Saifedean Ammous: Bitcoin, Anarchy, and Austrian Economics | Lex Fridman Podcast #284

1. 0:00 – 1:33

   Introduction

   1. SASaifedean Ammous0:00

      You can't have permanent war without fiat. And I also think there's a case to be made that you can't really have fiat without war.

   2. LFLex Fridman0:12

      The following is a conversation with Saifedean Ammous, one of the central and most impactful economists, philosophers, and educators in the world of Bitcoin. He's an Austrian economist, an anarchist, and the author of The Bitcoin Standard and the new book, The Fiat Standard. Saifedean does not mince words in his criticism of economists and humans in general with whom he disagrees. For example, Paul Krugman, who is a neo-Keynesian economist and a previous guest at this podcast. Saifedean's opinions are strong and often controversial. I do push back in this conversation, playing devil's advocate or trying to steel man each side. But as always, I do so in the service of exploring the rich space of ideas that Saifedean has about human nature and human civilization. I trust the intelligence of you, the listener, to come to your own conclusions. That is the burden of being a free-thinking human. It is on each of us individually to dive into this chaos of ideas, and from that chaos, discover long-lasting universal wisdom to live by. This is the Lex Fridman Podcast. To support it, please check out our sponsors in the description and now, dear friends, here's Saifedean Ammous.

2. 1:33 – 14:38

   Money

   1. LFLex Fridman1:33

      Let's start with the big question. What is money and what is the role of money in the history of human civilization?

   2. SASaifedean Ammous1:40

      Money is a medium of exchange. The thing that defines money is that it is a good that you don't buy for its own sake because you want to consume it itself or because you want to employ it in the production of other goods, which is what capital goods are. So we have consumption goods. We have capital goods. Money is distinct from those two because it is a good that is acquired purely to be exchanged later on for other goods. So, you just not something that you acquire for its own sake, you a- you acquire it so that you can then later on exchange it and that's a market good. That's a market good like all other goods. You know, it's a, you, you acquire food because you eat it. You acquire a car to move you around. You acquire money so that you can exchange it for other goods. And that's something that, um, many people have a hard time grasping, of the concept of money as a market good, but it is a market good, just like all others. And the importance of it is that it allows us to trade. It allows us to develop, um, to develop the division of labor, which would not be possible at any kind of sophisticated level without money. So if, um, you know, if we live in a small society of 10 people, then, uh, think about all the things that we can make, all the things that we can produce. Uh, i- if we're only 10 people isolated from the world, there's only very few things that we can make, and therefore, um, we can exchange those things directly with one another. But as, you know, if we get in contact with other societies that have more people, then the opportunities for specialization increase. You know, if there's 10 people, the only thing that you can make is, uh, the very basics you need for your survival. But if you're part of an economy of 10 million people, there's much more room for specialization. You can make a car. You can make a house that's very mo- sophisticated and that relies on the division of labor. That relies on you specializing in doing one tiny little thing which is not what you consume. You know, you, you con- and you trade that thing for all the things that you consume. So, as the economy becomes more sophisticated and involves more people, and currently we're all part of a, of an economy of almost eight billion people, um, each one of us produces one tiny little thing. And they exchange that thing for all the things that they want. And so because we specialize, we become more productive in doing the thing that we're good at. So, you know, there's people out there who are engineers who are designing windshields in cars. It's a very specialized thing. They sell windshield design to Mercedes-Benz and then from that, you know, th- that windshield design is, um, added onto millions of cars around the world. And from that, they're able to get enough money to meet all of their needs. So the division of labor is enhanced enormously with money because without money, it's very difficult to be able to exchange, um, a large number of goods. It's very difficult to have a sophisticated economy with its large degree of specialization because, um, it's, it's very difficult to find people who want the thing that you have and have the thing that you want. We call this the coincidence of wants, and that's really the problem that money solves. So you make apples and I make oranges. I'd like to have some of your apples, but you don't want my oranges. And that's, we have a problem of coincidence of wants. So what do I do? You want bananas. I need to find somebody who has bananas, give them my oranges, take their bananas, give you their bananas, and then I take the apples. In that case, bananas are a medium of exchange. So it's natural that a medium of exchange will evolve and will emerge in an economy as an economy becomes more sophisticated. As we move beyond 10 people and 10 goods, it's inevitable that we're going to come to a situation where we have the problem of coincidence of wants, and the way to solve that is to use a medium of exchange. And it can be anything. It can be a banana. It can be, um, food stuff. It can be any kind of good. As long as I acquire the good with the purpose of it, passing it on to you, not for the purpose of me consuming it or using it, then that's a medium of exchange.

   3. LFLex Fridman5:37

      So when we w- look at the entirety of human society of millions of billions of people and think of them just a bunch of individuals running around, I love the, the term coincidence of wants. So each one of them, it's like a stochastic system. They have desires. It's like a random collection of desires, som- somehow rooted in our evolutionary history but mostly random in terms of preference of banana or apple, that kind of thing. And then they also have the capacity, uh, for...... competence and excellence in particular kind of labor, so like, uh, a specialization. They're able to be, like, incredible at a particular set of tasks. So there's a bunch of ants running around with, uh, consciousness and intelligence, and they have desires and they have capabilities, and then how, um ... There's a coincidence of both the, the wants they have and the capabilities they have, and you wanted to create a system that kind of, um, exchanges those things. So when you imagine w- like, uh, what is a good? What is markets? When you imagine a market as like a h- hierarchical system, wh- what do you imagine? What is a market?

   4. SASaifedean Ammous6:53

      A market is just a name for the naturally emergent phenomena of people voluntarily exchanging things. It's, uh-

   5. LFLex Fridman6:58

      At any scale.

   6. SASaifedean Ammous7:00

      At any scale, yeah. Um, individ- it could be a market of two people on an island on their own. It could be eight billion people across the planet. Um-

   7. LFLex Fridman7:08

      Naturally emerging.

