Why Paul Krugman is wrong: Austrian Economics vs Keynesian Economics | Saifedean Ammous

what is austrian economics what is kenzian economic what how do you compare the two what should people know some interest what are interesting defining characteristics to you about these schools yeah so austrian economics the way that i said austrian economics is economics it's um it we call it australian economics because economics has been hijacked by a bunch of frauds really people who are wrong well it's much worse than wrong by people who are just essentially propagandists for inflation right um so it's like your opinion man all right yeah well that's also like your opinion man yeah but that's true well i also talked to paul krugman on this podcast so he's uh the o speaks enough but he is uh he's one of the people that is perhaps most harshly criticized by folks in austrian economics perspective and vice versa which is a fascinating intention yeah he's um he's done a great job as an actor who plays an economist on tv and the internet so anyway uh now tell me what you really think no but so the basics of what is austrian economics what is the what perspective does it take in the world yeah so i mean austrian economics really is uh the continuation of a tradition that it goes back to the ancient greeks of studying economics historically it's really just economics and that has evolved over time and the um the establishment of the austrian school per se came in 1871 150 years ago when carl menger the father of the school wrote a book called principles of economics and essentially invented marginal analysis which is a big deal in economics marginal analysis is the idea that in economics individuals carry out decisions at the margin that it's um when you when you make choice you're not making it for instance if you're making a choice between uh what should i spend my money on you're not making a choice whether it is um this thing is object a or b which one is more valuable for me in general which one is more valuable for me for the rest of my life you're choosing about the next unit right now at this point at this stage and if you analyze economic decision making at the margin it makes a lot more sense and you can understand why people decide and make the decisions that they do whereas if you don't apply marginal analysis things don't make sense the key thing that marginal analysis helps us solve is what is called the water diamond paradox so you will die without water we all need water and yet water is dirt cheap whereas diamonds are extremely superfluous nobody needs them nobody's going to live or die because they have a diamond and yet they're extremely expensive so why is it that as human beings we pay maybe say a dollar a liter for water whereas we pay thousands of dollars for a few grams of diamonds why is this the case do we value water less than diamond the answer is no but at the margin where we are right now you live in a place where water is very abundant because cities are only built in places where water is abundant and you're only making a choice about the next unit of water and so water is extremely abundant and you're choosing about whether to spend the next unit of money on water the valuation that you give to water given that you have a lot of water at home and then you live in a place that has abundant water is pretty low to the marginal unit but it's very high for water overall so if i asked you how much would you spend for water in general you know how much would you uh pay for water for all of your life it would be a lot higher than diamonds if i told you you can only have water or diamonds for the rest of your life you choose water obviously but you nobody's ever had to make that choice you only make your choices at the margin so at the margin where we are modern civilization we have an abundance of water that's why we have civilization and diamonds are very rare and scarce and people are only buying you know you buy your first diamond when you're gonna get married and you give it to your wife and that's it's gonna be the first few grams of diamond that she's ever gonna giving my wife water smart move you should definitely give her bitcoin instead of diamonds i tell my wife i occasionally remind her what uh what we how many bitcoin we could have had if i bought her bitcoin with the price of the diamond what's the downside of by the way diamonds for from the analysis of like gold and so on ah that's a great question um arguably diamonds are scam [Laughter] because they became popular as a thing in marriage after gold was banned after gold ownership was banned in the us in the 1930s and in many places around the world so before that you'd give gold and the reason you'd give gold in a dowry in uh wedding is because you know it wasn't just that it's pretty and shiny it's because it's money and so um you know if you die or your wife can take the gold and she can live off of it um it's it's a demonstration that you're giving her something valuable and that's because nobody can make a lot more gold that has the high stock to flow ratio but then they banned gold ownership where they allowed people to only own very tiny quantities of gold and that's when the diamond industry stepped in and marketed diamonds as the thing that you need to give but the problem with it is of course that diamonds aren't uh like gold they're not very hard to make more of and the reason we have uh scarcity in diamonds is really artificial there's a there's effectively a monopoly of diamond producers they restrict the supply and um it's a pretty dirty business and the way that they do it is you know all the um all of the talk about um blood diamonds is a way for them to ensure their monopoly so um if you're part of the monopoly of diamond producers then doesn't matter how many people get killed producing your diamonds if you're out of the monopoly