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The "What is Money?" Show
Time, Capital, and Civilization | The Song Series | Episode 1 (WiM080)
01:20:36
Jimmy Song joins me for a multi-episode conversation covering the masterful anti-state treatise “Democracy: The God that Failed” written by Hans-Hermann Hoppe.
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- [00:00]
Jimmy Song
Foreign.
- [00:09]
Unknown Host
Hey guys, welcome back to the what is Money Show. I am honored and thrilled today to be sitting down with Mr. Jimmy Song. And we're going to be exploring what I think is probably one of the most important books someone living in the year 2021 can read, specifically chapter one, which we will be focusing on today. The book is titled Democracy the God that Failed. And very excited to be talking about this book with you, Jimmy. So welcome to the show.
- [00:43]
Jimmy Song
Well, thanks for having me. And it's. Yeah, I know you always like go super long with this. I'm a little nervous about how long I'm going to have to be on this podcast and to, to wait for. Cause I'm going to eat steak after this. I was going to do it before, but the previous thing landed a little long. So you're, you're, you're keeping me back from my steak. But so you'll be, you'll be testing my patience to a little bit to, to a small degree.
- [01:10]
Unknown Host
Well, I think, I think you do have the world record for the most steak eaten in a single sitting. So don't, don't want to get between, between you and that. Um, you're lucky that this is pre recorded so we can take a steak break anytime you like.
- [01:25]
Jimmy Song
Appreciate that.
- [01:27]
Unknown Host
As we were just talking about offline, specifically chapter one and the introduction to this book are just in my opinion, one of the most important things anyone can read right now. Seeing what's going on in the world. It helps put a lot of the pieces together, I think, of what's going on with government and culture at large, civilization at large even. It's as if we have kind of a failed or mistaken socioeconomic software implementation, if you will, with democracy for reasons we'll get into. I realize that this may be a rather far claim for some people to come out and say, hey, democracy is a broken or flawed model. But I think the book here lays it out very intelligently. So before we get into that, I think we should talk a bit about economics. And as the author lays out in the introduction, the difference between empirical knowledge and a priori knowledge, or what we just also delineated as empiricism versus rationalism. I'll read one excerpt from the text here and then I'd love to hear your thoughts. And the author, Hans Herman Hopp. Is that how you pronounce his name? Hoppe? Hans Hermann Hoppe is the author of Democracy the God that Failed. And this is an excerpt from the introduction. He said if one is to make a rational choice among such rival and incompatible interpretations, this is only possible if one has a theory at one's disposal, or at least a theoretical proposition whose validity does not depend on historical experience, but can be established a priori, that is, once and for all, by means of the intellectual apprehension or comprehension of the nature of things, unquote. So, contrary to the scientific paradigm, where we think it's all about observation, there is another realm of knowledge where we can actually reason about things that we can't necessarily sense. Maybe that's the dividing line, is that empiricism relies purely on sense data, what we can see, hear, smell, feel, touch, measure. Whereas a priori knowledge or rationalism can depend more on reason. And things like mathematics and geometry and physics somewhat emanate from this domain. So I'd love to hear your thoughts on that. Divide.
- [04:35]
Jimmy Song
Yeah. So this is ultimately the divide between Keynesian and Austrian views of economics. And it's really about epistemology, which is the theory of knowledge that we're making claims about how we come to know things. And empiricism is this idea that you only know things through observation and that that is the only route. And Keynesianism very much falls into that empiricist camp. The other side is rationalism, which presupposes knowledge a priori in Latin, means from before. So before you do any observation, have some theory that you can sort of test out and so on, there are rational things that you can predict based on the sort of like, axioms and things like that that you have. And this is what Austrian economics is based on. It's based on a priori knowledge, or it's rationalistic versus something like Keynesianism. And both are really claims about how you get to know things. And the thing about Keynesian or empiricist models is that you have a tendency to make generalizations where you haven't observed that much. Or especially in a dynamic system like the economy, it's hard to isolate a variable. Bitcoin is the closest thing that we've actually come to being able to isolate a particular thing. But in general, everything is entangled with everything else. And, you know, health observations and things like that come like, in very much the same way, like where it's hard to isolate a particular variable. So when someone tells you, hey, like, X is good for you, you have no idea that it was X or something else that, that you were doing. Which is why, like, double blind control studies are so important for, you know, drug testing and things like that, because you can control all of these variables. But in an economy you can't really do that. It's. It's very difficult to is and say, okay, well this economy we're going to do X and this economy we're going to leave alone. Right? Like, right. That generally doesn't happen. And the situations are very, tend to be different enough that you can't consider one a control group. That said, so empiricism tends to work better when you, when you are able to isolate, but when you can, well, you just sort of like come up with observations and make the observations the goal, which is what Keynesians tend to do. They want to increase the GDP number or lower the unemployment number and doesn't matter about the quality of the jobs or the quality of the domestic product that you're getting and so on. You could be building all tanks and using them to destroy your own people or something like that, and you would have a high GDP number, but you're not actually producing much with that in mind. Mind. You know, Austrian economics, I think is a lot more rational and sort of gives way to the metaphysical. Right. It becomes a lot more philosophical. And I see science being a child of philosophy, where you are able to rationally figure out things instead of merely observing and trying to make rules about it. Although in that sense that's metaphysical too. And I think that's largely the reason for the failure of Keynesian economic policies because they try to just take these aggregate numbers and say, well, okay, if we increase this, then this goes down. So for example, if you have rising inflation, then unemployment should go down. That was the theory behind the 70s until they actually tried it. And unemployment also went up along with inflation, which was okay, why are we getting stagflation here? What's going on? You can't really do that with an economy because it's too dynamic and just trying to manipulate the outputs is not good enough. Although that's the current paradigm right now. I think what Hoppe is an Austrian economist, obviously, and he does take the A priority knowledge and he's applying it essentially to a lot of history. And he does talk about World War I a lot in this book and in the introduction, specifically about what happened there. But he takes it through sort of like a rationalist explanation of what's going on and he bases it in theory so it makes a lot more sense. Instead of being a strict historian. This is what happened and this is what happened and this is what happened. He's getting a little more into the why, unfortunately. And this is probably part of what he's Trying to establish here, history really is written by the winners, and they only let you observe what you want to observe, and they give explanations for why based on what they want you to observe. So, among other things, we've been told basically that democracy is the crowning sort of form of government and the only thing that can actually work to secure human rights and so on. And this whole book is about putting that on its head and saying, you know what, here's, here's the a priori rationalistic argument for why it doesn't work. And actually the observations that we've made over the last hundred years show that we're going down this very bad path of all sorts of evil things happening, degeneration of all kinds, and really a decivilization of society that the opposite should be happening if democracy were this amazingly good thing.
