← The Bitcoin Standard Podcast
Loading summary
Transcript1 lines
- [00:00]
A
Foreign. Principles of Economics. My complete guide to Understanding Economics is now available in hardcover, audiobook and ebook from seifeddin.com, amazon and many more booksellers worldwide. And now I am also teaching a course based on this book on my website seyfeddin.com Principles of Economics will run the whole academic year from September to June and will have a new lecture every two weeks, as well as weekly live online discussion seminars open to learners from all over the world and from all walks of life. Whether you're a student, a professional, or a retiree, you are making economic decisions every day and this course will arm you with the wisdom of centuries of economists to improve your economic decision making. You'll also get a free book of Principles of Economics. If you sign up for the course, go to seifedin.com and sign up now. Hello, welcome to Lecture 12 of the Principles of Economics online course on seifedin.com Today's lecture's topic is capitalism. So in the second section of the book we discussed the ways in which human beings economize as individuals. In the third section of the book we discussed the ways that human beings economize as part of a society or the societal ways in which people economize. We trade with one another, we use money with one another. We develop the concept of markets where we buy and sell our goods to strangers that we don't know, not people that we are related to or people with which we have close intimate relationships. And based on all of this, we are able to develop a system called capitalism. And that is the topic of today's lecture. So the extended monetary market order, the ability to trade with a large group of people because you have money and everybody's using money to trade. And so you don't need to worry about the problem of coincidence, of wants. All of that allows you to seek your best self interest by serving others, by benefiting everybody involved. And this results in the emergence of capitalism. An inextricable output of the development of a market economy is that you develop a market economy in capital itself, and that means we have a market in capital goods. So I define capitalism in this chapter as the system of private ownership of capital goods in which individuals can buy and sell capital freely and decide how to employ their capital, reaping the rewards of using it productively and bearing the losses of using it unproductively. In a nutshell, the key idea here is that if capital allocation is determined by capital owners who are free to buy and sell capital, then you have A system called capitalism. If, on the other hand, capital allocation is determined by government officials who don't own the capital, then you have something called socialism. And Mises sets a litmus test for understanding whether you have a capitalist economy or a socialist economy. And that is whether the economy has a stock market. This is a very, very important point. Why the stock market? Why is the stock market the litmus test for being a capitalist economy? Well, once a stock market exists, you're able to trade in capital as a financial good without having to own and operate and hold capital goods directly. So it's an elaborate and advanced form of capital where we can abstract capital away from the physical goods, away from the machines that produce things for us, away from the products that we use as capital goods, into understanding the market for capital as being a financial market in which people buy and sell shares in companies that own those capital goods. And so, by extending the division of labor to the process of capital production itself, we are able to separate management of capital from the financing of capital. And that creates a market in the financing of capital production, which allows the financing of capital production to be a lot more efficient, because it allows everybody to invest without having to learn how to manage the capital they want to invest. In other words, anyone can become a capitalist right now without ever having to touch a capital good in which they're invested. So you simply buy stocks in a company, and that company is able to then purchase the capital goods and use them and utilize them and hire the correct managers who know how to run that thing. So therefore, you no longer need to get your hands on the capital good in order to become a capitalist. You can just simply save your money and then take your savings and invest them in a company that owns the capital. And this, we can think of it as just the extension of the division of labor to the process of capital production itself. In other words, we continue to advance and develop more and more specialization and more division of labor with everything, including the process of capital production itself. Instead of every person having to accumulate their own capital and working to produce outputs from that capital, everybody now can just buy financial capital and let management decide. And so, as a capitalist, you decide where to allocate your capital, rather than deciding what exactly happens with the day to day management with that capital. And this makes capital investment available to anyone. And that allows capital to be allocated to those who use it most productively. This is the key point to understand about capitalism and why a stock market is so important. Because if there's a stock market, there's a free market, anybody can allocate their capital anywhere they want. Now, that might initially sound like a reckless thing. There are a lot of very, very not smart people in the world. There are a lot of people who make a lot of silly mistakes all the time. And just giving everybody the freedom to allocate capital seems like a reckless thing to do. Yet that's exactly what capitalism does. And that ends up being the best way of increasing the capital stock and increasing worker productivity over time. And the reason for that is that while it's true that everybody has the freedom and the choice to do whatever they want with their capital, they also face the consequences themselves. And so if they are able to invest the capital productively, if they're able to generate a profit, they have more capital at their disposal. On the other hand, if they're unable to generate profit, if they're unable to use the capital productively, they will generate losses, and therefore they will lose the capital that they have, or the capital stock they have will continue to be reduced until they either change their track or get out of the capital management business. So the only way to keep capital in a free market is to use it productively. And that's why this is such a powerful system for capital allocation. And that's why this only works with property rights. Only with property rights and capital can you have a free market in capital goods