   8. SASaifedean Ammous7:09

      Yes. This is the thing, I think, that is, uh, very hard for many, uh, uh, people who don't have a good understanding of economics to grasp, that, um, capitalism and markets are not something that you need a, um, a central planner or a government officer to make happen. Capitalism is just what happens when people are left to their own devices. It's just our cognitive capacity allows us to develop tools that we can use for production, and, um, that's what we do. That's what humans have been doing since they started, you know, making spears to hunt. That's the first capital good probably. So we're constantly accumulating capital. We're constantly trading with one another. We find an opportunity. You know, you've got a lot of oranges. I've got a lot of apples. Then I'll take some of yours, you'll take some of mine. We're both better off. This is just a naturally emergent thing, and money is what makes it enormously powerful. Money, money is what allows it to scale really. Uh, money is what allows it to go beyond, uh, small societies into just something that is global, because with money, um ... Again, as I was saying earlier, you know, all you need to do is specialize in doing one thing, the thing that you do best, and then you exchange that for money, and you don't have to worry about whether the other people involved in this want what you have and have what you want. You just sell it for money to whoever wants it, and you buy whatever you want from whoever has it. And that's, um, the- an enormous reduction in the mental burden of how a market economy functions. So the first thing that I would say about money is that it allows for the division of labor, and it allows for the market system to grow, and the second thing is that money is a mechanism for storing value into the future. So again, as humans, we developed the capacity to think f- for the future. We, you know, we, we make a spear so that we can hunt, and then we see that it works, and then we take it out of the animal that we hunted it with, and we keep it for the next day's hunt. And then we start making a better spear, and we make a better fishing rod, and then we make a fishing net, and then we make a fishing boat. And that's th- our ability to think of the future. And as we start building durable goods, we start thinking more and more of the future, we start becoming more and more future or- oriented, and that's, um, really the process of civilization, the process of denying our needs f- now in order to think for the future. So instead of spending all of our day on the beach enjoying ourselves, we take time off from leisure on the beach and spend some time, um, making a spear or making a fishing rod so that our productivity in hunting or fishing tomorrow is gonna be higher. And so that ability to think for the future is enhanced by our ability to provide for the future, and we do that with durable goods. But then money ends up being the best mechanism for providing for the future, because you- the future is uncertain. So, you know, you can, um, save your apples and oranges. You can save the spears. You can save the animal that you hunted, but these things, um, you know, first they rot, and they're not very good at holding onto their value over time. But even if they were, um, even if, you know, have o- objects that are durable, the problem with them is that you don't know if you need them n- tomorrow or next month or next year. You're not sure if you're going to be needing them, and you might end up not needing them, and you might end up not finding anybody who needs them or finding somebody who needs them but doesn't value them much and won't give you much in exchange. Money allows you the optionality of saving the most liquid good, the most saleable good, so it's something that you can sell tomorrow with the least uncertainty. It has the most liquidity, the most ability to, uh, be sold without a loss in its value. So money is our most advanced technology, uh, the, and our best technology for moving value into the future. And so I think history really, I- I argue this in all my books, is that really history we see, um, we can s- think of it as a process of our money gets harder, and so our money is gets better at holding onto its value for the future. Um, and by harder I mean harder to produce. We, we find things that are hard to produce that are better at holding onto their value, so they hold onto their value better for the future, and that allows us to plot and plan for the future, that makes the future less uncertain, and that makes us more future oriented. In other words, it lowers our time preference. And th- the harder the money is, the better it is at allowing us to think of the future.

   9. LFLex Fridman11:41

      So people should know that you've written, uh, the book Bitcoin Standard from 2018, I believe.

   10. SASaifedean Ammous11:48

       Yeah.

   11. LFLex Fridman11:48

       And then a new book called Fiat Standard. Um, the Bitcoin Standard is considered kind of the Bible, uh, in the cryptocurrency space, in the Bitcoin space, of, uh, just a very rigorous, systematic explanation of why Bitcoin, what is it, why should it be, why is it good. So you're describing in that book and in the new book different implementations of the technology of money. Uh, you ... In the new book, you talk about-... fiat money, which is another way to do money. So obviously, there's a lot of different ways to do money and maybe we haven't discovered the best way to do money yet. Our conversation today is how to do money better. Um, maybe we'll go back to bananas eventually. Uh, (laughs) right?

   12. SASaifedean Ammous12:33

       (laughs) Very good reasons why we won't. (laughs)

   13. LFLex Fridman12:35

       Well, we can disagree. Uh, we can agree-

   14. SASaifedean Ammous12:37

       (laughs)

   15. LFLex Fridman12:38

       ... to disagree on this. Uh, I'm open-minded to the bananas. They, uh, they're one of the biggest source of joy to me when I first came to this country is, uh, eating bananas. And so I'm, ma- maybe money, happiness, um, perishable happiness will eventually become the, uh, the best medium of exchange. I don't know. Uh, open minded. Anyway, so you mentioned hard money and soft money. So there's different ways to do money. What is hard money? What is soft money?

   16. SASaifedean Ammous13:08

       In The Bitcoin Standard, I present the argument that money is always whatever is the hardest thing to make. Um, historically, I think we see many examples of that. So for instance, in prison, people use cigarettes as money because nobody can make cigarettes in prison. In societies, uh, we have the example of Yap Island, for instance. It's an island that doesn't have any limestone, but there's a nearby island that has a lot of limestone and, um, it's very expensive, obviously, with primitive technology to move limestone from the, uh, from Palau to Yap. So on Yap, limestones were money and seashells, rare seashells that are not easy to find end up serving as money in places where they're rare. Um, glass beads were money in West Africa where there was no glass making technology because they were imported from abroad and they were very hard to make. And I think there's a conscious effort of some people might recognize the, uh, the, the hardness and the scarcity and choose this as money. But I think what's more important is just a natural evolutionary process whereby people choose all kinds of random things as money, bananas maybe even.

   17. LFLex Fridman14:14

       Mm-hmm.

