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

Saifedean Ammous 0:00 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.

Lex Fridman 0:12 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.

Lex Fridman 1:33 Let's start with the big question. What is money and what is the role of money in the history of human civilization?

Saifedean Ammous 1:40 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.

Lex Fridman 5:37 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?

Saifedean Ammous 6:53 A market is just a name for the naturally emergent phenomena of people voluntarily exchanging things. It's, uh-

Lex Fridman 6:58 At any scale.

Saifedean Ammous 7:00 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-

Lex Fridman 7:08 Naturally emerging.

Saifedean Ammous 7:09 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.

Lex Fridman 11:41 So people should know that you've written, uh, the book Bitcoin Standard from 2018, I believe.

Saifedean Ammous 11:48 Yeah.

Lex Fridman 11:48 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?

Saifedean Ammous 12:33 (laughs) Very good reasons why we won't. (laughs)

Lex Fridman 12:35 Well, we can disagree. Uh, we can agree-

Saifedean Ammous 12:37 (laughs)

Lex Fridman 12:38 ... 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?

Saifedean Ammous 13:08 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.

Lex Fridman 14:14 Mm-hmm.

Saifedean Ammous 14:14 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-

Lex Fridman 14:37 What is the gold standard?

Saifedean Ammous 14:38 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%.

Lex Fridman 16:32 Mm-hmm.

Saifedean Ammous 16:33 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.

Lex Fridman 18:30 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?

Saifedean Ammous 18:55 Mm-hmm.

Lex Fridman 18:55 When you say silver standard, gold standard, again, with a basic question.

Saifedean Ammous 19:00 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.

Lex Fridman 19:56 So the paper exactly represented the amount of gold.

Saifedean Ammous 19:59 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.

Lex Fridman 20:21 Sure.

Saifedean Ammous 20:21 And this has been-

Lex Fridman 20:21 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.

Saifedean Ammous 20:49 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.

Lex Fridman 21:01 Sure.

Saifedean Ammous 21:02 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.

Lex Fridman 21:39 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.

Saifedean Ammous 22:39 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.

Lex Fridman 22:45 They do, yeah.

Saifedean Ammous 22:45 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.

Lex Fridman 23:44 So just to, uh, return to the question of, uh, definitions, so what is hard money versus soft money?

Saifedean Ammous 23:51 Yes. So hard, I mean, it's a relative thing, but the hardness refers to the difficulty of producing more units of-

Lex Fridman 23:58 Right.

Saifedean Ammous 23:58 ... 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-

Lex Fridman 24:24 Mm-hmm.

Saifedean Ammous 24:25 ... 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.

Lex Fridman 27:06 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.

Saifedean Ammous 27:16 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.

Lex Fridman 27:22 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

Lex Fridman 27:49 sense, what role does collective hallucination play in the effectiveness of money?

Saifedean Ammous 27:56 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.

Lex Fridman 29:00 For people listening, we're gonna have fun in this conversation.

Saifedean Ammous 29:02 (laughs)

Lex Fridman 29:03 '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.

Saifedean Ammous 29:12 (laughs)

Lex Fridman 29:13 So, you- you have a strong certainty about the way you talk, which I think is fun.

Saifedean Ammous 29:19 (laughs)

Lex Fridman 29:19 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.

Saifedean Ammous 29:26 Mm-hmm.

Lex Fridman 29:27 '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?

Saifedean Ammous 30:18 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.

Lex Fridman 30:59 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-

Saifedean Ammous 31:21 Absolutely. Everything does happen in the mind. Whatever-

Lex Fridman 31:23 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.

Saifedean Ammous 31:31 True. But, um, economic reality exists in a way in which your beliefs are rewarded when they match up with economic reality.

Lex Fridman 31:40 With physical reality.

Saifedean Ammous 31:40 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-

Lex Fridman 32:02 Yes.

Saifedean Ammous 32:02 ... 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.

Lex Fridman 32:50 Mm-hmm.

Saifedean Ammous 32:50 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.

Lex Fridman 33:37 So like you said,

Lex Fridman 33:39 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?

Saifedean Ammous 34:01 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.

Lex Fridman 34:11 Or people who are wrong.

Saifedean Ammous 34:12 (laughs)

Lex Fridman 34:12 (laughs)

Saifedean Ammous 34:12 Well, it's much worse than wrong, by people who are just essentially propagandists for inflation.