and the allocation of capital to its most productive users. If the people who allocate capital don't own it, and they don't face the consequences of investing it successfully or investing it unsuccessfully, then the entire thing falls apart. Now remember, very important point we keep repeating is that value is subjective. And so the value of capital goods is subjective in itself. So what gives capital goods value is subjective. It depends on the individuals valuing them. It is not inherent or intrinsic to those goods. Whether something is a capital good or not is entirely the consequence of the judgment and the action of the person in command of it. A computer used for playing games is a consumer good, but the same computer used for professional graphic design is a capital good. So the only way that something can be a capital good is if you are utilizing it for the production of final goods that people want to purchase. And so if they are willing to purchase it and they are willing to pay for it, then you're able to make a return on it that is profitable, then you have a capital good. If you don't have that, if you're producing something that nobody wants, then you're just wasting resources. You don't have capital goods on your hand. In other words, the existence of capital is contingent on its ability to serve people. And of course, that ability to serve people is contingent on the owners of capital having full control over it. And that's what a capitalist system allows. Because without the ability to command capital goods for profit, there's little incentive for anyone to accumulate and maintain capital in the first place. Without the ability to trade capital for monetary gain, there is no mechanism to ensure capital is allocated for productive uses and is not monopolized by those who misuse and degrade it. So everybody's free to do whatever they want with their capital. But that is a very successful system precisely because it punishes people who use their capital irresponsibly and rewards people who use their capital responsibly with more capital to allocate. So capital is not a lump of machines, but a mental construct that survives like a living organism in an ecosystem where it is constantly valued and traded by acting individuals. It thus makes little sense to speak of a societal capital stock outside of the ability of individuals to freely value and command these capital goods, use them in production and benefit from their use. In other words, if it's not privately owned, and if it's not producing goods that are being sold on the market freely, if its use as a capital good is not being dictated by consumers deciding what to do with it, then it's not really capital goods. For it to be a capital good, it needs to be functioning as part of a market economy. If you followed my work, you know, I think that there are so many problems in the healthcare industry, and particularly in the health insurance industry in America, which is a complete fiat travesty, ruining the lives of millions and generating perverse incentives for hospitals and doctors. Providers and insurance have such a strong fiat incentive to overcharge that in some cases, what you pay when you are insured is larger than what you would pay when you are uninsured. The market has given us a wonderful solution to this problem, and that is Crowd health. I'm delighted that Andy and the team at Crowd Health are providing a fantastic option for those who do not want to take part in this insurance industry. Stop playing the rigged insurance game. Join Crowd Health, a community of people funding each other's medical bills directly. No middlemen, no no networks, no nonsense. Crowd Health specializes in getting the best deals from providers for its community. By joining, you get access to a team of health bill negotiators, low cost prescription and lab testing tools, and a database of quality low cost doctors Vetted by Crowd Health this year. Take your power back. Join Crowd Health to get started today for $99 a month for your first three months using code SAFE at join CrowdHealth.com that's JoinCrowdHealth.com code SAFE. CrowdHealth is not insurance. Opt out. Take your power back. This is how we win. Join CrowdHealth.com Capital outside of a market economy is like a fish out of water. Without this vital feedback that the capital gets from the consumers that are buying the product of this capital production process, then capital is not alive. It's like a fish out of water. It just like the fish needs to be ingesting the water water to take the oxygen out of it to survive. And then if you take it out of the water, it dies. Similarly, capital goods, if they don't exist in a capital system, in a market system in which goods are bought and sold and traded, then it's not really capital. It can only be understood as capital if it is being productive in producing goods that people value more than the cost of producing. That's what it is. So this is really a very simple and powerful way of understanding economies. And that's why stock markets are so important. Because if you've never had a stock market, then we can understand that what you have is a pre capitalist economy. This is an economy that is not a capitalist economy because you've not developed the sophisticated and sophisticated market for the trading of capital goods. So it's largely a pre capitalist market economy. But a capitalist modern economy, a market economy that is capitalist in the modern world, is something that has a stock market. Now if you shut down your stock market, then you have a socialist economic system because then you no longer have a market process in the allocation of capital. Instead you have a bureaucrat who allocates the capital as he sees fit. History for most of the world's countries has been the positive development from pre capitalism to capitalism interrupted by calamitous forays into socialist devastation. I think this is a good way of understanding economic history. It's not the way that it is usually taught in most universities, which is a heavily Marxist understanding of history, where these things are presented in silly religious terms of advancing toward this communist utopia that is essentially heaven but managed by a bunch of lunatic mass murderers. In the real world, I think what we see is that there is no utopia. There is no heaven at the end. There is just constant need for people to work, save, lower their time preference, accumulate capital, participate in the division of labor, and become more and more civilized and therefore improve their material living conditions day after day. That's the process of civilization. And with that process we move toward a system in which we develop more and more sophisticated markets until we develop a market in the capital itself, which is a stock market. And that's where it becomes a capitalist society. And then if you have a bunch of lunatic mass