- [11:16]
Unknown Host
Yes. So we have the empirical version of deriving knowledge, which comes from our senses, and we have this a priori method which is much. It's more fundamental, Right. To your point, it's almost born of philosophy, or part of philosophy, if we define philosophy as trying to get to the fundamental nature of things. But it's been largely disregarded by Keynesian economists. And it's been like Mises said, that economics is the youngest science. It's almost as if we've just recently, in the arc of human history, we've begun to understand that this method of deriving knowledge is more important to economics than Keynesian economics. And the analogy I like here is geometry. We know that Euclidean geometry has five axioms, essentially from which all of its body of knowledge is derived. Economics in the pure sense here is sort of similar. We have man must act, marginal utility of value, and things like this that we can derive many theorems from. Whereas Keynesian economics is suffering from more like the physics envy type thing that it seems like a lot of sciences suffer from, that they want super precise, mathematical, empirically verifiable observations for everything to explain everything. And it's just not possible, actually. And it, yeah, it's. It is. There's a difference between physical and metaphysical, because it all comes down to the sense data versus deriving things from reason itself. So we know that mathematics is like the bedrock of civilization. And I think this is. The awareness is dawning upon us is that economics is very close to that and that it's derived from a priori knowledge. And then this. So he's using this platform, I guess, this bedrock of reasoning to make the case largely about, specifically in chapter one, the relationship between civilization and Time preference. So saying that the aggregate reflection of time preference in the world is how civilized we are and how different governance models, specifically democracy versus monarchy, affect or influence time preference. So I'll read, I think this chapter one man, the writing is superb and he just gets straight to the point. So I'll read his opening paragraph. He says in acting, an actor invariably aims to substitute a more satisfactory for a less satisfactory state of affairs and thus demonstrates a preference for more rather than fewer goods. Moreover, he invariably considers when in the future his goals will be reached, that is the time necessary to accomplish them, as well as a goods duration of serviceability. Thus he also demonstrates a universal preference for earlier over later goods and for more over less durable ones. This is the phenomenon of time preference. This very basic fundamental truth of living amid conditions of scarcity and having a finite life. From this bedrock that we all know and understand, he will reason forth about really models of governance. So how do you, if he's explaining time preference in this way, is civilization just that? Is it just a reflection of aggregate time preference in your opinion?
- [15:37]
Jimmy Song
Well, it's the result of people having low time preference. You can almost sense it. It's very obvious when you go to a city whether or not they have low or high time preference. If you see graffiti everywhere, if you see rundown buildings, if you, you know that that's obviously high time preference. Like somebody like put a rock through the window or sprayed graffiti because they didn't care what the consequences would be or how the neighborhood would look or something like that. Whereas if you see something clean or you know, like some really nice classical architecture or building that's been there for a couple hundred years, that's immaculately maintained and things like that in cities like, you know, Paris or you know, some parts of London and things like that, you know, you get the sense that this is civilization building. And it's the result of somebody that planned from a long time ago because it takes a lot to build, say a cathedral. You know, those were usually like 100, 200 year affairs. And it took the community that took a community like most of this was. Most of that stuff was built on volunteer labor too, right? Like it took a community of people that were willing to forego even something good within their lifetime and build something that would last generations for their legacy. And that's low time. Like that's extremely low time preference behavior. Not even being able to reap within your own lifetime, but within the lifetime of your children and your children's children and so on. That is what builds up all of these things? What he's pointing to here is that as societies get higher time preference, there is a tendency to not build things that last. This is what he calls, I think, decivilizing versus low time preference behavior, which is literally just building things that last longer instead of building something just for now. And you could kind of see it a lot right now, even in something like architecture, because a lot of homes just get destroyed after 20 years. They're out of style or something like that. They're built with cheap materials, Sheetrock and wood and stuff like that, to make it very easy to tear down and build it back up again. Whereas if it's a cathedral, it's made out of stone, it's intricately carved, you have stained glass and all kinds of things that are very difficult to make, or at least they were at that time and take hundreds of years for that reason, but it's going to last a long time. There are cathedrals in Europe that have lasted over a thousand years. Right, like that. That's, that's, that's really lasting. That's civilization building. Whereas, you know, some, some of the stuff that's being built now is very high time preference. It's just for my lifetime. And you know, like for some people it's even much shorter than that. It's okay, whatever I'm going to do for the next couple of years. And some of the most destructive people are people that are very high time preference. I need the next hit of drug or something like that, and they're willing to go and smash windows and steal from other people and do all these things that essentially destroy in order to satisfy their needs or wants for now. And that to me is the biggest difference between low time preference behavior and the high time preference behavior. Where I would disagree with Hopper a little bit is that there is sort of like a morality component to this that I don't think he quite really articulates. He might even agree with it, but I don't think he really articulates, which is that low time preference behavior is one aspect. That's what a Christian would call prudence. Being wise about time and thinking ahead and, and doing something like that. But that's just one aspect. There are other aspects of virtue that also need to be present in order for civilization to really emerge. Those include stuff like justice and fortitude and temperance. Justice is making sure that other people get fair, get treated fairly in whatever interaction. It's possible to be prudent, but not just right. And in that case it would also be kind of decivilizing. I believe the Chinese emperor that created the Great Wall of China, like he predicted 10,000 generations, but he treated everyone so badly that the next generation, his dynasty got taken over. And, you know, he built something great, but. And it's lasted, but it's not, you know, he didn't really build civilization per se because, you know, they didn't really, really last. And you know, the other virtues, like, you know, these would be the cardinal virtues, fortitude and temperance are also necessary. You can't just do. You need to do things the right amount, which is kind of part of prudence. And you need to also be courageous about doing some of that stuff, which, which we can definitely talk about. It's hard to build things without some courage. It's hard to be an entrepreneur or to start something given all of the uncertainty of the future, without some courage. And that's what fortitude essentially is.
