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Aug. 3, 2006 - Freedomain Radio - Stefan Molyneux
45:05
355 The Marginal Revolution - Smith, Marx and Value

The gap of knowledge the socialism wriggled into...

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Good afternoon, everybody.
Hope you're doing well. It's Steph. It is, gosh, what is it?
1.30pm on August the...
3rd! Look at that! August the 3rd.
And I am lying in the middle of Ottawa, which is the capital of Canada.
And I am waiting for Christina to finish her conference.
I did go to a very interesting one this morning on weight loss and managing things like diabetes and so on.
Quite fascinating. I did not realize, of course, that weight loss was such a complicated business.
And one of the things they talked about, this gentleman talked about, was that...
If you're going to try and lose weight, let's say you have to lose 100 pounds, then it really is going to take you about 10 years because you're really only able to lose 5% to 10% of your body mass at any given time over a sort of 3-4 month period and then you have to maintain that weight for a year before...
Trying to lose any more weight simply because, as he put it, when you get hot, you sweat, and when you get cold, you shiver.
And so when you start to take body weight off, your system goes into a responsive mode or a reactive mode wherein it tries to conserve energy and will shunt everything.
Instead of using it for personal energy, we'll shunt it to the fat cells and so on.
quite fascinating.
And of course, this obesity epidemic that's going on throughout North America is quite fascinating as well, and has many causes as we've talked about before, from two-parent families to the need for convenient food, which is related to that, and subsidies of corn syrups and heavy taxes on sugars.
Corn syrups are more fattening, and a whole host of other fascinating and interesting reasons.
So it was a very interesting lecture this morning.
And now I'd like to chat about two topics.
The first topic I'd like to talk about is the history of value in economics.
And I'm only going to give this a very cursory overview.
It's a very complicated topic, and we'll just go over it in brief.
But I do think it's quite fascinating.
And it does help explain socialism or why socialism exists as a thought discipline.
Well, maybe not thought discipline, but as a set of thoughts, let's say.
Now, the question of value...
has always been a significant one.
How is the price determined?
And there have been a number of answers to this.
And sometimes it's called the water-diamond paradox.
And the question is always, why is something that is as valuable as water so cheap, whereas something that is as useless and vanity-based as diamonds so expensive?
And lots of people have gone into this as a thought discipline, and it wasn't really until about the 1870s That early 1870s, the three economists began to sort of really unravel it.
But in the intervening time between the publication of The Wealth of Nations by Adam Smith in 1776 and 1871, when these three European economists published their findings semi-independently, actually completely independently, but very much around the same time, This is sort of where Marxism arose.
1848 was a publication of the Communist Manifesto, as well as the large number of riots throughout Europe based on workers' desire for better conditions.
This sort of period between 1776 and 1871 was really where you got the flourishing of communist and socialist thought, and a lot of it had to do with this problem of value.
So the way that Adam Smith tried to figure it out was he said, well, there's stuff for use, right?
So water would be stuff for use.
Water, food, shelter, and things like that.
There's stuff for use, and then that has its own value based on how much people need it, based on their desire to use it, and so on.
And then he said there's stuff for trade.
Stuff for use or utility and stuff for trade.
And they both have kind of different mechanisms.
And the one that's for trade is sort of more speculative and just somehow basically kind of not as good.
You know, sort of the idea that if you buy a house to live in it, that's good.
If you buy a house as a speculation, leave it empty hoping to flip it for a profit, that's bad.
Even though, of course, that does drive up the demand for houses and will cause more houses to be built.
There's nothing you can do in the economy that is not based on coercion or fraud that will not benefit somebody at some point because otherwise nobody's going to give you any money for it.
So Adam Smith divided into things for utility or things for use and things for trade.
And this was kind of like an unsatisfactory way of doing it because the whole question of price for a lot of most of the things that are traded, right, in sort of Maslow's hierarchy of needs, once you take care of the basics like food and shelter and heat and so on, Then everything becomes things for trade.
So it's kind of hard to imagine how the vast amount of economic activity, which is everybody's economic activity once they've satisfied their basic needs, could conceivably be understood as sort of arbitrary and not as good as all the other stuff.
And so if you're not a farmer selling food, but a stockbroker selling stocks to people who already have food and shelter, that would all seem to be extraneous and so on.
And so the question of value became sort of separated from the question of production and distribution.
And that's sort of a complicated topic.
We'll just touch on it briefly here.
But in this miracle that was in the 18th century, the agricultural revolution, which everyone forgets about because it's not really well documented.
There was no Charles Dickens.
I've tried to document it in a novel called Just Poor.
