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July 23, 2012 - Freedomain Radio - Stefan Molyneux
24:29
2173 Burn Notice!
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Hi everybody, Stefan Marlenew from Free Domain Radio.
Hope you're doing well.
Oh yeah, oh yeah.
It's time to talk about the gripping visceral bone marrow topic called capital consumption.
All right, let's do that, shall we?
For many decades, libertarians have been anticipating a kind of fiscal crash, an economic crisis, and so on.
And it hasn't come.
It hasn't come.
And yet, I don't believe that libertarian theory is false in this regard, so we sort of have to figure out why hasn't it come.
And so we're going to start off, I'm going to make a case as to why it hasn't come and where it's at.
I'm going to make the case using a metaphor, because, well, as you probably know, metaphors are a heck of a lot easier than actually doing research.
So, let's go with that.
So if you're a farmer, you plant your barley, you plant your wheat or whatever, and you get these seeds, and you may use them to make wheat or beer.
It's pretty much the extent of my farm knowledge.
But there's something called seed crop.
A seed crop is what you have to hang on to in order to plant for next year.
So, I don't know, it's 10% of your crop.
So you plant, you get a bunch of seeds out of your crops, and you have to, have to, have to.
Hang on to your seed crop.
If there's one thing you can't do in the winter, it's eat your seed crop.
And once you start eating your seed crop, you'll have nothing to plant or less to plant come spring and then the cycle of grinding starvation sets in.
So this is very important to understand.
The seed crop is kind of a capital.
And if you eat into your capital, then you burn up tomorrow.
Now this is another example to me of how the state grows after freedom.
Because the more capital you have stored up, the more seed crop you have stored up, the more you can dig into it.
And the further your predations can go.
And also the longer the growing cycle, right?
So if you eat your seed crop in the winter and you've got nothing to plant come spring, you're going to be pretty darn hungry just within a few months.
But if you had like a 50-year cycle, then it would be your kids who would be hungry and not you kind of thing.
So this is really, really important to understand.
Capital is, you know, it's called capitalism, right?
Capitalism is one of these tricky things wherein basically, I mean, this is very basic, so I apologize for anything that's overly retarded in this approach, but basically what happens is for capitalism to work, people have to save, right?
So you have to save more than you're spending, right?
And in those excess savings comes capital, which is then used to improve and make things more efficient, right?
So, I mean, where do profits come from?
Profits come from producing more with the same, more or less.
And so people save money, they put the money in the bank, and then the bank lends that money to entrepreneurs and factory owners, other capitalists who then use those excess savings to invest in improvements by capital equipment.
Capital equipment is stuff like, you know, factory machines and so on that you wouldn't use at home, but which raise the profitability of each worker, raise the productivity of each worker.
And really, in the long run, the economy comes down to worker productivity and not a whole lot else.
Now, worker productivity is a measure of a whole other thing to do with the savings rate and to do with the increased efficiency that comes out of a variety of mechanisms, but fundamentally, an economy is sustained by worker productivity And worker productivity depends upon savings and efficient and effective capital investment.
Now, if there's a bunch of problems with capital investment, then you don't get the efficient improvements that occur, right?
That can occur.
occur.
And this happens when the government steps in and distorts the market either by swallowing up all the capital to borrow because it needs to borrow to bribe all the citizens, or because there's artificially high returns on capital elsewhere, like in the financial industry, rather than investing in factories and upgrading machinery rather than investing in factories and upgrading machinery and so on.
I mean, I want to say it's not just upgrading machinery.
It can be IT.
It can be a bunch of other things.
It can be worker training.
It can be a whole number of things.
But it is whatever adds to the productivity of the worker is what drives the growth in the economy fundamentally.
And it's also what drives the wages of the worker, right?
Because as capital improvements spread across an industry, the worker productivity goes up, which means that they can ask for more wages, and because of competition between capitalists, they will get those wages over time.
So, savings is really key.
Now, in the U.S. and in other areas, the savings rate is catastrophically low.
I mean, it's like 1% or 2%, if that.
And that's a big problem.
The other reason that malinvestment can occur in capital goods is if you end up having to comply with a whole bunch of crazy regulations and all this kind of stuff, that's a big problem for capital investment.
And it means that you're less likely to invest in your factories and more likely to invest in the stock market.
Now, in the stock market, there's also a whole bunch of other things.
The stock market ideally should reflect the future growth earnings and potential of the company, but when you have too much money in the stock market, the stock market then starts to reflect other people's desire to buy that stock.