murderers take over the country and prevent people from owning capital, then you destroy that and you move toward a socialist economic system. And so there are several examples that I give in the book. You look at the example of Russia. First stock market opened in the early 1800s. So you could say that Russia was a capitalist economy up until 1917 when its group of murderous lunatics took over the country, closed down the stock market, banned private property in capital goods and destroyed the economy and murdered millions and millions of people around the world. Then. Now for a quick word from our sponsors. With fiat money constantly debasing, preserving your wealth isn't an option or luxury. It's a financial and moral imperative. If you're familiar with my work, you know the only financial advice I ever give is to buy and hold Bitcoin for the long term. This has never failed anyone. If you want to buy Bitcoin, I strongly recommend using Swan, a group of hardcore bitcoiners laser focused on making Bitcoin easily accessible. While most scramble to react to each new crisis, Swan Private clients are already positioned in the only monetary asset with absolute scarcity, Bitcoin. Swann Private partners with families and institutions who share a principled conviction in Bitcoin as the foundation for multi generational wealth. With concierge service, deep expertise and uncompromising security, the Swann team helps clients exit the crumbling Fiat system and secure their future in sound money. Today, Swann Private serves more than 5,000 high net worth clients who have purchased more than $4.5 billion of Bitcoin and put it into cold storage. If you're ready to move beyond the false promises of fiat, start your long term bitcoin strategy@swann.com safe s aif but now finally Daylight have delivered a fantastic full function tablet with a paper like screen that's easy on your eyes and great for outdoor use. I've been using the Daylight computer to write my next book and it is absolutely fantastic and it has led me to invest in this company myself. Check out my interview with Anjan kata in episode 249. The Bitcoin standard Podcast is brought to you by Coinkite. Coinkite are my favorite makers of Bitcoin hardware. They produce the legendary opendime, the first bitcoin bearer asset, as well as the reliable cold card hardware wallet, the excellent stainless steel seed plates for storing your seed phrases, and the block clock. When that insane episode ended in 1991, these people were removed from power. And then Russia got a stock market again in 1991, and it became a capitalist economy again. And there are other examples in the book that are worth looking into Germany and Poland. So I urge you to look into their history. And I find this is a very, very powerful metric. It's. It's a really powerful litmus test that Mises has developed because you could always look at any and understand how it is developing and how it can be understood of as a capitalist or socialist economy. And these are terms that are used very often. All kinds of people call all kinds of things socialists or capitalists, but I believe this is the only real definition that is precise, useful, can help you distinguish between different types of economic system. And it's not just emotionally charged and ideologically driven. And this is, I would say anybody who's honest should be able to agree that this is an accurate assessment. Russia was a socialist economy from 1917 to 1991, and you could say that since 1991 it stopped being socialist, and before 1991, it was also a capitalist economy. So I think this is fairly uncontroversial, but it is a very powerful tool that very, very few people mention. Only in one article by Rothbard, he mentions asking Mises this as a question and Mises responding. And I don't know of any other place in which Mises writes this out, but I think it's a very powerful criteria. And this is useful to think about the world because in many places, all over the world, we see so many examples of people using the term socialist in a very inaccurate way. One of my pet peeves is they keep calling Scandinavian countries as socialist countries, which is not true because they've always had a stock market. The stock markets have been open and operation without interruption for more than a century. Denmark's stock market has been functioning since 1808, Sweden's since 1863, Norway's 1881, and Finland since 1912. And since then, these stock market has continued to operate. So these countries were never socialist economies because you could always own capital freely in these economies. There are, of course, other ways in which governments intervene in the economy, but as long as you're able to freely own and trade capital, I would not call you a socialist economy. A very important point to understand about capitalism, which is a really essential thing towards developing a good understanding of how capitalist economies work, is that capitalism is an entrepreneurial system. It is not a managerial system. And this seems like a strange thing to get hung up about, But I think it is extremely important. And it's something that Mises emphasizes, but most people don't take very seriously. The division of labor extending to the process of investment itself divides the process of investment into three distinct roles. Now, in many contexts, we see those roles overlap in the same individual, but it's important to distinguish between the three and to keep them distinct in your mind, because it's important to understand that these are distinct jobs. So they're. The process of investment involves three jobs. Effectively, you can do all three on your own, but you can also have three different people managing, handling each one of these jobs. So the first job is the capitalist. And by capitalist, we mean somebody who defers consumption in order to make capital available for the production process. So you have resources which you could consume. You've got money which you could use to throw a party, or to buy a house, or to buy a boat, or to travel around the world, or to consume anything that gives you pleasure today. But if you decide to defer that consumption and you decide that you want to invest the capital, the money, invest these resources into a production process, you become a capitalist. So deferring the consumption and making capital available for a production process is the job of the capitalist. Now, then there's another job, which is the entrepreneur. And the entrepreneur is the one who allocates the capital. He's the one who decides where that capital is going to go. So you decide, I'm going to put aside $1,000 a month that I want to invest. Then there's another job, which you could do if you're the entrepreneur yourself. Or you could hire somebody to do it. You could give the money to somebody and tell them, please, go figure out how to invest this money. And then that job