Which is available for donations.
I think 50 bucks or more you can get a copy of the novel that I have set in the agricultural revolution because that's the really important one.
The industrial revolution is the after effect, right?
The reason that the industrial revolution was possible was that the agricultural revolution had already occurred which produced the excess food which allowed people to live in cities and so on.
So that's, I think, fairly important to understand, that you really do need an agricultural revolution prior to an industrial one.
But throughout the 18th century, you really could say it was going on since the 14th century, but it really culminated in the 18th century when you began to get a heavy, heavy overproduction relative to prior centuries of food.
Then you began to get this incredible productive growth of the Industrial Revolution, And the real question, of course, was, as these eruptions of wealth occurred in Western Europe, for the most part, these eruptions of wealth, of course, it does create a kind of disparity between rich and poor, which didn't exist before.
As I said before, the poorest person in the modern West is far, far better off than the richest person in the Middle Ages or even in the 17th or 18th centuries.
This incredible eruption of wealth created these enormous disparities.
Now, when people began to examine this from a conceptual standpoint, this question of wealth, because, of course, what happened basically was that people stopped using guns to force other people to do stuff.
That's sort of basically what happened in the...
Industrial Revolution. The Agricultural and the Industrial Revolution were all just around a withdrawal of force, a withdrawal of violence, right?
If you stop pouring acid on your trees, then they're going to flourish.
But of course, if all you've ever seen is trees that have had acid poured on them, drip, drip, drip over millennia, Their sudden flourishing is going to seem fairly incomprehensible, when of course it's not.
That's what trees do in their natural state, is they flourish, and you really have to drip a lot of poison on them for a lot of years to keep them stunted and withered and barely alive.
And human history has been the history of violence applied in a universal manner through the agency of the church and the state.
And that is what has kept human beings in such a state of miserable exhaustion, depression, death, and suicide, and genocide.
A sickness for most of human history, as that force, for a variety of reasons we've talked about before, began to be withdrawn from people.
As the hobnailed boot began to lift off the human throat, well, miracle of miracles, people found that they were actually able to breathe, right?
So instead of just gasping their way through life, they found that they were actually able to breathe, and everybody thought, this is such a bizarre miracle.
How on earth could it be occurring?
And there were some, of course, explanations.
Adam Smith was a famous one.
Ricardo was another one.
And then there were some doomsayers.
Ricardo was to a smaller degree.
Malthus was to a huge degree.
Of course, the Malthusian population doctrine was sort of like this, that the increase in crop production has occurred at a linear level, right?
So it's 1 plus 1 plus 1 plus 1, and so you get the straight-line ascent of agricultural production.
Whereas human beings, because we are a species that breeds, multiplies in an asymptotic fashion.
So it's 2, 4, 8, 16, 32, 64, 128, 256, and so on.
And this basic disparity between agricultural production that increases in a linear fashion and the production of human beings which increases in an asymptotic fashion or geometric fashion is something which is going to always end up causing starvation, want and misery. And of course this has been proven repeatedly over and over and over again to be completely false.
It's only true in a situation where The growth of agricultural productivity is artificially kept low through violence from the state or the church.
Because when you have a state wherein human beings can be free to work with their agricultural lands and free to trade the products of those agricultural lands in a capitalist free market, then there's a fine calibration between the demand for food, the supply of food, and the supply of human beings.
So this is not that complicated.
I mean, this is easy for us to see, right?
And this is not to denigrate the intelligence of anybody who was working at the edge of this volcano, right?
Human beings being tossed around in this molten lava for hundreds and hundreds and thousands and thousands of years, and suddenly they crawl over to the lip and they see lush valleys and, you know, they're like, what, did I die?
What kind of heaven is this? So no disrespect to anybody's intelligence who was working there.
They were all far smarter than I am, of course.
But what we're able to see from this perspective is A kind of history that makes a little bit more sense.
We have a wider... And of course we have all of their accumulated knowledge as well.
So the explanation for all of this was very hard to come by because it was just so new.
And of course a lot of the people...
I mean this is an interesting thing about academics in general.
that a lot of the people who were studying this phenomenon were not themselves part of this phenomenon, right?
This is always the challenge of those that can't teach, right?
This is always the challenge, that the people who were out actually creating wealth in the free market, or the generally much freer market than it was before market, were out there doing stuff, not writing books about how to do it.
And so there was always this fundamental disconnect, and it always has been or often has been the case with economists, that, I mean, to me, I think that if you have been an entrepreneur, you get a lot of stuff about the economy, which you just don't get from reading books, right?