- [21:39]
Unknown Host
Yeah. So it really does start with the relationship between you and yourself. Ultimately, that is really time preferences, if you consider yourself, I like the analogy, that we're each a community of ourselves stretched across time. Right. You're yourself today and tomorrow and the next day and so on and so forth. The lower your time preference, the more of that community you're taking into account of yourself. And then that's also the case with others. I think Peterson calls these abstract others, which is like your future selves and all the others around you. So lowering our time preference is expanding this concern for others effectively. And you know, virtue, I guess that's kind of the soil from where virtue springs a little bit. Like it doesn't just create virtue, but once you, when you've lowered your time preference, you're more likely to adopt these different virtues that you're laying out here because they're more suitable for dealing with, for taking care of that larger community. You tend towards more selfless behavior, I guess would be the general theme versus selfish, high time preference behavior.
- [22:59]
Jimmy Song
And this is something that he points out, right. Like all about how if you are satisfied materially now, you tend to think a lot more about the future. But if you, if you are not satisfied now, then you're going to think about now. And that's right. That is like low versus high time preference behavior. But there, but there is some. Well, there is in one sense like virtue begets virtue, right? Like the more virtuous you are, the more virtuous you will become because it will, you know, satisfy you in certain other ways. But there is a sense in which you need to bootstrap this somehow. That's not necessarily easy in a civilization or a society that is very high time preference because it's hard to anchor yourself in at least this virtue of prudence of thinking long term without say, having to sell money, for example.
- [24:00]
Unknown Host
Yeah, absolutely. I guess the other point here that's real key is that time preference is always positive, which he pretty much lays out in the first paragraph. All things being equal, we always prefer today versus later, unless there's the prospect of more later. If there's not the prospect of more later, we want to receive the good, the service, whatever it is now. But as we lower the time preference, as we said, it is actually encouraging us to live life beyond ourself, our own individual ego. We start to consider our future self and others. And to your point, it's not. I guess it's not. This is where most things seem to be this way actually. There's a reciprocity between them. Right. You could have, you could consciously be more virtuous and that would cause you to lower your time preference or may perhaps there's some external incentives that could lower your time preference that could cause you to be more virtuous. There seems to be a feedback between the two. And so to connect this to the metaphysical or Christian domain, which I thought this was interesting, he makes the point that if man were not constrained by time, if there were no scarcity of time, that he would effectively always save and never consume. So this just sprang to mind, like is that in Christian tradition we talk about, you know, God saving and Jesus saving and being eternal. It's like this, there's something beyond time that saves us in a way. And you know, I don't know if there's a coincidence that the word saving and saved the same, but they both sort of lead us the same direction toward the, towards this eternal timelessness. Do you think this is just related to those metaphysical principles that are, that are kind of timeless for humans?
- [25:57]
Jimmy Song
Yeah. If you think of debt as consumption without any savings, that's kind of the situation we're put in with the Christian conception of sin and our morals is that every time we sin we are essentially consuming without any saving. But the redemption of Christ is paying for all of that. It's paying for the debt that we've essentially accumulated. So in a sense, the constraint of time allows for this debt accumulation, which from a Christian perspective, that gets. Gets paid off by somebody else because we have no real way to pay for that which we've consumed, which I Guess is in a sense, a metaphysical consumption and not just the physical consumption. So when you, you know, the Christian conception is that every time you commit a sin, you're not just offending God. There's like a real debt, a metaphysical debt that is impossible to pay off. It's not something that we have currency in. The only one with money in that economy to be able to pay it off is God. And it requires Christ to pay that off to bring it back to the constraint of time. I think in that metaphysical realm, you need somebody that. Well, in that metaphysical realm, I think it's kind of timeless. My philosophy there isn't completely developed, so there is sort of like a timelessness to all things metaphysical. They just sort of exist, right? Like the number five didn't have a creation or something, but that requires a timeless being that can just sort of pay for it in a debt that's hard for us to really grasp because it is a metaphysical debt and it is a debt in that realm of the spirit, as you would say, that it needs to be paid off.