   18. SASaifedean Ammous14:14

       But then the people who end up making these bad choices, um, don't end up with any wealth left. Whereas the people who store the m- their wealth in the things that are hard to make end up acquiring, uh, end up maintaining their wealth and maybe even increasing it over time. And of course, this culminated in the 19th century, in the end of the 19th century by the basically the entire planet being on a gold standard. And that-

   19. LFLex Fridman14:37

       What is the gold standard?

3. 14:38 – 27:49

   Gold standard

   1. LFLex Fridman14:38

   2. SASaifedean Ammous14:38

      The gold standard is basically when money is gold or at least government currencies backed by gold. But the reason gold became money and not copper, not nickel, not bananas, is that gold is the hardest metal in the world and it is the hardest metal to increase the supply of. And the reason for that is based in chemistry. So, um, gold is indestructible. You can't destroy gold in any meaningful sense. It's, um, it's, it's been accumulating stockpiles for thousands of years. You know, the gold that was worn by Nefertiti back in ancient Egypt is today, um, probably in somebody's necklace or in somebody's gold coin. It's still there. So for thousands of years, humans have been digging for gold, they dig it out of the ground, they refine it, and then they put it in a jewelry or a coin, and then it just stays there. Um, it gets melted down into new other forms. You know, the jewelry gets turned into coins or coins get turned into bars. But it's, um, it's just stockpiles that are accumulating. On the other hand, um, every year we get better at our technology of looking for gold. You know, there's more people all over the world. The population increases, the technology improves. So we keep finding more and more gold and we keep making the stockpiles bigger. However, because we are constantly adding to a stockpile that is not, um, being devalued, sorry, that is not being consumed because there's no way of consuming gold. You can't eat it, you can't, um, burn it. You can't, i- it doesn't rust. Um, because of that, we're constantly adding to a constantly growing stockpile. So if you look at the numbers, you see over the last 100 years, we've got pretty reliable data on gold production worldwide. We see that pretty much gold stockpiles increase at around one and a half to 2% per year every year. So yes, we, we're making more every year, but we are making more so we're adding to the stockpile. The stockpile grows more. So every year we're adding only around one and a half to 2%.

   3. LFLex Fridman16:32

      Mm-hmm.

   4. SASaifedean Ammous16:33

      Compare that to the second, uh, highest, the second hardest metal historically was silver. And that increased historically at around maybe 5% per year or so. Now it probably increases at something like closer to 30% because it's now getting used extensively in industrial, uh, uses. So when you use it in, in ind- in industry, um, you know, when you put silver in a laptop or in a camera or in a machine, effectively you aren't consuming the stockpile because it's not used as money. It's taken outta the monetary stockpile. So over the last 150 years, since 1870 in particular, and I discuss this in detail in, uh, The Bitcoin Standard, what happened in 1870 was, uh, Germany won the Franco-Prussian War. And Germany was on a silver standard, but the value of silvers was declining. So Germany did something very smart, which is they took their indemnity from France in, uh, silver, uh, and gold and used that big chunk of gold to switch to going on a gold standard. And since then, silver's been collapsing in value next to gold. So back then the price of an ounce of gold was around 15 ounces of silver. Today it's closer to 100. It's just been declining for the last 150 years. And so because of that, because of the fact that it's lost its monetary role as people shifted toward gold, the value of silver went down. And so it became economical to use it in more and more industrial applications. So the stockpile declines and then as a result, uh, that weakens its monetary properties more and more and more. So that's why by the end of the 19th century, I mean the beginning of the 19th century, gold and silver were money, by the end, it was basically only gold. And the countries that were still on a silver standard-... China and India in particular suffered enormously from it, because their money was devaluing very, uh, quickly next to gold. And so Europeans who would come to China or India were able to buy things at practically a big discount.

   5. LFLex Fridman18:30

      So I hope it's okay if I ask very simple, very basic questions. There's few people in this world that are good, as good as you are at answering very basic, uh, almost ridiculously basic questions. 'Cause I think exploring questions, like what is money, is a really great way to, uh, to think from first principles, to really think deeply about this world. So I really appreciate you doing that. Um, when you say standard, what does it mean?

   6. SASaifedean Ammous18:55

      Mm-hmm.

   7. LFLex Fridman18:55

      When you say silver standard, gold standard, again, with a basic question.

   8. SASaifedean Ammous19:00

      The term, really, I think, was based out of gold. Uh, the first time this came out was the gold standard, because... Um, so I- I said gold was money at the end of the 19th century, but it wasn't just that everybody was using gold coins and trading with gold coins, because that's got a problem of, um, divisibility, you know? So, um, a lot of things are worth less than one gold coin. So how do you buy that thing? And the answer was that you created monetary instruments that were backed by gold. And so currencies, national currencies under the gold standard, where specific units of gold. And that's how a gold standard functioned. Money was gold, but you had pieces of paper that were redeemable in gold. So you could go to the central bank, you could give them the piece of paper, the $100 bill or the $10 bill, and they'll give you gold in exchange, and they give you a specific quantity of gold in exchange. Effectively, the paper was just a receipt for gold.

   9. LFLex Fridman19:56

      So the paper exactly represented the amount of gold.

   10. SASaifedean Ammous19:59

       Exactly. That was the plan, or that- that was- that was what it's supposed to do, but a- arguably, we never had a pure, uh, gold standard, because the nature of gold means that the people who are in charge of the gold, um, they have an enormous amount of power because the gold is concentrated with them. And as long as not everybody shows up at the same time asking for their gold, then you can make more receipts than you have gold.

   11. LFLex Fridman20:21

       Sure.

   12. SASaifedean Ammous20:21

       And this has been-

   13. LFLex Fridman20:21

       So there's always, uh, shady stuff going on, but at least that's the stated goal, is the receipt should exactly represent the amount of gold there. And also when you say standard, it means that, uh, governments sort of publicly stated that this is the approved, the main way of making transactions that are monetary. So this is the money, this is- this is the official money that you should be using if you live in this country.

