Speaker 1: Pod cast. It it's a podcast that you're listening to.
Speaker 1: It's it could happen here. It's the the show where
Speaker 1: things fall apart and so as you put them back
Speaker 1: together again. And actually, okay, you know, I really should
Speaker 1: have checked the calendar before I did it, before I
Speaker 1: tried to do this introduction where I've referenced the thing
Speaker 1: that I'm saying came out last week but might actually
Speaker 1: have come out like no, no, no, okay, okay, I got
Speaker 1: it right. I got it right. It should never have
Speaker 1: doubted myself. Last week we did an episode about inflation,
Speaker 1: and we told maybe half that story and the part
Speaker 1: of it that we didn't tell. You know, we got
Speaker 1: through the most of the part about like, you know
Speaker 1: what this sort of theory of inflation that the people
Speaker 1: are trangged better to fellows. We got through what it was.
Speaker 1: What we didn't really talk about was what happened next,
Speaker 1: which is a very very interesting set of sort of
Speaker 1: maneuvers that happened where this theory started spreading through a
Speaker 1: bunch of very disparate academic circles and you know, sort
Speaker 1: of like economic circles and different political circles that usually
Speaker 1: don't have anything to do with each other. But we're all,
Speaker 1: I don't know, taking taking things in very interesting directions
Speaker 1: and to talk about how how how this sort of
Speaker 1: supply Chaine theory of inflation like spread through the world
Speaker 1: and all of this very very interesting, somewhat bizarre stuff
Speaker 1: that happened. Next, we once again have Steve Mann and
Speaker 1: John Michael Cologne, who are co editors of Strange Matters. Yeah,
Speaker 1: Steve jmc welcome back to the show.
Speaker 2: Thanks for having us.
Speaker 1: Yeah, I'm glad, glad glad we could have YouTube back,
Speaker 1: and glad we get to talk about the really really interesting,
Speaker 1: somewhat strange things that happened next, which was, Yeah, a
Speaker 1: lot of people started picking up your theories and starting
Speaker 1: to work with them.
Speaker 3: Yeah.
Speaker 1: I worrying if you talk a bit about I guess
Speaker 1: like how that kind of first started and how people
Speaker 1: first started sort of coming to you for stuff.
Speaker 3: Yeah, like last year. So last year when the first
Speaker 3: of these pieces came out notes toward the theory of inflation,
Speaker 3: we got like a really good response in general from it,
Speaker 3: and it was kind of provoking discussions between groups of
Speaker 3: economists and like readers of econ stuff on Twitter and
Speaker 3: stuff like that. Who otherwise wouldn't have really been talking
Speaker 3: to each other, but suddenly having a different theory of inflation,
Speaker 3: one that was like a lot different than what sort
Speaker 3: of like the people who thought it would be super
Speaker 3: transitory or the people who thought it was like purely
Speaker 3: a monetary phenomenon or something like that. Like having that
Speaker 3: option sparked good conversations, and it eventually led to some
Speaker 3: writers approaching us who are sort of inspired by those conversations,
Speaker 3: and particularly a few of them really wanted to follow
Speaker 3: up on like specific key like either points from the
Speaker 3: paper or follow some of the implications as far as
Speaker 3: they think they could take them. So one such paper.
Speaker 3: Oh and by the way, just as a refresher, the
Speaker 3: original theory that is laid out in part one of
Speaker 3: this series that we're doing is essentially saying that inflation
Speaker 3: has a tendency to propagate along supply chains first and
Speaker 3: then through supply chain networks secondarily. And so it's it's
Speaker 3: saying it's essentially that that's that's how it propagates. It
Speaker 3: starts in supply chains. Things like bottlenecks along production processes
Speaker 3: have give the price setters, who are people at companies
Speaker 3: social acceptable reasons to eventually if they need to raise prices,
Speaker 3: and but they but that generally pricing managers refrained from
Speaker 3: raising prices unless that us like every other lever they've pulled,
Speaker 3: essentially has not worked. So like people took that theory
Speaker 3: and wanted to follow up on it, and so one
Speaker 3: author who did that was Alex Vacolo who approached us,
Speaker 3: and we essentially wanted to do an updated version of
Speaker 3: the pricing manager survey that we found really helpful in
Speaker 3: writing those initial pieces. So we like in my piece
Speaker 3: and that sort of theory of inflation, I relied upon
Speaker 3: like a wealth of pricing manager surveys that showed that
Speaker 3: where they asked these pricing managers under what circumstances would
Speaker 3: you raise prices? And they sort of went through each
Speaker 3: scenario of that over the decades, starting in the thirties
Speaker 3: and going into the nineties, and do that in order
Speaker 3: to not have a replication crisis, Like we need more
Speaker 3: and more studies, right, Like this is a that's phenomenon
Speaker 3: across social sciences and elsewhere, So you want to have
Speaker 3: good replication studies. One way to do that is to
Speaker 3: have an updated pricing manager survey that talks to like
Speaker 3: sort of modern corporations in the twenty twenties, So are
Speaker 3: they still concerned about some of the same things, are
Speaker 3: they not? Are there innovations and pricing that we should
Speaker 3: know about? And so Alex Paccolo, who's a financial journalist
Speaker 3: by trade, he went and interviewed some managers at Walmart
Speaker 3: and other big companies and some smaller ones and found that, like,
Speaker 3: broadly speaking, a lot of the same issues are at play.
Speaker 3: So companies have cost plus market pricing as kind of
Speaker 3: their bedrock, and from there they developed some innovations such
Speaker 3: as like so called dynamic pricing, where they have the
Speaker 3: like if you're a larger company who knows that they
Speaker 3: are viewed as a price leader, you have some leeway
Speaker 3: in responding to sales forecasts and changing your pricing, like
Speaker 3: Walmart does what they have like everyday low prices, that
Speaker 3: type of thing. And if you're a grocery store and
Speaker 3: one of your competitors is Walmart, Serve on the flip side,
Speaker 3: you might start developing indexes of prices set by Walmart
Speaker 3: or like one of the other big like behemoth chains,
Speaker 3: knowing how important they are to the overall supply chain network.
Speaker 3: And knowing how important they are for the demand for groceries.
Speaker 3: Like if wherever Walmart goes, many people have no choice
Speaker 3: but to follow them in terms of their pricing schedules.
Speaker 3: And so that's another thing that is going on, Like
Speaker 3: people are developing just entire price indices of like Walmart
Speaker 3: or Costco or Sam's Club or whoe have you.
Speaker 1: Yeah, that was something that's I think interesting in terms
Speaker 1: of like the the difference between the way that like
Speaker 1: economists think about sort of price, the difference between and
Speaker 1: how it's actually getting set, which is like a lot
Speaker 1: of it, a lot of it. Very much seems to
Speaker 1: be like if you are if you are like the
Speaker 1: largest company in a market, like if you are like Walmart, right,
Speaker 1: you have this incredible ability to sort of like like
Speaker 1: you have this ability to like like force people force
Speaker 1: your like downstream or like I guess upstream suppliers to
Speaker 1: like sell it to you at low at lower prices,
Speaker 1: because you have this enormous sort of like you know,
Speaker 1: amount of buying power that like, you know, if you're
Speaker 1: like if you're like a smaller thing, you don't necessarily
Speaker 1: like you know, like like the same company will charge
Speaker 1: like another grocery store more for like the same thing,
Speaker 1: because Walmart, Walmart has the ability to sell it a
Speaker 1: lower price than if I'm remembering this right, I'm gonting,
Speaker 1: I'm gonna I'm getting strange looks.