Lex Fridman 34:17 Right.

Saifedean Ammous 34:18 Um, so-

Lex Fridman 34:18 That's like your opinion, man. Right? (laughs)

Saifedean Ammous 34:21 (laughs) Yeah, well, that's also like your opinion, man.

Lex Fridman 34:23 Yeah.

Saifedean Ammous 34:24 But you asked.

Lex Fridman 34:25 That's true. Well, I also talked to Paul Krugman on this podcast, so he's-

Saifedean Ammous 34:30 O.

Lex Fridman 34:30 (laughs) The O speaks enough, but he is, uh, he's one of the people that is perhaps most harshly criticized by folks in-

Saifedean Ammous 34:40 Yeah.

Lex Fridman 34:40 ... Austrian economics perspective and vice versa, which is a fascinating tension.

Saifedean Ammous 34:45 Yeah, he's, um, he's done a great job as an actor who plays an economist on TV and the internet. (laughs)

Lex Fridman 34:52 (laughs) So anyway, now tell me what you really think.

Saifedean Ammous 34:55 Yeah. (laughs)

Lex Fridman 34:55 No, but so the basics of what is Austrian economics? What is the, what perspective does it take in the world?

Saifedean Ammous 35:00 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.

Lex Fridman 38:07 I'm giving my wife water.

Saifedean Ammous 38:09 (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.

Lex Fridman 38:20 What's the downside of, by the way, diamonds for, from the analysis of like gold and so on?

Saifedean Ammous 38:25 Ah, that's a great question. Um, (laughs) arguably diamonds are a scam. Uh... (laughs)

Lex Fridman 38:31 (laughs)

Saifedean Ammous 38:33 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.

Lex Fridman 40:30 I'm gonna take this segment of the podcast-

Saifedean Ammous 40:32 (laughs)

Lex Fridman 40:32 ... when I'm getting married, I'm gonna send it, and then, uh, instead you're, you're getting, uh, water or Bitcoin-

Saifedean Ammous 40:38 Yes.

Lex Fridman 40:39 ... depending on the marginal analysis.

Saifedean Ammous 40:39 Water and Bitcoin is all you need.

Lex Fridman 40:40 So, so marginal analysis.

Saifedean Ammous 40:42 (laughs) Yes.

Lex Fridman 40:42 Focusing on the margin is the thing that allows you to most accurately capture human nature, the actual day-to-day decisions that we humans make.

Saifedean Ammous 40:50 Mm-hmm. Yeah, that's really revolutionized economics, so 1870. And that's, um, that was Menger's w- uh, work, and then, um, he had a student, um, Eugen Böhm-Bawerk who developed, um, capital theory, and then he had a student, Ludwig von Mises, who is arguably the most important economist ever. A- and he developed, uh, theory of money and, um, he wrote a book in 1912 called The Theory of Money and Credit. And then he, in the '40s, he wrote Human Action, which is, um, a, a big treatise on economics, and I think this is, um, this is the correct tradition of economics. And, uh, before, uh, World War I, this was just known as economics. And then, um, after... W- what happened in World War I, and I discussed this in detail in The Fiat Standard, is that the Bank of England essentially went off gold and, uh, tried to pass off their own credit as being as good as gold in order to finance the war. And incidentally here, um, this is part of the history that is not discussed often, you know, this is presented as an innovation. Um, later on, uh, uh, they needed essentially a propaganda school that would justify what they did. And, uh, later on it's presented as, "Oh, hey, we've realized that gold was not good and now, look, we've built this thing, uh, that is better than gold where now the government can just print money whenever it wants, and now, um, gold money is not an issue anymore," which is extremely idiotic (laughs) because the whole point of money is that it's not easy to make. If it's easy to make, it's not money anymore. It's just destroying the entire function of money, and we've seen that happen extensively in the 20th century after countries went off the gold standard. So essentially, Keynesian economics is just inflation apologia. It's just, uh, propaganda to justify inflationism, and it's, um, profoundly nonsensical. It's built on the idea that if you just make more money, you can stimulate economic production, and of course, this is very self-serving to the central banks and to the banks and to the governments who promote this nonsense. And, uh, this is also very pervasive. If you've had the misfortune of studying at a university (laughs) over the last century, you were taught Keynesian garbage economics. You were taught that, um, if there is a problem in the economy, the way to fix it is that the government prints money, the government lowers the interest rate, and then, uh, that leads to more economic production, which is completely nonsensical.