is the entrepreneur. You decide, I'm going to allocate that money toward the production of shoes, or toward the production of computers, or toward the production of AI software or any kind of business you believe is going to have positive return for you. So making that choice of going for the allocation of capital is the entrepreneurial decision. This is what the entrepreneur does. You decide you're going to invest this much money in that kind of company. That's the entrepreneurial function, where you allocate the capital. And then there is the managerial function, which is the overseeing of production. So once you've put the money into the company that is producing shoes, then there is a manager for that company who has a bunch of resources from investors, from capitalists and from entrepreneurs. So the capitalists and the entrepreneurs have allocated that money and they give it to the manager. And the manager's job now is to use those resources in order to produce the outputs. And so the day to day management of the business is carried out by the manager. But the manager is not the person who decides to take to undertake a certain production process. He is hired by the entrepreneurs in order to manage that production process. So distinguishing between the three is a very important thing for understanding market economics and for specifically for understanding why central planning does not work. What the entrepreneur does in this task when he allocates capital, is that he performs economic calculation in the capital market on capital itself. In other words, the entrepreneur looks at all the different possibilities for using capital and decides which ones are the most profitable and which ones are the most useful. So the manager performs economic calculation on the capital deployed by the entrepreneur, but the entrepreneur performs the economic calculation on the capital allocation process. So once the manager is given a certain amount of money, the manager will try and figure out how best to manage the capital that is given to him, how best to manage the machines that are given to him. But the entrepreneur is the one who decides how many machines and how many workers and how much production is going to be taking place. So the function of the entrepreneur in the market economy is to determine the allocation of capital to different lines of production and different industries. The entrepreneur decides which products to produce and which lines of production need to be introduced, expanded, contracted, or shut down. And this is a very, very important job that is distinct from the day to day management. It's distinct from management. This isn't to say management is a bad thing, of course. This is to say it is distinct. And understanding that distinction is going to help you understand why socialist central planning does not work, and why market planning functions and works properly. The distinction between management and entrepreneurship escapes most academics and economists, since they're not entrepreneurs and they just see the outward manifestations of the phenomena of production, which is that there's a manager who's telling the workers what to do. But if you don't understand the entrepreneurial function for allocating capital and how it is reliant on private property, and how it is inextricable from a system of private property, then you can imagine that we can replace capitalism with government management or socialism. This is the key thing if you don't understand the function of the entrepreneur in making choices about private property and allocating it into different production processes as capital, then you are incapable of understanding the importance of the private property system for capitalist production. And so you will think that it is possible to replace the property rights system by simply having a central planning make the decision about what needs to be produced and how that thing is produced. And that's conflation of managerialism with entrepreneurialism. So for academics and scholars who have never engaged in entrepreneurship, this distinction is not obvious, which results in their belief that private ownership of capital can be curtailed without affecting the production process. As in their models, the workers and managers can capably handle the entire production process. The capitalists do not contribute anything, and the entrepreneur is an inconsequential detail. So if the workers and the managers are the ones that are doing all the production, then you don't need the capitalists and you don't need the entrepreneur. And that's what most economists think. They think the capitalist's job is pointless because the government just generates credit for companies. We don't need to have savings because we have central banks that just generate alternatives to saving by printing money and dividing everybody else's wealth. Now for a quick word from our sponsors. The Bitcoin Standard podcast is brought to you by the safehouse.com, my independent publisher and bookshop, selling the best bitcoin books and high quality cloth hardcovers built to last for generations. Most books these days are pretty fiat, they're flimsy and they fall apart quickly. And I did not want that for my books. So I set up the Safe House especially to provide you with beautiful, long lasting classic cloth hardcovers you can proudly pass down for generations. You can get copies of my three books, the Bitcoin Standard, the Fiat Standard and Principles of Economics. And you can also get copies of Lyn Alden's Broken Money, Parker Lewis Gradually Then Suddenly, and Matthew Lishiak's Fiat Food, to which I contributed a few chapters. We now offer bulk discounts so you can can buy books for yourself and for the friends and family you'd like to learn about Bitcoin. Buy any two books for $50, any five books or more for $20 per book. And for more than 50 books, it's only $15 per book. Go to the safehouse.com thesaif house.com where you can get all of these books in high quality cloth hardcovers delivered worldwide and get 10% off for paying with bitcoin. This podcast is also brought to you by the Bitcoin Way, your professional Bitcoin IT team offering you personalized, secure and comprehensive solutions for every step along your Bitcoin journey. The Bitcoin Way offer live concierge service to guide you with your Bitcoin cold storage, running your node, privacy best practices, inheritance planning, corporate strategy, and multisig solutions. They don't touch your coins. They guide you through the process of acquiring your coins and securing them. If you'd like to make your setup safer and more reliable, book a consult with them and see what they have to suggest. If you want to give someone the gift of Bitcoin, get them this professional service that will ensure they start off knowing exactly how to manage their coins and not lose them. Go to thebitcoinway.com and start