then human rights organizations descend on you and call for shutting you down for selling blood diamonds and they're also restricting the production of artificial dimes this is the other thing you can make artificial diamond you can't make artificial gold so they restrict the production of artificial diamond and they try and insist that you know you shouldn't take artificial diamonds but they're indistinguishable from real diamonds so it's an artificial scarcity and i think there's going to come a point at some point that this monopoly is going to break and a lot of people are going to be left with uh essentially uh highly devalued jewelry i'm going to take this segment of the podcast when i'm getting married i'm gonna send it and then uh instead you're you're getting uh water or bitcoin yes and water and bitcoin is all you need so so marginal analysis guessing and the margin is the thing that allows you to most accurately capture human nature the actual day-to-day decisions that we humans make yeah that's really revolutionized economics so 1870 and that's um that was mangers uh work and then um he had a student agent bombard who developed capital theory and then he had a student ludwig von mises who is arguably the most important economist ever and he developed a theory of money and he wrote a book in 1912 called the theory of money and credits and then in the 40s he wrote human action which is a big treatise on economics and i think this is um this is the correct tradition of economics and before world war one this was just known as economics and then um after what happened in world war one and i discussed this in detail in the fiat standard is that the bank of england essentially went off gold and tried to pass off their own credit as being as good as gold in order to finance the war and incidentally here um this is part of the history that is not discussed often you know this is presented as an innovation um later on they needed essentially a propaganda school that would justify what they did and uh later on it's presented as oh hey we realized that gold was not good and now look we've built this thing that is better than gold where now the government can just print money whenever it wants and now um gold money is not an issue anymore which is extremely idiotic because the whole point of money is that it's not easy to make if it's easy to make it's not money anymore it's just destroying the entire function of money and we've seen that happen extensively in the 20th century after countries went off the gold standard so essentially keynesian economics is just inflation apologia it's just propaganda to justify inflationism and it's profoundly nonsensical it's built on the idea that if you just make more money you can stimulate economic production and of course this is very self-serving to the central banks and to the banks and to the governments who promote this nonsense and this is also very pervasive if you've had the misfortune of studying at a university over the last century you were taught keynesian garbage economics you were taught that if if there's a problem in the economy the way to fix it is that the government prints money the government lowers the interest rate and then that leads to more economic production which is completely nonsensical so so you're again for the listener you're using strong words and i'll push back just to uh find uh to please the devil's advocate to hopefully one day arrive at the truth so just because it's in the interest of the central banks and the government uh the interests and the models of kenzian economics and the government are aligned doesn't mean they're wrong so let's let's give them a chance so the conventional wisdom perhaps economics wisdom is that inflation is good uh in moderation as it encourages spending but too much is bad because you know it completely devalues destroys people's savings so a little bit of inflation is good to stimulate spending um and i mean i suppose this is one of the things that's supported by uh kenzie in economics wow this is basically the whole point of keynesian economics is to try and find uh an endless array of explanations to explain why inflation is a good thing well it could the chicken in the egg so that's that's the cynical take yeah this is a propaganda machine to sell the government's narrative the less cynical take is this a bunch of economists who are telling who um who figured out this thing and it happens to be good for banks and governments just because it's good for them doesn't mean and it justifies the existence of government and uh your basic i don't think it's your basic assumption but a foundational principle of your thought is that a lot of government is not a good thing your first gut instinct government bad like i mentioned i lived next door to michael malus who probably beats you on the intensity and how quickly he says government bad so so but there you know there's a potential argument for government good go some government is good maybe a lot of government is good maybe we need a lot of centralized management for resource allocation and so on because we humans specialize we're too busy and so on so is an argument for that uh that exists uh you probably disagree with any possible argument in that side but anyway so why is that idea yeah of kensington economics wrong i'm gonna focus for this on the uh money idea the idea that a little bit of inflation is good um the idea here i mean the criticism is that without inflation people wouldn't spend and then the economy would come to a grinding halt and that's nonsensical because people spend not because they want to keep this magical monster called the economy going people spend because they need to consume because you know that's how we live that's how we survive you need to eat you need shelter you need clothes to keep you warm and as technology advances the capabilities