Speaker 2: Yeah, well it's it's it's important not to mix up
Speaker 2: two separate things. One is Walmart's relationships to suppliers and
Speaker 2: the other one is relationship to its competitors. Right, So
Speaker 2: the supplier bit, you're totally right on the right track.
Speaker 2: It's like, you know, like people who supply Walmart with
Speaker 2: products because Walmart is such a big customer, you get
Speaker 2: the Walmart contract and you're a small producer or a
Speaker 2: medium sized producer, like you're set right because like you know,
Speaker 2: then you can basically just like you know, they can
Speaker 2: even be your only customer in many cases. But that
Speaker 2: comes at a cost, which is that you sell at
Speaker 2: the price that Walmart dictates. Otherwise they'll just tell you
Speaker 2: to fuck off basically. And you know, it's not only price,
Speaker 2: it's also the quality. You have to hit the standards.
Speaker 2: And oftentimes what these firms that are like the big
Speaker 2: important firms, so called nuclear firms in a supply chain
Speaker 2: do is that they set those standards like very rigidly,
Speaker 2: and you have to be certified with them. So McDonald's
Speaker 2: does this for example, you know, like all those poultry
Speaker 2: farmers or whatever who supply the chickens for the chicken
Speaker 2: mc nuggets, they have to go through this extremely rigid
Speaker 2: process in order to be able to qualify to be
Speaker 2: a McDonald's certified supplier or whatever, because that's how they
Speaker 2: keep the product standardized even though they're not in house.
Speaker 2: And then the other thing that you were alluding to,
Speaker 2: which is a vocalos piece, is the relationship to competitors.
Speaker 2: So obviously Walmart's able to keep things cheap all the
Speaker 2: time in their famous every day low prices beca because
Speaker 2: basically those they have economies of scale. You know, there's
Speaker 2: this notion, I think common sense for a lot of people,
Speaker 2: especially those who don't have a lot of business experience,
Speaker 2: is that the more that you make of something, the
Speaker 2: more expensive it's going to be. But actually it's almost
Speaker 2: the exact opposite. Any firm that has survived, like over
Speaker 2: a period of time being able to make more and
Speaker 2: more of something has generally found ways of making more
Speaker 2: and more of the same thing using fewer inputs and
Speaker 2: less labor like you know, and that's something that happens
Speaker 2: through automation, but it's also something that happens through administers
Speaker 2: rate of innovation and through and sometimes through less than
Speaker 2: the nice things, right through through through you know, Amazon
Speaker 2: warehouses where people aren't allowed to take bathroom breaks, or
Speaker 2: through sort of like you know, coercive measures that they
Speaker 2: can do because they've found a nice little spot in
Speaker 2: the economy that lots of people are depending on them
Speaker 2: and they can dictate terms. But whatever it is, you know,
Speaker 2: as firms get bigger, it actually gets cheaper to make
Speaker 2: more of their kind of thing. So people in a
Speaker 2: bodega can't match Walmart's prices for everything from like hamburgers
Speaker 2: to detergent right because for them, it's more expensive to
Speaker 2: produce or to acquire. So what they do instead, knowing
Speaker 2: this and they're able to survive, is that they do
Speaker 2: Walmart's price, and then they do a markup over Walmart's price.
Speaker 2: So in the same way that like by themselves they
Speaker 2: would do a markup over their costs, Walmart's costs are
Speaker 2: lower and they do a markup, so they do a
Speaker 2: percentage over Walmart's markup. And as long as it basically
Speaker 2: is something that's doable in terms of cost, they do that,
Speaker 2: which means that they're basically advertising them selves to customers
Speaker 2: as the slightly more expensive but more local you know,
Speaker 2: more you know, more reliable or easier to get to
Speaker 2: you can just walk to the corner store or whatever,
Speaker 2: you know, whatever conveniences. They're kind of like justifying themselves
Speaker 2: with to the customer base. And in cities, this can
Speaker 2: be enough to keep you know, small to medium sized
Speaker 2: you know sort of retailers in business, although in the
Speaker 2: suburbs the competition is basically just all other all gobbalistic
Speaker 2: firms on Walmart's scale, like you know, Wegman's, or in
Speaker 2: Florida it will be something like Public's, you know, and
Speaker 2: that kind of thing. So generally, uh Vacola was discovering,
Speaker 2: was I want to just emphasize Steve's point about replication, Like,
Speaker 2: you know, if if a lot of the supply chain
Speaker 2: theory depends upon a story about prices that most economists
Speaker 2: just don't believe in. Economists believe that supply and demand
Speaker 2: are automatically adjusting based on changing prices, and that those
Speaker 2: adjustments determine in turn how we spend and how we produce.
Speaker 2: You know, that's that's supposedly how everything works. They believe
Speaker 2: in this thing called the price mechanism. The supply chain
Speaker 2: theory depends upon a story where the vast majority of
Speaker 2: prices in the economy are a markup over costs or
Speaker 2: you know, beyond that some kind of strategic decision being
Speaker 2: made in pursuit of a certain strategy. But like, you know,
Speaker 2: if some studies had verified that, but then other studies
Speaker 2: refuted it, then you would have a situation like psychology
Speaker 2: where you know, the psychologists are always saying all human
Speaker 2: beings really have a neck fetish. But then you know,
Speaker 2: because some study of like some college students you know,
Speaker 2: said this, and then six months later it'll be like, actually,
Speaker 2: that failed to replicate this. It turns out that human
Speaker 2: beings don't have a neck fetish. You know. And I'm
Speaker 2: being rude to psychology, but this is a real crisis
Speaker 2: that happened there, called the replication crisis. Now. Fred Lee
Speaker 2: that the economists who kind of like started us along
Speaker 2: this track in his famous book POSTKINSI and Price Theory,
Speaker 2: found seventy one pricing studies and they form Appendix called
Speaker 2: Appendix B in his book, which ought to be legendary,
Speaker 2: but it's not, because all this stuff is very obscure.
Speaker 2: The seventy one studies from very different book length studies
Speaker 2: from very different people with very different like political and
Speaker 2: economic commitments. Some of them are business school literature. Some
Speaker 2: of them are empirical studies commissioned by states or by
Speaker 2: corporations on how corporate management works. Some of them are
Speaker 2: by like Marxist economists, some of them are by neoclassical economists
Speaker 2: like and they all converge, no matter what the biases
Speaker 2: of of the people involved, upon this same kind of
Speaker 2: similar cost plus administered prices model. Vocolo writing now in
Speaker 2: the present day, not in the period that Lee was
Speaker 2: talking about, which is roughly from the thirties to roughly
Speaker 2: the nineties, Like you know, he is talking about the
Speaker 2: twenty twenties. He just went out and started talking to
Speaker 2: pricing managers and capitalists and all this other stuff, and
Speaker 2: lo and behold he found the exact same thing. So
Speaker 2: the evidence base, the empirical evidence base, for the underlying
Speaker 2: basis of the supply chain theory is very very sound.
Speaker 2: The ball is in other people's court in mainstream economists
Speaker 2: court who want to defend the supply and demand bullshit
Speaker 2: and the price mechanism bullshit to to prove us wrong,
Speaker 2: because frankly, the weight of the evidence is so strong
Speaker 2: that they're the ones who have the who have to
Speaker 2: prove their case, not the other way around. You know
Speaker 2: that the what's it called when you when you've got
Speaker 2: the you know, the the I think the burdensump the
Speaker 2: burden of proof, thank you. The burden of proof is
Speaker 2: on their side.