Lex Fridman 43:18 So- (laughs) . So you're a- again, for the listener, you're using strong words and I'll push back just to, uh, find, uh, to please devi- a devil's advocate to hopefully one day arrive at a truth. So, just because it's in the interest of the central banks and the government, uh, the interests and the models of Keynesian economics and the government are aligned doesn't mean they're wrong. So let's, let's give them a chance.

Saifedean Ammous 43:49 Mm-hmm.

Lex Fridman 43:50 So the conventional wisdom, perhaps economics wisdom, is that inflation is good, uh, in moderation as it encourages spending. But too much is bad because, you know, it completely devalues, destroys people's savings. So a little bit of inflation is good to stimulate spending. Um, and I mean, I, I suppose this is one of the things that's supported by, uh, Keynesian economics. Why is that wrong?

Saifedean Ammous 44:17 This is basically the whole point of Keynesian economics is to try and find, uh, an endless array of explanations to explain why inflation is a good thing.

Lex Fridman 44:25 Well, it could ... the chicken and the egg.

Saifedean Ammous 44:28 (laughs)

Lex Fridman 44:28 So that's, that's the cynical take.

Saifedean Ammous 44:30 Yeah.

Lex Fridman 44:30 This is a propaganda machine to sell the government's narrative. The, uh, less cynical take is there's a bunch of economists who are telling, uh, who, um ...

Saifedean Ammous 44:38 Who figured out this thing and it happens to be good for banks and governments.

Lex Fridman 44:42 Yeah.

Saifedean Ammous 44:42 And just because-

Lex Fridman 44:42 Exactly.

Saifedean Ammous 44:42 ... it's good for them doesn't mean ...

Lex Fridman 44:43 And it justifies the existence of government and, uh, your basic, I, I don't think it's your basic assumption, but a foundational principle of your thought is that a lot of government is not a good thing. Your, your first gut instinct, government bad.

Saifedean Ammous 45:00 Mm-hmm.

Lex Fridman 45:00 Like I mentioned, I live next door to Michael Malice, who probably b- beats you on the intensity (laughs) and how quickly he says government bad. So, so but there, you know, there's a potential argument for government good. Gov- some government is good, maybe a lot of government is good. Maybe we need a lot of centralized management-

Saifedean Ammous 45:21 Mm-hmm.

Lex Fridman 45:22 ... uh, for resource allocation and so on because we humans specialize. We're too busy and so on. So there is an argument for that, uh, that exists. Uh, you probably disagree with any possible (laughs) argument in that side, but anyway, so why is that idea-

Saifedean Ammous 45:35 Yeah.

Lex Fridman 45:35 ... of Keynesian economics wrong?

Saifedean Ammous 45:36 I'm gonna focus for this on the, uh, money idea, the idea that a little bit of inflation is good. Um, the idea here, I mean, the criticism is that i- without inflation, people wouldn't spend and then the economy would come to a grinding halt.

Lex Fridman 45:50 Yes.

Saifedean Ammous 45:51 And that's nonsensical because people spend not because they want to keep this magical monster called the economy going (laughs) . People spend because they need to consume because, you know, that's how we live. That's how we survive. You need to eat. You need shelter. You need clothes to keep you warm. Um, and as technology advances, the capabilities of the things that we can do with our, um, w- with our time increases and so we want to buy more things. So people buy things because people want to consume. There's a limitless desire to consume. You know, there, there's no (laughs) th- th- it, it, th- there's no, uh, shortage of reasons for people to consume, whether it's food or Ferraris or, uh, p- private jets. People just always want to buy more and so th-

Lex Fridman 46:35 Can I interrupt just really quick? What about the fear about the uncertainty of the future where they might want to, they might want to, uh, buy things but they're really afraid because it seems like there's a lot, like a pandemic going on or whatever it is?

Saifedean Ammous 46:50 Yeah. That's good.

Lex Fridman 46:51 So, so fear of uncertainty is-

Saifedean Ammous 46:54 Yeah, but here's-

Lex Fridman 46:54 ... can you have too much fear of uncertainty?