   14. SASaifedean Ammous20:49

       Yes, although I would say it's more like the other way around. It's not that the governments, um, established gold as money, it's more like the- it's- it's more like gold gave the governments the credibility for their currencies.

   15. LFLex Fridman21:01

       Sure.

   16. SASaifedean Ammous21:02

       So, uh, uh, governments were not, uh, the ones that made gold money. Gold has been money before states were invented. Um, states, if you have a government and you'd like to have some legitimacy and you'd like to be able to deal with other governments on an equal footing, you had to go buy the gold standard. You had to have a currency that was redeemable in gold so that you could trade with the rest of the world so that people could, um, in your country use that currency. Um, so it's- it's- it's not that governments were choosing gold, it's more like they were having to adapt their own currencies to gold in order to give their currencies credibility.

   17. LFLex Fridman21:39

       So there's a dance there though, because if they had to, then why did they switch away from it after? So there is a dance where the governments, you know, the people pressure... So first of all, the- the- the- the basic characteristics of the hard money pressures the governments and the people in terms of what should be used. Then the people, based on their community, the network effects, the way they- the- the narratives they tell each other, all that kind of stuff, they pressure the governments to, uh, take on a particular money. Then the governments, uh, you know, they like power, they like control, all those kinds of things, they pressure the people and tell different kinds of narratives. So there's a dance going on in this evolution of what technology to use for a monetary system. So it's- I- the reason I- it- it- I don't know if governments had to, because they clearly didn't have to, because they eventually moved away from it (laughs) . So it- but there was pressure probably.

   18. SASaifedean Ammous22:39

       Yeah, but I mean even after they moved away from it, you know, central banks until today, they still hold a lot of gold reserves.

   19. LFLex Fridman22:45

       They do, yeah.

   20. SASaifedean Ammous22:45

       In fact, if you look at 1914 when they- when the world really went off the gold standard, uh, the amount of gold reserves held by central banks was a tiny fraction of what it was. As time went on, central banks accumulated more and more gold. What ended up happening is they prevented their citizens from using the gold, but they continued to use it. So gold continued to be money up until 1971, because, um, effectively the world was on a dollar standard and the dollars were backed by gold. But then after 1971, even then, you know, central banks continued to accumulate gold because why would you as a central ba- central bank want to accumulate pieces of paper effectively or credit liabilities of another central bank that can produce them infinitely? And it's- it's- it's a lesson that's becoming, um, more and more obvious to governments today, you know, as- as we see US sanctions taking, say, Russian reserves or Afghanistani reserves. Um, and this is why, you know, we see China and Russia have accumulated a lot of gold over the last, uh, 10, 20 years.

   21. LFLex Fridman23:44

       So just to, uh, return to the question of, uh, definitions, so what is hard money versus soft money?

   22. SASaifedean Ammous23:51

       Yes. So hard, I mean, it's a relative thing, but the hardness refers to the difficulty of producing more units of-

   23. LFLex Fridman23:58

       Right.

   24. SASaifedean Ammous23:58

       ... the money supply. So an easy money would be a money that is, um, uh, relatively easy to make, so you can increase the supply by 10, 20, 30, 40, 50% or something like that. So pretty much all commodities, all market commodities other than gold and silver, they're easy money, and they're not suitable as a monetary medium because they're being consumed. So if you look at... And I- in The Bitcoin Standard, I mentioned this metric called the stock-to-flow ratio-

   25. LFLex Fridman24:24

       Mm-hmm.

   26. SASaifedean Ammous24:25

       ... which is the ratio of the annual production, the flow, to the stockpile, the existing stockpile. If you look at all the other metals, they're easy money because they're being consumed. So think about how much stockpiles of copper there are in the world today. So copper companies obviously have some stockpiles of copper, um, major copper consumers will have stockpiles of copper.But the vast majority of copper is essentially on a- uh, on a conveyor belt of production, from the mine straight to the, uh, consumer good that it's being used for. So, the existing stockpiles are roughly in the range of one year's production. If you take all of the companies, um, I-I don't have exact statistics. It's- it's very difficult to get these. But, you know, it's roughly in the same range. Like, if- if- if copper production were to stop completely today, we'll have about a year's production stored in various places. So, that makes copper terrible money. Because if you started using copper as money ... And this is why, you know, a lot of people say, "Well, money is a collective illusion. Money is a social construct. Um, if we all agree that something is money, then something is money." I think this is completely clueless. And it's usually Marxists who believe this, so obviously no understanding of economics. It's completely clueless because even if everybody in society decided we wanted to make copper as money, even if we all decided to collectively, uh, take part in this hallucination or illusion, it would not make copper money. It would just make everybody who decides to take part in this hallucination poor. That's it. It would make copper miners rich, it would make all of the people who chose copper as money poor, and copper would not be money. It can't work, because what happens is, because of the fact that the stockpiles are so small, if you buy, you know, even if you get the 1,000 richest people in the world, all of the world's billionaires, they get together and they all dump all of the money that they have, all the stocks, all the bonds, all the, um, gold, all of the Bitcoin, everything that they own, they dump it and they buy copper with it, what's gonna happen? The price of copper is gonna go up a lot. But what's gonna stop copper miners from flooding the market with even more copper than what the billionaires bought? Nothing. They're gonna dump all of that extra copper production. If the price of copper is gonna go up, so, you know, there will be a lot more copper mining than all the other metals, a lot of, um, you know, nickel companies and gold miners are gonna switch to focusing on copper. And then we're gonna dump an enormous amount of copper on the market. The value of copper is gonna crash, and the people who chose copper as money are just gonna end up with large warehouses of very cheap rusting metal.

   27. LFLex Fridman27:06

       So, that's a brilliant description in that that kind of pushes towards gold, where the, um, stock-to-flow ratio I guess you would say is 1.5 to 2% like you mentioned earlier.