Speaker 3: Yeah.
Speaker 1: And so something also I think is really interesting from
Speaker 1: the color pieces that like, you know, there is a
Speaker 1: bit in there about firms that try to do this
Speaker 1: sort of like like in real time reacting to supply
Speaker 1: and demand stuff. And it's like Uber and if you
Speaker 1: look at Uber's like, okay, so Uber has a couple
Speaker 1: of things. One they don't have, like the thing that
Speaker 1: they're like they don't really have the supply chain really,
Speaker 1: a B. They don't make any money. They never make money,
Speaker 1: They will never make money. And the third thing that's
Speaker 1: really interesting about is that like that kind of pricing,
Speaker 1: like you know, if if if you have some people
Speaker 1: who go in ideologically and like we're gonna build an
Speaker 1: algorithm to like try to have pricing respond to demand
Speaker 1: or whatever it like. It fucking sucks and everyone hates
Speaker 1: it because it means that, like, you know, suddenly, like
Speaker 1: when you actually need a thing, it's unbelievably expensive, and
Speaker 1: it pisses people off. Like most most people who have
Speaker 1: to deal with actual like the normal things that a
Speaker 1: business do don't do. And the only people who do
Speaker 1: it are like the insane tech people who are like like,
Speaker 1: I don't know it. I almost want to call it
Speaker 1: like intensely ideological, and also assholes and also don't make
Speaker 1: any money, which is just I don't know, it's it's
Speaker 1: I think it's kind of a coincidence. But it is
Speaker 1: just very funny to me that the people who actually
Speaker 1: try to use the neoclassical like pricing theory, it sucks
Speaker 1: and everyone hates them.
Speaker 3: Yeah, and uh, the Colo kind of summarizes like the
Speaker 3: several different pricing procedures that he witnessed and to just say,
Speaker 3: like on both on both determining your company's costs and
Speaker 3: determining what market markup you should have, so the cost
Speaker 3: plus markup you need to you need to figure out
Speaker 3: both of those pieces. It's anything but automatic. Yeah, it's
Speaker 3: a very manual process. And even I would I would
Speaker 3: go so far as to say, like Walmart has teams
Speaker 3: of tech people, Yes, but they're liaising heavily with the
Speaker 3: finance department and sales and marketing to determine what is
Speaker 3: an appropriate margin based on historical like in industry and
Speaker 3: sub industry trends and like what is our historical cost
Speaker 3: structure for each product down to the product level. And
Speaker 3: they have so many different products that they might actually say, well,
Speaker 3: because we're selling everything to everyone, maybe some things can
Speaker 3: just be what are called lost leaders and have a
Speaker 3: negative margin because they get people in the store and
Speaker 3: then those people are there and they see other things
Speaker 3: which have higher markups and then they buy those and
Speaker 3: then overall they've made more of a profit because they
Speaker 3: use something's a negative margin on them. And it's like
Speaker 3: it's a really complex process. And even if an algorithm
Speaker 3: is being developed by say by say Uber to like
Speaker 3: dynamically priced things up and down based upon events like
Speaker 3: a baseball game or something they're going on in a
Speaker 3: city so you can get more revenue, that was still
Speaker 3: a people. It was a group of people in a
Speaker 3: room in a very extremely manual process. Coding is extremely
Speaker 3: manual still, and like liasing with like sales, marketing, finance
Speaker 3: people all at once.
Speaker 1: Yeah.
Speaker 2: And the other thing is that it's like supply and
Speaker 2: demand is afraid that gets thrown around anytime that there's
Speaker 2: any kind of interaction between like the amount of people
Speaker 2: who want something and the amount of people and the
Speaker 2: amount of stuff that there is, right, which is a
Speaker 2: lot of different situations. But the specific supply demand price
Speaker 2: theory that's at the core of neoclassical economics is this
Speaker 2: price mechanism story whereby you know, companies basically all make
Speaker 2: one thing. The price of that thing is not something
Speaker 2: that is really under their control. It automatically fluctuates based
Speaker 2: on demand, which I guess you can roughly measure as
Speaker 2: sales and like the UH and in turn, like what
Speaker 2: the price of that thing is determines how much they
Speaker 2: produce and how much of it people buy, because people's
Speaker 2: buying decisions are in some fixed functional way, and people's
Speaker 2: production decisions in some fixed functional way are tied to
Speaker 2: that price. Like if you want to create an algorithm
Speaker 2: that includes as a consideration doing a discount when you
Speaker 2: haven't yet sold all the seats in an airplane in
Speaker 2: the hopes that you'll get some last minute sales, which,
Speaker 2: by the way, statistically is shown to not actually help
Speaker 2: that much. Those kinds of last minute sales and discounts.
Speaker 2: I mean, I suppose in a flight where there's a
Speaker 2: time limited thing, it might work better. But for a
Speaker 2: typical product, it doesn't move the dial very much in
Speaker 2: terms of sales, which is why Walmart pursues an every
Speaker 2: day low prices strategy, just keeping prices down in general,
Speaker 2: so you don't do sales and discounts which don't move
Speaker 2: the dial much. But like you know, that's a strategic
Speaker 2: pricing decision that you've chosen to make because you think
Speaker 2: that it might move the dial in some way, and
Speaker 2: you experiment it with it and see if it works
Speaker 2: or whatever. That's not the automatic lawlike functional relationship that
Speaker 2: is supposed to exist according to neoclassical theory between supply
Speaker 2: demand and prices. People will say that the algorithm is
Speaker 2: about supplying demand, but that's not really how it works.
Speaker 2: That's it's it's not the same thing as the theory, right,
Speaker 2: It's just a pricing system that takes into account among
Speaker 2: many other variables and usually not as the primary thing
Speaker 2: whether or not for example, there is available available slack
Speaker 2: in the in the you know, in what you're producing
Speaker 2: to be able to get some last minute sales if
Speaker 2: you do a discount or something like that, like or
Speaker 2: like Steve was saying, like, you know, there's a there's
Speaker 2: a game today, so you can do surge pricing because
Speaker 2: people are gonna you know that a bunch of people
Speaker 2: are going to want to get in the game, So
Speaker 2: you're basically just price gouging based on this opportunistically based
Speaker 2: on this event that's happening or whatever, like like, yeah,
Speaker 2: you can do that, and you can say that it's
Speaker 2: pricing that tries to take into account supply and demand,
Speaker 2: but it's not the supply demand price mechanism of neoclassical theory.
Speaker 2: And also, as McColo like you know, finds out it
Speaker 2: attempts to do this are very very mixed in their
Speaker 2: success at best. You know. Basically, people who are trying
Speaker 2: to do it are like, yeah, maybe it could work,
Speaker 2: and then they try it, and nine times out of
Speaker 2: ten it doesn't work very well. So they go back
Speaker 2: to some variation on a cost plus model, you know,
Speaker 2: or a price leadership model or something like that. You know,
Speaker 2: the kinds of methods that Lee discusses.
Speaker 3: Yeah, I mean the customer good will that you kind
Speaker 3: of put at risk with these more dynamic pricing models
Speaker 3: is like often a little too risky, like even for
Speaker 3: big companies like Uber, Like there's been a backlash against
Speaker 3: Uber for doing that.