Saifedean Ammous 46:55 No, here's the thing. Uh, what I was saying is, uh, I was making the point that, uh, uh, w- we don't need to be motivated to consume. Like we have the insatiable desire to consume. Everybody would like to have more of all kinds of things. Everybody would like to have a bigger house. Well, not everybody. Some people have a big enough house, but everybody would like a house. Everybody would like a car, jet, um, all kinds of things, you know, electronics, uh, machines. So, eh, we don't need a desire to consume. But of course, the limit on how much we consume is opportunity cost. Why don't you buy a Ferrari? Well, because that's really expensive and it would mean that, you know, uh, well, maybe you do have a Ferrari. But I mean, most people don't buy a Ferrari because it's too expensive. They don't ... they can't afford it. They'd have to work too hard to get it. Um, and if they do get it, it might mean that, you know, they can't afford their house anymore. So we have to economize. That's a good thing. And we have to also think of the future. And so humans consume that w- we don't need more motivation to consume. We have to deal with the economic reality of the things that limit us from consuming more. So, um, what Keynesians present is that w- when there is a problem in the economy like there was after World War I, the problem is always a cau- a res- caused by the inflation. And what the Keynesian hucksters do is that they look at the (laughs) inflation, uh, at the consequences of inflation and blame it on people not spending enough when people are doing the rational thing. You know, the money is, um, the ... so there was inflation caused the, uh, an unsustainable boom. It caused a recession. And now a lot of people lost their jobs and they don't have enough money to go out and spend, um, frivolously, so they save for the future. The future is uncertain. That's a good thing. You know, that's how you fix things. Um, you begin the recovery by y- well, you know, you lost some wealth, so you spend less. Like if you, you know, if your business goes bust, if you lose your job, it's natural and smart that you stop, uh, spending money on the frivolous things that you used to spend and you save it for the future. You, you invest in something else. You get a new job and then once you've recovered, you start spending more. This is, this is very sane and very good and it's, it's the way to recovery. But essentially, the Keynesians have used this as a justification for more inflation because inflation is an addiction. I- once the government gets down the path of spending money to solve its problems, then every problem looks like it can be solved by more inflation. And so ...This is where Keynesian economics comes in. And, of course, the Keynesian economics, um, uh, is based on the work of, uh, Keynes, which came in the 1930s. And this is the key point, like, um, it's portrayed in the textbook as if it's just (laughs) this- this scientific breakthrough that, you know, somebody in the 1930s, this genius came about and realized that, "Oh, we don't actually need gold. We don't need hard money. We can actually just print all the money." And in reality, of course, it was just the very thin, flimsy, idiotic justification for what governments were already doing for 20 years. They'd already gone off the gold standard, and they'd gone through 20 years in which they were lying to their population, telling their population, "We're still on a gold standard, but, you know, there are problems caused by various random things. But don't worry, we're gonna be going back on the gold standard." 20 years later after they went off the gold standard, they come up with this justification for why, oh, actually, the gold standard was bad, and- and- and this is the really pernicious thing about it is the problems that were caused by us going off the gold standard were caused by the gold standard, and we're going to fix them by going off the gold standard even more.

Lex Fridman 50:43 Just because government is lying and is shady and it does these kinds of things doesn't mean Keynesian economics is wrong. So just 'cause I wanted to separate a few things you said. Um, it could very well be very wrong, uh, and they could indeed be hucksters, all of these colorful...

Saifedean Ammous 50:58 (laughs)

Lex Fridman 50:58 Such colorful language. Uh, I- I love you deeply for this. This- this is fun.

Saifedean Ammous 51:03 Yeah. But I mean, you know, it's not like somebody like Krugman doesn't use this kind of language when discussing Austrians. It's just that-

Lex Fridman 51:08 Yes, I understand (laughs) .

Saifedean Ammous 51:08 ...when actors like him use it, it's presented as if it is, um, legitimate because he's, you know, he's part of the major shows.

Lex Fridman 51:15 (laughs) So the case they make and the criticism, uh, Keynesians make of Austrian economics and the case they make for Keynesian economics is it's based on empirical evidence. So, uh, Austrian economists are pie-in-the-sky theorists about, uh, like-

Saifedean Ammous 51:35 (laughs)

Lex Fridman 51:35 ...how human nature works, and it's just all theory. Um, and just like you said, Keynesian economics kind of sell it as a science, data-driven science.

Saifedean Ammous 51:44 Mm-hmm.