It's an interesting switch that's pretty catastrophic to the economy as a whole, although very profitable for stockbrokers and other forms of financial workers.
But the stock price should reflect the future earnings growth and potential of the company.
It's, you know, efficiency of its management, the quality of its products, and its commitment to long-term value and so on.
But what happens when you get too much money in the stock market and the government herds trillions of dollars into the stock market, as governments do this around the world by forcing people to invest in 401ks, otherwise it'll be like investor tax, investor tax.
That's really all it comes down to.
But...
When you have too much money sloshing around in the stock market, the stock price reflects what other people are willing to pay for the stock.
How much in demand is the stock rather than the underlying value of the company?
So you have these impressive, dangerous, scary algorithms and computers that buy and sell millions of stocks a minute or sometimes even a second.
They're obviously not processing fundamental changes in company value.
They're processing spikes and drops, peaks and valleys in demand for that stock.
And so the stock has become the commodity.
It is no longer a reflection of the commodity that it's representing, the actual company.
So, we haven't hit this economic crisis yet, and I would argue it's because we're eating our seed crop.
We're eating our capital.
We're eating our savings.
Now, there's the obvious way in which you're eating your savings, which is that Americans are burning through savings in order to sustain themselves and other people in Europe.
They're burning through their savings in order to sustain themselves through the economic crisis.
Right?
And that's a clear example of eating your seed crop.
As Americans burn through their savings and spend them, then there's less money available for capital improvements, which means that there are fewer jobs, which means more people burn through their savings, which means there's less money for capital improvements.
Well, you get the picture.
You get the cycle, I'm sure.
But there's so many.
I was going to say millions, but I won't.
There's so many other ways that we are consuming capital in a pretty catastrophic way.
I'll give you another example.
Children.
Children are a very foundational capital to the future of society.
So, Phyllis Schlafly makes the case, right?
She makes a very interesting case about Social Security.
So, let's put on her status helmets for the moment, pretend we're Republicans, and this is the case she makes.
She says, why do widows who've never worked get paid Social Security?
They've not paid into the system, blah, blah, blah.
She says, well, I've raised six children, all of whom are economically productive, all of whom are contributing to the social security system, and therefore I should receive benefits because I have created a huge amount of value for the social security system by staying home to raise my children, raising them well.
One of her kids was an engineer.
Another one, you know, they all went to Ivy League colleges and so on.
So she's saying, look, I've created this enormous amount of capital in the system, and therefore I should receive benefits from it.
And, I mean, in a sort of cold-eyed way, in a purely economic argument way, I mean, that's actually a pretty good argument.
She has created a huge amount of money that's going into the social security system because she has raised these kids and they're economically productive and so on.
And so, when we...
As a society, enact policies and approaches, and this is not just in the government legal sense, but also in the social ethics sense.
When we end up with a society that harms the future economic productivity of children, then we are truly burning through our seed capital.
Truly and terrifyingly, and in a very visceral and ugly way, burning through our seed capital.
So, for instance, public schools.
Public schools harm the minds of children.
They don't teach them how to reason.
The skill sets that people graduate with are pathetic.
Fail rates, even up here in Canada, close to 50%.
It's the same and even higher in some places in the U.S.
And why is the quality of education so bad?
Well, because politicians and public sector unions have this unholy deal by which they pretend to keep the peace at the expense of the children.
So public sector unions don't want people to get fired.
Children desperately do want bad teachers to get fired.
But who wins?
Of course, the children don't win because the children don't pay union dues.
So the children don't win.
And so what happens is in order to profit from the present, we buy, eat, and burn the seed crop of the future.
So in order for politicians to get elected, which is profitable for them, in order for teachers to stay teachers without becoming better teachers, which is profitable for them, and for union bosses to stay union bosses by protecting bad teachers, which is profitable for them, We are destroying the seed crop of the future called the mind, the rationality, the ambition, the energy, the independence, the clear goals and future productivity of the kids.
That's called eating your seed capital in order to profit in the moment.
We burn the future, right?
We have nothing to plant come spring because we ate all our seed crop in the winter because we wanted five meals a day.
And so for the past really 30 or 40 years in particular, it's in the 60s that teachers could no longer be fired and unionized in very powerful ways.
So it's been a couple of decades that we have been eating the future by profiting off the kids, right?
The quality of the kids' education goes down.
And adults profit in the here and now.