Speaker 2: Absolutely the only reason they can maybe get away with
Speaker 2: it has been because they have access to infinite finance.
Speaker 1: But yeah, how long is that gonna last?
Speaker 3: Yeah?
Speaker 1: Like, and that's an everything's interesting, Like you know this
Speaker 1: is this is to some extent like a different economic question,
Speaker 1: but like you do at some point have to ask
Speaker 1: the question, like to to what extent can you learn
Speaker 1: things about the economy based on companies that don't have
Speaker 1: a revenue model or the revenue model is they will
Speaker 1: continue to be headed piles of money by like the
Speaker 1: same seven billionaires they've conned. And that's like a I
Speaker 1: think there's an interesting interplay of how dependent you are
Speaker 1: on actually making like actually having revenue be the source
Speaker 1: of like the continuing existence of your company, and how
Speaker 1: ideological you can be about running do you have a gameshom.
Speaker 2: Yeah, Well, it's actually very funny that You say this
Speaker 2: because one of the people that Vocolo talks to is
Speaker 2: this guy Cohen. I can't find his first name right now,
Speaker 2: and I don't want to scroll up. But somebody whose
Speaker 2: last name is Cohen is quote unquote more skeptical of
Speaker 2: the of the dynamical pricing, and he says, I think
Speaker 2: it's a sexy idea, and probably it has a lot
Speaker 2: of intellectually valuable pathways, except when it crashes into the
Speaker 2: sensibility of the customer. He said, it could create a
Speaker 2: universe of very inconsistent prices across categories in time, which
Speaker 2: I don't think. Human beings to align to these dynamic
Speaker 2: models need common sense judgment attached to them, which is
Speaker 2: not always necessarily available. Now, this is a very diplomatic
Speaker 2: statement by somebody who's formerly of Sears Canada. Now I
Speaker 2: find this very funny because there's a kind of subtext here.
Speaker 2: Vocola doesn't get into it, but Sears Canada obviously kind
Speaker 2: of related to Sears. In the nineties, Sears had a
Speaker 2: CEO who was like this ultra libertarian, you know. He
Speaker 2: basically believed that the problem with the free market is
Speaker 2: that it's not free enough. Right at the height of neoliberalism.
Speaker 2: So he's really pissed off about the fact that inside
Speaker 2: the corporation there's no free market. It's all a planned economy,
Speaker 2: you know, which is true. There's no there's no market
Speaker 2: exchanges in there, like, it's all allocations, Like, Okay, we
Speaker 2: have this goal, so we're going to allocate these workers
Speaker 2: to this place and blah blah blah blah. You know,
Speaker 2: and and we're and and and you know, anything that
Speaker 2: the company owns, they just use it to pursue their goals.
Speaker 2: He wanted everything inside the company to have a bress
Speaker 2: so that everything could just be you know. But and
Speaker 2: this is kind of a mad scientist experiment done on
Speaker 2: this like very old American corporation. But somehow, I guess
Speaker 2: it was the nineties, you know, people were coked up
Speaker 2: on this kind of thing. They tried it, and it
Speaker 2: was a catastrophic failure that actually generally seen as contributing
Speaker 2: to the end of Sears as a as a major
Speaker 2: player in retail. And it's like like, so it shows
Speaker 2: so I think that the fact that this person very
Speaker 2: diplomatically from Sears is like this doesn't work, you know,
Speaker 2: And that might be born of more experienced than than
Speaker 2: than not.
Speaker 1: You know, yeah, okay, we have to go to an
Speaker 1: advak Before we do that, I want to tell one
Speaker 1: more insane nineties Like people in the nineties really really
Speaker 1: had market brain in a way that's like difficult to
Speaker 1: understand now. And you can even see this kind of
Speaker 1: through Obama, Like they really have market brain. And like,
Speaker 1: I think the most market brain thing anyone ever did
Speaker 1: was the the I think it was the Army Joint
Speaker 1: chiefs of Staff brought in like a group of aonomists
Speaker 1: who were you know, like you were doing the whole
Speaker 1: like okay, we like, how how can we make how
Speaker 1: can we use the market to make the army run
Speaker 1: more efficient? And the first polls that they put on
Speaker 1: on the table is we're going to have each each
Speaker 1: like like each like section like what's the tap time declartum.
Speaker 1: We're gonna have each branch of the military bid for
Speaker 1: control of who of who gets controlled the nuclear weapons.
Speaker 1: And there's a bunch of just like five star generals
Speaker 1: sitting at this table going like what the fuck are
Speaker 1: you guys talking about? This kid about and that that
Speaker 1: was the end of like but that was like like
Speaker 1: peak absolute peak nineties brain of like these these people
Speaker 1: thought you could solve terrorism by like having futures markets
Speaker 1: on like where when terrorist attacks would happen, Like it
Speaker 1: was these people were wild. None of this stuff worked,
Speaker 1: Unlike the products and services that you're gonna you're gonna
Speaker 1: now hear ads for and we're back from these fine
Speaker 1: products and services. If you're if the thing you were
Speaker 1: doing right now is you have your finger on the button.
Speaker 1: We are about to message Sophie about the fact that
Speaker 1: we have gold ads again, like please don't like please
Speaker 1: leave Sophie alone. Oh my god. I think we we've
Speaker 1: gotten We've gotten a little we've we've gotten sort of
Speaker 1: into the weeds of I guess, like the kind of
Speaker 1: research stuff it's been produced, but I wanted to move on,
Speaker 1: I think to some of the some of the other
Speaker 1: like kinds of like I don't know, kinds of discourse
Speaker 1: and kinds of sort of work that's been produced out
Speaker 1: of this.
Speaker 2: Yeah. Sova Cola's piece I think was was very, very accomplished,
Speaker 2: and it adds to this proud tradition of pricing surveys
Speaker 2: like you've been saying. But the piece that I would
Speaker 2: say ended up having the biggest impact in the sense
Speaker 2: that it really kind of started getting followed up on
Speaker 2: by a lot of people and it got a lot
Speaker 2: of attention, was Tim Dimetzio's piece, So a little bit him.
Speaker 2: He's an economist based in Australia and I should remember
Speaker 2: the name of his university, but it was the University
Speaker 2: of Something and it starts with W and it's a
Speaker 2: very long name there you go, University of Yeah, And
Speaker 2: he's a political economist. He does a lot of stuff
Speaker 2: pertaining to kind of like international relations type stuff, but
Speaker 2: he also comes at economics from a particular perspective. So
Speaker 2: we mentioned last time that there's these the orthodoxy and
Speaker 2: economics is this one school called the Neoclassicals, who believe
Speaker 2: in the supply and demand stuff and along with a
Speaker 2: whole bunch of other dogmas. Then there's a bunch of
Speaker 2: dissident heterodox schools. And there's a whole bunch of these,
Speaker 2: and one of them is called the capital as Power school,
Speaker 2: which is named after a book called Capitalist Power by
Speaker 2: these two professors called Bickler and Nitsen, and it has
Speaker 2: a lot of things to say about a lot of subjects.
