All Episodes
Previous Next
March 1, 2006 - Freedomain Radio - Stefan Molyneux
59:57
121 Socialist Calculations Part 2: Labor, Capital and Goods
| Copy link to current segment

Time Text
Good afternoon, everybody.
It's Steph.
I hope you're doing well.
It is five o'clock on March the 1st.
It is a Wednesday.
So we continue with our gripping examination of the problems of socialist economics, which I got to tell you is pretty nice.
And the reason that it's nice is that instead of getting emails saying, what you talk about my mother for that way, boy, I'm getting emails saying, Huh?
You have like one point and it takes you half an hour to make it?
How many times can you restate it?
So, let's just say that I am pleased to be doing economics for a bit.
A little less explosive and a little bit more conceptually stimulating.
And don't poke at the old family dynamics too much.
So, Let's have a look at some of the other problems that occur within socialist calculations.
And just as a point of clarification, I am going to include in the phrase socialism communist.
And national socialist or Nazi.
We can include fascist.
So basically it's any time where the movement of goods, labor, or capital is centrally coerced through a government agency.
So let's just understand that.
So when I say socialist, I don't just mean sort of Democrat, left of Democrat or something like that.
It's the entire mechanism of state coercion within the economy.
Just so you know where it is that I'm coming from, man.
And the last thing I'll mention is that I absolutely chickened out.
I found that keeping the podcast going for 30 to 40 minutes while driving a car in intense highway conditions, especially during winter when it's snowy, became a little bit of a strain.
So what I've done is I've picked up a software package which should cut out if I need to pause.
That should also help me because I really don't find it too stimulating after the podcast to go back and pick out any pauses.
And cut them out.
It's time-consuming and not too thrilling.
Hopefully that will work out and everything will be hunky-dory.
So let's talk about other problems with socialist calculation.
There are three main categories that I'm going to talk about today.
One is future goods, also known as latent production.
Another is unknown goods, and we'll take an example of video games.
And the other one is capital itself, the price of capital itself, which is saving versus spending.
The capital accumulation, the time value of money, and so on.
Sound great?
Excellent!
Let's get started.
I have about eight minutes for each topic, so I'm going to speak really fast without taking a breath.
Oh, actually, isn't that sort of what I do anyway?
Anyway, so the idea behind these is that if you have a socialist economy, centrally commanded and controlled by the state, Then, you have a bunch of stuff which is being put to existing uses.
And those existing uses are already inherited from the pre-existing capitalist system.
Because, as you may or may not know, Marx believed that... and I know socialism is more than Marxism, but just for the moment...
Marx believed that societies went through sort of four major stages.
One went through agrarian, which was obviously just farming.
Then they went through feudal, which was sort of collectivized farming under an aristocratic master.
And then they went through capitalist, which was private property.
And then they went through the final stage, which was this ascension to the blissful state of pure communism, which started off with a nasty totalitarian state.
But then, don't you know, the nasty totalitarian state was supposed to fade away into nothing, to wither away into a stateless society where everybody lived in perfect bliss and the rivers ran with chocolate and the trees rained down lemon drops.
Unfortunately, he never really got around to explaining exactly how this totalitarian state of centralized collectivized ownership of everything was supposed to wither away into the wonderful anarchistic stateless society, which you'd think would be kind of like a detail you'd want to get the hang of.
And in sales we call this a hockey stick projection, where you're supposed to deliver like $2,000,000 a year in sales.
And if you're a software salesman, say between $1,000,000 and $2,000,000.
Let's say $2,000,000.
And at the six-month period, you've done $400,000.
And so you say, well, yeah, but don't worry.
At the end of the year, there's always an uptick.
There's always an uptick at the end of the year because people have got to spend their stuff.
They've got to spend their budgets.
And so, don't worry about it, I'll absolutely be able to hit my two million dollar mark, you know, and this happens all the way through the first half of the year, and September, October, and people are beginning to get worried, and you're like, no, don't worry about it, there'll be an uptick, and so it's called the hockey stick graft, because that's sort of, if you hold a hockey stick up, it sort of goes up at the end.
And this, in sort of, would be sort of important for Max to explain as well, which he never quite got round to, How are we supposed to get rid of the state at the end of all of this?
But I will save this exciting and gripping topic for a chat about Marxism, which is a fascinating subject in and of itself, simply because it's amazing, to me at least, just how so much error could have been produced by so few a number of men and believed by so many.
It's really just quite astounding.
So let's look at the problem of future goods or latent production.
So in capitalism, We have a sort of fixed number of resources, capital, materials, labor, and so on.
And they can be applied to a near infinity or a near infinite number of uses.
And so we like that.
That's a good thing.
If you inherit this as a socialist planner, you inherit a particular configuration of goods.
And the question is, how on earth are you going to be able to figure out which goods could be producing other things than they're producing right now?
So, to take a simple example, to go back to our famous tree example of the forest that you're producing for timber, Let's say that in the free market what's happening is that people really want cottages.
So you've got all this timber and it's around a lake and it's sort of in the past before cottages became famous or desired.
Then you've got this land sitting around a lake.
It's full of trees, which you're harvesting for timber.
And what happens is the popularity of cottages begins to grow.
Well, in the free market, what would happen is the person who owned the land for the timber rights, or who was harvesting the timber rights, would sort of go, hey, you know what seems to be kind of big these days is cottages.
I wonder, I'm just going to take this idea for a spin.
I wonder if I might not be able to carve off some section of my land to produce cottages.
I'll build some cottages, I'll see how they rent, and then you would compare your income per acre with the cost of building the cottage and the roads to them and so on.
You would compare your income per acre with your land turned over to cottage use versus your land as a timber factory or timber production.
And that's one way that you're going to constantly get goods allocated to other uses.
To other uses.
That's very, very, very important.
So, for instance, you might have a TV factory that, let's just say, TVs become pretty unpopular, and computer monitors become very popular, because everybody enjoys going to freedomainradio.com rather than watching the evening news, which is almost diametrically opposed both in content, methodology, and logic.
So, everybody wants to come to freedomainradio.com, so nobody's buying TVs anymore.
