Keynesian nightmare of a society that delays all but absolutely essential consumption. Such a society would have plenty of capital for reinvestment. Instead of eating the seed of its labor, it would plant the seed. But why, if it will not eat the next harvest either, to plant it again? And it does not take long, once one plays with a compounding table, to see that even the sternest apostles of delayed gratification will eventually accumulate so much capital that their Aurelian Stoicism will crack. And if it did not, the society would continue compounding its technology in productive capacity at an astonishing rate. Were it ever to stop or even slow down, cash would come gushing out, much as it would from a company that had spent decades reinvesting everything into growth. The real question then is not consume or never consume, but what do we consume now and what do we invest so as to consume later?
[00:39:28] There are trade offs here grounded in uncertainty and subjective valuation that cannot be quantified, only intuited.
[00:39:36] So yes, entrepreneurs react to present consumption patterns when hypothesizing future consumption patterns and deciding how to allocate capital.
[00:39:46] But to jump from that obvious observation to the claim that investment as a function of current consumption is ridiculous. We often hear fiat economists decry hoarding, but what they usually mean is that people are saving and investing. With more hoarding, perhaps we would build fewer automobiles, but more machines that build automobiles and if people became especially thrifty, the economy would climb higher up the stack still to build the machines that build the machines that build automobiles. The thriftier we are, the more roundabout our production methods become and the deeper our capital base grows.
[00:40:24] Such a society would be living for a better tomorrow.
[00:40:30] Let us also get one thing clear. Even if people quite literally stuffed money under the mattress, that would still benefit society. Holding money for longer simply means elongating the average holding period of money.
[00:40:45] People are storing more of their labor in the monetary system. That raises the value of money relative to goods and services and therefore lowers prices for everyone else.
[00:40:55] Under a hard monetary system, people are rewarded for participating in the system. By holding monetary capital and operating on that network, they give it depth and liquidity, thereby empowering entrepreneurs on that same network to try to make things cheaper.
[00:41:15] A worker whose savings sit on such a system helps underwrite innovation and then benefits from the resulting deflation. She did not receive that benefit for doing nothing. Her reward came from backing a monetary network that fosters innovation. In none of these scenarios is capital wasted. Yet the people most worried about the evils of delayed consumption will tell you that deliberately destroying useful assets is a net good.
[00:41:46] Before we trick ourselves into thinking deflation will cause more deflation until everybody starves, we must recognize the distinction. The fiat analysis.
[00:41:56] Producers are in constant competition with one another.
[00:42:01] Consumers are not.
[00:42:04] Consumers deciding to delay a purchase face only opportunity costs.
[00:42:10] Their consumption satisfies only their own subjective values.
[00:42:15] Producers, by contrast, are in a different position altogether.
[00:42:20] They are always competing against other producers on price in the short term and on innovation in the long term. Emphasizing that competition is against real rather than hypothetical competitors, that it generates real rather than hypothetical returns, and that it relies on tacit rather than perfect knowledge. Altzion writes, realized positive profits, not maximum profits, are the mark of success and viability. It does not matter through what process of reasoning or motivation such success was achieved. The fact of its accomplishment is sufficient. This is the criterion by which the economic system selects survivors. Those who realize positive profits are the survivors. Those who suffer losses disappear. The pertinent requirement, positive profits through relative efficiency, is weaker than maximized profits, with which, unfortunately, it has been confused.
[00:43:18] Positive profits accrue to those who are better than their actual competitors, even if the participants are ignorant, intelligent, skillful, etc. The crucial element is one's aggregate position relative to actual competitors, not some hypothetically perfect competitors.
[00:43:35] The analysis changes quite fundamentally once we consider price declines in capital goods, which necessarily precede price declines in consumer goods. For the Reasons already discussed. A producer cannot simply wait around to earn a higher return later by allowing her own cost to fall in the meantime, because capital accumulation is iterative and competitors can always iterate faster.
[00:43:59] If the price of some key capital good is falling because its producers have invested successfully in pursuit of returns, you can postpone buying it in hopes of an even better entry point later. But you are probably better off buying it now, lowering your own prices, increasing your own returns, and putting yourself in a stronger position to buy again later from a better capitalized base. The alternative is to sit still while your competitor buys the cheaper capital good first, cuts prices, takes your customers, crushes your returns, and leaves you without the money to buy anything later at all.