Lex Fridman 51:44 And so, um, where's the data, bro-

Saifedean Ammous 51:49 (laughs)

Lex Fridman 51:49 ...on the- on the Austrian... So one way of saying it is, um, how do you know if we get rid of inflation, how do you know if we get rid of central banks, if we push towards that direction, uh, we will have a better world, um, a- a better functioning economy, better functioning markets, better functioning society?

Saifedean Ammous 52:11 This is, uh, another inaccurate, uh, way in which they present, uh, the economics. They- they present it as if it's just theory and that the data doesn't matter, but that's not the case. Um, what the Austrians say is that without guiding theory, data is mute, data is dumb, data can't say anything. So...

Lex Fridman 52:27 Theory first, and then, uh, you have to have models (sighs) to provide context for interpretation of data.

Saifedean Ammous 52:35 Exactly. And it's a sign of just how little self-awareness they have that they think that they're just being led by the data when they're re- being- being led by Keynes's moronic theories (laughs) . And it's... They use the data to justify those theories and to stick by them, and, in fact, they are the ones whose theories cannot be refuted because it's just, uh- uh, it's- it's just government-mandated religion. So according to Keynes's, uh, nonsense, um, you know, (laughs) ... So the way that the whole thing is... the way that they justify the inflationism is this... And I'm just using this to give an example of what you're talking about in terms of theory. The way they justify the inflationism, to tie it back to the original point, they justify it by, well, all right, we need money to spend, and then the level of spending in the economy is what determines the state of the economy. And I've taught macroeconomics at university level for a while, so I know this. I- I know K-Keynesian nonsense better than most Keynesians know Austrians, if not all of them, I- I guarantee you. And so the way they see it is the level of spending in the economy is what determines the state of the economy. There's a level of output and there's a level of spending. So there's like the factories on the one side that are churning out goods, and those goods have a certain quantity and value, market value, and it's completely nonsensical, of course, because, um, how can the value of- of the goods produced be different from the value of the spending? But let's put that aside for a senten- for a second. So the amount of spending that happens in the economy determines the state of the economy. If the value of the production, which they call Y, is higher than the aggregate expenditure, so this is the production, and then the aggregate expenditure is lower, then we don't have enough spending to buy all the goods, and then that causes a recession. The factories start laying off workers, and then the laid-off workers start spending less, and then that leads to aggregate expenditure dropping even further. And so it's a vicious cycle where the economy gets into recession. And the only way out is for Keynes's bankster buddies and government buddies to print a lot of money to give to themselves, and then, um, that will-

Lex Fridman 54:39 Well, that's one interpret-

Saifedean Ammous 54:40 (laughs)

Lex Fridman 54:40 So but to... Uh, so to- to print more money to increase the expenditure that... to- to match this But I just seen us get in trouble with human psychology, certainty, certainty of ideologies in general. You mentioned Marxism and so on. I came from the Soviet Union. There's a lot of people that are very certain throughout the history of the 20th century that communism is the utopia that humanity should strive for. So I'm nervous around certainty.

Saifedean Ammous 55:54 I could be wrong, but, you know, you-

Lex Fridman 55:56 (laughs)

Saifedean Ammous 55:56 ...you asked me for my opinion.

Lex Fridman 55:57 Yes, yes. Sorry. So it's that- that little bit of a caveat.

Saifedean Ammous 56:00 So to go back to the- the idea, then on the other hand, you have the level of... If the... You know, the other situation is when the level of spending is higher than the amount of aggregate output.

Lex Fridman 56:09 Yes.

Saifedean Ammous 56:10 In that situation, you have too much spending, so therefore what ends up happening is inflation. So according to the Keynesian worldview, this is really important because this is a way that I'm going to get to your point about empirical data and to show you why, um, they're... (laughs)

Lex Fridman 56:25 Not correct.

Saifedean Ammous 56:26 Yeah, they're not correct about what they say about empirical data. So then what this means is that there's a level of output and there's a level of aggregate expenditure. The aggregate expenditure can either be higher or lower than the output or equal to it. If it's higher, we get inflation. If it's lower, we get recessions. Okay?

Lex Fridman 56:46 Mm-hmm.