bitcoining more confidently. And if you don't understand that also you don't understand the importance of having an entrepreneur who allocates the capital, who figures out how to make the capital work in order to make the production process possible. But the correct costs and benefit of actions cannot be calculated unless the capital goods involved are owned by someone who can use them in any way he likes. This is a very important point. Having all options available to the owner allows the owner to choose the option that serves society best and would generate the most profit for him. This is the thing. Unless there's private property, unless you have full ownership and control, unless you can do whatever you want with your capital, you aren't able to perform economic calculation on all the different ways that you can use it, and you aren't able to figure out which one is the most productive one, because the one that is the most productive is the one that is most profitable. So unless you have property and you are able to use that property and you are able to gain the profit from it, then you are incapable of performing economic calculation and knowing how to allocate capital properly. Without ownership and full command over capital goods, which entails reaping profits and suffering losses, there is no scope for rational calculation of profit and loss. Profit and loss are the lifeblood of a market economy. Entrepreneurs making calculations about profit and loss is what keeps the entire economic production process going. Once we move beyond the primitive economy of one or a few small individuals to a market based economy, to a market economy based on money, where everybody's performing trade with that one money, and the money is the medium of exchange that everybody's using. It becomes possible to perform economic calculation on all courses of action. So what you would do Then, as an entrepreneur, what entrepreneurs do is they speculate on production processes being profitable and apply the factors of production, land, labor, and capital to these production processes. They incur the upfront costs and the risks, and they collect the revenues and the rewards. So calculation ensures capital is being used to serve others most efficiently. If entrepreneurial revenue from output goods is greater than input good cost, then an entrepreneur is providing value to society. If the entrepreneur purchases input goods at costs lower than the revenue from the output goods, then the entrepreneur is wasting resources. The entrepreneur is using more valuable resources to produce less valuable outputs. His capital stock is reduced. He has to change what he's doing or run out of capital. And that's really the brutal way in which capitalism keeps becoming more productive. It punishes the unproductive and it rewards the more productive. And if you subvert that process, if you prevent that feedback process from punishing the unproductive and rewarding the productive, you destroy the process of capitalism. You destroy the possibility of allocating capital successfully, and you end up with a failed economic system that generates misery and poverty and destroys capital rather than increases capital. All of that is necessarily, inextricably built on private property. So entrepreneurs, wealth and prosperity is at stake. It's the scorecard for entrepreneurship. The scorecard is the reality life. Your real wealth in the real world is what governs this entire process. And so the entrepreneur's wealth and prosperity is at stake, and that's what makes it so important. Economists who imagine market production could be replicated without private property profit and loss are engaging in cargo cult science like primitive tribes who encountered airplanes for the first time and imagined that replicating their shape with wood sticks would produce a functioning airplane. I think this is really the best way to understand socialist economists. They don't understand how an economy functions, and they just look at the outward manifestations of an economy. They see goods being produced and they see consumers consuming them, and they see producers producing them. They see workers working, and they think, let's just get all of these superficial epiphenomena of what a market economy is and have me run them. And then in my inimitable wisdom, I'll be able to make things better. I'll be able to make the workers get paid more, and I'll be able to make the consumers consume more simply by cutting out the evil entrepreneur and capitalists who are allocating the process and managing it. Because I don't understand economics, I'm able to think, yeah, let's just remove these. Similarly, you look at a car, if you don't understand what a car is. You look at a car, you think, well, you know what, this car is really nice. But all of the stuff that's in the front trunk, it's ugly, it's noisy, and it's not fun. I'm going to remove it and I'm going to put a flower pot instead of it. And then that's going to make the car easier to drive, it's going to make it prettier, and it's also going to make it faster because a flower pot is a lot lighter than this giant hunk of metal that is in the front trunk of the car. Well, that's exactly what a socialist does when they look at an economy and they think they can remove capital ownership and still have an economy function. The only reason the car functions is because it has an engine. If you don't understand why the engine is there, doesn't mean you can remove the engine and the car will work. It means you need to shut up and learn how cars work before giving strong opinions about how cars work. Simply replicating the shape of a car or an airplane doesn't create an airplane. And so this is a well known phenomena in the In World War II, American airplanes had landed on these isolated islands in the Pacific and people on these islands would see airplanes for the first time. And they were absolutely amazed at these things. And then they designed out of of bamboo sticks and out of tree twigs, they built things that looked like the airplanes that they saw and they thought they could make them fly. And that's again very similar to what socialists do when they look at a market economy and they think in this market economy they're producing cars and steel and computers. Well, we can get rid of the capitalist, get rid of the entrepreneur and just make the same thing out of three twigs essentially and we'll be able to have the same production process. But again, that's because you don't understand how the airplane of capitalism works. And the way that it works is through private property. Only because the entrepreneur is allocating capital and performing economic calculation with capital, because he owns the capital or he's working for somebody who owns the capital and he faces the consequences both in terms of profit and loss. Only because of that is the process of