All they want is computer monitors.
It would not be beyond anybody's imagining to take a television factory and retool it so that it could produce computer monitors.
There are lots of similarities in the way that they're put together and so on.
Now, if you're a socialist planner, you are not going to have a very strong awareness of the kinds of retooling or reuse that factories can or that resources can achieve.
So you're going to say, okay, well I got a hundred million acres of farmland, I got a hundred million acres of timberland and so on.
And you're not going to know how much of that could be converted profitably to cottage use.
You're not going to know how many factories could be retooled from producing one kind of good to producing another.
So even if you were able to reproduce the price system in some manner in a socialist economy, and you were able to figure out demand, like, hey, people don't want paper as much, they want cottages, you still would not know which are the best lands to produce cottages, to build cottages on and satisfy that demand.
So it's kind of like a double whammy in the socialist scheme of things.
You don't have any prices, so you can't figure out demand.
But even if you could, you can't figure out supply.
Because you could just say, OK, well, I'm going to take 10 million acres and turn them over to cottages.
But you don't know if that's efficient.
You don't know how efficient that is relative to timber or any other kind of use that the land could be put to.
And you won't know, for instance, if I'm the guy who owns the land that could be turned over to cottages, I'm going to sit over, I'm going to pore over my whole map and I'm going to say, OK, well, this Timber growth is about to start up, so I definitely want to keep that.
This one's kind of old, but I can't really use that because it's too old, so it doesn't have any cover, so it's not going to look very nice, so people aren't going to want to buy cottages there.
But this one, okay, this one has a really good view of the lake.
The lake there is really clean.
It's not downriver from any kind of effluent runoff from processing.
The dancing rug rolling guys go by, so there'll be a great show for the kiddies on Saturday mornings.
And all these other Considerations.
How close is it to a road?
Okay, well in this one I know there's an old road.
There's an old logging road that I can rebuild and reuse for this.
And I know a guy who can build me cottages really cheap.
I've got three sons who can help him build them and therefore I don't have to pay them wages and I can just give them part of... I mean, you can sort of go on and on.
But if you're owning these lands, you are going to be very sensitive to the price indicators that you're getting from the marketplace.
And you are really going to want to follow those price indicators, figure out what better use you can make of your land.
And if you do find a better use for the land, The methodologies by which you're going to switch the land from one use to another are only known to you, are only known to those who are close to you, are only known to the guy who reports to you who manages the land.
They're not going to be known to some centralized socialist planner in Moscow or Washington.
And that's another very important factor when you're looking at the problems within socialist economics.
It's a problem of latent production, or latent retooling, or however you want to put it.
It's the idea that some new demand has come up, and how are you going to satisfy that?
And how you're going to satisfy that is complicated, and it's based on an enormous amount of knowledge that is very specialized, and very local, and not known outside a very small group of people.
So that's sort of pretty important.
You can look at the obvious ones like, hey, you know, TVs aren't that popular.
What's really popular is computer monitors so we can retool these plants.
But that's just one example of many.
Maybe there's a sunglasses factory that makes oversized sunglasses, those Nicole Ritchie sunglasses.
And that oversized sunglass factory can be retooled with relatively little effort to produce televisions because, boy, their sunglasses are just that big!
And so you won't know that unless you are the factory owner who's got a stake in it, who's going to look at all the options, who's going to figure out how to retool, who's going to do a cost-benefit analysis, who's going to know all the ins and outs of that industry, and the demand, and whether people can be retrained, and how old this workforce is, and how enthusiastic they are for change.
There's about a bajillion things that go into making a calculation about investment if you're an entrepreneur or a business person.
And those things are just not available to centralized planners.
You can't get them no-how, no-way, no chance.
So that's future goods and latent production.
The other thing, sorry, latent production and the satisfaction of needs that are coming in that are new.
Now, what about unknown goods, completely unknown goods?
Things which just haven't come into existence at all.
So, I mean, I'll sort of give you an example and lift the lid on my personal life a little, because that would be a nice change from the 120 podcasts I've done so far.
I like video games.
I really, really like video games.
They are great for the brain, and there are good studies out there to prove this.
They really do get your brain crackling and electrical, especially those action video games.
I'm a big fan of Unreal Tournament 2004.
If you're ever online and you see StephBot, that's me, baby!
I'm out there preaching socialism with a flat cannon.
I'm preaching capitalism with a rocket launcher.
So, I really like video games, and one of the things that's, I think, quite important to understand about the free market is that no central planner came up with the idea of video games.
I mean, who would have thought that Pong could end up being an industry that was larger than movies and television combined?
I mean, it's a crazy, crazy idea.
But what happened was people began writing their own video games and then other companies took them over and they started selling them commercially and upping the quality and so on.
And central planners aren't going to know that there's a latent demand out there for video games.
And that's just one example of about a bazillion that you could come up with.
They're not going to know, say, that there's a latent demand out there for a musical or sound-based compression scheme called MP3, which is going to result in the capacity to take your music with you everywhere and shuffle through it and listen to fabulous podcasts and so on.
They're not going to know about that because it doesn't exist yet.
And in the price market, in the free market where you've got prices, the price is the thin edge of the wedge that opens up the market.
We all know about this idea of bleeding edge, right?
Like the first people to buy VCRs paid like $2,500 for them, and now you sort of get them thrown in with a large coffee at Tim Hortons.
And those who bought DVDs or CD players and so on, those people with $1,000, $1,500, they're the ones who open up the market by paying exorbitant amounts of money.
for a very small, for a small number of goods.
So you don't sort of, when you're trying to make a CD player for the first time, you don't make a hundred and fifty million of them and amortize the cost.
It's just too much of a risk, because they're very expensive to make.
Because until you get volume, prices remain very high.
Once you can crank stuff out, then it's why plays are more expensive than movies, right?
Plays, you constantly have to have actors reproducing stuff.
Movies, you crank them out and they just reproduce themselves.