So if you try and create products and sell them and you try and manage a company's growth and you deal with all the vagaries and uncertainties and joys and failures of the marketplace, you kind of get things like pricing and marginal utility and so on and the pull value of consumer demand a whole lot more than if you're looking at charts and graphs.
And I think, I mean, obviously there's infinitely better economists around, but I would say that in my own amateur way, One of the things that I bring that is of value is having spent 10 or 12 years duking it out in the free market and in the real wild west of the free market which is the software industry I can bring a fair amount of practical experience to bear on these topics which I think has been quite helpful in at least allowing me to understand this stuff in a slightly less mathematical and abstract way.
So the question of how you explain this sudden growth of the ability of people to be able to produce all of this wealth was really hard to come by.
Because it was so new, right?
Nobody sort of said, oh my god, what?
It's like if you're in the middle of the Black Death and suddenly everyone gets well...
You know, you could go crazy trying to figure out the sources.
Is it the water? Is it the air?
Is it the dance? Is it God's will?
You could go nuts trying to figure out the causes, and it would be almost impossible to isolate them.
And so this is sort of what was happening in the 18th and 19th century, early 19th century.
They were trying to figure out, A, where did it come from, and B, what do we do with it?
Because everyone had come from a sort of command and control economy, and religion was much stronger, and so the sort of redistribution of wealth was considered to be a very important thing.
And Adam Smith did allow for it, of course, allow for the redistribution of wealth, and this is something that Marx took and really just extrapolated a whole lot further on.
But the question of sort of production was the core, and the question of, A, where did the production come and what should we do with the proceeds was a significant problem for most academics in this sort of time period.
And... One of the things that became separated was production and distribution, right?
So it was kind of considered to be, to some degree, that some sort of magic formula had descended upon the land, or maybe people felt, well, once we invented the steam engine, or, you know, once we invented X, Y, and Z that allowed the Industrial Revolution to move forward on a faster basis, or once we figured out the finer points of crop rotation and produce the extra food and so on, turnips as a winter crop, all that kind of stuff, Then we have this amazing amount of wealth just pouring out of people relative to history, right?
It's like you've just struck a gold geister and it's just raining money, gold, goods, whatever.
It's just amazing. And so people kind of got the impression that this stuff was sort of appearing out of nowhere as a result of some sort of weird miracle.
And so the question then became, okay, so this stuff is being produced magically.
It's just pouring out of people in a way that we just, you know, we've got some theories, but let's just say we've got all this stuff.
And of course, as the wealth pours down, it tends to cluster around those who are the most economically productive.
So you have the rise of the middle class and the bourgeoisie, and there's people who are still down working in the sort of mines and still working in the factories.
Of course, the majority of people are in that way.
And so the question then becomes, if you just look at production, like just some sort of magical phenomenon, like just some sort of, you trip over a tree stump and up pumps all the oil, if you look at production from that standpoint, then you have a great deal of difficulty with the idea that then you have a great deal of difficulty with the idea that property rights are causing it and people should own the property and it's only there because of because the government is known as the church and the state are no longer using violence to keep people down.
That's why you have production. And so, to some degree, it's kind of looked like found money.
The money that you find, you're probably going to have slightly different viewpoints on how to spend the money that you've sort of spent your blood, sweat, and labor earning.
So... The question was, well, what do we do with all of this?
And the socialists came along and said, okay, so X, Y, and Z inventions and a couple of rearrangements of human society have magically produced all of this wealth, and now what we need to do is to redistribute this wealth to even up the peaks and valleys of consumption, to even up the peaks and valleys of rich and poor.
And they said this, let's just say, in all innocence, and of course economics was a very new science at this time, so we can forgive them for this.
It's not the case now, but we could forgive them for that in the past.
Let's just say that they viewed this redistribution as a great thing to do.
And genuinely had no idea of the relationship between distribution and generation.
The distribution of wealth and the generation of wealth.
So they felt that no matter how we distribute this wealth, no matter who we hand out this oil to, the oil is still going to come spraying up through the ground in this big geisterous formation.
This is a very important thing.
If you've got all of this oil and you can collect it in barrels, You can give some away to the poor.
You can give some to the oil companies.
You can do whatever you want. The oil is still going to come spurting out of the ground.
And this was their perspective.
And so the socialists had a very good argument at the time, especially for people who are religious, which we'll talk about another time.
So they said, look, we've got all this stuff anyway.
It's all coming spurting out of the ground.
We've got this amazing generation of wealth, so let's redistribute it in a just and fair manner.