of the things that we can do with our um with our time increases and so we want to buy more things so people buy things because people want to consume there's a limitless desire to consume you know that there's no there's no um shortage of reasons for people to consume whether it's food or ferraris or private jets people just always want to buy more can i interrupt just really quick what about the fear about the uncertainty of the future where they might want to they might want to uh buy things but they're really afraid because it seems like there's a lot like a pandemic going on or whatever it is that's good so so fear of uncertainty is yeah but can you have too much fear here's the thing what i was saying is i was making the point that we don't need to be motivated to consume like we have the insatiable desire to consume everybody would like to have more of all kinds of things everybody would like to have a bigger house well not everybody some people have a big enough house but everybody would like a house everybody would like a car jet all kinds of things you know electronics machines so we don't need a desire to consume but of course the limit on how much we consume is opportunity cost why don't you buy a ferrari well because that's really expensive and it would mean that you know well maybe you do have a ferrari but i mean most people don't buy a ferrari because it's too expensive they don't they can't afford it they'd have to work too hard to get it um and if they do get it it might mean that you know they can't afford their house anymore so we have to economize that's a good thing and we have to also think of the future and so humans consume that we don't need more motivation to consume we have to deal with the economic reality of the things that limit us from consuming more so um what keynesians present is that when there is a problem in the economy like there was after world war one the problem is always a cause caused by the inflation and what the keynesian hucksters do is that they look at the inflation at the consequences of inflation and blame it on people not spending enough when people are doing the rational thing you know the money is um the so there was inflation caused the uh an unsustainable boom it caused the recession and now a lot of people lost their jobs and they don't have enough money to go out and spend um frivolously so they save for the future the future is uncertain that's a good thing you know that's how you fix things um you begin the recovery by well you know you lost some wealth so you spend less like if you you know if your business goes bust if you lose your job it's natural and smart that you stop spending money on the frivolous thing that you used to spend and you save it for the future you invest in something else you get a new job and then once you've recovered you start spending more this is this is very sane and very good and it's the way to recovery but essentially the keynesians have used this as a justification for more inflation because inflation is an addiction once the government gets down the path of spending money to solve its problems then every problem looks like it can be solved by more inflation and so this is where keynesian economics comes in and of course the keynesian economics is based on the work of keynes which came in the 1930s and this is the key point like um it's portrayed in the textbook as if it's just this this scientific breakthrough that you know somebody in the 1930s this genius came about and realized that oh we don't actually need gold we don't need hard money we can actually just print all the money and in reality of course it was just the very thin flimsy idiotic justification for what governments were already doing for 20 years they'd already gone off the gold standard and they'd gone through 20 years in which they were lying to their population telling their population we're still on a gold standard but you know there are problems caused by various random things but don't worry we're going to be going back on the gold standard 20 years later after they went off the gold standard they come up with this justification for why oh actually the gold standard was bad and and this is really pernicious thing about it is the problems that were caused by us going off the gold standard we're caused by the gold standard and we're going to fix them by going off the gold standard even more just because government is lying and it's shady and it does these kinds of things doesn't mean kensington economics is wrong so just because i wanted to separate a few things you said uh it could very well be very wrong and they could indeed be hucksters all of these colorful such colorful language uh i i love you deeply for this this this is fun yeah but i mean you know it's not like somebody like krugman doesn't use this kind of language when discussing austrians it's just that when actors like him use it it's presented as if it is um legitimate because he's you know he's part of the major shows [Laughter] so the case they make and the criticism uh kenzians make of austrian economics in the case they make for kensington economics is it's based on empirical evidence so uh austrian economists are pie in the sky theorists about like how human nature works and it's just all theory uh and just like you said kenzie and economics kind of sell it as a science data-driven science and so um where's the data bro on the on the uh so one way of saying it is um how do you know if we get rid of inflation how do you know if we get rid of central banks if we push towards that direction we will have a better world a better functioning economy better functioning markets better functioning society this is another inaccurate way in which they present the economics they present as if it's just theory and the data doesn't matter but that's not the case what the austrians say is that without