And so, You're going to want to make sure when you start coming up with a new consumer item that you get your test groups, your marketing groups, you figure out what the price point is, you figure out how much you can spend, you figure out whether you can drive the prices down to the point where you think you're going to be able to recoup your investment over the long run because with something like CDs and DVDs it takes a couple of years to recoup the R&D investment and then you're sort of in the money but it's a big hump to get over.
And so what you do is you sort of say, okay, well, you get a couple of audiophiles to listen to your brand spanking new first ever CD player, and they go, oh, I'm drooling, I can't, oh my god, I've messed up my shirt here with all my drool, it's fantastic.
Look, you click on the pause button and you start again and it's right where you left it!
I remember a couple of audiophiles telling me about that when CDs first came out because, you know, with tape decks you lost about a tenth of a second and that's just changed the whole musical experience for everyone.
But you get the audio files, you get it written up in magazines, you just see what kind of demand you can get.
And maybe you sell them as kits to begin with, or maybe you give them to cool people so that they play them, or you look into radio stations.
But you try and get those ones out there for, you know, somewhat for free.
You start to try and build up some kind of demand.
And then you're going to sell your first ones for $1,500, $2,000.
They're going to be, you know, almost feature-less, as far as that goes, but they're going to be very expensive, and then if people are willing to pay that, then you can look at the aftermarket, or the people after the bleeding edge.
So once people are willing to pay an enormous amount for something up front, maybe then they'll pay less later on down the road, and maybe that's a way that you can do it.
Now, how on earth is this supposed to work in a socialist economy?
How are you supposed to figure out goods which people don't even know that they want yet?
How are you going to go out there and stimulate demand for goods which there's no demand for at the moment?
That's fairly important and that's a fairly critical part of what we call progress in the free market.
That you're going to try and figure out better ways to do things even remotely conceivably.
And you're going to figure out how you're going to stimulate the demand, how you're going to get people to understand that something is a problem when they don't even know that it's a problem.
So for those who are over the age of, oh gosh, I would say 20 or 22, you may remember back a little black box we called DOS, Microsoft's Disk Operating System, which came out, I guess, in the 80s and It was just... It was OK.
It was like Capital Tunnel Syndrome to get anything done, though.
And I still, of course, can't remember any place I leave my watch, but I can certainly remember all of the DOS commands from my days of working a computer in the black hole of the DOS land.
And I remember when Windows came out, it was like, yeah, okay, so what?
So you can click around and you can see the italics, who cares?
But, you know, once Windows began to be more functional and you could run many programs at the same time, it began to be sort of more...
Enjoyable.
But it wasn't until Windows 3.1, and in particular 3.1 for workgroups, came out, which was 92 or 93 I think, that Windows really took off.
So Microsoft had already spent 10 years developing Windows before Windows really took off with Windows 3.1.
So that's kind of important.
How on earth are you going to figure out, as a centrally planning socialist, that it's worth investing an enormous amount of social resources into a graphical user interface to spend ten years and know what elements are going to be put in there if you don't have a profit motive, if you don't have prices?
And that's another very important thing.
The penetration of goods into new sectors is very important.
So computers were used originally in the military.
I think the first was built for the Manhattan Project, if I remember rightly.
The ENIAC or something like that.
So, computers were built originally for military purposes, and then a couple of them were built by IBMs as these monolithic beasts that chewed through payroll at large organizations, and you had to program using... I think you had to kill three chickens and rub sticks to get them to understand commands.
You had to program them in Assembler with punch cards.
I don't think they even had a screen.
And then, nobody thought that these beasts would ever be anything that anybody else would ever want to use.
And it's the free market that sort of stepped in and said, you know, I think there's potential in these things.
Now, they didn't see all the way to Unreal Tournament 2004, but they did see that if we could get these things down to smaller than the size of 20 outhouses in a row, That maybe there'd be some value in that.
And so you think of the enormous amount of mind-bending investment that went in there.
Even the guy Thomas Watson Sr., the guy who ran IBM at the time, said he thought maybe there was a market worldwide for half a dozen, maybe a dozen computers.
And that was his approach to it, because they were so big, so unwieldy, and only useful for high-transaction, database, number-crunching processing, which is not much of a fun hobby which people get into on their own.
So they used it for NASA, they used it for big businesses, they used it for military.
Now think of the amount of investment, time and money that has gone into getting computers from that big, monstrous, ugly level.
To a computer that can fit inside an iPod, to a computer that can fit inside a Palm Pilot, to the computers that can help you get back on the right path when you're lost on a business trip, which I'm so happy that they have now, because I spent a good third of my business career going, was that a left?
A right?
I don't want to crash!
That would never have happened with central planning, because you would have to see so far in the future.
You would have to understand that everybody who worked on building computers from the ENIAC to the Pentium 4, and from a punch card interface all the way through to touch screens and to sophisticated 64-bit GUIs like Vista, There's just no way that a central planner is ever going to see that.
It's absolutely, completely impossible.
The only way that that comes about is through incremental tiny little price signals and usability signals and user requests closely monitored, closely followed up, closely wrapped around end-user preferences, closely tied to business and return on investment, net present value, internal rates of return kinds of calculations.
You just don't get that stuff from central planning.
Central planning, the very best that it can do, is photocopy the same situation, year after year after year, that was left the last time there was a free market.
And when you see socialist economies in action, that's exactly what you get.
You get a photocopy year over year, with imaginary and inflated numbers, of course, and nothing new gets invented, nothing new gets created.
In fact, there's a book, which is sort of interesting, called East Minus West Equals Zero, and it's a little bit old, and it's a little bit Cold War-y, but it does show that everything that was invented within the Soviet Union was stolen from the West, and pillaged intellectually from the West.
So, you just don't get innovation, because there aren't those subtle price signals.
There isn't the long-term return on investment that lets people invest in R&D, and lets them put all of the effort they can put into test marketing new products and getting people excited about them.
And selling them at a discount, and building momentum, and I mean, you could just go on and on.
But these things just don't happen in a centrally planned economy.
So that's another idea.
Video games.
Who on earth would have... What central planner could have conceivably figured out that I really wanted a game which I could play online, which had an onslaught mode, and flak cannons, and rocket launchers, and translocators, and tanks, and airplanes, and whatever, whatever.