Saifedean Ammous 56:46 So is there any universe in this model, is there any p- potential universe in which you can have both inflation and a recession? According to the Keynesian model, you can't, right? Because aggregate expenditure cannot be both higher and lower than output. So therefore, if you were truly being an empirical, uh, uh, person, if you were looking at evidence and trying to be... Uh, analy- trying to analyze data, you'd look at this and say, one example, you know, one... You just need one example of high inflation and high unemployment to refute this entire model, right? And of course, the world is full of examples of high inflation and high unemployment. And that's what happened in the 19... And of course, you know, they ignored it when it happens in poor countries because, you know, poor countries don't really matter. But then in the 1970s, that happened in the US and in the Western economies, in the most advanced industrial economies. So historically, before then, you had all these Keynesian, um, um, central bankers the- talking about this model and saying, you know, "Well, aggregate expenditure is too low now, and that's why we have unemployment. So we need to print more money." And then they print more money. Inflation goes up, but also unemployment goes up because this model is broken. Th- that's not how the world works. That's not... The level of aggregate spending in the economy is not a lever with which you can control inflation and unemployment. So what would a scientist do? What would a non-huckster do in this case? Admit the theory is wrong and find another way to reformulate it. Have the Keynesians done that? No.

Lex Fridman 58:23 But-

Saifedean Ammous 58:23 Still the same garbage in the textbook that is being taught until today.

Lex Fridman 58:27 So is it possible to have a non-Keynesian model or one that still supports moderate amount of inflation is good for the economy?

Saifedean Ammous 58:34 I mean, since the 1970s, since this has happened, yeah. This is what, um, uh, basically most, uh, fiat economists, as I like to call them, essentially anybody at a university financed by governments, which is financed by central banks, which is financed by-

Lex Fridman 58:48 Oh, we'll talk about that.

Saifedean Ammous 58:49 Yes.

Lex Fridman 58:49 The- the effect of fiat money on our life, as you write about in your book, uh, Fiat Standard. One of them is education. I'm sure we'll disagree there too. Um, I'm not smart enough to disagree, but I'll disagree anyway.

Saifedean Ammous 59:04 So, yeah. So a whole bunch of other models came up, but basically it's... I mean, it's... It- it's such an example of motivated reasoning. Like, anybody who's got a familiarity with the scientific method or who's got an engineering background who comes into economics immediately has a lot of red flags. And I remember when I used to teach, uh, macroeconomics, I used to teach, you know, introductory macroeconomics, and it's a course that would be taken by econ majors as well as engineers. A lot of engineers would take it as an elective. And every time I'd explain the... And I would just teach, you know, the Keynesian basic stuff. And every time I'd explain it, there's always that smart engineering kid who just looks at me and says, "Sir, this doesn't make any sense because this, this and that." And I'm always like, "You get it."

Lex Fridman 59:43 (laughs)

Saifedean Ammous 59:43 "Exactly. You're correct." Because if you have any kind of shred of scientific thinking, you see that this is all motivated reasoning. Like, the answer is government needs to print money, and here's a whole bunch of models brought up by people for why government printing money is good. And the reason they're coming up to this conclusion is that you only get funded if you come up with this conclusion (laughs) . If you come up with a conclusion that we need to, um, shut down the central bank, you don't get funded by the central bank. You don't get published in the journals. You don't get a job at the prestigious universities. You don't get quoted by, uh, fiat publications like the New York Times and CNN, they don't invite you on as an expert.

Lex Fridman 1:00:21 Well, that's the fundamental flaw with a lot of institutions we have today, uh, hu- and throughout human history. Let me zoom out for just a second to the big question, what is economics, uh, in general? What's the goal? You said there's a bunch of models. Uh, is any b- any economist basically trying to throw a bunch of models about human behavior on the table and try to generalize it to the global scale, so both dance between micro and macro somehow in order to determine public policy and ex- explain the past, predict the future, prescribe policies that can control the future, those kinds of things? This is the big basic ridiculous question of what is economics?