Now, if you want to look this up, this Spenumland thing was something that was tried in the 18th century, mid to late 18th century in England, and it was a redistribution of the welfare state kind and caused exactly all of the messes that you would expect from a redistribution of the welfare state kind.
So we won't go into that in detail now, but it's S-P-E-E-N-H-A-M-L-A-N-D. You can look that up.
It's quite fascinating. Maybe we'll do a podcast at some point in the future.
But it was one of the earliest and most predictable results of the welfare state.
But people didn't really study that.
And why? Well, because most of the academics were raised at least to some degree in religious households.
A lot of their parents were priests.
And so this is one of the reasons why they ended up with this kind of redistribution perspective.
So, you got all this oil spurting up out of the ground, let's start redistributing it.
And this was sort of the argument.
And to say that it shouldn't be redistributed looked kind of like mean.
It's like, well, there's this general social largesse, let's carve it up and give some to the poor, there's still going to be enough for the rich, everyone's...
And so to say, no, we shouldn't do that, looked selfish.
It looked like... Yes, I created this wealth, but now it's an automatic self-running process.
So if I want to keep all of the wealth that I'm creating, even though it's an automatic self-running process now, and not give any to the poor, then it just looks kind of greedy.
It just looks like you want more than other people.
And of course, based on the church and the historical...
There was still quite a lot of the egalitarian notions around, like people shouldn't be unequal and this, that and the other.
So this idea that production and distribution were not closely entwined was really not understood until much, much later.
And so in this gap between the wealth of nations in 1776 and almost a century later, in 1871, when we have the marginal revolution, you have an enormous amount of thinking going into, well, how do we just redistribute all this wealth?
And you start to see this kind of stuff come in.
It culminates in the communist revolution and the socialist revolutions and so on, which was all around this wealth being generated.
Let's redistribute it in a fair manner.
Now, the marginal revolution that came along was something like this.
I mean, this whole question of value just became really baffling to people.
Marx, of course, as we've talked about before, had what he called the labor theory of value, that the value of something is related to how much labor is invested in the creation of it.
So he would say, and this is an oversimplification, but he would say it in a much more lengthy, tedious, and frankly German manner, He would say that a coat is worth eight times what a hat is worth because it takes eight times more labor to create a coat.
So it's like a push value.
The value of a good is pushed, is created from the amount of labor that's invested in it at the beginning.
And he also had some success explaining the water-slash-diamond paradox of, like, why water is so cheap, even though it's much more valuable than diamonds, because the amount of labor to go get a bucket, get some water, is relatively low, but the amount of labor to go out and get a diamond, to dig up a diamond, and then to grind it down, and so on, is...
And this is long before...
Certainly in Adam Smith's time, this was long before diamonds had any industrial utilities, so it really was quite a mystery for economists to try and work on.
So he was able to explain that based on labor.
But as Jacques Barzin has said, this is quite a paradox.
Because it's like saying that pearls are valuable because we dive into the ocean to go and pick them up.
And I'm taking some of these metaphors from Mark Scusen's The Story of Economics, Modern History of Economics, which is quite good if you get a chance to pick it up.
So, is the value of a pearl because we dive down to pick it up, or do we dive down to pick it up because it's valuable?
Of course, I think the answers are mostly obvious to us, at least it is to me, because I certainly have worked very hard on software programs that took a long time to write.
I've worked on other software programs that were easier to write that sold a great deal.
I've also worked on novels that were held to write and sold not at all.
And I've worked on other novels that took me like three months and sold well.
So for me, just because I have generated and sold stuff within the marketplace, this idea of the labor theory of value just never made any sense to me.
The answer, which is the marginal revolution answer, is to say, no, we don't end up creating value in pearls by going to die for them.
We die for them because they are valuable.
And why are they valuable?
Well, they're valuable because of demand.
They're valuable because consumers want them.
And, of course, this seems very obvious to us in the 21st century, but it certainly wasn't.
At least we had a lot of smart people working on it.
This whole problem of having to solve this labor theory of value was...
And, of course, then...
Well, the labor theory of value was something that Marx promised to sort of solve in volume three of Das Kapital.
And Engels actually put even out a contest for anyone who could come up with an essay that would help him solve it.
Nobody ever did.
And it was all sort of nonsense as far as that went.
But this question, which was finally answered by the marginal revolution, had profound implications on social policy.
And was the beginning of the end for certain kinds of socialism, at least in a sort of generally accepted conceptual way.
Not, of course, in a practical political way, because politicians love redistributing and keeping a good chunk for themselves and their friends, so we won't talk about the economic incentives, we'll just talk about the logical development of the idea.