   28. SASaifedean Ammous27:16

       Well, that would be like the inverse of the stock-to-flow. That's the supply growth rate, so the stock-to-flow is the inverse. It's around 60.

   29. LFLex Fridman27:22

       Inverse. 60, got it. But let me push back on, uh, as somebody who likes human psychology, let me push back on the collective hallucination, uh, and the illusion. So, that's for copper. But what about paper money? Uh, that, you know, that- that's not ... You can't smoke it. You can't eat it. It's just, it's supposed to represent, it's supposed to just be the medium of exchange. And, uh, in that

4. 27:49 – 33:39

   Collective hallucination

   1. LFLex Fridman27:49

      sense, what role does collective hallucination play in the effectiveness of money?

   2. SASaifedean Ammous27:56

      Exactly zero. Because all of the paper money, first of all, there's never been an instance, and again, um, this is, uh, flies in the face of a lot of what a lot of people like to think about money, there's never been an instance where a- a government came out and said, "All right. We're printing out these pieces of paper. Use them as money, and this one is worth 10 apples," or, "Use it for buying things, and here's the piece of paper." This has never happened. They've always taken ... Uh, fiat money, paper money, uh, all of these things were always born out of fraud. Initially, it was a receipt for gold, and then they told you, "Uh, well, you know, you don't need the gold anyway and you have to use this. And then if you don't use it, we throw you in jail." And then, so first of all, it doesn't, um, it-it can't, you can't enforce this thing. So, it's never really just happened and it's never been hallucinated into existence. Um, people can hallucinate this kind of nonsense in, uh, writing, uh, textbooks and books and, uh, in academia. But in the real world, people don't hallucinate, uh, money. People are very careful about what they put their money in.

   3. LFLex Fridman29:00

      For people listening, we're gonna have fun in this conversation.

   4. SASaifedean Ammous29:02

      (laughs)

   5. LFLex Fridman29:03

      'Cause you're like, you- you already said Marxist, fraud, hallucination. Just because we use these words doesn't mean they're true, but they're fun to talk about.

   6. SASaifedean Ammous29:12

      (laughs)

   7. LFLex Fridman29:13

      So, you- you have a strong certainty about the way you talk, which I think is fun.

   8. SASaifedean Ammous29:19

      (laughs)

   9. LFLex Fridman29:19

      Um, but allow me in my dumb self to push back, to play devil's advocate. And I'll actually ask you sometimes to play devil's advocate if possible.

   10. SASaifedean Ammous29:26

       Mm-hmm.

   11. LFLex Fridman29:27

       'Cause you're smarter than me on all this stuff. So, uh, we- we want the smartest devil- devil's advocate possible. (laughs) And I'm certainly not that. But anyway, so but nevertheless, we are currently on a fiat standard. So, money does have value, paper money. And the reason it has value is because we believe it has value. To what degree, if we put the hallu- hallucination word aside, the belief that something is worth value is actually value and is the thing that helps money work? 'Cause you're saying it's fraud and the belief is almost valueless. But how much value? Can we quantify the value of the belief, the collective belief?

   12. SASaifedean Ammous30:18

       No, I- I should say, like, um, all economics is subjective. I- I consider myself an Austrian school economist. And the starting point of all Austrian economics is that all value is subjective. So, um, obviously, you know, value only exists because humans choose to make the valuation. However, um, the economic reality of the way that money works means that it's just a technology like all others. And so, if we ... For me, when people say, "Well, if we hallucinate that this thing can be money, then it'll be money. If we can hallucinate bananas to be money, then it'll be money," for me, it's like saying, "Well, if we hallucinate that bananas can be spaceships, they'll be spaceships." I mean, you can call them spaceships if you want, but a banana is not gonna get you to the moon.

   13. LFLex Fridman30:59

       Well, then nevertheless ... So, that's true. There's ... So, you're drawing a big distinction between physical reality and the space of belief. But it seems like so much power re-... o- of human civilization. Uh, so much destruction, so much creativity, creation happens in, in our minds. So-

   14. SASaifedean Ammous31:21

       Absolutely. Everything does happen in the mind. Whatever-

   15. LFLex Fridman31:23

       You're not gonna get to the moon, but you might still have a significant impact on h- human civilization if a lot of people believe a thing.

   16. SASaifedean Ammous31:31

       True. But, um, economic reality exists in a way in which your beliefs are rewarded when they match up with economic reality.

   17. LFLex Fridman31:40

       With physical reality.

   18. SASaifedean Ammous31:40

       And they're punished when they don't. So if you ride a banana (laughs) jump off a cliff thinking you're gonna get to the moon, you know, that solves the problem of people thinking that bananas are spaceships by killing people who think that (laughs) that bananas are spaceships. And I think, uh, to go back to your question on, in terms of paper money, so yes, even though, you know, ignoring the, um, the original sin of the creation-

   19. LFLex Fridman32:02

       Yes.

   20. SASaifedean Ammous32:02

       ... of fiat money, and ignoring everything that happened before 1971, all right, well, here we are. People are using... Well, it's not really paper money. We should say, like, uh, fiat money is predominantly credit. So like the- it's also digital currency. So more than 90% of dollars are digital. Less than 10% of dollars are physical. So it is a digital currency. And all over the world, all these governments are using digital currencies effectively with some physical manifestations in paper but yet even within these currencies, it's still the same analysis. And I discussed this in chapter four of The Bitcoin Standard. You look at government monies, you see that the currencies that have held onto their value, the ones that have the biggest value, the ones that play the biggest role in global trade, the ones that are used as currency reserves all over the world are the ones that have the lowest supply growth rate.

   21. LFLex Fridman32:50

       Mm-hmm.