- [28:36]
Unknown Host
This was from our recent book club, that connection between the words debt and deception. I think it was in the. It was either in Hebrew or Greek, where they were almost synonymous terms. And that the word sin too is derived from. I think it's hamartia, which is the archery term for missing the mark. So it's like we're incurring these costs and, you know, you don't need. You could consider sin and the very Judeo Christian sense, or you. I really think about it as just missing the marks. Like when we make an effort towards something, towards an aim, whether the aim was wrong or we just missed the aim, that's kind of a sin, right? You missed. And these virtues that we're alluding to, they certainly seem to be timeless, right? It's like no matter where in history you look, justice, fortitude, prudence, all of these things seem to be a net benefit to anyone in any situation almost. So it's very interesting making that connection. To take this back to the book here. I think the next point he really lays out is the natural interest rate and its importance on time preference. And we often think of the interest rate as the price of money or the cost of capital, which is true in a sense, but I think more fundamentally it is the ratio at which actors value the future to the present. So one of the ways I think about this is if you have a higher interest in obtaining things now, you have a higher time preference. That means there's a Higher interest rate. So you're discounting things more heavily basically from the future backward. And he goes into the point, really making the point that savings is that which underpins investment and the interest rate is what mediates between the two. Right. So the interest rate is incentivizing people to save and it's also determining the demand for goods that people believe can contribute to outperforming that hurdle rate so investors can borrow and use capital to improve civilization, frankly, and lower time preference further. So that's something that's very interesting. We hear about interest rates a lot. We think it's some kind of obscure macroeconomic term, but it's something fundamentally, be psychological or perceptual even, and it's related to our time preference. Is that how you.
- [31:30]
Jimmy Song
Yeah, it is sort of like a measurement of time preference, Right? Because in a sense, the interest rate, at least in a sound money economy, tells you something about how much they prefer now to the future. Unfortunately, in a fiat money system, the interest rate doesn't tell you you very much. In fact, it is purposefully manipulated because for a Keynesian, that's just one of the variables that you use to get the numbers that you want on GDP or unemployment or something like that instead of what is, you know, and it reflects more in, you know, your station in life rather than in your actual virtue, which I think, in a sense this is what it's getting at is the more low time preference you are, the more prudent you are and the less of a discount you require in order to take money in the future instead of now. But instead it's become this thing where it's dependent entirely on the access that you might have to certain loans. So if you're Mark Zuckerberg, you can get a mortgage at 1%. If you have 750 plus credit score, you can get a mortgage at 3%. If you are subprime or something like that, then it's scored a little differently and based more on your income or your credit history and things like that, which to be frank, that's not a terrible measure of time preference because a credit score tells the lender, okay, how many times did this person do badly once they got a loan? But it is interesting that you could put a number on it. But it only really works when you have a sound money that isn't constantly changing because the measurement is no longer valid once you have an inflating currency, because whoever is inflating it out is going to lend it out at a much lower interest rate than the Market.
- [33:50]
Unknown Host
Like, yeah, it's confusing because with the unnatural interest rate that we observe today, it's clearly at or below zero, which sounds great in this framework. It's like, oh, we're very civilized. But it's because it's manipulated so the natural interest rate would actually be much higher. So I guess fundamental to this he makes the point that for animals, let's say, their natural interest rate is basically infinite because they cannot, they cannot overcome this impulse to consume and save the way humans can. Humans can reason about the world and ourselves and we can decide, I'm going to eat a little more now and save for the future and actually increase our productivity over time. Whereas animals are just kind of led by instinct in a way. So you could say then in that lens that this is almost the. A quantifiable metric that discriminates man from animal in a way. And the measure of a civilization would be getting that natural interest rate as close to zero as possible.
- [34:58]
Jimmy Song
Yeah, I mean, to put a moral spin on it, I think what separates animals from humans is virtue. It's the ability to do good things. If you are able to, you know, not consume now so you can consume later. That, that, that is what makes you kind of different from an animal. That said, of course, like, there are animals that plan for the future, right?
- [35:22]
Unknown Host
Yes, of course.
- [35:22]
Jimmy Song
Squirrels hide nuts, you know, bears hibernate by eating a lot more first and things like that, but talking more about sort of like the long term and doing things that, that can help not just you, but your legacy and things of that nature. For people like that, the natural interest rate does reduce. I do think there's a connection here between this and the traditional, I guess, maybe Thomistic conception of usury, which is that a lot of church forefathers thought that the only interest rate that you can charge is zero. And actually this is something that Safety told me about his faith too, is that in the Muslim world, the only legitimate interest rate that you can charge is zero as well. And he's like, well, why is that? What happens as people become more civilized? Well, you get lower and lower time preference, and I think it does asymptotically go to zero. And in a sense, the process of civilization is an increase in virtue of all of its members. And that eventually leads to a point where you're willing to lend a zero, especially under sound money, because what you get back is worth more, even if it's the same amount nominally, because things will have progressed in the few years or a few months that you lent it out where things will be, much technology will have progress and more things will be built and things will get more efficient so that you'll be able to buy more with the same amount of money. In a sense, maybe usury laws do make sense or at least considering a positive interest rate as immoral at a certain point when you have sound money because it is ultimately an exercise of virtue and you know, like it helps the rest of civilization. But yeah, I don't like compelling anybody. So like, yeah, I don't know, I don't know how like, you know, it could be considered moral but legal, immoral but legal, something like that. I'm not sure. But there is that connection there which I hadn't really thought of until you brought this up.
- [38:00]
Unknown Host
Yeah, yeah. On your first point there that animals certainly do seem to exhibit some kind of time preference, some more than others. But the big difference it seems to be is this human capacity to change our behavior that we. You can consciously adopt a new lifestyle. Basically you can program yourself to do something completely different. You don't see too many squirrels doing that, right? Like going on a diet and nut free diet and this idea of usury. I had a friend of mine tell me once that he thought that usury was outlawed because it was written at a time when hard money was the norm. So to your point, if you lent out money at 0% and received it back, there tended to be a built in interest rate to that because as the economy progressed the money tended to appreciate in tandem that it typically had over average time spans, more purchasing power when it was returned than when it was lent out. So I think that's really interesting. But it seems like from a moral perspective it would just be correct to let the market sort that out. Just let the market determine what the interest rate is. But yeah, I think that's interesting that certain wisdom traditions, including Christianity sort of say that usury is a bad thing.