There's just no way that a central planner is going to be able to get inside my head and figure out that that's what I want.
Or, even if I don't know that I want it, the moment I see it, I'm going to go, ooh, daddy likes.
Central planners can't figure that sort of stuff out.
And just in case, just in case, you think that I'm talking about the Soviet Union circa 1956, I'm really not.
I'm really, really, really not.
What I am talking about is Canada in 2006.
What I am talking about is your country in 2006.
Right now.
Because that's exactly what's going on.
It's not going on to the extent that it went on under the Stalinist regime or the Maoist regime or the Pol Pot-ish regime in Stalin and China and Cambodia.
But it's absolutely going on nonetheless.
It's absolutely going on nonetheless.
An enormous amount of social resources are being drained to follow the whims and bribed preferences of bureaucrats.
That's very important to understand.
The amount of the destruction of wealth that is occurring currently in society because we have this capital resources and labor being herded around based on bureaucratic whims at the point of a gun Being fritted away on nothing, on wasted stuff, on useless stuff, on bridges to nowhere, on crops that are bought.
The farmers paid to grow these crops.
They're bought by the government and they're just set on fire.
They destroy millions of oranges, tens of millions of eggs.
There are lakes of wine in France.
There are mountains of butter.
All of it is just bought, paid for and destroyed.
And that's just at the very obvious level.
There's an enormous amount of money that's just wasted on stuff that's kinda there, kinda not there, kinda worth it, kinda not.
I mean, we have these oil fields, underwater oil fields off Newfoundland called Hibernia that are sort of kinda getting there, kinda not getting there.
There are these I mentioned in an article recently about the cucumber farms.
They've been converted to some other use, but it's still a loss.
It's still a loss.
Spending the money and creating jobs doesn't matter at all.
What matters is profit and growth, if you're talking about the economy and improvements within the economy.
So, I mean, people say, well, the government spends the money and it goes to create jobs anyway, so what does it matter?
To which I reply, well, that's a very interesting theory.
Let's put it to the test.
So, you own a convenience store and somebody comes in and says, lend me $10 and I'll spend it in your store.
Are you going to do it?
Are you going to open your till, give the guy $10 and let him spend it in your store?
Of course not!
Of course not.
Because what's happened?
Well, you've lost goods.
You only have the same amount of money that you started with, and you've also lost all the time and effort it took to get those goods, put them in your store, stick them up, put the price tag on them.
So even though the money is being spent in your own store, it's still an enormous net loss.
And the same thing is true of government programs.
They steal from one group of people.
They jam the money into the hands of other people while keeping, of course, most of it for themselves.
And it's a huge net loss to the economy.
So that's just something that's very important to understand.
It's not neutral for the government to move money around.
It's not like, well, hey, it all stays in the same economy.
What does it really matter?
It's like, well, okay, if that's all that matters to you, why don't you send me a check for $10,000 if you're a Canadian?
Because, hey, it's all gonna stay, I promise, if you send me a check for $10,000, I will not only quit and do podcasts full-time for a month, but...
I promise I will spend it in the Canadian economy.
In fact, if you're within an hour's driving distance of Toronto, you send me a check for $10,000, I'll even come and spend it in your town!
I really will!
So, if you don't feel like doing that, if that doesn't seem like a good idea for you, then it's obviously not a good idea for the economy as a whole to have money shunted around, even if it, quote, stays in the same economy.
I don't know why people think these things, but they do.
So, we've talked about latent production, the transfer of one resource from producing one good to producing another good based on demand, that even if you could solve the problem of demand with some sort of price calculation, and there have been a number of theories that have been put forward in socialist economies about how prices can be reproduced through some horrendous set of calculations, but none of them have ever really been successful because there's no amount of
We've dealt with that.
We've dealt with unknown goods.
Goods which are yet to be.
Goods which don't exist but which, once you start to work up a market demand and do research and figure out how to get those goods out there, suddenly become something that is enormously valuable and you absolutely want to get a hold of.
That's not going to happen in a socialist economy, because how on earth are they going to know, without the enormously sensitive and important price fluctuations at the beginning, how are they going to know if people really do want these things?
So, that's another pretty important thing as well.
And let's take a look at the third one, which is capital itself.
And I don't want to get overly technical in this area, but capital is simply stored savings.
It's potential goods, like kinetic energy.
It's like potential savings.
So if I've got $10,000 in the bank, that's capital.
It could be spent But it's not spent, and it's available then to be lent out to other people, to be invested, to upgrade equipment in a factory to produce more goods, and so on.
It follows the, what do the bankers call it, the 3-6-3 rule.
This is the life of a banker.
3-6-3.
You borrow at 3%, you lend at 6%, and then you go play golf at 3.
That's the life of a baker.
Capital itself is also a very interesting phenomenon, and it's a very rich and deep phenomenon, and I don't claim to be any kind of brain-bending expert on all of this, but I think I know some of the basics.
Capital is the root of the word capitalism, and for good reason.
One of the main things that allowed capitalism to come into being at all was the raising of the restriction on what used to be called usury.
You may even know the word usurious, but it sort of has the same root.
It's meant to be a loan sharky kind of pillaging of people, like, yeah, I'll lend you this money, but you've got to pay me back tomorrow at 50% or I'll break your kneecaps.
And that's what capitalism really means, is the ability to lend for interest.
That's one of the basic fundamental building blocks of the market.
You've got a stock market, you've got property rights.
Property rights and stock market go hand in hand.
But you also have to be able to have the capacity to lend money for interest.
So, of course, a lot of Jews, I mentioned this before, but a lot of Jewish people are in the financial sector, let's say.
In fact, we have a salesperson whose last name is very Jewish, and there was a sales conference call, and he was like, yeah, I think we're going to be approaching the banks.
And one of the rather outspoken and very delightful female sales reps said, oh yeah, well that's not going to be a problem with a name like that, is it?
And he's like, what do you mean?
What do you mean?
He's like, oh come on, you know exactly what I mean.