   22. SASaifedean Ammous32:50

       The ones that grow, whose central banks are the least inflationary. And on the other hand, the ones that, whose supply is more inflationary, similar to copper, end up failing. You look at Lebanon, Venezuela, Zimbabwe, these are currencies whose supply increases very quickly and therefore, um, their value collapses. Whereas the dollar, the Swiss franc, the euro, um, the British pound, the Japanese yen, they increase at a much lower rate in general than the, um, than these terrible currencies and that's why all over the world, you see people are looking to get more dollars and more of these harder currencies than the easier ones so I think this analysis of, um, the hardness of the money and the ease of money is pretty well supported empirically.

   23. LFLex Fridman33:37

       So like you said,

5. 33:39 – 1:06:00

   Austrian vs Keynesian economics

   1. LFLex Fridman33:39

      uh, you're at least in part or in whole consider yourself an Austrian economist so you're perhaps a great person to ask about the basics. Uh, what is Austrian economics? What is Keynesian economic? What, how do you compare the two? What should people know? Some interest- What are interesting defining characteristics to you about these schools of thought?

   2. SASaifedean Ammous34:01

      Yeah. So Austrian economics, the way that I see it, Austrian economics is economics. It's, um, we call it Austrian economics because economics has been hijacked by a bunch of frauds, really.

   3. LFLex Fridman34:11

      Or people who are wrong.

   4. SASaifedean Ammous34:12

      (laughs)

   5. LFLex Fridman34:12

      (laughs)

   6. SASaifedean Ammous34:12

      Well, it's much worse than wrong, by people who are just essentially propagandists for inflation.

   7. LFLex Fridman34:17

      Right.

   8. SASaifedean Ammous34:18

      Um, so-

   9. LFLex Fridman34:18

      That's like your opinion, man. Right? (laughs)

   10. SASaifedean Ammous34:21

       (laughs) Yeah, well, that's also like your opinion, man.

   11. LFLex Fridman34:23

       Yeah.

   12. SASaifedean Ammous34:24

       But you asked.

   13. LFLex Fridman34:25

       That's true. Well, I also talked to Paul Krugman on this podcast, so he's-

   14. SASaifedean Ammous34:30

       O.

   15. LFLex Fridman34:30

       (laughs) The O speaks enough, but he is, uh, he's one of the people that is perhaps most harshly criticized by folks in-

   16. SASaifedean Ammous34:40

       Yeah.

   17. LFLex Fridman34:40

       ... Austrian economics perspective and vice versa, which is a fascinating tension.

   18. SASaifedean Ammous34:45

       Yeah, he's, um, he's done a great job as an actor who plays an economist on TV and the internet. (laughs)

   19. LFLex Fridman34:52

       (laughs) So anyway, now tell me what you really think.

   20. SASaifedean Ammous34:55

       Yeah. (laughs)

   21. LFLex Fridman34:55

       No, but so the basics of what is Austrian economics? What is the, what perspective does it take in the world?

   22. SASaifedean Ammous35:00

       Yeah, so I mean, Austrian economics really is, uh, the continuation of a tradition that it goes back to the ancient Greeks of studying economics. Uh, historically it's really just, um, economics and that has evolved over time and the, um, the establishment of the Austrian school per se came in 1871, 150 years ago when Carl Menger, the father of the school, wrote a book called Principles of Economics and essentially invented marginal analysis, which is a big deal in economics. Marginal analysis is the idea that in economics, individuals carry out decisions at the margin, that it's, um, when you, when you make a choice, you're not making it... for instance, if you're making a choice between what should I spend my money on, you're not making a choice whether it is this thing is object A or B, which one is more valuable for me in general? Which one is more valuable for me for the rest of my life? You're choosing about the next unit right now at this point, at this stage. And if you analyze economic decision making at the margin, it makes a lot more sense and you can understand why people decide and make the decisions that they do. Whereas if you don't apply marginal analysis, things don't make sense. The key thing that marginal analysis helps us solve is what is called the water diamond paradox. So you will die without water. We all need water and yet water is dirt cheap, whereas diamonds are extremely superfluous. Nobody needs them. Um, nobody's gonna live or die because they have a diamond and yet they're extremely expensive. So why is it that as human beings we pay maybe say a dollar a liter for water, whereas we pay thousands of dollars for a few grams of diamonds? Why is this the case? Do we value water less than diamond? And the answer is no, but at the margin where we are right now, you live in a place where water is very abundant because cities are only built in places where water is abundant and, um, you're only making a choice about the next unit of water and so water is extremely abundant and you're choosing about whether to spend the next, um, unit of money on water. The valuation that you give to water, given that you have a lot of water at home-... and that you live in a place that has abundant water is pretty low to the marginal unit. But it's very high for water overall. So if I asked you how much would you spend for water in general, you know, how much would you, uh, pay for water for all of your life, it would be a lot higher than diamonds, right? If I told you you can only have water or diamonds for the rest of your life, you'd choose water obviously. But you, nobody's ever had to make that choice. You only make your choices at the margin. So at the margin where we are in modern civilization, we have an abundance of water, and that's why we have civilization. And diamonds are very rare and scarce, and, um, people are only buying, uh, you know, you, you buy your first diamond when you are gonna get married and you give it to your wife, and that's, uh, that's gonna be the first few grams of diamond that she's ever gonna own.

   23. LFLex Fridman38:07

       I'm giving my wife water.

   24. SASaifedean Ammous38:09

       (laughs) Smart move. You should definitely give her Bitcoin instead of diamonds. I tell my wife, I occasionally remind her of what the, what we, how many Bitcoin we could have had if I bought her Bitcoin with the price of the diamond ring.

   25. LFLex Fridman38:20

       What's the downside of, by the way, diamonds for, from the analysis of like gold and so on?