Saifedean Ammous 1:01:02 Economics is the study... The- the way the Austrians define it is the study of how humans make choices under the condition of scarcity. And we begin with the starting point of economics is the fact that scarcity exists. And, uh, why does scarcity exist? Well, because it's easier to want things than it is to make them. It's much easier to want a Ferrari than it is to make one. And so, um, because it's... You know, we have wants and we have limited means to meet those wants, we need to economize. It's a permanent s- um... It's a permanent marker of the human condition. We are always economizing at all times. And so-How people make those decisions under the conditions of scarcity is what economists study. So to go back to your point on empiricism and Austrian school, so it isn't that the Austrians don't, uh, believe in data. E- on the contrary, it's that theory has to inform data. And in fact, if you think about it, as the example of the, um, stagflation of the 1970s shows, um, i- i- if you have stagflation, that just completely refutes the Keynesian model. The Austrian way of thinking, which is think from first principles, understand how the world actually works, think about how humans act, and understand that economics is really all about human action. So it's not about aggregates of goods. This is really the key distinction in terms of methodology. And for the Keynesians, it's physics envy. They look at the market economy, they look at individuals in the market economy, and they think that they can understand the market economy by looking at aggregates. This is really the key point of what I think makes, uh, the, uh, certain branch of economics pseudoscientific, is the introduction of aggregates. When you i- when you introduce those aggregates, you know, how much production takes place, how many people are unemployed, um, the percentage of the inflation rate, and then you think that you can establish scientific relationship between those aggregates, it's purely physics envy. You, you know, in physics, for instance, or in chemistry, you put, let's say, a container with, contains, uh, a gas, and you have the, uh, ideal gas law, PV equals to nRT, calculate the pressure, calculate the volume, and then, uh, and n- and then the temperature. You can, you c- if you have the pressure and the volume, you can calculate the temperature because you have the, um, n, R constants. So there's a clear relationship that has been demonstrated in a laboratory, and that can, you know, we can do it right now. We can measure it and we can see it, and it's continues to hold. And all it takes is one scientist to show that this relationship does not hold, to do an experiment that shows this does not hold, and it stops being a law of chemistry, um, then it's, and it's broken. Where, whereas in economics, what they've done is they've copied the superficial shape of this without any of the scientific rigor that was used to build it. There's no experiments. You can't experiment on economies. We don't have the ability to establish laws. And all the laws that we establish are just models that get people published and get them on the media to say, "My model says we need to print more money." But it's never subject to actual scientific scrutiny. If it were, they would all be rejected in 15 minutes because the world is full of examples that count- contradict them.

Lex Fridman 1:04:28 Was it possible to do scientific scrutiny when it's human nature, when you can't, when there's a nearly infinite number of variables and you can't control them? Is it po- so what's the best thing you could possibly do?

Saifedean Ammous 1:04:40 You do thought experiments.

Lex Fridman 1:04:43 But the problem with thought experiments, you know, Freud thinks everybody wants to have sex with their mother. Uh, is he right?

Saifedean Ammous 1:04:50 (laughs) That's the problem with Freud.

Lex Fridman 1:04:51 I don't know.

Saifedean Ammous 1:04:52 (laughs)

Lex Fridman 1:04:52 Maybe he's right. Well, obviously I'm, I'm joking on that front, but the...

Saifedean Ammous 1:04:57 Freud is probably another Keynes.

Lex Fridman 1:04:59 Yeah. (laughs)

Saifedean Ammous 1:05:00 (laughs)

Lex Fridman 1:05:00 Well, no, I, I think there's power to the thought experiment, just like Einstein, you know, a lot of general relativity, special relativity that, that's a thought experiment. It originates in a thought experiment. Now, is it true, you know, and nice thing about physics, you can eventually have experimental validation. The ne- the downside of economics is you really can't have experimental, s- like, definitive experimental scientific rigor of validation of a theory. So a thought experiment is just a thought experiment using your intuition, you, it's the power of reasoning together-

Saifedean Ammous 1:05:32 Exactly.

Lex Fridman 1:05:32 ... about human nature.

Saifedean Ammous 1:05:33 And that's why economics cannot make the claims that physics can make. So with physics, you can predict that if you get this gas at this pressure, at this volume, the temperature will be that much. And you can make that prediction y- and, and test it a million times. And you'll always get the precisely correct answer. With economics, we can't make quantitative predictions.

Lex Fridman 1:05:53 But still on Twitter and even today, you're very certain about the statements you're making. Do you...

Saifedean Ammous 1:05:58 Yeah, but I don't make quantitatively certain

Saifedean Ammous 1:06:00 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.

Lex Fridman 1:06:30 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.

Saifedean Ammous 1:06:52 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.

Lex Fridman 1:09:51 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?

Saifedean Ammous 1:10:33 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.

Lex Fridman 1:11:22 Well, so what about things like that all of us use? So infrastructure, for example, or education.

Saifedean Ammous 1:11:29 Mm-hmm.

Lex Fridman 1:11:30 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?

Saifedean Ammous 1:11:45 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)

Lex Fridman 1:12:28 And you don't find that case compelling?

Saifedean Ammous 1:12:30 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.