- [39:34]
Jimmy Song
Well, it's interesting because I believe I read a book recently on Catholic social teaching and stuff. I think it's now allowed for you to lend out as long as you're lending out at the interest rate at which the money is expanding. Something like that. I guess that would effectively be a 0% interest rate from usury standpoint. And that might be a reason, reasonable approximation of what would be is all right, lending out at 7% in the current economy might not be so bad. That's actually a decent return and I think there's a lot of people that would take that in a heartbeat. So it might just be the whole idea of usury might be don't go above or below the market, just lend that a fair price. 0% would be the fair price in a sound money economy, in a weird corrupted money economy like we have today, the interest rate should probably be pegged to the monetary expansion rate, which is around 7%. And coincidentally that's actually not like that. Seems pretty reasonable on both sides, right?
- [40:59]
Unknown Host
Yeah. Hey everybody. As you've no doubt learned by watching this show, Bitcoin is the single most important asset you can own in the 21st century. And one of the most important companies in Bitcoin today is NYDIG. NYDIG's mission is to get Bitcoin into the hands of as many people as possible. One of the ways they are accomplishing this mission is by empowering banks and financial technology companies to offer their own Bitcoin products and services. As a true game changer in the industry, NYDIG is safely unlocking the power of Bitcoin for forward thinking individuals and institutions alike. Led by Robbie Gutman, Yin Zhao and Ross Stevens, NYDIG has absolutely exploded onto the Bitcoin scene recently and has quickly become a leader in this space. So whether you are a professional investor looking for asset management services or a company looking to white label your own Bitcoin product or service, consider NYDIG your single source solution for everything Bitcoin. Okay, so I'm going to branch now into this conversation on capital and I want to read an excerpt again from chapter one. Hape says capital goods have no value except as intermediate products in the process of turning out final which are consumer goods later and insofar as the production of final products is more productive with than without them, or what amounts to the same thing insofar as he who possesses and can produce with the aid of capital goods is nearer in time to the completion of his ultimate goal than he who must do without them. And then in regards to the price of capital, he says it is the price paid for buying time, for moving closer to the completion of one's ultimate goal, rather than having to start start at the very beginning. This is something that's so philosophically interesting to me that capital is time or time savings or a stock of time, something like that. He explains it two ways. One is that it amplifies the production rate of consumption goods. So if we're trying to produce, we can produce more units of food per man hour, let's say. So there's a net increase to our utility of time through using capital. But he also says the holders of capital, which is kind of looking at the same thing from another way, the holders of capital are closer in time to the realization of their goals. So capital lets you just achieve your goal more quickly. So it's kind of a form of storage time in a way. And therefore the cost of capital, which again is the natural interest rate, is just the price paid for buying time effectively. And again, we're looking at this gap between we're humans living within time, trying to overcome the scarcity it imposes upon us saving and capital accumulation. These are the scaffolding by which we build civilization. We're trying to pull ourselves up, bootstrap ourselves, I guess, out of scarcity and into abundance. And it's only through this act of saving and capital accumulation that we're able to do that.
- [44:50]
Jimmy Song
Yeah, the whole idea of capital is interesting because it really is about investment in the sense that you are putting your time into something that will save you time later. So it's kind of like, you know, the, you know, in Safety's book, the whole analogy of, you know, building a fishing pole so that you can fish more efficiently and then that leading to building a boat so that you can fish more efficiently all the way up to today where you have these fishing vessels that take like five years to build, but once you build them, you only need like, like 12 men for a few months to catch like a million fish or something. Something where it's, it's insane amounts of food that you can accumulate very quickly. Whereas, you know, the very inefficient way of catching with your hands to do that would take like a million lifetimes, right? Like to catch the amount that 12 man can do in like a matter of like six weeks or something. That effect. So that is really the virtue behind capital accumulation is that it lets you be much more efficient with your time. And I think as like Hopa talks about in that chapter, all things are really ultimately sort of like human time, right? Like it's. You have to turn something that's more or less useless. It's that whole homesteading, appropriating things that were considered useless. And then you do something with it and put in your labor and make it useful. What capital goods do is multiply the effectiveness of your time. Unsurprisingly, that that building the capital good also takes time in a sense, because of the time cost of building the capital good, it ends up being a lot more low time preference. It ends up multiplying your effort later. But during that time you are not getting the production that you would before. So if you own the capital good, then of course you can churn out things much faster than your competitor or somebody else that doesn't have that capital good. These days you have many layers of capital goods from people that know how to mine steel very efficiently, to people or iron very efficiently. There's steel mills or capital goods that are related to turning iron into steel very efficiently. And then there's other capital goods that shape the steel to some electronic part, and then other ones that take that electronic part and make it into part of your phone. And then there's you using your phone to go trade for Bitcoin or something like that. There's so many levels of capital goods now, and each of them sort of of multiplies the effectiveness of your time. And that's really, I guess in a sense what civilization is, is this great multiplier of your labor to the point where you can, you know, like I'm a programmer, I can code things and live pretty abundantly as a result of being able to code, which even the richest people, even 70 years ago, couldn't ever imagine being able to do with the skill that we have. It's an abundance multiplier, I suppose, what civilization ultimately is.