guiding theory data is mute data is dumb data can't say anything so theory first and then uh you have to have models to provide context for interpretation of exactly data and it's a sign of just how little self-awareness they have that they think that they're just being led by the data when they're being led by keynes's moronic theories and it's they use the data to justify those theories and to stick by them and in fact they are the ones whose theories cannot be refuted because it's just uh it's just government-mandated religion so according to keynes's nonsense um you know so the way that the whole thing is the way that they justify the inflationism is this and i'm just using this to give an example of what you're talking about in terms of theory the way they justify the inflationism to tie it back to the original point they just all right we need money to spend and then the level of spending in the economy is what determines the state of the economy and i have taught macroeconomics at university level for a while so i know this i know keynesian nonsense better than most keynesians know austrians if not all of them i i guarantee you and so the way they see it is the level of spending in the economy is what determines the state of the economy there's a level of output and there's a level of spending so there's like the factories on the one side that are churning out goods and those goods have a certain quantity and value market value it's completely nonsensical of course because um how can the value of the goods produced be different from the value of the spending but let's put that aside for a sentence for a second so the amount of spending that happens in the economy determines the state of the economy if the value of the production which they call y is higher than the aggregate expenditure so this is the production and the aggregate expenditure is lower then we don't have enough spending to buy all the goods and then that causes a recession the factories start laying off workers and then the laid off workers start spending less and then that leads to aggregate expenditure dropping even further and so it's a vicious cycle where the economy gets into recession and the only way out is for keynes's bankster buddies and government buddies to print a lot of money to give to themselves and then um that will that's one interpreter so but to uh so to print more money to increase the expenditure that to match the match the level of sounds pretty good to me i'm sold all right but you even though you're saying huckster so yes i just you know like the way i i love you very much but like uh just for people who are listening i think it's i love the way you talk and it's great and keep doing it but just for context um like i don't know anything that involves human nature deserves this level of certainty i at least my position is that we don't know what the hell we're doing on basically anything and perhaps but i mean like there's a lot like certainty can get us in trouble it's my worry i don't know much about economics i don't even know you know financial systems monetary systems um but i just seen us get in trouble with human psychology certainty certainty of ideologies in general you mentioned marxism and so on i came from the soviet union there's a lot of people that are very certain throughout the history of the 20th century that communism is the utopia that humanity should strive for so i'm i'm nervous around certain i could be wrong but you know you you asked me for my opinion yes yes sorry so it's that little bit of a caveat so to go back to the idea then on the other hand you have the level of if the you know the other situation is when the level of spending is higher than the amount of aggregate output yes in that situation you have too much spending so therefore what ends up happening is inflation so according to the keynesian worldview this is really important because this is a way that i'm going to get to your point about empirical data and to show you why they're not correct yeah they're not correct about what they say about empirical data so then what this means is that there's a level of output and there's a level of aggregate expenditure the aggregate expenditure can either be higher or lower than the output or equal to it if it's higher we get inflation if it's lower we get recessions okay so is there any universe in this model is there any potential universe in which you can have both inflation and a recession according to the keynesian model you can't right because aggregate expenditure cannot be both higher and lower than output so therefore if you're truly being an empirical uh person if you were looking at evidence and trying to be and like trying to analyze data you'd look at this and say one example you know one you just need one example of high inflation and high unemployment to refute this entire model right and of course the world is full of examples of high inflation and high unemployment and that's what happened in the 19 and of course you know they ignored it and when it happens in poor countries because you know poor countries don't really matter but then in the 1970s that happened in the us and in the western economies in the most advanced industrial economies so historically before then you had all these keynesian central bankers talking about this model and saying you know well aggregate expenditures too low now and that's why we have unemployment so we need to print more money and then they print more money inflation goes up but also unemployment goes up because this model is broken that's not how the world works that's not the level of aggregate spending in the economy is not a lever with which you can control inflation and unemployment so what would a scientist do what would a non-huckster do in this case admit the theories wrong and find another way to reformulate it have the keynesians done that no