Speaker 2: But so Capital's power is a book that says a
Speaker 2: lot of things and a lot of different subjects, but
Speaker 2: at its core is the idea that what makes the
Speaker 2: capitalist system tick is the process of capitalization, and that
Speaker 2: that process of capitalization is controlled by certain people, and
Speaker 2: their control over that process is the basis of the
Speaker 2: entire economic system. That's very heavy stuff. It tends not
Speaker 2: to have to do with what we're going to be
Speaker 2: talking about, but it informs the perspective that Demutzio comes from. Now,
Speaker 2: Demuzio saw Steve's brilliant essay on the splashing theory of inflation,
Speaker 2: was very inspired by it because there are certain affinities
Speaker 2: between the framework that we're coming from in this kind
Speaker 2: of research and the capital's power framework. They don't agree
Speaker 2: one hundred percent on everything, but there's a lot of
Speaker 2: common ground there. So he basically hopped aboard to say, well,
Speaker 2: why don't we talk about interest rates? Because remember the
Speaker 2: main upshot of Steve's of Fred Lee's administrative crisis theory,
Speaker 2: and then and then by extension, Steve's theory about inflation
Speaker 2: is that inflation is not about money, it's about prices.
Speaker 2: And in order to understand inflation, you have to understand
Speaker 2: why people set the prices that they do, and why
Speaker 2: prices across the economy will go up at any given
Speaker 2: moment because it's people who set prices, not the market,
Speaker 2: not the money supply, and not any of these other
Speaker 2: sort of automatic general macroeconomic things. It's a microeconomic decision
Speaker 2: made by particular people within particular institutions with the ability
Speaker 2: to pull the lever on particular prices. Right, So the
Speaker 2: interest rate is a price, you know, it's a very
Speaker 2: important price too.
Speaker 1: Because we should look, we should we should back off
Speaker 1: for a second and explain what when when you say
Speaker 1: the interest rate, you should explain what that is, because well, yeah,
Speaker 1: that's under explained.
Speaker 2: Yeah, that's that's totally exactly where I was going. Because
Speaker 2: there's actually many interest rates out there in the economy.
Speaker 2: When we talk about the interest rate, what we tend
Speaker 2: to be talking about is the interest rate that is
Speaker 2: set at the central bank of the country that control
Speaker 2: like of the currency under discussion. Right. That is basically
Speaker 2: an interest rate that sets the price for credit for
Speaker 2: loans in the rest of the economy. And it's basically
Speaker 2: you can see it as a supply chain, even though
Speaker 2: it's not a physical one and it's basically the main
Speaker 2: cost for banks that want to borrow, you know, and
Speaker 2: they then have to set a markup over that cost
Speaker 2: as the price for anyone who wants to borrow from them,
Speaker 2: which includes other banks but also includes end consumers and firms.
Speaker 2: So that's basically I mean, I'm oversimplifying and Sea probably
Speaker 2: a more nuanced version of this, but that's the basics.
Speaker 3: Yeah, Banks, just like any company, need to determine both
Speaker 3: their cost structure to except that they are able to
Speaker 3: themselves and their markup and markup is they like banks
Speaker 3: have costs just like anyone. One of their principal costs
Speaker 3: is the rate of interest that they pay on deposits
Speaker 3: of their customers in order to get them to get
Speaker 3: new customers in Like, that's one of their main services
Speaker 3: that they provide is checking checking accounts and savings accounts
Speaker 3: and like, so how much interest are you is a
Speaker 3: bank willing to set on its savings account is like
Speaker 3: an important decision that's like part of its cost structure.
Speaker 3: But where people if the Federal Reserve were to raise
Speaker 3: its federal it's the federal funds rate, it's a principal
Speaker 3: policy rate up to what they have now five and
Speaker 3: a half percent or so, when it was less than
Speaker 3: one percent only a year ago. In order to compete
Speaker 3: with all of the other products which are based upon
Speaker 3: this so called risk free rate of return that the
Speaker 3: central bank offers that governments used to like set the
Speaker 3: rate of things like treasury treasury bills and stuff like. Eventually,
Speaker 3: if you're a bank, you have to start charging higher
Speaker 3: and higher interest rates. Sorry, you have to start offering
Speaker 3: higher and higher interest rates on your savings accounts. And likewise,
Speaker 3: you need to, like, you need to start charging higher
Speaker 3: interest rates on the products that are your actual money makers,
Speaker 3: like mortgages and home equity, lines of credit and that
Speaker 3: sort of thing, and so like the cost so the
Speaker 3: cost structure of a bank will shift as the Federal
Speaker 3: Reserve is changing its policy rate, and so too will
Speaker 3: its margin over time as it competes with other banks
Speaker 3: for like a narrowing pool of qualified mortgage applicants, and
Speaker 3: also for people who are willing to shop around for
Speaker 3: where to keep their deposits in a way that they
Speaker 3: previously they weren't because there was no sort of differential
Speaker 3: in interest rates at all. It was just being held steady.
Speaker 2: Yeah, absolutely, So the key thing to understand, and by
Speaker 2: the way, up to now, Steve and I have been
Speaker 2: describing what we regard as the real world. Like everything
Speaker 2: that we've just described, we can see it in action
Speaker 2: like in the world right Like if the FED raises
Speaker 2: this interest rate effectively, what that means is that this
Speaker 2: whole supply chain of people lending to other people, who
Speaker 2: lend to other people, who lend to other people, the
Speaker 2: cost of lending has essentially increased, which will eventually lead
Speaker 2: to a rise in the cost and the cost of
Speaker 2: lending to people downstream until for end consumers, which is
Speaker 2: basically like firms and households trying to get a loan
Speaker 2: from the bank, those loans are going to be more expensive.
Speaker 2: And conversely, if the Fed's interest rate goes down, those
Speaker 2: prices will tend to go down as well.
Speaker 3: If you like. Crucially, none of it is just automatic.
Speaker 2: That's Y's absolutely true.
Speaker 3: There's even just just because it's a bank doesn't mean
Speaker 3: it's any different than the story that Facola was laying
Speaker 3: out for retailers.
Speaker 2: Mm hmm, that's exactly right. The Fed's rate is a
Speaker 2: very important rate because it's basically the first, the first
Speaker 2: one in this chain, and it's a cost for pretty
Speaker 2: much everybody who's doing business and dollars. But that doesn't
Speaker 2: mean that it in some simple way just controls everything else.
Speaker 2: You can hope that it controls if you're the central banker.
Speaker 2: But of course all these firms are making their own
Speaker 2: decisions based on their own reasons, so you know, they
Speaker 2: can make all sorts of decisions based on their priorities
Speaker 2: and based on like like, all sorts of things. Now,
Speaker 2: by the way, if you want the more detailed version
Speaker 2: of this story that actually talks about the different agents
Speaker 2: at each step of this process in much more detail,
Speaker 2: you should check out Perry Merling's work on this. And
Speaker 2: there's even online online lectures that kind of get into
Speaker 2: the nitty gritty which I have absorbed and then since
Speaker 2: completely forgotten the details of, so I would need to
Speaker 2: watch them again to actually be able to name the names.
Speaker 2: But the point is that so far, so real. Right. Now,
Speaker 2: here's where things get a little bs.
Speaker 4: Remember that the mainstream theories of inflation are all basically
Speaker 4: descended in their DNA, even though they've been moving further
Speaker 4: and further away from.