- [48:57]
Unknown Host
Yeah, this amplification of labor efficiency, or a force multiplier on time, something like that. And if you look at it through the scope of, okay, we transition from being hunters and gatherers to an agricultural society. Some I forget, 5, 7,000 years ago, at that transition point, basically 100% of the human labor force is focused on agriculture or supporting agriculture directly. You're either farming or maybe making tools for farmers, maybe you're defending the harvest from attack. But through this process of making the production process more roundabout so saving more capital, allowing us to specialize further and further, we get to something more like today where I think the numbers are sub 5% of the world populations focused on agriculture. So 5 out of 100 people can now feed the hundred. The other 95 can go and focus on satisfying other wants, more specialized, more specific wants for people. And it's again that scaffolding through which we're creating wealth and abundance. And the author makes a later point that this creates a virtuous cycle too, because as you accumulate more capital, you're able to go out and take even more risk or delay consumption even further. So the larger capital stock base we build, the even more roundabout we can make our production process, which means we can create even more wealth. And so that's the aim that's the thrust, or that should be the thrust of a civilization that wants to live in wealth and abundance and peace and all these things. And so that I think that's sort of the bedrock for how now he starts to explore monarchy versus democracy. And he segues into that by first discussing these different factors that influence time preference, which I think are important for evaluating the governance models later. So the first category factors he discusses are external factors influencing time preference. The general dichotomy here is, so if you have an expectation of a positive future, so things are going to be better in the future, this tends to make you want to save less today because you think things are going to be better in the future, so it doesn't necessarily matter as much. Whereas if you have an expectation of a negative future, it would actually lower your time preference. You would want to accumulate more capital, accumulate more options, basically for whatever the negative future you're moving towards. I'm wondering, is that why so many people are hoarding dollars today? We see so much on the sidelines. This is just people are kind of forced to be prepared for an anticipated negative future.
- [52:14]
Jimmy Song
Yeah, so you made a really good point that Hapa also articulated that I really don't want to miss, which is that wealth has a flywheel effect. The more wealth you have, the less concerned you have to be about now, and the more concerned you can be for the future. And that in turn builds essentially more capital goods that allows you to have more abundance later, which allows you to plan more for later. There's a flywheel effect, right? And it multiplies upon itself and you get more and more abundance. The question then is really about, okay, what's on the other side of that equation? What are the forces or the incentives that cause people to have a higher time preference or to do all of these other things? That's what we're talking about here. There are external factors that sometimes happen that cause us to either have lower or higher time preference. As he points out, there are negative expected future events which will cause people to become a lot more low time preference. For example, if you know that there's a hurricane coming to your town, then of course you're going to buy up groceries and things just in case something goes wrong. And in fact, I don't think many of us have been in war situations, but that happens all if you expect the war. You hoard food, right? You hoard everything that you need because you have no idea what will get disrupted. You might not get access to food later on. There might not even be food available to buy. So you go and make sure you're planning for the future and negative expectations sort of set us up for that. Now to your question, is that why people are hoarding dollars? Yes, that is exactly what people tend to do when they expect bad things to happen. There's a flight to safety, whatever is the most liquid you're going to keep around. But that sort of assumes a functioning market. So in a sense, the people hoarding dollars are still expecting there to be a functioning market in the midst of whatever chaos they're expecting. So probably they're expecting some sort of economic disruption of some kind, but not a complete market disruption where goods aren't coming to the market and so on. And I don't know if that's exactly the right thing to be doing. Although there are people, I believe every Mormon is supposed to keep a year stock of food in their basement. Exactly. Because they expect just in case things go bad. And you can actually buy packages@costco.com where they'll sell you an entire year's worth of food that you could store in your basement for 3,000 bucks or something. So there are things like that. There are behaviors like that that do happen. The other thing though, about that is after it passes, then everyone's time preference just sort of shoots up. It's kind of a spring. And I think we're kind of seeing that right now because I mean, we all remember like a year and a half ago everyone was hoarding toilet paper and frozen pizzas and things like that because they had no idea what the heck would happen with the economy. But then as soon as like all the mask mandates started to go away and stuff, people started spending like crazy. You can't get anything now. Right. We're at a point where like no business can hire hire anybody. And you know, you try to go buy furniture and nobody has any furniture. There's like supply chain problems all over the place. You just can't go. Look, everyone is consuming and, and the expectation is essentially temporary. It does lower time preference when you're expecting a disaster, but it comes right back up as soon as it ends. And you can kind of see that in a lot of post war scenarios where people just kind of go crazy and get drunk every night and do kind of crazy stuff because it's an artificial low time preference, if that makes sense.
- [56:51]
Unknown Host
Sense.
- [56:52]
Jimmy Song
And that. That's the point I wanted to make.
- [56:54]
Unknown Host
Yeah, no, it's a great point. The way I think about it is there's the best antidote to uncertainty is options, right? So that if you don't know what's going to happen, the best preparation you can make is to have as many options available as possible. Right. So you can deal with any eventuality. And it just seems like, to your point, it's the most liquid asset, represents the greatest optionality effectively. So people are stocking dollars in anticipation of being able to deal with any situation. The next factor he points to that influences time preference is biological factors. And I think the obvious one here is maturity. There's the old marshmallow experiment where child's given one marshmallow now, but if they can, you know, withstand eating it for five minutes, they get two marshmallows. And the kids that succeed in doing it tend to exhibit lower time preference and are more successful later in life, et cetera. Clearly, as you shift from childhood into adolescence and adulthood, you tend to have at least the ability to have a lower time preference. I would say, on average, you probably have a lower time preference preference. But then he makes the further point that actually in senility, when you get close to the end, your time preference tends to come back up because there's not much future left, so you're going to consume your savings or whatever capital you've managed to accumulate in your lifetime. I'm wondering, is this perhaps this idea that senility raises your time preference, do you think this is contributing to the cultural divide in the world and that we have the baby boomers who control most of the wealth in the world now? I think the bulge of that demographic is in retirement age, and we have more entering retirement age every day. Do you think that's contributing to this little bit of chaos we're seeing in the world? This big demographic is getting their time preference pushed up just by virtue of their. Their age and biology?