still the same garbage in the textbook that is being taught until today so is it possible to have a non-kenzia motto or one that still supports moderate amount of inflation is good for the economy i mean since the 1970s since this has happened yeah this is what um basically most uh fiat economists as i like to call them essentially anybody at a university financed by governments which is financed by central banks which is fine but we'll talk about that yes the effect of fiat money on our life as you write about in your book uh fiat standard one of them is education i'm sure we'll disagree there too um i'm not smart enough to disagree but i'll disagree anyway so yeah so a whole bunch of other models came up but basically it's i mean it's it's such an example of motivated reasoning like anybody who's got a familiarity with the scientific method or who's got an engineering background who comes into economics immediately has a lot of red flags and i remember when i used to teach macroeconomics i used to teach you know introductory macroeconomics and it's a course that would be taken by econ majors as well as engineers a lot of engineers would take it as an elective and every time i'd explained and i would just teach you know the keynesian basic stuff and every time i'd explain it there's always that smart engineering kid who just looks at me and says sir this doesn't make any sense because this and this and that i'm always like you get it exactly you're correct because if you have any kind of shred of scientific thinking you see that this is all motivated reasoning like the answer is government needs to print money and here's a whole bunch of models brought up by people for why government printing money is good and the reason they're coming up to this conclusion is that you only get funded if you come up with this conclusion if you come up with a conclusion that we need to shut down the central bank you don't get funded by the central bank you don't get published in the journals you don't get a job at the prestigious universities you don't get quoted by fiat publications like the new york times and cnn they don't invite you on as an expert well that's a fundamental flaw with a lot of institutions we have today a human and throughout human history let me zoom out for just a second to the big question what is economics in general what's the goal you said there's a bunch of models is any any economist basically trying to throw a bunch of models about human behavior on the table and try to generalize it to the global scale so both dance between micro and macro somehow in order to determine public policy and ex explain the past predict the future prescribe policies that can control the future those kinds of things that's the big basic ridiculous question of what is economics economics is the study the way the austrians define it is the study of how humans make choices under the condition of scarcity we begin with the starting point of economics as the fact that scarcity exists and why does scarcity exist well because it's easier to want things than it is to make them it's much easier to want a ferrari than it is to make one and so um because it's you know we have once and we have limited means to meet those wants we need to economize it's a permanent it's a permanent marker of the human condition we are always economizing at all times and so how people make those decisions under the conditions of scarcity is what economists study so to go back to your point on empiricism in austrian school so it isn't that the austrians don't believe in data on the contrary it's that theory has to inform data and in fact if you think about it as the example of the um stagflation of the 1970 shows um if you have stagflation that just completely refutes the keynesian model the austrian way of thinking which is think from first principles understand how the world actually works think about how humans act and understand that economics is really all about human action so it's not about aggregates of goods this is really the key distinction in terms of methodology and for the keynesians it's physics envy they look at the market economy they could individuals in the market economy and they think that they can understand the market economy by looking at aggregates this is really the key point of what i think makes the certain branch of economics pseudoscientific is the introduction of aggregates when you when you introduce those aggregates you know how much production takes place how many people are unemployed um the percentage of the inflation rate and then you think that you can establish scientific relationship between those aggregates it's purely physics envy you you know in physics for instance or in chemistry you put let's say a container with contains uh a gas and you have the uh ideal gas law pv equals the nrt calculate the pressure calculate the volume and then uh and and then the temperature you can you can if you have the pressure and volume you can calculate the temperature because you have the um n constants so there's a clear relationship that has been demonstrated in a laboratory and that can you know we can do it right now we can measure it and we can see it and it continues to hold and all it takes is one scientist to show that this relationship does not hold to do an experiment that shows this does not hold and it stops being a law of chemistry um then it's and it's broken where whereas in economics what they've done is they've copied the superficial shape of this without any of the scientific rigor that was used to build it there's no experiments you can't experiment on economies we don't have the ability to establish laws and all the laws that we establish are just models that get people published and get them on the media to say my model says we need to print more money but it's never subject to actual scientific scrutiny if it were