economic production possible. Unless the person making the allocation has to make real choices involving trade offs between different options over scarce resources, they will not be able to consider the true costs involved. That's why property is inseparable from capitalist economic production. And this is how we can understand the Mises critique of socialism, which is called the economic calculation problem. And this is one of the most important contributions that Austrian economics has given to the world. And it is something that most people have no idea about. So most people have a general idea that Austrian economists are pro free markets and that they think socialism doesn't work. But if you ask them why does an Austrian economist think that socialism does not work, they'll tell you about the incentive problem. In a capitalist economy, people can get rich, and so they have an incentive to go to work. They have an incentive to be productive. Whereas in a socialist economy, if everybody's going to be living the same life, if a central planner is going to decide how much you can consume, and if consumption is dependent on need rather than ability to produce, then who is going to take out the trash? Who wants to have the unglamorous dirty jobs? Who wants to go to medical school for 20 years to become a, to become a brain surgeon? Well, not 20 years of medical school, but who wants to go to school for 20, 25 years on total to become a brain surgeon when you could just get any easy job and still make the same amount of money. If everybody's going to be getting the same nice things, then everybody wants the same job, which is sit in an office in air conditioning and click, add a keyboard all day and then go home and make money. Nobody wants to do the dirty jobs, nobody wants to do the hard jobs. And that's why socialism fails. That's wrong. That's not the problem with socialism. At least it's not the problem with socialism that economists identify. And by economists, of course, I mean real economists, as in Austrian economists. The incentive problem was arguably solved in the Soviet Union in particular, because you have a stronger incentive than profit under a socialist system, and that is not to be sent to the gulag, not to be sent to the prison camp, to the war camp, not to be killed. And so if you didn't show up to your work that the government had assigned for you, you faced very severe consequences. In a capitalist economy, you don't show up to work, you don't make money, but nobody's going to kill you, nobody's going to throw you in a slave camp for the rest of your life because you didn't show up to work. Well, in socialism they might. And that's why I do not believe that socialism suffered from a serious incentive problem. The incentive problem was highly competently solved by threatening people with death and slave labor. So people did have an incentive to work. If you look at the collapse of the Soviet Union. The Soviet Union collapsed not because of absenteeism. It wasn't as if all these giant factories were just missing the people because the people didn't show up, because they weren't getting paid enough. That is not the case. People went to their work, but they sat there and they couldn't do anything. The entire process of economic production collapsed and fell apart, part because of the problem of calculation. Socialist economic systems cannot perform economic calculation because of everything we've discussed in this lecture so far, because there is no private property in capital. Without private property in capital, it is not possible for anyone to perform the entrepreneurial function and figure out where to allocate capital so that it is used productively rather than wastefully. And the result is blind allocation of capital without calculation, which is like blind assembly of an airplane without design. And so therefore it's going to collapse and fall apart. What exactly would these planners tell the the army? Or this is a quote from Mises when he's in which he says, imagine if we solve the problem, problem of incentives, if we have the new socialist man, who is this ideal man, built by socialist central planners to be extremely productive and extremely obedient and always listening to what the benevolent central planners are telling him. If we have that man, if we have an army of these people willing to work without any complaint in order to achieve the goals of socialism, would that mean that socialism would work? Mises answer is no. What exactly would the planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production, and how much of each and where specifically to locate all this production? How would they know their costs? Or what process of production is or is not efficient? Or those are the important questions that are answered by economic calculation by entrepreneurs, which the socialist system cannot answer. Without a free marketing capital, without the possibility of buying and selling all the inputs and the outputs of the production process, there is no possibility for figuring out how to allocate these things consciously in a rational way. There is no rational means for ascertaining how to allocate resources without property prices and a market for entrepreneurs and consumers to conduct economic calculation. How to decide where the resources go is the question. And that's a great quote here by Rothbard that explains this point in more detail, which I'm going to read in full. Mises demonstrated that in any economy more complex than the Crusoe or primitive family level. The socialist planning board would simply not know what to do or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate the existence of a market in the means of production. A market that brings about money prices based on genuine profit seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic. And therefore the existence of a socialist planned economy is literally impossible. Mises concludes that in the socialist economy, in place of the economy of the anarchic method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect. And this was an extremely prophetic and profound insight because this is exactly how the Soviet Union collapsed. So Mises wrote this in 1920, 22 he wrote the book on socialism. And yet socialism came apart in the late 80s and early 90s. And during that time these factories were operational, but they were producing nothing. So you had a factory, everything was fine. From the outside it looked like you had an actual factory. The workers showed up and they were there on time. So it wasn't an incentive problem. But the factory was unable to produce what it was had to produce because even though it could run its machines, it was missing one key ingredient. And why was it missing that key ingredient? Because they were unable to perform economic calculation to figure out how much of that ingredient they needed to produce. So