[00:44:39] Once again, we encounter the failure of static analysis.
[00:44:43] If you somehow knew you had no competition and could afford to wait for lower costs in the future, then, yes, you might imagine boosting returns this way. But even that collapses on inspection.
[00:44:54] If you have no competitors, who is buying the capital goods in question?
[00:44:59] If nobody is, how is the producer of those capital goods earning the returns required to fund the R and D that is causing the deflation in the first place? The circle cannot be squared.
[00:45:09] No circle can. Non zero consumption creates the price signals that direct capital allocation, not merely at the level of consumer goods, but at every level of capital goods that underlies productivity and wealth creation. In any remotely complex economy, to the extent demand is ever truly stimulated, if it is real and sustainable, it is stimulated by deflation.
[00:45:39] Competition has another helpful consequence.
[00:45:42] It bids up the price of labor and other inputs. Entrepreneurs would certainly like to pay workers less, but in a competitive market, workers can play employers against one another and demand the highest wage that still makes economic sense. That wage is linked to their productivity, which is itself increased by access to better tools. The more tangible and intangible capital workers have available to them, the greater their bargaining power and the higher their wages. So not only do entrepreneurs make things cheaper for consumers, they also help workers earn more.
[00:46:22] Once again, the fiat fear confuses the effects of bad deflation on wages during a credit crunch with the effects of good deflation produced by rising productivity. A worker does not need nominal numbers to rise to be better off. He needs purchasing power to rise.
[00:46:40] Switching now to consumers, it is undeniable that they can delay discretionary purchases if they wish.
[00:46:48] But they must consume something to survive. And that fact alone gives entrepreneurs a clear signal to focus on necessities and bring their costs down as far and as fast as possible.
[00:47:00] Under a hard monetary system, entrepreneurs are pushed toward making essentials cheaper, not merely toward selling luxuries. And essential here is not defined by some committee, but pragmatically by what people actually choose to spend on. In a world where their money is not being set afire by enlightened elites stimulating the economy, consumers are also often producers. In that capacity, they compete with other producers and must spend to remain competitive. A worker may buy an automobile because it gets him to work faster or more comfortably than the bus.
[00:47:35] That is consumption, certainly, but it is also productive consumption. It channels resources towards goods and services that genuinely augment the economy's productive potential.
[00:47:48] The perverse reality under fiat is that monetary inflation kills the incentive to save and invest.
[00:47:55] People are nudged towards spending more on luxuries, a PlayStation, a package holiday, and less on productive reinvestment.
[00:48:04] In a system free of monetary lies injected from above, people would consume what they truly wanted and invest the rest into improving the economy.
[00:48:15] So yes, luxuries would probably see lower demand if the printer stopped good. That would come at the gain of better alternatives. A fact that only becomes visible when prices are allowed to transmit information. Clearly, entrepreneurs would quickly reallocate capital. We would probably get fewer Ferraris and more life saving drugs.
[00:48:36] The fiat economists want to have their cake and eat it too.
[00:48:40] There are essentially no entrepreneurs in their static models. Nobody prices anything. Things simply have prices. Nobody makes plans. Things are merely produced and consumed. Firms are imagined to maximize profits, and if prices do not keep rising, their incentives supposedly break and the machine stops.
[00:49:00] Charlie Munger had an amusing quip attesting to the dynamics at play here.
[00:49:05] When we were in the textile business, one day the people came to Warren and said, they've invented a new loom that we think will do twice as much work as our old ones. And Warren said, gee, I hope this doesn't work, because if it does, I'm going to close the mill. He knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners. And it isn't that the machines weren't better, it's just that the savings didn't go to you. The cost reductions came through all right, but the benefit of the cost reduction didn't go to the guy who bought the equipment. It's such a simple idea. It's so basic and yet it's so often forgotten.
[00:49:48] Buffett understood how much more would have to be spent to keep selling into a market where the product was relentlessly becoming cheaper. That calculation simply was not attractive enough, so the money went elsewhere. The same logic holds across industries with capital goods or long duration intangible investment, which is to say across almost every serious industry.
[00:50:10] But we can end the section with a more accessible Moore's Law in case the reader is unaware. Moore's Law, not a real law, merely an impressively accurate long standing prediction, holds that the price of computing power roughly halves every 18 to 24 months.