   26. SASaifedean Ammous38:25

       Ah, that's a great question. Um, (laughs) arguably diamonds are a scam. Uh... (laughs)

   27. LFLex Fridman38:31

       (laughs)

   28. SASaifedean Ammous38:33

       Because they became popular as a thing in, uh, marriage after gold was banned, after gold ownership was banned in the US in the 1930s and in many places around the world. So before that, you'd give gold, and the reason you'd give gold in a dowry, in a wedding is because, you know, i- it wasn't just that it's pretty and shiny, it's because it's money. And so, um, you know, if you die, uh, your wife can take the gold and she can live o- off of it. Um, it's, it's a demonstration that you're giving her something valuable, and that's because nobody can make a lot more gold that has the highest stock-to-flow ratio. But then they banned gold ownership, or they allowed people to only own very tiny quantities of gold, and that's when the diamond, uh, industry stepped in and marketed diamonds as, um, you know, the thing that you need to give. But the problem with it is, of course, that diamonds aren't, uh, like gold. They're not very hard to, uh, make more of. And the reason we have, uh, scarcity in diamonds is really artificial. There's a, there's effectively a monopoly of diamond producers. They restrict the supply, and, um, it's a pretty dirty business. And the way that they do it is, you know, all the, um, all of the talk about, um, blood diamonds is a way for them to ensure their monopoly. So, um, if you're part of the monopoly of diamond producers, then it doesn't matter how many people get killed producing your diamonds. If you're out of the monopoly, then human rights organizations descend on you and, and call for shutting you down for selling blood diamonds. And they're also restricting the production of artificial diamonds. This is the other thing. You can make artificial diamonds, you can't make artificial gold. So they restrict the production of artificial diamond and they try and, um, insist that, you know, you shouldn't take artificial diamonds, but they're indistinguishable from real diamonds. So it's an artificial scarcity, and I think there's gonna come a point at some point that this monopoly is gonna break and a lot of people are gonna be left with, uh, essentially, uh, highly devalued, uh, jewelry.

   29. LFLex Fridman40:30

       I'm gonna take this segment of the podcast-

   30. SASaifedean Ammous40:32

       (laughs)
6. 1:06:00 – 1:22:29

   Free market

   1. SASaifedean Ammous1:06:00

      statements. That's the thing. In economics, we don't make quantitative predictions. We cannot do that because we don't have experiments, but we can understand how the world actually works with humility. This is really the key difference, that the Keynesians think they just want to copy the methods of physics and then that's just, you know, uh, gonna give them the certainty of the results of physics, which is like me saying, "I'm just gonna put a red, um, blanket on my back and jump from the fourth floor because I'm Superman." Well, it's not the red blanket that's gonna make me Superman. It does, there's a lot more to it.

   2. LFLex Fridman1:06:30

      So humility manifests itself in economics as the belief in a free market, meaning, like, I can't centralize, I can't do centralized control on this thing. We're going to, uh, minimize the friction of the free exchange of goods. So, um, Austrian economics puts priority in, in the market.

   3. SASaifedean Ammous1:06:52

      Yes. And you could, you could, you could arrive at it through two paths. The, the, the more, um, the more practical path which most scientific minded people arrive at, you know, I came from an engineering background. So I initially had this idea that what is lacking in economics is mathematization. We need to have better math models. We need to get all of those tools from engineering, apply them to economics, and, and we'll be able to plan the world economy and make it work better. And then you start actually trying to solve problems, you know, trying to actually calculate them, and you realize nobody can have that ability because the difference ultimately comes down to the fact y- we can't have experiments. And the reason we can't have experiments is that you can experiment on particles of a gas. You can't experiment on human beings and, and entire economies. And because particles of a gas are just dumb matter...And so, you know, you, you kick matter in a certain way, you can calculate exactly how much is going to fly. Human beings are much more complex. They have a will inside them. And this is really th- this is the humility to understand that you are a human being and other people are also human being just like you. And that the, the, you know, every person wakes up every morning and they have a million things in their mind, a million things they care about, a million things they wanna do. And you will never be able to make the decisions for somebody else, let alone for millions of other people. So this is one path by which you arrive at the conclusion that free markets are better, because you realize that all of the people that think that they can centrally plan markets can't actually do that. And that there's really nothing scientific about them except essentially the rituals they ape of the scientific process. And the other path I think that ar- makes you arrive at the Austrian perspective or the libertarian perspective, I should say, is, uh, simply the, the, the notion of individuals as having their own inalienable right to decide what they want to do with themselves. If you, uh, I mean, the only way that you can give yourself the idea that, um, you get to be planner is ultimately you think you're better than other people. You think your choice, your judgment overrides mine. And I don't think that's a defensible position. I think, uh, I'm in no position to want to force anybody ever. I will never want to force anybody to do anything they don't want. Um, the Keynesian perspective, the central planning perspective is, unlike physics, you know, which is let's force a bunch of particles to sit in a lab so that we can study them, in economics, you're forcing people to do things. You know, let's stop these people from doing this job because it's bad for the economy and let's get them to do that job. Let's force them to pay this price. Let's tax them this much. Let's prevent them from using gold as money and force them to use our credit as money. So it has to rely on coercion. There's no central planning without coercion. And coercion is a crime, in my opinion. There's no way that it is justifiable, morally or ethically.

   4. LFLex Fridman1:09:51

      So from a politics, from an ethical perspective, uh, your view is the, I mean, perhaps the broadly speaking, the libertarian view is coercion is unethical. Uh, freedom is essential. What is, what are the pros and cons of government intervention in the economy? So can you steel man, can you provide pros? You just kind of provided arguments against. Is there any arguments to be made for government intervention, for the role of government in society? Speaking from a political or from an economics perspective, what is a positive role of government that you can imagine you can speak to?

   5. SASaifedean Ammous1:10:33

      I can repeat many other cases, but I, I don't find any of them compelling for the reason that I mentioned, which is that ultimately they all rely on putting a gun to somebody's head and using the threat of force. So that for me is c- can never be justifiable. Whatever the ends are, if the means are violence and the threat of violence, then the ends aren't justified. Everything that's good, governments will use as an excuse to justify coercion. (laughs) So, you know, what do you like? You like motherhood and apple pie? Well, government needs to ensure that motherhood works well and we need government central planning of birth. We need regulations on birth, for instance. We need regulations on how people give birth. We need to ban people from giving birth in traditional ways that have been tried for thousands of years. We need to force people to do things in the modern scientific way.