they would all be rejected in 15 minutes because the world is full of examples that contradict them was it possible to do scientific scrutiny when it's human nature when you can't when there's a nearly infinite number of variables and you can't control them it's a part so what's the best thing you could possibly do you do thought experiments but the problem with thought experiments you know freud thinks everybody wants to have sex with their mother uh is the right problem with freud i don't know maybe he's right well obviously i'm joking on that front but the freud is probably another keynes well no i i think there's power to the thought experience just like einstein you know a lot of general relativity special relativity that that's a thought experiment it originates in a thought experiment now is it true you know a nice thing about physics you can't eventually have experimental validation the the downside of economics is you really can't have experimental like definitive experimental scientific rigor of validation of a theory so a thought experiment is just a thought experiment using your intuition it's the power of reasoning together against human nature and that's why economics cannot make the claims that physics can make so with physics you can predict that if you get this gas at this pressure at this volume the temperature will be that much and you can make that prediction and and test it a million times and you'll always get the precisely correct answer with economics we can't make quantitative predictions on twitter and even today you're very certain about the statements you're making do you yeah but i don't make quantitatively certain statements that's the thing in economics we don't make quantitative predictions we cannot do that because we don't have experiments but we can understand how the world actually works with humility this is really the key difference that the keynesians think they just want to copy the methods of physics and then that's just you know going to give them the certainty of the results of physics which is like me saying i'm just going to put a red um blanket on my back and jump from the fourth floor because i'm superman well it's not the red blanket that's going to make me superman it doesn't there's a lot more to it so humility manifests itself in economics as the belief in a free market meaning like i can't centralize i can't do centralized control on this thing we're going to uh minimize the friction of the free exchange of goods so um austrian economics puts priority in in the market yes and you could you could you could arrive at it through two paths the the the more um the more practical path which most scientific minded people arrive at you know i came from an engineering background so i initially had this idea that what is lacking in economics is mathematicization we need to have better math models we need to get all those tools from engineering apply them to economics and then we'll be able to plan the world economy and make it work better and then you start actually trying to solve problems you know to try and actually calculate them and you realize nobody can have that ability because the difference ultimately comes down to the fact we can't have experiments and the reason we can't have experiments is that you can experiment on particles of a gas you can't experiment on human beings on entire economies and because particles of a gas are just dumb matter and so you know you you kick matter in a certain way you can calculate exactly how much is going to fly human beings are much more complex they have a will inside them and this is really the this is the humility to understand that you are a human being and other people are also a human being just like you and that the the you know every person wakes up every morning and they have a million things in their mind a million things they care about a million things they want to do and you will never be able to make the decisions for somebody else let alone for millions of other people so this is one path by which you arrive at the conclusion that free markets are better because you realize that all the people that think that they can centrally plan markets can't actually do that and that there's really nothing scientific about them except essentially the rituals they ape of the scientific process and the other path i think that iran may survive at the austrian perspective or the libertarian perspective i should say is um simply the the the notion of individuals as having their own inalienable right to decide what they want to do with themselves if you i mean the only way that you can give yourself the idea that um you get to be planner is ultimately you think you're better than other people you think your choice your judgment overrides mine and i don't think that's a defensible position i think i'm in no position to want to force anybody ever i will never want to force anybody to do anything they don't want the keynesian perspective the central planning perspective is unlike physics you know which is let's force a bunch of particles to sit in the lab so that we can study them in economics you're forcing people to do things you know that's stop these people from doing this job because it's bad for the economy and let's get them to do that job let's force them to pay this price let's tax them this much let's prevent them from using gold as money and force them to use our credit as money so it has to rely on coercion there's no central planning without coercion and coercion is a crime in my opinion there's no way that it is justifiable morally or former politics from an ethical perspective uh your view is the i mean perhaps the broadly speaking of the libertarian view is uh coercion is unethical freedom is essential what is what are the pros and cons of government intervention in the economy so can you steal man can you provide pros you