think about a car factory that has, that doesn't have enough glass to operate because there's a shortage of glass. Because how was the glass factory going to be able to figure out what what to calculate? And they concluded that it was more important to have glass for houses this year. And so they didn't end up with enough glass for the cars they wanted to produce. And so you have a car factory that's paying the salaries. It's got all the machines sitting there, but it can't make any cars because we don't have any glass for the cars. This is the kind of thing that happened in the Soviet Union at the late stages. It's not a problem of absenteeism or incentives. It's a problem of machines being unable to run sanely because they can't produce the output, because there's no way of cooperating and coordinating that output. Now, in response, socialists reformulated their economic system partly in response to Mises critique. In fact, as I mentioned in the book, there was a Polish economist, Oscar Lang, who spoke about the debt of gratitude that socialists have for Mises for exposing the problems of socialism, because now it's going to allow them to reformulate their economic plans in order to make them workable by using the insights from Mises. And of course, they went about and being completely ignorant of economics, they didn't understand what Mises was saying. They thought they could fix it. And of course, they didn't fix anything. So what they suggested, they suggested all kinds of ways around the inability of socialist central planners to calculate without property rights. And all of these ways they suggested, of course, couldn't solve the problem because it couldn't solve the real cause of the problem, which is the lack of private property. And that's what socialism is. Socialism is all about not having private property in capital goods. So if you solve that problem, you simply get rid of capitalism as you. Sorry. You get rid of socialism and you move to a capitalist economy. So the only solution for socialism is to make it capitalist. But they came up with all kinds of hilarious substitutes and they all failed. And there's a. I discussed them briefly in the book. There's a more extensive discussion in the paper that I cite by Rothbard, the one that I just quoted. It's called the Socialist Calculation Debate Revisited. And so some of these ideas were that the central planning board would or order managers to assign prices to goods, observe the reactions of buyers, and use trial and error to arrive at the proper prices in the same way that capitalists would. They would react to a surplus by lowering the price while reacting to a shortage by raising the price. But of course, that did not work because these socialist central planners were managers, not entrepreneurs. They did not have secure property in the goods they managed, and they could not calculate the profits and losses associated with. With different lines of production. The consumers didn't really have real choice in what they were consuming because their decisions were planned by the central planners. And the producers had to follow what the central planners say. They performed this economic calculation as pretend play rather than real economic calculation because they did not stand to lose or gain based on this. And therefore, it's all hypothetical calculations that cannot replace the real thing. The characteristic mark of the socialist system is that the producer's goods are controlled by one agency only in whose name the director acts that they are neither bought or sold, and that there are no prices for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic. As Mises put it, economic decisions are made only in the context of scarcity, when each decision will carry with it a real cost and benefit that the decision maker will experience in the real world without property, opportunity, cost, and real life consequences. Socialist pretend markets bear no resemblance to the real thing, as Mises put it. And that's an excellent Mises quote, one of my favorites in this entire book. What these neo socialists suggest is really paradoxical. They want to abolish private control of the means of production, market exchange, market prices and competition. But at the same time, they want to organize the socialist utopia in such a way that people could act as if these things were still present. They want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate. This is absolutely devastating and extremely accurate. And it is exactly the problem with socialists and why they don't understand economics and why socialist central planning fails. Their understanding of it is like the general who thinks children playing war is the same thing as the war itself. War is not like children playing war. Children will hold a bunch of sticks, pretend that they are guns, and say pew, pew. And shoot at each other and then pretend to be dead and pretend to be doing all those things. That's not what war is like. You can't look at a bunch of children playing war and then decide, yep, I understand how I'm going to launch a war and then go and fight a real war based on that. Children playing war is very different. Similarly, socialist central planners making pretend prices and pretend calculation pretend decisions is not equivalent to real markets, real prices, real decisions, real choices, real opportunity cost, and people revealing their preferences based on these real things. And this entire episode, I think is a very, very important lesson. And it's something that many people think. All right, well, okay, the Austrians were right about socialists. But you know, socialism is, is dead. Socialism is gone. Who cares why the Austrians keep bringing this up? No, socialist economic central planning is not dead. It is by no means dead. Not only is it not dead, it is what people think of as economics. That's why the Austrians won't shut up about this, because it's not a problem of morons like Karl Marx or Oscar Lang or all of these real socialists. It's not just them who have have this problem. We can laugh at these people even though they've been very bloody and very tragic. And their disasters have caused hundreds of millions of death. But that's not, as I say in the book, at some point, it's very few serious people still take that nonsense seriously. But a lot of people who think of themselves as serious and who don't think of themselves as socialists, their idea of economics is shaped by this. In fact, all of the textbooks of economics are, in their assumptions, fundamentally socialist in the way that they believe that central economic planning and central economic calculation is viable. And that's true for all of your major econ textbooks that are taught at universities today. The most popular economics textbook, maybe two most popular economic textbooks, are Samuelson's Principles of Economics and Economics by