Speaker 2: It from the old school quantity theory of money. The
Speaker 2: idea that the amount of money in the economy basically
Speaker 2: determines the price level. More money that there is circulating,
Speaker 2: the less that money is worth because there's too much
Speaker 2: of it, so the price of it goes down, and
Speaker 2: the price of money basically determines like how much your
Speaker 2: money is able to buy. Now. People have been moving
Speaker 2: away from that towards theories that get more realistic, but
Speaker 2: still retain the basic structure where the money supplies the
Speaker 2: main thing that matters, and they'll say, for example, that
Speaker 2: it's the amount of money circulating in people's pockets relative
Speaker 2: to the amount of goods being produced, such that if
Speaker 2: too much money is chasing too few goods, like there
Speaker 2: isn't enough supply to meet the demand, and that causes something,
Speaker 2: although people disagree on what, that causes prices to be
Speaker 2: bid upwards, and that's called the demand poll theory. It's
Speaker 2: the dominant theory that most economists, classical mainstream economists that
Speaker 2: you talk to today will will will pedal to you. The
Speaker 2: ones who are not orthodox monitorists, they still believe in this,
Speaker 2: which means that they still think that you have to
Speaker 2: when there's an inflationary event, you have to attack the
Speaker 2: money supply now from them. From their point of view,
Speaker 2: it doesn't have to do with the absolute amount of
Speaker 2: money circulating. It has to do with the amount of
Speaker 2: money in people's pockets relative to the amount of stuff
Speaker 2: that can be bought. So, if there's too much money
Speaker 2: in people's pockets, how do people use their money? They
Speaker 2: spend it on goods and services that are produced by firms.
Speaker 2: So if you reduce that amount of money, that basically
Speaker 2: the only way that you can do it is by
Speaker 2: putting people out of work, right, you know you by
Speaker 2: because then they don't get the wages which they would
Speaker 2: have spent on stuff that you know, the factory is
Speaker 2: in Walmart and everything else, the agriculture and whatever, all
Speaker 2: the stuff that gets made, the goods and services. Now
Speaker 2: they think that if you raise the interest rate, it
Speaker 2: makes the cost of finance more expensive. Some firms are
Speaker 2: depending on finance, so if that cost increases for them,
Speaker 2: they're going to go under. And when they go under,
Speaker 2: people get unemployed. When people get unemployed, they have less
Speaker 2: money in their pockets, which means that they're spending less,
Speaker 2: which means that some other firms go out of business,
Speaker 2: and then those people go unemployed. Now, the full version
Speaker 2: of this is like the crash of two thousand and
Speaker 2: eight or nineteen twenty nine, where suddenly a whole bunch
Speaker 2: of people are unemployed and a whole bunch of companies
Speaker 2: are empty. They don't want to go all the way
Speaker 2: with that, but they want to kind of get part
Speaker 2: of the way to that. They want to put the
Speaker 2: squeeze on the economy and get some companies put out
Speaker 2: of business and some people unemployed on the dole so
Speaker 2: that people don't have money in their pockets, so that
Speaker 2: the supposed pressure of too many people spending money on
Speaker 2: goods that are not being produced enough to meet that demand,
Speaker 2: the demand pressure goes down, so therefore it equilibrates and
Speaker 2: inflation prices. Inflation ceases because prices go down too, because
Speaker 2: the idea is that there's a law like relationship between
Speaker 2: demand and prices such that if demand goes down, the
Speaker 2: price will go down. The actual explanation for this is
Speaker 2: will vary depending on the thing. They basically accept it
Speaker 2: as a religious orthodoxy, and then different economists justified in
Speaker 2: different ways. But that's why they're trying to raise interest
Speaker 2: rates so that basically people get thrown out of work
Speaker 2: and that'll cause prices magically to go down. Now, as
Speaker 2: we discussed, the actual cause of the inflation was an
Speaker 2: exogenous shock based on like the chip shortage, the labor shortage,
Speaker 2: and key things like agriculture, the container shortage and the
Speaker 2: war in Ukraine causing increases and grain prices that have
Speaker 2: cost cost increases. That firms tried to hold off price
Speaker 2: increases as long as they could, but then they couldn't,
Speaker 2: and then they traveled down the supply chain and a
Speaker 2: whole bunch of prices across the economy went up. So
Speaker 2: we know that because we have looked at the news
Speaker 2: stories that you know, and talk to people at these
Speaker 2: different companies. By we, I don't mean strange matters. I
Speaker 2: mean like you know, journalists or whatever, and like you know,
Speaker 2: that's what they say. And yet nevertheless they're trying to
Speaker 2: make the interest rates go up to throw people out
Speaker 2: of work and partially induce a recession in the hopes
Speaker 2: that that will drive prices down.
Speaker 3: But they can't even get that, right.
Speaker 2: That's right, they haven't.
Speaker 3: Actually they haven't been able to get unemployment up either.
Speaker 3: So it's.
Speaker 2: Exactly well, and what's really funny is that Demucio basically says, Okay,
Speaker 2: why do people believe this? They believe it for a
Speaker 2: lot of reasons, but they think that it worked in
Speaker 2: the seventies. That's the myth. Right. You asked Larry Summers,
Speaker 2: why do you think this shit will work? And Larry
Speaker 2: Summers will say, well, you might not like it. And
Speaker 2: I think he actually said things like this, like a
Speaker 2: couple of weeks ago, you might not like it, but
Speaker 2: this is how we got out of the crisis of
Speaker 2: the seventies. If we hadn't done the vulgar shock, which
Speaker 2: is basically the same thing, they raised interest rates through
Speaker 2: up the yazoo, you know, like like we and hadn't
Speaker 2: induced that unemployment or whatever, prices would never have come down.
Speaker 2: But you see, Demucio did something that you're not supposed
Speaker 2: to do, which is that he actually checked up on
Speaker 2: the relationship between between interest rates and prices. And what
Speaker 2: he found was that basically, there's either that I believe
Speaker 2: that I explained his essay is that there's a strong
Speaker 2: version of his argument and there's a weak version. The
Speaker 2: week version is definitely true. The strong version is speculative.
Speaker 2: So he charted it and you found that there is
Speaker 2: absolutely no inverse relationship between interest rates and prices. They
Speaker 2: raise interest rates, they raise interest rates, the prices keep
Speaker 2: going up. Then they're not coming down, right, And the
Speaker 2: prices don't start to go down until oil because remember
Speaker 2: the oil shock caused by the war in the Middle
Speaker 2: East between Israel and Weal and UH and Egypt and
Speaker 2: a whole bunch of other places caused OPEK to raise
Speaker 2: their prices in order.
Speaker 1: Yeah, it's I'm gonna, I'm gonna, I'm gonna, I'm gonna
Speaker 1: point in a thing, which is that the actual story
Speaker 1: behind that is slightly more complicated, which is that, like, okay, so,
Speaker 1: to be completely one hundred percent accurate about this, OPIK
Speaker 1: had a meeting where they decided to raise prices, and
Speaker 1: then the war started, and then like like two weeks afterwards,
Speaker 1: and then they kind of tacked their explanation on to
Speaker 1: the back of the price increase they'd already decided on.
Speaker 2: Oh okay, but.
Speaker 1: Yeah, so this this this is the thing that like,
Speaker 1: I don't know, there was a there was an oil
Speaker 1: historian who went back and like spent a bunch of
Speaker 1: time looking through the records of OPEC and shit and
Speaker 1: trying to figure out what the actual sequence of events was.
Speaker 1: But it it is true that like one of the
Speaker 1: things behind keeping Opek together so that it could increase
Speaker 1: the price of oil was like the like what was
Speaker 1: their sort of solid aarity and they faced the opposition
Speaker 1: of the war. But also it's slightly more complicated than that,
Speaker 1: and I want to I want to I want to
Speaker 1: put that on the record, just because the oil knowers
Speaker 1: will get mad at us. We Yeah, yeah, so that's
Speaker 1: the version of it that like like ninety nine percent
Speaker 1: of accounts will give you. It's just slightly not quite
Speaker 1: exactly what was happening.