Another way, of course, is union pensions.
And, you know, I don't mean to bash unions.
I mean, again, for the nth time, unions are a great idea.
Voluntary association.
Let's get together and feel all right.
Stick it to the man who's doing us wrong.
Fantastic.
But I'm talking about the government enforcement of these things, right?
So it's not the unions I have a problem with.
It's force.
But it's force in this case associated with unions.
So unions, of course, keep promising more and more to their members, but there's a fiscal reality that the unions can't touch, which is that if they ask for too much, the government can't pay.
And if they go on strike, then public sentiment turns against them.
And so it's a challenging thing.
So what do the unions do?
Well, they can't ask for too much money.
So what they do is they ask for retiree benefits.
They ask for free health care and other kinds of massive benefits.
In the future.
And again, this is buying peace in the present.
This is eating your seed crop.
This is buying peace in the present.
Profiting in the present.
By selling off and destroying the future.
Really what they're doing is they are, you know, these negotiations went on in the 80s and 90s, and now the bill is kind of coming due.
So again, sort of 20 years, 30 years that this has been going on.
So a little bit less than public sector education, but more than some of the other ways in which we're consuming our capital.
Human capital here I'm talking about, which is economically productive, rational, ambitious, intelligent, skilled, able-to-be-trained thinking.
So, in this example, we are selling off the unborn in order to buy peace in the present.
Right?
We're stealing from those who have yet to be conceived.
Inconceivable!
We're stealing from those who have yet to be conceived in order to profit in the present, which is fundamentally exactly the same as eating a seed crop and having nothing to plant come spring.
Because, of course, what's happening now The economic productivity of the young is very low because they're badly educated, because they have a fair number of useless degrees, because there's a trillion dollars worth of student debt that needs to be repaid before the elderly can profit from their pillaging of the young many decades past.
The economy is much slower.
Other economies are doing better, but we're largely barred from free trade with them.
And there are far fewer young people.
When you create a system that inhibits reproduction, then you create a system that eats the seed crop.
Because you have more old people retiring with more benefits than more...
Pensions and more health care that needs to be paid for, and you have far fewer young people who are more in debt, who are less intelligent, less educated, less economically productive, and you have lower savings rates, you have less capital investment, you have massive amounts of malinvestment through the state and through regulations.
And so this is why it's been postponable, but this is why I would argue that the bill is really coming due.
So here's another example.
As I mentioned, that which inhibits reproduction inhibits your growth rate, of course.
And so the argument that, or the idea that we've got to get women into the workforce or get, you know, primary caregivers, whether it's women or men, generally it's women.
I use the general sense.
You've got to get women into the workforce now, not, you know, have your kids get them into school, you know, have your kids in your early 20s, get them into school, and then in your, you know, maybe go to college, have your kids, and then in your late 20s you can go and have a great career for the next 40 or 50 years if you want.
Well, no.
The government said, you know, through their funding of feminism and through feminists themselves in the 60s and 70s, they said, get into the workforce now!
Get into the workforce now!
And, of course, that creates a massive, massive hit for states, right?
Because they're moving income from non-taxable to taxable.
They're moving...
Sorry, not income.
They're moving activities from non-taxable to taxable.
So a woman who stays home and raises her kids can't be taxed.
But when the woman goes to work, she can be taxed.
And then when she puts her kids in daycare because she has to go to work, they can be taxed and so on.
The daycare workers, the whole daycare institution can be taxed and regulated and so on.
And so government's got a huge hit out of women going into the workforce.
Massive amounts of heady cocaine tax juice going into their eyeballs through the needles of the income tax.
And so, that is a situation where you get a massive amount of taxes, but you cause a pretty catastrophic decline in the birth rate.
And this has happened all over the Western world, particularly in Europe, to some degree in America.
America, I think, is stabilizing it just below replacement rates.
But that's not good, because you have an entitled generation heading into the sunset of money grabbing decades from the young, grabbing money from the young, and so you just don't have enough young.
So, by moving women into the workforce, you cause the birth rate to decline, but you get a massive amount of taxes.
And because you've got more taxes, you can use that as collateral to borrow more.
Right?
Look, we've got all these women in the workforce.
You understand.
I mean, women can go into the workforce.
That's fine.
I mean, obviously, that's, you know, I mean, it's not even important what my opinion is about that.
I think it's perfectly fine for women to go into the workplace.
Not that that matters at all, but the reality is that It does mean that birth rate is going to go down and short-term taxes and profits are going to go up.