McConnell, Bre and Flynn. Those two books have been taught to tens of millions, probably maybe even hundreds of millions of students over the past 60, 70, 80 years. They've become extremely foundational to what economics is. And these books are built on the idea that a central planner can make decisions that improve the state of the economy. And, and that is something that you see in all of these books over and over and over again. Throughout the Soviet era, Samuelsson's book continued to say that the way of organizing the Soviet economy is superior to the US Economy, that the Soviet economy is going to catch up to the US Economy and it's going to overtake the US Economy. And he kept on saying this, even in the book that was printed in 1989, his textbook that was printed in 1989 as the Soviet Union was falling apart. His textbook said the Soviet economy is better run than the US Economy and it will overtake the US Economy in the foreseeable future. He continued to make that prediction over and over again until the Soviet Union fell. Now it's easy to laugh at people like Samuelsson. And there's a lot of reasons, there are a lot of reasons to laugh at somebody like Samuelson. And he deserves, he deserves it. And he deserves absolutely no sympathy because his idiot, idiotic mistakes are far from just innocent, stupid mistakes. I mean, he is an idiot himself. I have no doubt about it. He's a simpleton who doesn't understand how the world really works. But being an idiot is no defense. It doesn't exonerate you from the horrible actions that you have unleashed because his ideas have been utilized by people who have used them to achieve massive devastation and destruction on the earth. So the question is, how do all these economists arrive at this understanding of economics that is so flawed, that is being taught all over the world, that says it's okay Private property is something that can be ignored. In other words, how is it that Samuelson looks at the Soviet Union and thinks, the problem with the Soviet Union is that it is politically repressive, but it is more economically efficient. And the reason that we don't have a Soviet Union system like the Soviet Union is because we value freedom too much and therefore we are giving up on economic efficiency in order to have freedom and private property. In other words, he's teaching people, and this is really the underlying assumption in the brains of the vast majority of brainwashed university victims in the world today. He's teaching people the idea that private property is a hindrance to economic progress. We'd have a more efficient, more productive economy economy if we had one central planner dictate and direct economic production, rather than have everybody make their own decisions on their own, because that's a wasteful way to make decisions. How do we arrive at that? Well, I get into this in a little bit more detail in the final section of this chapter. But the basic idea is that economic modeling today is built on this idea of general equalized, a general equilibrium modeling where we look at the state of the economy and we try and put it into this model that is at equilibrium, that everything is static, everything is in everything. All the forces within the model are driving us toward that point of equilibrium. And this is a mental construct, as I discussed in the previous chapter. It's a mental construct that helps us to understand how how a market operates. It's useful in helping us understand how the equilibrating process takes place, rather than in helping us understand how the markets actually function and the way that a market functions. That there's constant new data being internalized and that the market is very dynamic. New things are coming along. And who brings about new things? It's the entrepreneur. By deciding how to allocate capital, the entrepreneur has an idea and he says, I think we can make something called an airplane. And so he allocates capital toward the production of an airplane. And then he makes an airplane. And that creates a new world, a new market, a new economy in which now we have something called an airplane. And it's very different from the world from before the airplane. And all of that is because of the entrepreneur and his role in making changes in the economy. That's something that doesn't fit into the general equilibrium model. The general equilibrium model is just another statist socialist way of thinking about economics and centrally planning economics. Economic reality is constantly changing, and that's why textbooks are unable to understand and that's why, for them, it is possible to see something like the Soviet Union survive and thrive and even overtake the U.S. so, in conclusion, as with all of these other mechanisms of economizing that we've discussed from Chapter 4 until Chapter 12, what entrepreneurial investment and capitalism does is that it increases the productivity of capital because it allows us to allocate it more efficiently. It encourages us to save more and lower our time preference because it offers us a way to use our savings productively that offers a higher return. And so the more you expect to be rewarded for investing, the more you are likely to save and invest, and that results. And of course, the increased productivity results in increased wages and rents in real terms. People become more and more productive, and the factors of production that they own become more and more productive. Capitalists, of course, benefit from an increase in capitalism and entrepreneurial investment, but of course, they take on an enormous amount of risk. Workers just watch their productivity go up. You don't have to take any risk. Your productivity goes up because you're using more advanced machinery than because entrepreneurs are allocating capital more efficiently. Entrepreneurs are the ones who are subject to the risk. You just benefit by increasing the productivity. And of course, the social impact of capitalism, which we're going to be discussing in the final section of the this book, is that it encourages behavior that is conducive to peaceful coexistence. Once you understand how much you benefit from being part of a market economy, from being part of a capitalist economy, you have an incentive to deal with people around you in a way that is conducive for cooperation and for peaceful coexistence rather than conflict. That is it for this lecture. And this brings us to the end of the part three of this book, Economizing in the Social Context. And in the next chapter, we're going to begin to focus on money, the economics of money. So chapter 13 will discuss time preference, which is the foundation for understanding money from the Austrian perspective. And then in the last three chapters, we are going to be discussing the topic of civilization, which this book leads up to. So thank you for joining and I will see you next week or in two weeks.