Lex Fridman 1:13:19 Mm-hmm.

Saifedean Ammous 1:13:20 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.

Lex Fridman 1:13:33 And you believe the free market is best in managing that dance, that balance of-

Saifedean Ammous 1:13:37 Exactly.

Lex Fridman 1:13:37 ... decentralization?

Saifedean Ammous 1:13:39 Exactly.

Lex Fridman 1:13:39 Go ahead.

Saifedean Ammous 1:13:39 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.

Lex Fridman 1:15:11 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-

Saifedean Ammous 1:16:19 Yeah.

Lex Fridman 1:16:19 ... outside of that.

Saifedean Ammous 1:16:20 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)

Lex Fridman 1:16:46 Well, love requires a push and pull, a little bit of tension, a little spice in a relationship, I think, uh-

Saifedean Ammous 1:16:51 Yeah. I mean, uh-

Lex Fridman 1:16:52 ... a little gun to the head

Narrator 1:16:53 (laughs)

Saifedean Ammous 1:16:53 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)

Lex Fridman 1:17:00 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)

Saifedean Ammous 1:17:18 (laughs)

Lex Fridman 1:17:19 So wh-

Saifedean Ammous 1:17:19 At the bottom, if you don't want to pay, if you don't want to th- You know, "All right, I don't want to be part of your power plant. I want to get my own generator. I don't want to do it and I don't want to pay for it." You go to jail. You can't not pay for it. That's really the asymmetry which the market doesn't have, which is why i- in my opinion it's not as if, you know, I'm being stubborn and stuck on the idea that I want a market and that the government can't work. It's presented as if, you know, we're choosing between two different machines, you know? Should we use an Apple or a, uh, PC? And I'm just, um, constantly choosing one of them and saying that the other one can't work. It's not equivalent. It's not two machines. We're comparing between a machine and a gun to the head, and we're comparing between a situation in which anybody, anywhere is free to provide the service or the good, and anybody, anywhere is free to buy it from them or reject to buy it from them. So anyone can build a power plant, anyone can succeed at it, anybody can fail at it, anybody can build it in a way that I can choose to take part in or not take part in. I can build my own. So we have a situation in which 10 million people let's say, they each can freely choose to provide the good or to buy the good. That cannot be considered an alternative on an equal footing to a situation where one person or one entity gets to decide for everybody, and those who disagree go to jail.

Lex Fridman 1:18:37 So the problem is that the alternative to governments is other large successful entities that have humans in them. And human nature is such that there's corruption, manipulation and so on. I think free market depends on the honest communication of information, uh, as widely as possible so people can make great rational decisions. But sort of my f- fear is, I'd like to propose, is that in general there's manipulation, whether it's government, whether it's companies. They're going to manipu- they're going to try to do propaganda. They're going to try to manipulate you, deceive you, uh, shut down competition by playing games, human games of different kinds. Um, and sometimes even meaning well. It's not like everybody thinks they're doing good and they're actually doing evil. So how do we prevent the worst of human nature coming out, um, in a free market as well?

Saifedean Ammous 1:19:35 By not giving the worst of human nature a monopoly on violence in the institution of government. (laughs)

Lex Fridman 1:19:40 (laughs) So that, that little inkling of coercion, that little bit of asymmetry creates a gigantic like ripple effect of asymmetry in your view?

Saifedean Ammous 1:19:50 Yes. And it ends up just being the place where, you know, corporations, individuals, free markets, they can't coerce without the resort to government. So, you know, you think about all the examples of corrupt, uh, corporations doing bad things.... it's always because they have certain privileges from governments, because, you know, the- the... As it exists, you know, Coca-Cola, McDonald's, all of these giant corporations, they can't do anything to me without government. They can't take any of my money and they can't force me to buy their stuff. And so doesn't matter to me. You know, so if- if Coca-Cola is corrupted, that's a problem for Coca-Cola customers, that's a problem for Coca-Cola shareholders, that's a problem for anybody who deals with Coca-Cola. But as somebody who doesn't drink their stuff and isn't a shareholder, I have absolutely no interest in what happens. I... They could all go bust tomorrow and I don't care. I don't buy their product and I don't... Uh, and I'm not a shareholder. So in this situation where you choose to voluntarily associate with people and you only give your money to people you want to voluntarily give them money to, so you either buy their product or invest in their production, in that situation, the only way that a company