I thought that was pretty funny, because he's in New York, and approaching the banking circles with a very Jewish name in New York is probably not the hardest thing in the world.
One of the reasons that the Jewish culture ended up having a strong emphasis on finances was that, of course, they were allowed to lend for money, which Protestants and Catholics... Well, Catholics weren't.
Protestants developed the ability after the Reformation.
But the ability to lend money at interest is pretty fundamental.
That means you can't get capital accumulation unless you can lend money for interest, because there's no capacity to accumulate capital into invested factories and so on.
I mean, how many of us would be able to buy a house if people didn't give us a mortgage, right?
If the banks didn't sort of advance us the money and then we pay it back over time at an interest.
So you can imagine that since so few of us would be able to buy a house, if we had to put all the money up front, then much fewer houses would be built, houses wouldn't be efficient because so few people would be building them, and we'd just be that much poorer.
I think I'm just about to pay off my car this August after eight years.
Although it's a great car, it has been a bit of chunk of time to pay the car off, and at least for four years, and then I renegotiated something because I got such a good rate that it seemed like a good idea, and I think it was.
But if I had to come up with the cash for everything up front, if I couldn't put anything on credit or anything on visa or borrow any money, then I simply wouldn't be able to have half the things that I have, if not more, fewer than half.
So once you start to get capital, the ability to lend for interest, You begin to really stimulate demand because people will say, I'll take it now and pay it off over time so I get the use of it while I'm paying it off.
And I'm paying extra interest so that I can use it while I'm paying it off.
I'm happy to pay the bank interest because I get to use the house while I'm paying it off.
That's great for me.
In capitalism, or in the free market, becomes spending versus savings.
Sort of one of the fundamental choices that we all make as consumers, as people who have capital.
So, am I going to buy some bonds?
Am I going to put the money in the bank?
Or am I going to blow it on a vacation?
Or am I going to build a deck?
I mean, these are sort of uses that you can put to deferred spending, right?
To an accumulation of deferred spending or deferred value, which you can call capital.
Numbers in a bank statement is the easiest way to think of it.
Now, one of the things that's very interesting in the socialist calculation is that when you are talking about prices, we've mostly been talking about prices for goods, and of course that's a fascinating topic you could spend a lot of time on.
However, It's also important to talk about, I think, or at least in my view, it's also important to talk about the price of capital and of labor.
And we can sort of touch on labor very briefly before we dive into capital.
But, you know, another question that the socialist planner has is, how many programmers do we need in a couple of years?
How many doctors do we need?
In Canada, there's currently an unbelievably desperate shortage of doctors.
Because to save money, about 10 or 12 years ago, the then government slashed enrollment to medical schools.
This is the kind of messes that you get when you get central planning of the economy.
So the government slashed enrollment to medical schools, and now 25% of Canadians are without a doctor.
So it's great because it's free, but you can't get it.
So it would be free in the free market as well, because you couldn't get it.
You wouldn't have to pay for it anyway.
So this is the kind of decisions that people make in centralized bureaucracies, right?
And in particular, this mess and bureaucracy is a whole topic which we can talk about another time.
But very briefly, the people who cut the medical school enrollment at the time We're obviously encouraged to do so.
The doctors who were out there loved it.
I mean it's the corrupt ones because they got to restrict demand which they knew was going to up their salary in six to eight years because there would be fewer doctors.
More people would come to them.
They'd be able to pick and choose and reject patients that they didn't want to treat and so on.
But also, the government saved money by slashing medical school enrollment.
And, of course, now that the shite has hit the fan and nobody has any doctors, the people who were in power, oh, they're long gone.
They're sitting on their pensions in their cottages in Tamogamy, just cracking a cold one and saying, well, glad to be out of that mess.
Sorry for the confusion.
Which is another problem that you have with central planning.
The time horizons of politicians and bureaucrats are pretty short relative to the time horizons of people who are investing their own money.
And, of course, the level of risk is very different.
You're very careful with money that you spend.
It's your own money and you're spending it on yourself.
If you're spending other people's money from a bottomless well on other people for their benefit and there's no risk or benefit to you, of course you're going to throw it around like water.
And that's another thing that, you know, if you don't have any skin in the game, you don't tend to play very carefully.
And that's another thing that socialism was never able to solve.
So the question of who gets trained for what is pretty important.
And there's a guy I know at work whose son is a good violinist.
Apparently a very good violinist.
And this kid's teacher sat this guy down.
This is a friend of mine at work.
And he said, your son is really talented.
Your son could be a great musician.
He could really be a great musician if that's what he wanted to be.
And my friend looked at this guy and said, you know what?
This is what my son is going to be.
My son is going to be a doctor who plays the violin about the best.
He's going to be the best violin-playing doctor in the city.
And the teacher, of course, laughed and said, yeah, okay, I think I get where you're going with this.
And that's fairly important, because in the arts, for instance, I mean, 98% of the money goes to 2% of the people.
I went to theater school for a couple of years when I was younger, studied acting, studied playwriting.
I still keep my eyes out for my classmates.
There were 16 of us when we started.
There were 9 of us when I left.
I've seen two, a grand total of two, on stage and in movies in the intervening time.
One did sort of okay.
Another one I only saw in one.
He was the crazy German guy in The Producers, the Mel Brooks play I saw in Toronto.
And he did a great job.
He's actually a good comic actor.
But that's it!
I mean, that's not exactly the kind of role that comes along as a dime a dozen.
That's another thing that's important to understand, that if you start subsidizing things, and here we have the Canada Council, and we have all these subsidized magazines, and we have these Artists Collective, and we have Ontario Arts Grants, and we have subsidies that go into theatre schools, and subsidies that go into people who want to get degrees in art history, and sculpting, and...
Papier-mâché from toilet paper rolls?
I don't know, but we've got a vast amount of subsidies.
And what they do, they lure people into this non-economic realm, or this realm that just doesn't make any sense from a fundamental economic standpoint.
And then they just get destroyed.
Their lives get destroyed.
And it's the same thing with sports.
I don't know if I've talked about sports once before, but the Winter Olympics kind of made me a little twitchy this way as well.