[00:50:31] Much less well known, but more important here is that Moore's Law is really a special case of Wright's Law, which says that in any production process, costs tend to fall by some stable amount for each increase in cumulative historic production.
[00:50:47] Semiconductors simply happen to exhibit this dynamic at extraordinary speed and have done so for so long that Moore's Law can be expressed as unfolding over time.
[00:50:59] Emphasis on unfolding over time.
[00:51:03] If it were even remotely true that people defer consumption merely because deflation offers a better entry point later, then Moore's Law would imply that nobody has ever bought a computer or invested in producing one. Were the fiat thesis correct, anyone who wanted to compute something in 1970 would still be waiting for this terrible deflation to stop.
[00:51:26] Of course, the opposite is what actually happened. Computers are extraordinarily valuable capital goods. They help entrepreneurs innovate better, cheaper and entirely new ways of producing almost everything else. So entrepreneurs have aggressively bought them, justifying the purchases on the back of returns, which in turn allowed the producers of computing hardware to earn healthy enough returns to reinvest. Cumulative production exploded and prices collapsed. Nobody starved. Quite the opposite. Countless lives were almost certainly improved and many saved as a downstream consequence. It is also worth noting that this is the fastest and most durable rights law coefficient of which we are aware.
[00:52:13] Virtually every other technology in which capital can be invested in pursuit of returns and deflates more slowly than semiconductors do. It is therefore even less sensible to imagine people deferring purchases indefinitely merely because prices are likely to be lower later.
[00:52:32] The proper interpretation of the so called paradox of thrift is that it reveals the fear that fiat economists live under that people may stop consuming luxury products they could never really afford, products they were tricked into consuming by inflationary lies.
[00:52:52] They cannot tolerate a world in which people are allowed to discover for themselves how best to allocate their finite resources.
[00:53:02] This fiat worry is not merely sloppy thinking, it is a negation of history.
[00:53:09] Great capitalist fortunes are almost always amassed by drastically lowering prices for consumers.
[00:53:18] To the fiat paradox of thrift, we oppose the empirical Jevons paradox, also not really a paradox but we do not name these things which states that as technology or efficiency lowers the relative cost of a resource, new uses of that resource become profitable and total demand rises.
[00:53:38] The resource becomes cheaper, yet more is spent using it, not less.
[00:53:44] Carnegie made his fortune by lowering the cost of steel. Vanderbilt used increasingly affordable coal, steam engines and steel to build railways. That lowered transportation costs and open up markets. Rockefeller relentlessly expanded the use of oil by innovating and passing cost savings through to consumers. Henry Ford pushed the logic to its natural conclusion. His policy was to reduce the price, extend the operations and improve the article, thereby enlarging the market and generating profits that could immediately be reinvested in making the automobile cheaper still, as Ford said, profits made out of the distress of the people are always much smaller than profits made out of the most lavish service of the people at the lowest prices that component management can make possible.
[00:54:32] The empirical result of his actions speaks for itself. And for those who don't, go see the chart in reference here. This is the Ford model T from 1909 to 1923. Comparing the number of units sold with the price.
[00:54:49] And their trajectories are exactly the opposite. The price from 1909 to 1923 is steadily falling while the number of units sold is aggressively increasing. So what's the obvious truth? Deflation in price produces aggressive growth in demand.
[00:55:10] Not the opposite, the effect on prices.
[00:55:16] All right, we're going to stop right here because I am losing my voice and we are about halfway through the piece.
[00:55:24] But it's really funny. One of the things like, I know we've covered this so many different times in so many different ways on the show, and it's incredible how powerful the Fiat denial is that you can delude yourself against this obvious truth. And what's really funny is I wonder if like a collection of these charts would be so funny to just look at juxtaposed against the constant. If there's deflation, well, it'll be a disaster. We can't let prices fall. You have to have steady inflation because this is not an exception to the rule. This is not an uncommon example of the Ford Model T getting lower in price and the number of units being sold increasing aggressively directly in line or directly opposed to to the falling price. To the contrary. It is the rule everywhere.