But once you figure out that a coat does not cost eight times as much because there's eight times as much labor, but people invest eight times as much labor in a coat as opposed to a hat because they can charge eight times as much for it.
And the reason they can charge eight times as much for it is because people want coats.
People want coats, and because it takes eight times as much labor to make a coat versus a hat, there are far fewer coats than there are hats relative to the same amount of labor.
So hats are plentiful relative to the shortage of coats.
And of course, wherever you have a constant demand, plentiful means cheaper, and scarce means more expensive.
This is something that's the basic sort of law of supply, the supply curve or the demand curve, they call it.
So... Once they figured out that it was a pull market, that the consumer's willingness to plunk down his hard-earned gilder or pound or franc, or Deutschmark, I don't know if it was called the Deutschmark in the 19th century, maybe it was.
It's the willingness of the consumer to plunk down his hard-earned money for a particular good or service that conditions the price of that good or service.
And also conditions whether that good or service exists or does not exist.
It's a very fundamental thing to understand.
If I'm willing to pay $500 for an iPod when it first comes out, then iPods will exist.
If it costs $500 to make an iPod, but nobody is willing, or if a profit can only be made relative to everything else you can put your money into, invest in, If a profit can only be made if people are willing to spend $500 for an iPod, but nobody is willing to spend $500 for an iPod, then an iPod does not exist.
It's not like there are fewer iPods.
There are no iPods.
This is a very important thing to understand.
Because once you get that, that the demand of the consumer relative to the price, relative to everything else that the consumer could buy, that the price the consumer is willing to pay for a particular good not only influences the supply of that good, but it also influences not only the end price, but also whether that good exists or not.
because beforehand we were saying that wealth was created in the 18th and 19th centuries sort of viewed like this geyser, like this automatic phenomenon, the wealth was just going to be created, and then you could tax it, you could redirect it, you could put it into social welfare schemes run by the government, you could do whatever, bury it in the backyard, do whatever you wanted with it, and the wealth would bury it in the backyard, do whatever you wanted with it, and the wealth would
Now with the marginal revolution, when they figured out that it was the demand that drove everything in terms of the organization of capital, the investment in capital machinery, the organization of labor, the supply chain, the level of profit that everybody was able to take along the supply chain, once they realized that it was the final demand of the consumer the level of profit that everybody was able to take along the supply chain, once they realized that it was the final demand of
everything in the marketplace, then they really understood that redistribution or the distribution of wealth cannot be separated from the generation of wealth.
So, to take an example, there are all these iPods going around, and they cost, I don't know, I think now they're about $400.
So, right now you say, okay, well, a million iPods get generated, and they cost $400 a piece, right?
That's $400 million transferred around the iPods.
So, if we slap a 50% tax on that, then we will get $200 million a year.
Because the price will go up to, what, $600, $600 million.
So you get that kind of stuff, right?
So this is sort of the fundamental thing that the Marxists and the socialists didn't understand until the Martian Revolution, and with a certain amount of willpower, still failed to understand even now.
And this is the basis of the Laffer curve, which was made famous under Reagan's advisors in the 80s.
But if you say, well, if I slap a 50% tax on the iPods, then I'll get $200 million in revenues, well...
You're completely incorrect. So the creation cannot be separated from the distribution and the price.
So if you decide to do that, and the price of an iPod goes to $600, then you are going to have an enormous amount of After Effects that come out of that, which are going to go all the way back to the origin, and they're going to try and figure out whether or not It can actually be done, right? So if you slap a 50% tax on iPods, old Apple guy, what's his name?
He will end up with the choices, right?
So he can either say, oh, okay, well, we'll just sell them for $600, and I'm sure we'll be fine, which is probably not going to be the case, Steve Jobs.
Or he can say, oh, crap, okay, well, let's just get rid of the capacity for it to play videos.
That's going to save us 50 bucks will make the color screen black and white.
That'll save us another 50 bucks on iPod.
We'll take the hard drive down from 60 or 30 to 30 or 15 gigabytes.
We'll do X, Y, and Z. We'll take away the games, we'll make the USB slower, whatever.
We'll downgrade the processor in order to get the price back.
So what's happened is that you end up not getting all of this extra money because once the capacities of the iPod are downgraded, then fewer people are going to want them, right?
Maybe everybody wants them because they've got videos and because they've got color screens and so on.
And so you're really going to end up with far, far less money.
And of course, what might happen is that they test some of these crappy iPod dumbed down versions to make up for the taxes.
And people say, well, that sucks.
I don't want them. So then they just say, forget it.
I'm going to shut down the whole iPod line.