Because you see, people, this is the thing I can't stand about sports.
I find it kind of stressful to watch, because all I can think of is this poor schmo.
The skater.
He's out there and he's been practicing for like five hours a day since he was six.
And you just think thousands upon thousands upon thousands of hours in a cold ice skating rink, falling, bumping, bruising, spraining, breaking, repairing, the diets, 10, 15, 20 years of practice and study.
What a nightmare.
How economically unproductive is that?
How many of us are going to go and pay to watch skating practice on CNN?
And then it all comes down to, you know, 90 seconds.
And it fluked, to some degree.
I mean, all sports are based, to some degree, on fluke.
And it's not that there's no skill involved.
Of course, there is.
But even the best skater can never land a triple axel with perfect reliability.
So it's just like, did they fluke out?
And, you know, maybe they get it.
Maybe a really great skater gets it four times out of five.
But that's the best they can do, is land that triple axel four times out of five.
And so they're out there in the Olympics, and it just happens to be that they're just rolling, and the 20% comes up, and they fall, and that's it!
The whole thing was a waste of time.
I just can't take it.
Seinfeld's got a funny bit about this, too, where he talks about people in a race, especially the 100-meter dash.
You remember the gold guy?
Who cares?
Nobody cares about the silver guy or the bronze guy or anything.
And it's like, I was two one-hundredths of a second slower than the guy who's now world-famous and making millions of dollars.
And I'm some unknown nobody washing your car.
And I'm like, with two one-hundredths of a second away from eternal fame and glory and having my face on the cover of a cereal box and being a motivational speaker from here to the end of time.
My motivational speaker being, man, I was lucky!
So Seinfeld sings like... If I'd had a pimple, I'd have won!
I think it's a great way of putting it.
So the other thing that happens is that people get subsidized into these dead-end, do-nothing, wasteful occupations like artist and sportsperson, athlete.
And most of them are just going to crash out of it, and almost none of them are going to make any living at it.
And those who do make a living at it, make a living out of continuing their careers as State-sucking parasites because they then get into things like, ooh, I'll coach other subsidized skaters.
That's what I'll do!
So that to me is pretty funny and kind of sad.
How so much human capital, human potential, career choices get skewed, distorted, destroyed.
by subsidies, by the problems of incentives and disincentives that are created by the socialistic planning.
The number of people who make their living as artists in Canada is ridiculous.
It's in the hundreds of thousands.
And they do that because of government grants.
And they do that because of subsidized television and subsidized radio and subsidized magazines.
I mean, if you're a Canadian writer, you can get a grant to write a short story, or you can get a grant to write a novel for sure, which you can then excerpt as a short story, bits of it as a short story, and you sort of write that on your government-subsidized computer, your government-subsidized internet, with your government-subsidized and you sort of write that on your government-subsidized computer, your government-subsidized internet, with your government-subsidized income, and then you send it through the government-subsidized post office and postal system to land on the desk of a government-subsidized magazine, which then gets printed on a
come, and then you send it through the government-subsidized post office and postal system to land on the desk of a government-subsidized magazine, which then gets printed on a government-subsidized press, which then mails out all of its magazines through government-subsidized postal office systems to get to which then mails out all of its magazines through government-subsidized postal office systems to get to people who Or if they're going to read it, it's because they're interested in submitting to that magazine as well.
And And a magazine's in Canada, all they say, and I'm sure this is true everywhere.
They just say things like, if you want to submit to this magazine, you really need to read a couple of issues, so order them here.
So that you know you get a flavor of what it is we're looking for.
Well, so you just end up with this big circular wank job where everybody's being subsidized to piss their lives away in meaningless scribbles.
And instead of them actually doing something productive and useful in society, they just sit there and write about their bad childhoods and how people were mean to them when they were teenagers.
And you end up with this... The last side sort of thing that I'll say is you end up with this unbelievably sick fiction.
I can't take modern fiction at all.
I stick with the classics.
I can't take it.
I really can't.
After Atlas Shrugged, it's kind of tough for me to pick up a book and sort of not go, oh, the writing is pretty, but man, the content is revolting.
It's like a model.
I call it modeling, this kind of writing.
The sentences are pretty, they add up to nothing, and the core is rotten.
And it's the same thing with models, right?
Models are pretty, You know, kind of empty and at the core pretty rotten people, at least a few that I've known.
So, this question of labor and misallocation of labor resources due to socialistic central planning, which says, we need more artists, let's subsidize the artists, is a real problem in society, causes an enormous destruction of human potential.
And I don't just mean like they should be a widget maker because the world needs more widgets.
I'm talking about having a satisfying and productive occupation.
And that's Not what these people get.
I'm sure they're pretty happy in their early to mid-twenties, but, you know, you try raising a family on government subsidies for short story writers, and you're really not going to have a whole lot of fun.
And by that time, it's too late, right?
Then you've got to get a job teaching in, yes, you guessed it, a government-subsidized writing college or university.
It really is just this enormous handout and pass-around of government money and a huge destruction of human capital and people who could be really productive, creative and useful in other fields, perhaps like myself.
So, the last thing that I'll talk about is capital itself.
So, we've talked about misallocation of resources, like material resources and goods.
We've talked about misallocation of labor resources.
Let's also talk about misallocation... I mean, we're not even talking about civil servants when it comes to labor resources.
I mean, that's a one-third misallocation right there.
Think of what that does to your paycheck.
Let's talk about capital itself.
The relationship between saving and spending is very, very, very complex.
So, I'm going to, you know, chew it off in about 90 seconds.
Okay, here we go!
It's complex, see?
And we're gonna... Okay.
Maybe that second or third coffee this afternoon wasn't quite the right idea.
But, uh...
The relationship between saving and spending is very complex.
For instance, if everybody only saves, there's no point saving.
Because if nobody's buying anything, what's the point of having factories?
If everybody just sucks their money away and never buys anything, then there's no point.
You're never going to get any return on putting your money in the bank.
So you don't want to do that.