   6. LFLex Fridman1:11:22

      Well, so what about things like that all of us use? So infrastructure, for example, or education.

   7. SASaifedean Ammous1:11:29

      Mm-hmm.

   8. LFLex Fridman1:11:30

      Um, or well, the economy too, right? Uh, c- can you make a case for the role of s- some large scale centralized systems, whether it's government or not, that do this kind of management?

   9. SASaifedean Ammous1:11:45

      I guess perhaps you could say it as the economies of scale argument that some things must exist at a very hard, a very large scale and therefore you would want, um, you would want political accountability of the people who manage them. This is kind of the argument that's given for infrastructure monopolies, you know, for instance roads or electricity, um, that let's say we live in a country, we need one power plant. The bigger the power plant, the better off we will all be. And there's a natural monopoly in the power plant business, so we're gonna have to have one power plant and since it's only one power plant, then we can't just let anybody d- um, own it because then they're going to make it too expensive. So we need to have the government own it, so it can make it too expensive. (laughs)

   10. LFLex Fridman1:12:28

       And you don't find that case compelling?

   11. SASaifedean Ammous1:12:30

       Not at all. I used to believe in it. I was pretty much a Keynesian when I first started my graduate studies at Columbia. Um, and I, no, I don't find that compelling at all because I think all these examples that they mention of natural monopolies or economies of scale that can only fit at a scale of government, um, it's always, it's always, you know, government bans people from opening power plants and then there's only one power plant and they need to be in charge of it. But in reality, uh, no, in reality, you know, power plants can exist at all kinds of manners of scales of operation. And yes, of course there are benefits to centralization in power plants in particular because there's efficiency in generation, you know. One big, uh, power plant is more efficient than 10 equivalent smaller power plants.

   12. LFLex Fridman1:13:19

       Mm-hmm.

   13. SASaifedean Ammous1:13:20

       But there's also inefficiencies in centralization because the more centralized and the bigger the plant is, the further away a lot of the population is going to be. So you're going to be losing a lot of the electricity in transmission.

   14. LFLex Fridman1:13:33

       And you believe the free market is best in managing that dance, that balance of-

   15. SASaifedean Ammous1:13:37

       Exactly.

   16. LFLex Fridman1:13:37

       ... decentralization?

   17. SASaifedean Ammous1:13:39

       Exactly.

   18. LFLex Fridman1:13:39

       Go ahead.

   19. SASaifedean Ammous1:13:39

       I mean, if we do end up in a situation where there's one power plant for an area, then I, you know, i- if the markets ends up centralizing all of it into one power plant, I don't see that as a problem.Um, there are pla- you know, there's a small town with only one barbershop. Is that a catastrophe? No. Because, um, they don't need two barbershops. Now, if that barbershop started to take advantage of people, started to charge higher price, well then that's just an opportunity for others to step in and, uh, put them in their place. And that's the same thing with power plants. It's the same thing with everything. Um, ultimately, I think the key thing is this. From the central planning perspective, they'll present you the problem as it is and they'll tell you, "Well this is bad, so the fix, you know ... And, and what we can do is better, so let's stop what's bad and do what is better." Two problems here. Usually the r- reason that the thing is bad in the first place is because it is a government monopoly. It is because of government intervention. But the second thing is that this notion that we could just pass a law and fix what's wrong and make it better is, um ... It ignores the fundamental underlying reality, which is that what you're doing is you're offering only one way for this problem to be solved and making all other solutions practically illegal. You're taking taxpayer money, you're putting guns to people's heads to take their money, to use it to build, say, this one solution for a power plant. But you're preventing the free market process from providing us with other alternatives.

   20. LFLex Fridman1:15:11

       Well, so you phrased it sort of from that perspective, but there ... In theory there is a feedback accountability mechanism for the solution that you propose and enforce by, as you're saying, placing a gun to people's head. You're accountable for the, uh, for that choice, for the quality of that solution by being voted out if you, if the solution is actually bad. So it's just a different selection mechanism. And y- and I think ... I personally believe it is a selection mechanism that has worked in the past. It just often does not work, uh, nearly as well as a free market. And the question is, are there domains in which the free market gets itself into trouble? So this th- theoretical view is that th- that's the point of a free market is it doesn't ... If there's trouble, that's a signal and it will respond to that signal, and it will respond appropriately to make ... You try to maximize happiness. The question is, is there a local optima that free markets get stuck in and you need governments to represent the broader scale of the people to get-

   21. SASaifedean Ammous1:16:19

       Yeah.

   22. LFLex Fridman1:16:19

       ... outside of that.

   23. SASaifedean Ammous1:16:20

       I th- I think the fundamental problem here is the idea that there is a feedback mechanism when there is coercion in one party, wh- when one party can employ coercion and the other one cannot. So in other words, I'm gonna put a gun to your head, I'm gonna take your money, and I'm gonna use it to buy more guns for me to put against your head. But somehow you're gonna put a paper in a box and that's going to deactivate my guns. (laughs)

   24. LFLex Fridman1:16:46

       Well, love requires a push and pull, a little bit of tension, a little spice in a relationship, I think, uh-

   25. SASaifedean Ammous1:16:51

       Yeah. I mean, uh-

   26. LFLex Fridman1:16:52

       ... a little gun to the head

   27. NANarrator1:16:53

       (laughs)

   28. SASaifedean Ammous1:16:53

       Good luck to anybody who's going to be dating you if you think, you know, putting a gun to people's head is comparable to a relationship. Uh ... (laughs)

   29. LFLex Fridman1:17:00

       Uh, all jokes. But yes, I, I mean, people don't often think of it as gun to the he- as government and the military as gun to the head. Um, but that is sort of a libertarian perspective because ultimately when you, you know ... Turtles all the way down and at the bottom there's guns. (laughs)

   30. SASaifedean Ammous1:17:18

       (laughs)

Episode duration: 4:14:40