Speaker 2: Yeah, I gotta wrote that book.
Speaker 1: Yeah, I think it was, God, I don't remember what
Speaker 1: book I think it was in. I think it was
Speaker 1: in Carbon Democracy, maybe like eighty percent.
Speaker 2: Sure.
Speaker 1: Sorry, I read like four books about oil and coal
Speaker 1: in like incredibly rapid succession, like several years ago, and
Speaker 1: sometimes I have trouble remembering exactly which one which thing
Speaker 1: is from. But yeah, although I want to say sorry,
Speaker 1: I guess I want to say one other kind of
Speaker 1: interesting thing about that that makes specifically trying to use
Speaker 1: the interest rates arguments about like I think it is
Speaker 1: it is pretty clear that raising the interest rates directly
Speaker 1: would like did not immediately did wasn't the thing that
Speaker 1: brought down prices. I think there's like an interesting there's
Speaker 1: like a weird thing going on there too, because the
Speaker 1: like almost all like when when economists tend to look
Speaker 1: at this, what they tend to look at what the
Speaker 1: interest rate rises was what was happening to the US
Speaker 1: economy and the other the other thing that the vocal
Speaker 1: shock did was it raised the interest rates on It
Speaker 1: raised raised the interest rates in all of these adjustable
Speaker 1: rate loans that like all of these countries like all
Speaker 1: over the world had and those economies got fucking obliterated.
Speaker 1: And that actually I think, I think actually that there
Speaker 1: there is an argument that like my my argument would be,
Speaker 1: I think it kind of probably prevented prices maybe from
Speaker 1: going up more, But it did that because it prevented
Speaker 1: any more opex fromforming and just like absolutely annihilated any
Speaker 1: kind of political movement to like have pricing be set
Speaker 1: by like raw material producers rather than by like countries
Speaker 1: that do production. And this is a kind of like
Speaker 1: separate thing, but like this is I think, I think
Speaker 1: the moral of my story with this before we get
Speaker 1: back to sort of like the I don't know, the
Speaker 1: the other arguments about this is that like that moment
Speaker 1: was such a fucking shit show. There were so many
Speaker 1: things going on. It's so complicated. It is absolutely nuts
Speaker 1: to try to base literally your entire theory about how
Speaker 1: you stop inflation by raising interest rates on one event
Speaker 1: in like probably the most complicated economic crisis, and it
Speaker 1: like we've ever had. And yeah, because like it did,
Speaker 1: like the Volker shock did a lot of things that
Speaker 1: weren't what Volker or not even not not what Vocal
Speaker 1: were trying to do, but it did a lot of
Speaker 1: things that aren't what economists talk about when they talk
Speaker 1: about what the Volcan shock did. Like it had all
Speaker 1: of these incredibly like powerful political ramifications that they just
Speaker 1: don't put in the equations because it doesn't feel like
Speaker 1: how do you mathematically model like the collapse of the
Speaker 1: like like the collapse of the non online movement and
Speaker 1: like the Third World movement, Like you can't, right, And
Speaker 1: so they just sort of like wave their hands and
Speaker 1: pretend that it was just like directly it caused more unemployment,
Speaker 1: the unemployment prot inflation rydown.
Speaker 3: Yeah, it's interesting to think of the global effects of
Speaker 3: the Vulcar's shock. It's like you have countries who are
Speaker 3: dependent upon USD finance suddenly are facing a much stronger dollar.
Speaker 3: So if they didn't already have dollars, that's a huge problem.
Speaker 1: Yeah and again, yeah and again. Also just like like
Speaker 1: just literally the interest rates on their loans like increased
Speaker 1: by like twenty percent. And that's like, you know, like
Speaker 1: you're it doesn't really matter what your economy is. You can't,
Speaker 1: I don't know, it's it's unbelievably difficult to survive them
Speaker 1: like that.
Speaker 3: Yeah, on the four x dimension and just on regular
Speaker 3: lending terms, in dollar lending anyway, it's going to get
Speaker 3: way tougher. They even domestically, like to de Mitiu, superimposes
Speaker 3: the oil price onto the inflation and like the the
Speaker 3: inflationary crises of the seventies and early eighties, it was
Speaker 3: a double it was a double victim, if you remember.
Speaker 3: And so like the first time the FED chairman who
Speaker 3: proceeded Paul Voker was blamed for not raising interest rates
Speaker 3: during an inflationary crisis because of the emerging theory, said
Speaker 3: that maybe that would be a good idea, and so
Speaker 3: like the monitorists had like their one moment after that
Speaker 3: to say like they were, they became more than simply
Speaker 3: an academic movement and became like briefly hegemonic. With with
Speaker 3: the the vulgar interest rate arise that happened to like
Speaker 3: in set in nineteen seventy five or so, when the
Speaker 3: oil price was about fifteen dollars per barrel. That's when
Speaker 3: inflation and the oil price start to move closely in
Speaker 3: conjunction with each other, going into nineteen eighty, which is
Speaker 3: also when the interest rates are being raised more like
Speaker 3: give or take nine to eighteen months or so, and
Speaker 3: the economic historians, the neoclassical economic historians, will forget about
Speaker 3: the supply chain pressures like the oil price, which has
Speaker 3: nothing to do with the FED, and like that happened
Speaker 3: in this inflationary when oil prices were up to like
Speaker 3: one ten. During our current inflationary crisis, this exact debase
Speaker 3: debate was taking place again. Yeah, which like where it's like,
Speaker 3: I mean, there's like all of the prices that the
Speaker 3: FED has no control over. It's like, well, if you
Speaker 3: ignore those ones, then actually our theory is like kind
Speaker 3: of getting close to being right.
Speaker 2: And the worst part, the worst part is that the
Speaker 2: interest rate correlates positively with prices.
Speaker 5: This is so like so like so like the interest
Speaker 5: rate when it's high, theory expects that prices will be low,
Speaker 5: but actually and and and and like even.
Speaker 2: If you adjust for like a delay where maybe like
Speaker 2: the prices get low afterwards, like no, that's not what happens.
Speaker 2: It's like the interest rate goes up and prices go
Speaker 2: up to prices go down, and the interest rate goes
Speaker 2: you know, like like like.
Speaker 3: It's like yeah and like and Demucio is like it
Speaker 3: when he eventually he super imposes old price, fed funds,
Speaker 3: thorough funds, rate, and inflation all in one chart. It's
Speaker 3: just like this epic wave of all three going up
Speaker 3: at once, like almost in lock step. And then oil
Speaker 3: goes back down, and then interest rates go back down,
Speaker 3: and then prices go back down.
Speaker 2: Yeah, I can't think prices first before interest rate. Let
Speaker 2: me see.
Speaker 3: Oh yeah yeah like inplation, Chris, like yeah, somewhat concurrently
Speaker 3: with the federal funds and then the uh, the oil
Speaker 3: price eventually falls like like shortly thereafter.