If everybody buys and nobody saves, then there's no capital for improvement, and there's going to be no improvement in the economy, and there's a huge amount of risk, because some people aren't going to be able to pay off their debts, because everybody's living purely paycheck to paycheck and spending everything that they possibly can.
And not even running up debts.
I mean, that's sort of important, too.
When you run up a debt, at least somebody can secure that debt for capital, which loosens up some other capital.
So there's lots of things you can do around debt that keeps capital moving.
Not that I'm saying that debt is good.
Debt is a cancer in the modern world.
But if you just spend everything that you get, never put anything in the bank, and never go into debt, then there's really no point doing that, because nobody's going to be producing any goods.
Because there's no accumulation of capital, but you can lend for The creation of factories or the improvement of capital, fixed assets and so on.
So you don't want to be doing that either.
It's a very complicated balancing act between spending and saving.
An economy has to be pretty finely tuned to get that productively, that relationship optimal.
For instance, what's going to happen in the economy is if everybody's saving and nobody's spending, Then the price of goods is going to drop, of course, because the demand for goods is everybody's putting their money in the bank and going home to do their macrame.
So the demand for goods is going down.
Therefore, the price of goods is going to drop.
Now, the price of goods dropping lures the money out of the bank accounts, like getting a mouse out of a hole with a little piece of cheese.
You say, come out of the bank accounts, you little pieces of capital.
Go spread yourself.
Go forth into the world and multiply and get me goodies.
So, that's what happens with that relationship.
So, nobody's buying, price of goods go down, people stop saving and start buying.
Now, when too many people are buying and nobody's saving, then the demand for capital... Yes, you in front.
Yes, it goes up.
Thank you very much.
So the price of capital goes up, and what does that mean?
Well, the price of capital goes up, which means that it's more expensive to borrow.
Because it's more expensive to borrow, banks are going to want to get you to put more money into your bank account so they can lend it out to other people.
And so what are they going to do?
Well, they're going to raise the interest rate that they pay you, either on your savings account or on the bonds or whatever it is that they're... whatever instrument is paying interest.
They're going to raise that to lure your money out from chasing around goods in the market to being concentrated in the hands of a nice, fat, juicy, cigar-jumping capitalist so that he can upgrade his production line.
And that's a very important relationship.
The price of saving, or the profit of saving, versus the profit of spending is a very complicated relationship.
And it needs to go back and forth.
And it needs to be very finely calibrated.
And, of course, right now it's a complete mess.
It's a completely destructive mess.
Because the government, the Fed, the government central banks, they set the interest rates.
They manipulate the money supply.
There is just absolutely no rationality.
Fundamentally, which is why nobody's making any more money these days except for corrupt politicians, bureaucrats, and those in the know on the inside of the stock market.
But this relationship between saving and spending is very complicated.
Now, it really only works if there are prices.
So we've been talking about the price of goods, fantastic.
Talking about the price of labor, fantastic.
Talk about the price of capital.
If you were thinking about going out and dropping $40,000 on a new car, but I said, no, you tell you what, you give me that $40,000, and I'm going to give you 20% interest on that money over a couple of years.
Well, you're probably going to take that, unless you're just desperate for the car.
Or at least you're going to buy a $20,000 car, at least stick $20,000 into the bank.
Because if you're getting $4,000 a year in interest, that's pretty good.
I mean, 20% is way above what you'll ever get in the stock market with any regularity.
So that's how you think of capital or money or resources and capital resources.
You know those lava things which sort of cycle up and down from one side to the other and you get this oily 70s lava thing that sort of rolls back and forth?
Well, that's what happens in a free market between capital And spending, between savings and spending, the accumulation of capital and the expenditure of capital on material goods or services, that's what happens in the free market.
And it's exquisitely important, and it's exquisitely refined, and it's exquisitely sensitive.
And if you take a hammer to that mechanism, which is what's happened throughout most of the 20th century and into the 21st century, oh, I mean, you get these ridiculous boom-bust cycles you get.
If entrepreneurs can't figure out what the hell's going on over the next couple of years in terms of money supply and inflation and the price of capital and the consumer demand and so on, I mean, you just can't.
You can't.
As an entrepreneur, it's just lunatic.
And I've talked about this once before.
in voodoo economists.
But this relationship between saving and spending, absolutely crucial to wrap your head around, cannot in any way shape or form ever remotely, conceivably, productively, possibly be ever achieved within a socialistic or centrally planned economy.
This is the biggie.
I've saved the best and most gripping for last.
This is the biggie.
This is what socialism The Democrats, the Republicans, the Fed, the fascists, the Nazis, the communists, the centrally planned nutjobs of every stripe and every hue can never reproduce.
They can never reproduce this balance between savings and spending.
Should the government put a certain amount of money in the bank so that capital goods can be produced, which will make consumer goods cheaper?
Okay, maybe.
5%?
I don't know.
Who knows?
What are you going to do?
You have to make up demographics and say, well, there are going to be more kids based on the birth rate that need diapers.
You're going to just make stuff up.
And it's going to be wrong.
It's going to be completely wrong.
The other relationship between, should we take money out of the banking system?
I know that in communism there's not a particularly strong banking system, let's say.
But are we going to take money out of reserve, out of the government banking system or the government reserves or wherever we're putting it?
Should we take that out, invest it in capital upgrades for cheaper consumer goods?
Or should we just release that and let people buy their own consumer goods?
And forget about the price of it, because either way, it doesn't really matter.
For you as a consumer, it doesn't matter, right?
I mean, if your money's in the bank, you're going to get cheaper consumer goods, because it's going to go into improvements in productivity.
Fantastic!
If your money's not in the bank, then your goods are going to be cheaper, but you're going to have access to them sooner.
So, I mean, again, the big point about economics is that all choices are the same.
All choices are equal.
In a free market, I mean, I'm not talking about government coercion, all choices are the same.
So, if I want a job at a big company, I'm going to get paid more, and I'm going to have more job security to some degree, but I'm going to be put into a little peghole, and I'm going to have 1,600 different manuals to read, and procedures and policies, and it's going to take forever to make a decision.
And blah blah blah.