- [59:10]
Jimmy Song
Yeah, it's kind of a weird situation that I don't think we've really seen in the world before, because in a sense, baby boomers came up in the age of all these social services and the welfare state and things like that. So they're used to having things taken care of them, not by their parents, but by the state. And this, in turn means that they are really high time preference more so than you would be, say, if you lived 150 years ago because you had to worry about, okay, well, what are my children gonna do? Right? Like, and you didn't have just, like, one or two kids like baby boomers do today, but you probably had, like, six or seven kids and you worried about, okay, well, well, the first four are fine, but the last three, I need to make sure that they're taken care of or that the first four are wealthy enough that they can take care of some of the ones that are struggling or something like that. There was a low time preference in the future about the future, even in your old age, because of the legacy that you would want to leave behind, especially as you had children, because you still care about them, and that's an important consideration. But with baby boomers, they had less kids than the generation before they were the baby boom, and they decided to have less kids and so on. Many of them don't even have kids. So for them, it's going to be much higher time preference. But even for the ones that did, they don't have as many kids, so they're still going to have relatively high preference compared to, say, people a few generations before. To answer your question, is that why we're somewhat culturally divided? Because baby boomers do have a high time preference compared to everybody else, like, say, people between the ages of 20 and 50 or something like that? You know that. I guess that would be like Gen X and the millennials, something to that effect. Yeah. They certainly have a very different perspective and might want to build things up a little bit more. I do think that there's definitely something to that. And. And especially in the last year, like going back to the whole Covid thing, who are the people that were the most vulnerable? Well, it was the unhealthy older people, and most of those were baby boomers. All the decision makers were more or less baby boomers. They're much older and they impose this very high time preference lockdown on everybody else who weren't in danger. If you're a healthy young adult, it did not matter whether you caught Covid, you would survive. So in a sense, that is the big cultural divide that contributed to the division we have today, which is you have a lot of people, that you have a lot of different divisions, but this one of the major ones that, that were caused in part by the boomers. Extraordinary high time preference.
- [62:58]
Unknown Host
Yeah, so many. Just such a confluence of factors, and there's kind of a bell curve. As we just said earlier in life, you tend to have a higher time preference. I imagine even in your early 20s, a lot of people are just kind of spending, not saving as much. Then you get into your prime earning years, which I think think somewhere like 28 to 44 maybe, people tend to get a little more focused on savings. Lower time preference. And then in older age you flip back to high time preference again. Yeah, really interesting. And then we'll get into. Clearly fiat currency has a big influence on that, which I think we'll get into here. But this was going deeper to the factors that influence time preference. I thought this was excellent. We're now in the personal, social and institutional factors. Hoppe makes the point that savings, it's not just lowering the time preference of the individual, that it's actually creating more investment in the economy, which is increasing. Maybe I'll just read this excerpt real quick here. So Hoppe says, moreover, in an exchange economy, the saver investor also contributes to a lowering of the time preference rate of non savers. With the accumulation of capital goods, the relative scarcity of labor services increases and wage rates, ceteris paribus, all things being equal, will rise. Higher wage rates imply a rising supply of present goods for previous non savers. Thus even those individuals who were previously non savers will see their personal time preference rates fall. So this process of saving, it's not just for the individual saver, it's actually creating an influence on the time preferences of others around them. Not even around them, just in the economy to actually induce a lower time preference. So I mean, savings, it's almost indistinguishable from civilization in a way. It's like the more we save, the more capital we accumulate. You're actually fostering civilization not just within yourself, but without as well.
- [65:31]
Jimmy Song
Yeah, and we talked about capital goods being a multiplier of the labor of your time. Savings is really a form of a capital good. It has that same flywheel effect where the more you have savings, the more capital goods you get. The more capital goods you get, the more efficient everything is, the more abundance there is and the more consumer, the less needs you're going to have because everything's going to be cheaper and you're going to be able to afford everything. And that in turn means that even for non savers, they're able to get things more cheaply and they'll have more abundance, in which case they can invest in longer term things because their current needs are satisfied. That is certainly not the case for most people today because of debt. This is the opposite of saving and it does all of the the opposite. And it also has a flywheel effect, which is very unfortunate. But it, but the saving part is literally building up civilization. It's creating capital goods and, you know, multiplying the labor of each person significantly so that you can, you can do a lot more with the, you know, short amount of time that we have on earth, and that in turn causes everyone else's to get more efficient as well, because you're able to sell those goods at a cheaper price to everybody else, essentially. I think what Hapa is describing is there is a natural virtuous cycle here at play that as people sage, they cause even more people to save, and that causes even more abundance and better goods and better products and better services. And again, this is only really available from a rationalistic a priori knowledge kind of theory, rather than sort of the Keynesian one which says, okay, well then investment numbers need to go up, so we're going to print money to invest in whatever, because then we're going to have way more investment in the economy. And investment is good, right? And we create capital goods. Well, no, actually, oftentimes what you end up doing is wasting it. And you make processes that nobody wants, very efficient, instead of processes that people do want efficient. And you have a significant inefficiency. And in order to fund all of that, you have to steal from everybody else. And really you're stealing from their savings, destroying their capital formation and their capital goods in order to do so. This is where Austrian economic theory helps us to understand how this actually works so that we can put the money into good use instead of wasteful use, like Keynesians tend to do.