Or I'm going to manufacture them in Malaysia.
Because at least then I can save on the laborer and now that the government slapped this 50% tax on iPods, it's worthwhile being shipping overseas.
Plus I can sell them on eBay from Bangladesh where I don't have to pay this tax.
Like all of this kind of stuff.
This is how people in the manufacturing area get really screwed.
So, from that standpoint, you don't end up with, if you mess around with redistribution, right, if you take the profits that were formerly going to Apple, and you begin to divert them to the government or to social programs, same kind of thing, right, or to the military, you are actually changing the production of these things.
So, what else could people do to try and solve this problem of a 50% taxation?
Well, of course, they could divert, once they saw this thing coming up, they could divert a huge amount of their resources from investing into the IPART and say, well, let's start buying up senators and congressmen to prevent this pill from getting passed or at least get it down to only 10% or 20% and so on.
So again, you're taking money away from the full future development and so on.
You're adding to the cost of it, but hopefully it'll be less than.
It'll only be 30% rather than 50% and so on and so on.
But at an even more fundamental level, what is going to happen is that once the government comes in with a 50% tax on iPods, everybody who's thinking of entering that field is going to think twice.
In fact, they're probably not even going to think twice.
They're just not going to do it.
So once a good, like an iPod, and we can just mean all MP3 players or whatever here, once something like an iPod gets a 50% tax slapped on it, that causes a fundamental redirection in the flow of capital in the economy.
Now, it's like you've got this fast-flowing river, and the iPods formerly were like this great tributary that all the water wanted to go down because it was downhill and so on.
And basically what you've done is you've put a big dam up there called 50% tax on iPods.
And... What that means is that you've sort of raised the rock in the middle of the stream, now all the water is just going to rush around it, go elsewhere even faster.
Because people aren't going to want to invest in an industry which has an enormous amount of government interference unless they themselves are the very largest companies who have the money to buy off the politicians and so on.
So people aren't going to want to get involved in that.
Entrepreneurship, for sure, is going to pretty much be stopped dead in its tracks.
Because as an entrepreneur, you can do a whole bunch of things.
You can do a whole bunch of things with your time, your energy, your intellect, and so on.
And of course, if you're a successful entrepreneur, you don't have to do a damn thing with any of those things.
You can just retire. But an entrepreneur is going to look at every possible field that he could go into.
And it's not like, you know, I could become some medical entrepreneur or something.
But even within the software field, there's thousands and thousands of different areas that I could go into.
But what you're going to do is you're going to look at that and say, well, you know, they just slapped this 50% tax on things.
Now, what that means basically for an entrepreneur is threefold.
It means, one, that it's going to have a much higher barrier to entry.
You're going to have a lot more difficulty raising capital Why?
Because all of your profit models are going to have to have a 50% tax going to the government, which means that all of the entrepreneurs are going to get less than 50 cents on the dollar back in terms of profit, because the other half is going to have to go to the government.
So that's what it sort of means, number one, that as an entrepreneur, it's going to have a direct consequence to you in terms of going for funding.
It means that you're going to have to give something sweeter to the investors than you would have if There was no 50% tax, right?
So it's going to mean that for the same amount of investment, you're going to have to give up 60% of the company rather than, say, 30% of the company, which means that your motivation is lower, which means that your personal profits as an entrepreneur are lower.
There's lots of problems, right, in terms of that.
So you're going to go and say, well, forget that.
I'm not going to give away 60% of the company when I could go into a related field and give only away 30% of the company and so on.
That's the first thing it means. The second thing it means is it means that once you get a heavy tax imposed upon an industry, that only the big hitters are going to be able to influence policy.
This is a very, very important thing to understand.
If the good is sustainable from an entrepreneurial standpoint, so if a $600 iPod is sustainable, what it means is that Apple is going to be deep, deep, deep, deep in bed with Washington because having had a 50% taxation slapped on them, Now, Washington is going to pay attention to Apple as a huge source of revenue.
So if Apple gets really pissed off or whatever, and Apple says, that's it, we're going to shut down the iPod line, then the government's going to listen to them because the iPod line's generating them $200 million a year, probably a lot more, but in revenue.
Which means that, A, you have political interference, and B, that political interference is only going to be for the established big hitters.
It's never going to be For the company starting out.
So if I start out with some MP3 player competitor, the StephPod or something, or comes preloaded with free domain radio and takes nothing else.
But if I start releasing the StephPod and I sell 100 units in the first quarter, well, that's contributing a grand total of what?
$2,000 to the government.
Whereas Apple, the sales of their iPod, are contributing $200 million to the government.