And I would argue that this is really fundamentally what it was all about.
Why is the government so pro-feminist?
Because there's a multi-trillion dollar financial benefit to getting women into the workforce.
It expands and extends its control over children by licensing and regulating the daycares they go to.
And all kinds of good stuff accrues to the state.
And the bill, of course, doesn't come due for another generation or two.
It's the same thing with state policies that favor and subsidize single motherhood.
Again, this creates economically much less productive children, but it creates a dependent class of reliable, steady voters in the short run, and so it's good for political power in the short run, it's just bad for the economy as a whole in the long run.
So, that's another way.
Now, another way that we burn our proceed capital is we, you know, through forcing a huge amount of money into the stock market, we end up with executives in companies focusing on short-term stock price rather than long-term value creation.
Right?
So, if you can make a few million dollars By talking up your stock price over a couple of weeks, by finding some way to raise interest in your stock price over a couple of weeks, then you will do that, right?
Because if you don't do that, then your shareholders or stockbrokers will find other people who will do that.
So that's really important to understand that the horizon of executives gets very, very short when there's too much money in the stock market because the profits that are made from this mad sloshing back and forth Of money seeking whatever credible fairytale of the moment can push up the price of stocks changes the focus of the CEO. So,
if you can make enough money to retire on by manipulating the stock price over a couple of weeks or months, then you will focus on that to the detriment of focusing on the long-term sustainable productivity and growth of your company.
So that's a very important thing to understand.
That's another way that we're burning up our seed crop.
By forcing all of this money into the stock market, fundamentally changes the goal of management.
And it draws another kind of management in.
So the management that is really interested, that says, forget the stock price.
Let's just work on building long-term value.
Well, the problem is that the next CEO over is saying, invest in me, I'll double your money in 18 months.
And so the people who want to invest all go to the other guy, and the first company which is actually building long-term value ends up really looking at CEOs who will work the short-term stock price more than the long-term value.
In my own minor way, I've seen this very much up close in my own career when we were bought out by a company that went public.
So I think this is really, really important to understand.
This is how we can last.
So, somebody loses their job, right?
They dip into the savings.
They, you know, sell stuff they don't need as much.
They start going into credit card debt.
They borrow.
They maybe sell their house and downsize.
Like, you can stave off running out of money for a heck of a long time.
And particularly, this is true when the government can create artificial credit all the time by printing money.
Because that's not good, right?
That's really not good.
So all of these challenges, all of these problems are why things haven't gone tits up yet, right?
Why we haven't taken the snake ride down the infinite drain of fiscal collapse.
When you have a large amount of capital, you can burn through.
It takes a long time to burn through it.
And, you know, we came into this, these crises, with a lot of capital.
So, that's one aspect.
When you have another kind of… When it's intergenerational, that is also an issue where it takes a long time to show So when you make promises 30 or 40 years down the road that people who haven't even been born yet are going to pay your bills, why?
You can get by for quite a long time in that kind of situation.
Because it's generations.
And the fact is, of course, these bills can't be paid and people are going to get very upset.
But it has deferred all of this for quite a long time.
I mean, this is the great tragedy.
I mean, the fact that people thought they were getting free health care means that, you know, free pensions means that they made decisions to not save and maybe made decisions about how healthy they were going to be.
And, you know, this is not how it's going to turn out to be.
So these are all big, significant, meaty problems.
And the fact that we have this declining birth rate, that students are laden down with debt, that job opportunities are far scarcer, that there is, of course, a national debt that is having huge effects on the economy throughout the West.
The fact that there is a lot of malinvestment in education, And all of these other myriad problems are why we've been able to stave this stuff off for so long.
It takes such a long time.
There's a huge amount of seed crop and the growing cycle is like 40 years.
And so it takes a long time.
But I think that it will be sooner rather than later that we do fundamentally run out of what we need to sustain ourselves as a civilization.
And then there will be a huge and wrenching change.
And if we can make the case that a short, sharp tear-off of the Band-Aid is the way to go, then I think we will have a pain that will last only, say, half a decade.
But of course, that's very, very unlikely.
No matter how convincing we are, it's very unlikely that that will be the case.
What will happen is governments will attempt to stave off this change.
And this will put us in a Japanese-style second or third world low rent in perpetuity, at least until people figure out that we need to stop the use of force to truly flourish as a society.
Thank you so much!
As always, I hope this was helpful.
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