- [68:36]
Unknown Host
Absolutely, yeah. Keynesianism is antithetical to this whole process because their aim is actually to try and increase consumption in the economy. I guess the theory there, or their perspective is that by actually depreciating the dollar, at least this is the ostensible purpose, you're actually encouraging consumption, so you're stimulating the economy. That's their go to policy tool. Every time there's an economic shudder or shock, print more money, stimulate consumption, get things revved back up. But this does a number of things. One, it's destroying accountability, frankly. So the businesses that are not turning a profit actually servicing the productivity of civilization, they're not wiped out and their capital reassimilated into other, other aims. And this, I think that's a really important point too, that accountability, or we could say skin in the game, right? Fiat and Keynesianism sort of eliminate accountability or skin in the game. That's a really important point. Later, when we start to compare monarchy and democracy in general, the monarch has a lot more skin in the game, frankly. And so this fiat is actually incentivizing, dissaving. So if we said that savings is civilization in a way, or at least the scaffolding of civilization Debt is the opposite of that, dis saving. And then ultimately debt is opposite to that. It's actually decivilizing, it's destructive. And this is something that is so deeply embedded in our socioeconomic system today. And the numbers are scary. Frankly. I think it's 350% global debt to GDP last I checked. Probably worse since. So it's really bad. On these other. Again, looking at factors influencing time preference makes this other great point that essentially voluntary exchange contributes to a lowering of time preference. Whereas intermittent involuntary exchange, which we might call crime, someone's taking something from you actually raises time preference. There's a interesting difference here because crime is something that's intermittent and it can be insured against. You can hire security, you can buy insurance, whatever it may be. So there's a way to overcome that risk or to hedge that risk, if you will. And he makes a point that once successfully hedged, we can resume the process of lowering our time preference or building savings, which is great. But when you look at government interference, it's this continuous involuntary exchange. There's no way to hedge against. I mean there are ways to hedge against it. But before Bitcoin let's say there was no real good way to hedge against the predations of private property. Even holding physical gold is a better option than say holding real estate perhaps. But we still had an Executive Order 6102 that they outlawed the ownership of gold. So he makes the point that when it's continuous that you cannot insure against it. And this has a really detrimental effect on time preference. So this whole government intervention, government action, anytime it's non consensual, it's extremely damaging to time preference and therefore decivilizing.
- [72:43]
Jimmy Song
Yeah, and I thought that was a really good point that he made regarding trade. First of all, that when you do a trade and it's voluntary, that means that you're getting something that you want more for something that you want less. So by definition because it's voluntary, you are getting more satisfied as a result of that trade and that you have more abundance. And both parties to a trade do that. And this is part of the flywheel fact is that if you have a capital good or you have the ability to produce something in abundance, the marginal utility of an extra unit is probably not going to be worth very much to you. But if it's the first unit to somebody else, that's going to be very useful to them. Say you're a cobbler or something like that, every shoe you make, you're not going to be using them. You probably have plenty of shoes already. But if it's the first pair of shoes for somebody, that's going to make them a lot more efficient. And it's going to be very. Even if it's their second or third pair of shoes or something to that effect. And whatever you get back, if it's money, then you can go use that to go buy something else that you need, like butter or something like that. But any voluntary trade, if it's shoes for butter, the butter is going to be much more useful to you than the marginal utility of the shoe. So you're both sort of, of gaining in that regard. And that's a very good thing. That's part of the civilization building and what's extraordinary about capital goods and specialization of labor and things of that nature. But the thing that he talks about about involuntary exchange or crime is that it takes away from this virtuous cycle of capital formation and creating capital goods and specialization and being able to trade and everyone getting continuous abundance. It puts friction into this flywheel effect that we were talking about. Because if you are, the minute somebody steals from somebody or commits a crime in some sort of involuntary exchange, now you have to spend all this money on security, which before you didn't have to spend money on. So that's not a capital good. It's not producing anything. It's a security good. It's to secure what you already have. And that in turn means that it's not actually beneficial necessarily to everybody else. It's not really building up civilization. One of the things that I find really sad is that you go to some of the poorest countries in the world and you look at their homes and immediately you notice that they all have walls around them. Because if it's at all nice, right, or anything that people, people are going to come in and steal, and that means that they have to put all of those resources that could have been put towards another home, for example, that they have to build walls and security and all this other stuff. And that's detrimental to that society. And this is why like crime is in a sense, like so, so evil. Because it make it not only like steals the rightful property of somebody else, but it causes spending on stuff that doesn't necessarily produce anything. And his point about government theft is even more poignant because in a sense, when government takes stuff away, you can't just build walls. I guess you can hire better lawyers or something like that, but there's no easy way or there's no spending that you can do to prevent them from passing a new law to take more money away from you. And that's the difficulty is that because of that uncertainty you're always constantly sort of discounting future earnings in relation to the expected amount that they're taking away. And that's not just like a one time like rock into a flywheel or something. That's like a stick that's just there constantly slowing everything down. And that's much worse. And this is sort of like the framework in which he evaluates government is to what degree can they slow everything down and make things much worse? Because in a sense, I think he's an anarcho capitalist. No, government is the best government because at least you can have certainty and you can do things to prevent whatever crimes might be committed against you. But crime by government is just absolutely like destructive in every single way. Despite them having written most of the history books and making themselves out to look amazing. That's actually at least given this a priori knowledge. That's not actually how it is. And they're a hindrance more than anything.
- [78:14]
Unknown Host
Yeah, again, it's such a powerful point actually that we have in government this unhedgable risk. In a way it's just like you know you're going to be stolen from. You don't know how much, you don't know in what way, whether it's inflation, taxation, outright confiscation. He goes on, I think to make the later point that even any limitation on what you can do with your property is a form of theft. So this could be certain. He talks about law and whatnot. And this I guess is the most detrimental factor to time preference. So this is the most decivilizing thing you can really do to a group of humans trying to organize themselves is have this constant specter of theft and risk that you can't do anything about. You can't insure it away, you can't hedge it. And like you said, I love the stick and a flywheel. It's a great. Just gets worse over time. And to his point too, that these security costs, which, I mean, this is just for crime. You can build the walls, you can hire the security forces, whatever. They really would be wasteful if the property could not be stolen. Right. So it's almost like a, a waste of resources if the security were embedded in the asset, which is where something like Bitcoin I think really shines. It just has a security built right into it. So it allows us to free up these other expenditures on security and allocate them towards something more productive. This idea, I think this is something I just really can't stop thinking about that I think very fundamentally, voluntary exchange or voluntarism maybe more generally, it's the only avenue to value creation. You cannot have both parties entering a transaction and leaving it better off unless it's voluntary. It has to be purely voluntary. If there's any coercion involved, it's necessarily, by definition, destructive.