However, if I wanted to work at a small company, which is certainly more my style, man, if I want to work at a small company, then I'm not going to get paid as much, but I'm going to get more options and upside.
I'm going to be able to make decisions quicker.
There may not be any policies and procedures.
I may either get to write my own or just, you know, fly freestyle on that.
All decisions are equal.
It's really up to personal preference.
In economics, I'm not talking about who you marry or who your friends are or anything, but in economics every choice is equal and it's really up to your personal preference.
The idea that there's some ideal choice out there that everybody should make is kind of funny.
They talk about this with dollar cost averaging.
You want to put the same amount of money in so that when a stock is going down, we'll buy more of it, and that's the smart thing to do.
It's like, really?
So when the stock's going down, I get to buy more of it.
If I'm putting $500 a month into a stock purchase plan, I get more when the stock is going down, because...
You know, I'm not saying buy me $500.
Sorry, I'm not saying buy me 500 shares every month, which would be 500 shares and I'd spend less when it was going down and more when it was going up.
I say buy me $500 of shares, which means if the stock price is increasing, I get fewer of them.
And if it's decreasing, I get more of them.
And this is sort of touted by sleazy investment guys as some sort of big deal that you should get all excited about.
And all it means is that you buy fewer successful stocks and more stocks that are underperforming.
I just think that's kind of fun.
If it's going down, you want more of it!
And, of course, it's nonsense.
What interest that serves, just by the by, the interest that that serves is the cash requirements of a brokerage house.
If you've ever been an entrepreneur, cash flow is king.
You can't survive cash flow fluctuations, and you never know when your cash flow is coming in, because big companies can take forever to pay you.
The one thing you do know, like a metronome, is you've got to make payroll, and you've got to make your benefits plan payments, and you've got to make your rent, and you've got to make your Heating, and you've got to make your lights, and you've got to make your internet provider, and all of that you know, and some of those are a little bit more loosey-goosey than others.
You might be able to buy some time from your ISP, but you sure as heck can't buy more than 20 seconds from your employees when it comes to payroll.
You miss a payroll by one day, and everybody's flooding out the door.
Or if not right away, they certainly start shipping their resume out, and you've lost them as far as loyalty goes.
So in business, cash flow is king.
You know that you have these regular expenditures that you have to make, but you have an uncertain relationship to your accounts receivable, which is the money that's coming into your company.
So the reason that investment houses want you to give them a fixed amount of money every month, rather than buy a fixed number of shares, is because then their cash flow becomes predictable.
And so they sell it to you like it's a benefit for you, and it's really just a benefit for them.
I mean, that's just sort of an example of... Maybe you want to do that.
I mean, maybe that's something that you have some sort of inside track or inside knowledge.
It's a good thing to do, but it's not a better thing to do.
It's just one choice among many.
And all choices are subject to personal preference.
There's no one profession that's great for everybody, right?
I mean, maybe you want to be a surgeon, and I'm glad that you do, because if I need to get cut open, I want somebody who knows what they're doing.
But I don't really think that would be a job for me.
Although, it would be a captive audience that I could just keep talking to.
Let me think about it.
So, that's the sort of three major areas that I wanted to talk about in terms of problems that the lack of price has or causes within a socialistic or centrally planned economic structure.
So, latent production.
What can you transfer from one use to another?
Can you retrain this guy who's a typist to be a computer programmer?
Can a mathematician become a computer programmer?
If the price of a computer programmer doubles, well, some mathematicians are going to say, I can do that.
So they're going to switch over.
But you're not going to know that in the absence of a price mechanism.
And you're not going to know that, even if you do have the price mechanism, if you're not that Mathematician himself or herself.
Because the mathematician is going to know whether or not he or she wants to transfer over to computer programming.
You, as a central bureaucrat, aren't going to have a clue.
But the mathematician is going to know, and that's fairly important to know.
And there's just no way to know that unless you're the mathematician.
The central bureaucrat's never going to know that.
So, unknown goods, goods which don't even exist, like video games or Windows, and sorry for all of the computer references, but that's my scene, man.
That is something which is also, can't be solved by a socialistic economy.
And the relationship between saving and spending, capital itself, the cost of capital versus the cost of goods.
The cost of deferring the consumption of goods through savings and the stimulation versus the stimulation of demand that occurs through that money actually going out there and buying goods which people have to produce for a profit.
All of that is very complicated.
It's very subtle.
It's very refined.
It's very sensitive.
It is absolutely subject to the most minor and minuscule and microscopic fluctuations Within the price system.
And if you don't have a price system, if you don't have a free market, or to the degree with which you do not have a free market, in other words, we have this wretched mixed economy at the moment, which is just unbelievably destructive to human potential, you're just messing everything up.
Everything gets misallocated, people get poorer, and this is the result of violence.
I mean, this sort of comes back, as it always does, to coercion.
What human being could conceivably have the right to say to another human being, this is how you must spend your time, this is how you must spend your money, these are how your days are to be consumed.
You simply can't do that morally.
And the results of violence have... I'm going to do a podcast on this that's separate.
I'm still trying to think of a good central metaphor and so I haven't gotten that through my brain yet, a good way to describe this.
But violence, the roots of violence go so incredibly deep and they're so incredibly subtle.
That seeing things like the relationship between capital and consumption, between saving and spending, seeing those relationships, it's so complicated to figure out.
And the effects of it are so diffused and so complicated and so destructive in a very subtle manner that you just can't pick these things up very easily.
And that's why people have trouble seeing the effects of this kind of coercion.
So I hope this has been helpful.
I know it's been a long podcast.
I do thank you so much for hanging in there, and I hope it's been useful to you.
I've tried not to be too repetitive, and I'm sorry it's been so long.
It actually was... I got stuck in traffic, so I couldn't finish in the 30 minutes.
But I think it was worth it, because I think that this is such an important topic to understand.
It's not an argument for morality.
It definitely is an argument for an effect.
But it does help you understand why it's so important to use the argument for morality and to be secure when you're doing that, that what you're arguing for is going to end up being a much better, much freer, much more productive world.
▲
Export Selection