So it means capital is going to be harder to find.
It means that political interference is already in the game.
And it also means that the political decisions are going to go to the largest players.
And they're never going to go to the smaller players.
And so this is why it's important to understand that A big tax is not always a bad thing in a mercantilist sense.
It's not always a bad thing for the dominant player in the market because it raises the barrier to entry and it also means that they have the ears and the eyes and the balls of Washington.
And so it's a sort of mutual, sick, sadomasochistic relationship that's kind of hard to break into.
So the reason I sort of went on that long tail is so that you understand the marginal revolution that's going on here, or what the marginal revolution was talking about, is that the consumers drive demand.
And if you start mucking about with the price or the quality or the features, then you're actually going to change whether that product exists or not.
So there's a way to reverse demand.
There's a way to reverse all of the gains of the Industrial Revolution.
And the way to reverse those gains is to redistribute profit, is to tax, to regulate, to control in a sort of mercantilist slash fascistic or, to its ultimate degree, to a communistic, in the communistic model.
You can destroy production through redistribution, and in fact, that is always the end result of redistribution, is the destruction of production.
So, it's very interesting.
It's like, to use the physical metaphor we've been using before, if the oil...
That is coming, spurting out of the ground.
You gather it in barrels.
It's like if the guy who found it and is gathering it gets to keep it, the oil keeps flowing.
But the moment somebody comes along and demands to take his barrels away, the oil stops flowing.
It's really quite miraculous when you think about it.
And, of course, it's one of the reasons that this goose that laid the golden egg is quite a powerful story, right?
This is the story of a couple, they buy this golden egg, and they buy this goose that lays a golden egg every day, and they get rich, rich, rich, and then they get greedy, and they say, well, let's cut open the goose to get all the eggs that are in it, and they cut open the goose, and the egg dies, and they don't find any eggs inside the goose, because the moment you use violence...
The wealth generation stops, right?
That's the goose that lays the golden egg.
I think I've got that relatively right.
But it's a very important thing to understand that in the gap between Adam Smith's inability to explain value, what value was and how it meant, and this artificial division into utility and trade...
And the Martian Revolution was the gap wherein socialism came rushing in with a vengeance.
This is where you get the establishment of central banking.
This is where you get the government control of the money supply in many, many countries.
The foundation of public education.
The foundation of the redistributionist welfare state.
This is where you get the foundation.
And it is to some degree, or to a large degree, an inevitable result of this problem that they could not explain value.
If you think that value is based on labor, then of course labor should keep the vast majority of the value.
If you think that value is not based on capital, then people like landlords, landowners, those who don't work the land, people who rent you stuff, people who are stockholders and managers who don't directly work with the equipment...
All of those people, they start to look parasitical, right?
Because the real value is in the labor.
But of course, the real value is not in the labor.
The real value is in what consumers are willing to pay for something.
That's why capitalism is constantly fine-tuning what it provides in order to satisfy demand.
And yes, sometimes you can create demand if you invent a new product that's great enough.
But this is why capitalism is constantly requiring the endless re-shifting and re-shifting of resources to further satisfy customer demand.
Because customer is king.
The customer is always right.
This is the root of that famous saying in the service industry.
The customer is always right.
You can't argue with the customer.
If you argue with the customer and you don't have monopolistic or mercantilist state-granted powers, if you argue with the customer, the customer will simply go elsewhere.
There's no point arguing with the customer because trade is a voluntary interaction.
The customer, you see, the customer has one dollar that he can spend anywhere.
You have one product that you need to get that customer to buy.
So arguing with him will simply make him, and there's usually lots of competitors even for the same product, So arguing with a customer is going to end up with you getting nothing.
And the customer keeps his dollar or spends it somewhere else and is perfectly satisfied.
So this basic idea, I mean, I don't mean to sort of trivialize it, but the basic idea behind the marginalist revolution or the marginalist approach to things is the customer is always right.
Customer is king, customer rules.
You don't ever argue with the customer.
It's the end user rule.
Who ends up plopping down his money that determines everything around the value of a product, everything around investment, everything around capital organization.
And of course, that is the dynamism of capitalism.
That is why capitalism is so incredibly efficient, is that capitalism, and capital as a whole, is constantly trying to wrap itself around like a second bodysuit on Jessica Alba.
No, wait. Okay, I'm back.
Capital is always trying to wrap itself around the needs and desires of the consumer, and of course the needs and the desires of the consumer are constantly, constantly, constantly, constantly, constantly, constantly changing.
Even the same consumer within a two-week period...
He might have given birth to a kid.