just kind of provided arguments against is there any arguments to be made for government intervention for the role of government in society speaking from a political or from an economics perspective what is a positive role of government that you could imagine you can speak to i can repeat many other cases but i i don't find any of them compelling for the reason that i mentioned which is that ultimately they all rely on putting a gun to somebody's head and using the threat of force so that's for me it can never be justifiable whatever the ends are if the means are violence and the threat of violence then the ends aren't justified everything that's good governments will use as an excuse to justify coercion so you know what do you like you like motherhood and apple pie well government needs to ensure that motherhood works well and we need government central planning of birth we need regulations on birth for instance we need regulations on uh how people give birth we need to ban people from giving birth in traditional ways that have been tried for thousands of years we need to force people to do things in the modern scientific way well so what about things like that all of us use so infrastructure for example or education um or well the economy too right uh can you make a case for the role of some large-scale centralized systems whether it's government or not that do this kind of management i guess perhaps you could say there's the economies of scale argument that some things must exist at a very hard a very large scale and therefore you would want um you would want political accountability of the people who manage them this is kind of the argument that's given for infrastructure monopolies you know for instance roads or electricity um that let's say we live in a country we need one power plant the bigger the power plant the better off we will all be and there's a natural monopoly in the power plant business so we're gonna have to have one power plant and since it's only one power plant then we can't just let anybody own it because then they're going to make it too expensive so we need to have the government own it so it can make it too expensive and you don't find that case compelling not at all i used to believe in it i was pretty much a keynesian when i first started my graduate studies at colombia and no i don't find that compelling at all because i think all these examples that they mention of natural monopolies or economies of scale that can only fit at a scale of government um it's always it's always you know government bans people from opening power plants and then there's only one power plant and they need to be in charge of it but in reality uh no in reality the you know power plants can exist at all kinds of manners of scales of operation and yes of course there are benefits to centralization in power plants in particular because there's efficiency in uh generation you know one big uh power plant is more efficient than 10 equivalent smaller power plants but there's also inefficiencies in centralization because the more centralized and the bigger the plant is the further away a lot of the population is going to be so you're going to be losing a lot of the electricity and transmission and you believe the free market is best in managing that dance that balance of centralization exactly and if we do end up in a situation where there's one power plant for an area then i you know if the markets ends up centralizing all of it into one power plant i don't see that as a problem um there are places you know there's a small town with only one barber shop is that a catastrophe no because they don't need two barbershops now if that barber shop started to take advantage of people started to charge higher price well then that's just an opportunity for others to step in and put them in their place and that's the same thing with power plants it's the same thing with everything um ultimately i think the key thing is this from the central planning perspective they'll present you the problem as it is and they'll tell you well this is bad so the fix you know and and what we can do is better so let's stop what's bad and do what is better two problems here usually the reason that the thing is bad in the first place is because it is a government monopoly is because of government intervention but the second thing is that this notion that we could just pass a law and fix what's wrong and make it better is it ignores the fundamental underlying reality which is that what you're doing is you're offering only one way for this problem to be solved and making all other solutions practically illegal you're taking taxpayer money you're putting guns to people's heads to take their money to use it to build say this one solution for a power plant but you're preventing the free market process from providing us with other alternatives well so you phrased it sort of from that perspective but there in theory there is a feedback accountability mechanism for the solution that you propose and enforce by as you're saying placing a gun to people's head you're accountable for the uh for that choice for the quality of that solution by being voted out if you if the solution is actually bad so it's just a different selection mechanism and i think i personally believe it is a selection mechanism that has worked in the past it just often does not work and nearly as well as a free market and the question is are there domains in which the free market gets itself into trouble so this theoretical view is that that's the point of a free market is it doesn't if there's trouble that's a signal and it will respond to that signal and it will respond appropriately to make you try to maximize happiness the question is is there a local optima that free markets get stuck in and you need governments to represent the broader scale of the people you get well here i think the fundamental