[00:56:20] It is exactly the obvious state of all economic production and price discovery. And it is almost unit. It's almost incredible, the level of pseudo scientific delusion. You have to have to pretend that this isn't true, especially people who claim they are empiricists and I had never actually thought about it in the context which I think I really love that Farrington and Myers brought up here at the end of this section, was that this is literally negating Jevons Paradox. It's the exact opposite of what Jevons Paradox says, which is actually something commonly taught of in school or commonly taught or discussed in economics in general, even fiat economics. And this is a perfect example of the sort of stuff I told you that when we first discovered Bitcoin.
[00:57:13] My brother was in school going to economics, and it's a perfect example of the sort of stuff that he would constantly run into of the. You taught us this this week, and these are the arguments that he would have with his professors, is that you taught us this last week in microeconomics or in this relationship between production, consumption, blah, blah, blah, and now this week you are teaching us this.
[00:57:36] These are built from the exact same principle. Both of these things cannot be true at one time.
[00:57:43] This, the thing you taught us this week necessarily suggests that what you taught us last week is utter nonsense. Like it, it must be false, or the other way around. And they would just be like, shut up. This is what the textbook says.
[00:57:56] And Jaon's paradox is a perfect example is Jaon's paradox says exactly the opposite. That as the price and the cost of a good becomes false, as it becomes more affordable to access by more people than its demand and number of units, the amount of actual capital devoted to it because new uses of it become economic increases.
[00:58:23] In other words, the falling price, the deflation of that good or resource causes and explicitly stimulates demand for it. It causes more spending, it expands the economic plate or the economic pie of what you can even do with that resource. And it's like, okay, so is the deflation causes a deflationary spiral and destroys the entire economy. Unless the elite are inflating everything and watching their stock portfolios explode and their debt disappear and robbing the middle class and the poor of their future. Is that really a necessity to act, actually grow the economy?
[00:59:06] Or is Jevons Paradox real? Like, seriously, which is it? You can't just say two perfectly opposite things are true at the same time and then put on a suit and pat yourself on the back and pretend that the world, the universe, is going to bow or change its rules arbitrarily because you had to write down your delusions in a textbook. And I love that Mike Brock jumped in on this. And this is a dumb. This is the absolute worst possible explanation or description of what this is, it says it's actually a pretty unserious piece that mocks and dismisses the opposing critiques with memes. And I would say that the only thing that's actually accurate about that is that he does mock the opposing critiques specifically because Farrington and Sasha go into extreme detail explaining why they're stupid.
[00:59:56] When Brock will dance around for thousands and thousands of posts trying to come up with any damn excuse he can to ignore Moore's Law or to somehow pretend that it doesn't apply to the idea of prices falling.
[01:00:10] It's really incredible that the more you dig into the idea, the crazier it seems. Like the realization of how big the blinders are. Like how uncritically and uncreatively one has to even imagine what the economy is and to think about what anybody is doing in it in total absence of first principles and basic like this is a human how do they relate to the economy? How does the economy relate to them?
[01:00:45] Thinking to actually maintain such a ridiculous idea that falling prices causes a deflationary spiral, that it is literally bad for the economy.
[01:00:58] And the irony, the profound irony that the only examples they have are with the negative consequences of expanding the debt of literal fiat policy.
[01:01:11] So the only thing that they can actually point to as destroying the economy is themselves.
[01:01:18] And again, to claim to be the empiricists and ignore the most.
[01:01:26] Like without a doubt, the absolute most important piece of empirical data when it comes to their prime examples of how deflation destroys the economy, like the Great Depression is what happened to the debt levels between 1920 and 1929.
[01:01:46] Just what happened? Did you bother to look at the empirical data on that one?
[01:01:51] But anyway, we will close this one out here and get right into I'm gonna go ahead and actually kick off part two so I can try to get this to you as soon as possible. I'll be traveling in the next couple of days, so I want to get it out before I get on the road because that will, you know, cut off a whole nother day of waiting.
[01:02:10] And I do not want to keep you guys waiting. I know you guys like the long ones or like it when I actually get the long ones done quickly. And of course Farrington and Sasha Myers are always a fantastic and entertaining read. So I'll do my best and I will catch you guys. Stay tuned, stay subscribed. You will get it right here on the next episode of Bitcoin Audible. And until then, everybody, I am Guy Swan and that is my two SATs.
[01:02:52] The first rule is to keep an untroubled spirit. The second is to look things in the face and know them for what they are.
[01:03:02] Marcus Aurelius.