He might have bought a new house.
He might have lost his job.
He might have inherited some money.
Endless, endless amounts of things.
He might have picked up a glass of French wine and decided that he wants to become a wine connoisseur.
And therefore, his resources are going to go into buying wine magazines and buying a vinery to run in his basement, along with his other plants.
But... Because people's tastes are constantly changing, either through internal whatevers or external whatevers, right?
The desire to become a sommelier or something like that, a wine taster, versus, you know, your house is burnt down, you've got to buy a new one.
All of these things are constantly causing people's desires for goods and services to change, and this is only around goods and services that they already know exist.
Of course, there's many, many introductions, countless introductions of new goods and services in the free market anyway, all the time.
So not only do they have to choose between everything they know about, but they also can choose with new things which have higher risk but could have higher reward and so on and so on and so on.
So, that is all such a complicated business that thinking that value is driven from the amount of labor you put into something or that value is differentiated between use and between trade is all very silly.
It's only silly to think of it now.
It's not silly back then when we were trying to figure out what was going on.
But it's certainly silly to think about it now in any other context than the customer is always right.
If you've ever been a salesman, you've been in those meetings, you're talking about a good, the guy that you talked to this morning, a good or service, loved it and was willing to plop down a good chunk of change.
The guy this afternoon, for whatever reason, just isn't that interested.
Well, it's the same good, same amount of labor went into it.
One guy likes it, another guy doesn't like it.
There's nothing you can do.
So I just wanted to talk about that as a little bit, just so you could understand, this was the gap This was the crater between Adam Smith and the Marginal Revolution.
This is where redistribution became really popular.
Now, of course, redistribution would never have remained popular if it didn't get into the hands of the state.
We'll just talk about this very briefly now, because I don't want to go on too long.
Well, who am I kidding?
I'd love to go on too long, but I don't want to try your patience, because in my case, with you guys, of course, the customer is always right.
But the reason that this all lasted so long and has escalated to the current day is We're good to go.
A squat, parasitical, aristocratic, evil, mafia-like toad, but still, you get to feel like the big man on campus.
And that's one of the reasons.
And, of course, another reason is that companies that are very big and who are market leaders want to get in bed with the government so that they can raise the barriers to entry.
And then they can start, instead of having to pay to innovate and benefit the consumer, they can take some of those profits and make a fortune for themselves and redistribute some of those profits to Washington people who can make a fortune for them as well.
So because you have a government, something as ridiculous as the fact that the Martian Revolution went in 145 years ago and is 135 years ago, 136 years ago?
135 years ago. And it's still kicking around.
It's because of the government.
Let's just say that charities or religions demanded X, Y, and Z from you in terms of a tithe, like a 30% or 40% tithe, and then they found that they were actually ending up with less money.
Just picture a voluntary organization, just for a moment, so you can understand just what a gross evil the government contributes to in this kind of manner.
Let's just say that you are a church and you demand a 40% tithe.
Like, you demand a 10% tithe of your members, you notice they're all getting rich, and so you demand a 40% tithe.
And then within a couple of weeks, you notice that your donations are now less than they used to be when you were asking for a 10% tithe.
Well, what would you do? Well, you'd go back to a 10% tithe.
Why? Because you want more money as a charity or as a church or whatever.
And if you continue to hike and hike and hike your rates, then of course you'd simply lose people from your religion, right?
I mean, there's no religion that has 100% tithe, right?
Except for maybe that one where they cut their balls off to go join the comet.
But the fact that this has lasted so long, because simultaneous to the marginal revolution was the establishment of the first major, major welfare state in Bismarckian Germany in the 1870s, which was not inconsequential, of course, in the aggressions of Germany in the 20th century, but...
The fact that this was all proven wrong 135 years ago and continues to this day is entirely because you have things like the state.
And all we can do is think very sadly of the large numbers of generations that have perished and wasted lives because of this amount of wealth redistribution which has really cut the soul out from other people and blended it into a fine state-ridden corrupt frappe.
So I hope that this is helpful just so that you can understand why this redistribution idea came along and also why this redistribution idea continues despite every economist in the world saying what a ridiculous idea it is except for a couple of weird Marxists and so on.
So thank you so much for listening as always.
I will talk to you soon. I hope you're having a wonderful time.
I will be back into my sort of regular old podcasting mode probably next week.
Until then, I will hopefully chat with you on Sunday and talk to you soon.
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It's a way of getting money to Free Domain Radio without having to worry about donating.
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I won't even ask you for a minimum sign up because frankly I can't be bothered to keep track of that kind of stuff.
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