problem here is the idea that there is a feedback mechanism when there is coercion in one party when one party can employ coercion and the other one cannot so in other words i'm going to put a gun to your head i'm going to take your money and i'm going to use it to buy more guns for me to put against your head but somehow you're going to put a paper in a box and that's going to deactivate my guns well love requires a push and pull there's a little bit of tension a little spice in a relationship i think uh yeah i mean uh hello gun to the headness and good luck to anybody who's going to be dating you if you think you're putting a gun to people's head is comparable to a relationship uh all jokes but yes i i mean the people don't often think of it as gun to the as government and the military as gun to the head um but that is sort of a libertarian perspective because ultimately when you you know turtles all the way down and at the bottom there's guns yeah so bottom if you don't want to pay if you don't want to you know all right i don't want to be part of your power plant i want to get my own generator i don't want to do it i don't want to pay for it i go to jail you can't not pay for it that's really the symmetry which the market doesn't have which is why in my opinion it's not as if you know i'm being stubborn and stuck on the idea that i want a market and that the government can't work it's presented as if you know we're choosing between two different machines you know should we use an apple or a pc and i'm just um constantly choosing one of them and saying that the other one can't work it's not equivalent it's not two machines we're comparing between a machine and a gun to the head and we're comparing between a situation in which anybody anywhere is free to provide the service or the good and anybody anywhere is free to buy it from them or reject to buy it from them so anyone can build a power plant anyone can succeed that anybody can fail at it anybody can build it in a way that i can choose to take part in or not take part in i can build my own so we have a situation which 10 million people let's say they each can freely choose to provide the good or to buy the good that cannot be considered an alternative on an equal footing to a situation where one person or one entity gets to decide for everybody and those who disagree go to jail so the problem is that the alternative to governments is other large successful entities that have humans in them and human nature is such that there's corruption manipulation and so on i think free market depends on the honest communication of information as widely as possible so people can make great rational decisions but sort of my fear is that like to propose is that in general there's manipulation where there's government where there's companies they're going to manipulate they're going to try to do propaganda they're going to try to manipulate you deceive you shut down competition by playing games human games of different kinds uh and sometimes even meaning well it's not like everybody thinks they're doing good and they're actually doing evil so how do we prevent the worst of human nature coming out in a free market as well by not giving the worst of human nature a monopoly on violence in the institution of governments that that little inkling of coercion that little bit of asymmetry creates a gigantic like ripple effect of asymmetry in your view yes and it ends up just being the place where you know corporations individuals free markets they can't coerce without the resort to government so you know you think about all the examples of corrupt corporations doing bad things it's always because they have certain privileges from governments because you know that as it exists you know coca-cola mcdonald's all of these giant corporations they can't do anything to me without government they can't take any of my money and they can't force me to buy their stuff and so it doesn't matter to me you know so if if coca-cola is corrupted that's a problem for coca-cola customers that's a problem for coca-cola shareholders that's a problem for anybody who deals with coca-cola but as somebody who doesn't drink their stuff and isn't a shareholder i have absolutely no interest in what happens i they could all go bust tomorrow and i don't care i don't buy their product and i don't and i'm not a shareholder so in this situation where you choose to voluntarily associate with people and you only give your money to people you want to voluntarily give the money to so you either buy their product or invest in their production in that situation the only way that a company can get my money is if they build the product that they uh that i value or if they convince me that they are going to use it in a way that's profitable and they they might i may be wrong you know i may invest in a company that fails or i may invest in a company that is turns out to be um fraudulent but that's my fault you know and it's it's my fault that i gave them my money and then it turned out to be scoundrels but it's a totally different problem when we make it um mandatory you know it's it's violence it's um it's a crime to put a gun to my head and force me to subsidize companies and force me to come at certain conclusions you

Channel: Lex Clips

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Keywords: ai, ai clips, ai podcast, ai podcast clips, artificial intelligence, artificial intelligence podcast, computer science, consciousness, deep learning, einstein, elon musk, engineering, friedman, joe rogan, lex ai, lex clips, lex fridman, lex fridman podcast, lex friedman, lex mit, lex podcast, machine learning, math, math podcast, mathematics, mit ai, philosophy, physics, physics podcast, saifedean ammous, science, tech, tech podcast, technology, turing

Id: GUvTJ0xy74c

Length: 48min 15sec (2895 seconds)

Published: Thu May 12 2022