Speaker 1: Yeah, and then and this this just gives you a disaster,
Speaker 1: right because you like, okay, so the you will get
Speaker 1: neoclassical economists who are like, oh my god, oh no,
Speaker 1: all these idiots are saying that increasing the increasing the
Speaker 1: interest rate actually increases prices. It's not what happening. It's
Speaker 1: like you get into this mess. You have to figure
Speaker 1: out the new classical explanation, right, is that like, okay, well,
Speaker 1: the reason it looks like the fund rate increasing increases
Speaker 1: prices is because you do that in response to the
Speaker 1: inflation happening. Right, But like you can also just very
Speaker 1: easily look at this as like a panic index basically
Speaker 1: like where you know, it's like, okay, well, prices go up,
Speaker 1: and then the Fed panics and so they raise their
Speaker 1: it doesn't, and you know, like it's it's this is
Speaker 1: one of those things where like the neoclassical economists have
Speaker 1: invented a mechanism that like allows them to explain their
Speaker 1: own actions in a way that's plausible enough that they
Speaker 1: can call anyone that they've they've gotten a fagiblity that
Speaker 1: could say anyone who says they're wrong is just like nuts, right, right,
Speaker 1: And also it's it's it's entirely possible that not only
Speaker 1: are they not right, they're literally perfectly exactly wrong.
Speaker 3: Yeah, and that yeah, they tried out the like the
Speaker 3: the econometric jargon long and variable lags when people say,
Speaker 3: when our interest rate's gonna cause unemployments arise, when our
Speaker 3: interest rate's gonna cut down on inflation by themselves and
Speaker 3: not some other supply chain phenomenon, And they say like, well,
Speaker 3: the monetary transmission mechanism has long and variable lags, which
Speaker 3: means that like nine to eighteen months from now, it'll
Speaker 3: settle down and then we'll know it's from interest rates.
Speaker 3: Trust us, right, And.
Speaker 2: Even their purported explanations are demonstrably false. So theoretically, the
Speaker 2: mechanism by which this happens is that the monetary that
Speaker 2: the money supply will go down. Well, yeah, M two
Speaker 2: is our best estimate for the monetary for the money supply,
Speaker 2: and it's not even a perfect one. You know, interest
Speaker 2: rates go up, interest rates go down, M two keeps
Speaker 2: going up. And this is over the course of like
Speaker 2: from the seventies to the nineties, you know, like like, yes,
Speaker 2: another graph of the mussios.
Speaker 3: That's another important point that like the money, it doesn't
Speaker 3: even get the money supply down.
Speaker 2: Yeah, So like it's quite questionable whether this interest rate
Speaker 2: adjustment thing even works at all on its own terms,
Speaker 2: because all the evidence says that there's at least and
Speaker 2: this is what I mean by the weak version of
Speaker 2: the Vicis argument, that all the evidence shows that there's
Speaker 2: at least no relationship between interest rates and the price level,
Speaker 2: that there is like no relation ship whatsoever. It basically
Speaker 2: just is useless for controlling prices one way or the other.
Speaker 2: The uh. Now, the strong version of argument is he
Speaker 2: takes the he takes the the the fact that interest
Speaker 2: rates track prices very seriously, and he's like, well, what
Speaker 2: if making finance more expensive actually raises business costs and
Speaker 2: businesses choose to respond to it by raising their prices?
Speaker 2: You know, what if you what if you actually, by
Speaker 2: raising the interest rate, are contributing to inflation. Now, this
Speaker 2: is this is kind of how we framed the whole
Speaker 2: article in our title editors make titles, not not not
Speaker 2: not writers do interest rate hikes worsen inflation? And I
Speaker 2: remember showing this to some of my friends who were
Speaker 2: financed bros. And they were like, what what are you
Speaker 2: talking about? This is a crazy idea, But like it
Speaker 2: makes a lot of sense because if you look at
Speaker 2: things as a supply chain. At the very least, rising
Speaker 2: financially rising cost of loans would be a higher cost
Speaker 2: for some businesses. Theoretically they could respond to that by
Speaker 2: raising their prices. Now, in actual fact, it probably at
Speaker 2: least my solo opinion is this is a small effect,
Speaker 2: if it exists at all, it's much more plausible that
Speaker 2: there is simply no relationship. Yeah, and the general price.
Speaker 1: Yeah, and that and that and that and that, Like
Speaker 1: the fact that they're correlated is just it's just a
Speaker 1: panic index on the on the on the on behalf
Speaker 1: of the fed that they just get scared and do
Speaker 1: this thing and it doesn't it has no effect, but
Speaker 1: like you know, they've got to press the panic button.
Speaker 3: Yeah. I think I'm for a variety of reasons, I
Speaker 3: think I'm a weak form demusiist on this point. I think, like, like,
Speaker 3: especially these days, there's so many other like a relatively
Speaker 3: small percentage of commercial and business credit is variable right
Speaker 3: to begin with, These days, more of it is fixed rate,
Speaker 3: and like especially for more well certainly for mortgages, like
Speaker 3: it's it's like eighty percent plus approaching eighty five percent
Speaker 3: even fixed rate, which will not be affected. And then
Speaker 3: businesses have other so many other means of liquidity other
Speaker 3: than loans these days, particularly the like medium large scale businesses,
Speaker 3: like the you know, you can go to the capital markets,
Speaker 3: private equity or the stock market and get the funding
Speaker 3: you need. That I'm in ways that don't don't depend
Speaker 3: upon what the federal funds rate is doing or only
Speaker 3: weekly depend upon it. So it's just like there's so
Speaker 3: many other liquidity sources, especially like in the last thirty
Speaker 3: years or so, like well since since the Vulcar Shock.
Speaker 3: Basically they've like all of these like private equity and
Speaker 3: other capital markets methods for liquid you have opened up,
Speaker 3: and a good deal of the debt, a good deal
Speaker 3: more of the debt, that's a percentage of total debt
Speaker 3: is fixed rate. So like on that basis, I'm like,
Speaker 3: all right, well, maybe it doesn't maybe it doesn't increase prices,
Speaker 3: but there is at the very least it's like non correlated.
Speaker 2: This caught a lot of people's attention, Like once Stevens,
Speaker 2: you put this paper out there, this is one of
Speaker 2: our most successful essays because it got picked up by
Speaker 2: a bunch of folks. I mean, Investipedia cited it as
Speaker 2: a source Economy called this a blog and not a magazine,
Speaker 2: you know, like like it ended up being taken up
Speaker 2: by another capital as Power influenced economists Blair Fix, who
Speaker 2: found yet more empirical evidence that there is no relationship
Speaker 2: whatsoever between interest rates and like the general price level,
Speaker 2: you know, and to the extent that there is, it's
Speaker 2: only because you induce a recession, you know, that that
Speaker 2: that puts people out of work, in which case you've basically,
Speaker 2: you know, you've in order to deal with a paper cut,
Speaker 2: you've cut off your hand, right and even then, like
Speaker 2: they can't they can't reliably get unemployment up, you know,
Speaker 2: by raising rates. So like what like what use is
Speaker 2: that even if you accept that mechanism. So they found
Speaker 2: more evidence and they got even more attention. Cory Doctoro,
Speaker 2: the science fiction writer and futurist and kind of left
Speaker 2: wing all around public intellectual, he found both Demusia's study
Speaker 2: and Blair Fix's study and was like really excited about it.
Speaker 2: And after that it really took off. It started getting
Speaker 2: debated all over the place. There's a heterodoxy economics international
Speaker 2: organization called Rethink Economics, which is all about like, you know,
Speaker 2: inciting pluralism and the discipline, and in their Australian blog
Speaker 2: because they're all over the world, an economist called Matthew Harris,
Speaker 2: you know, took up took up the controversy and basically
Speaker 2: sided with with Demusio like and JW. Mason writing in
Speaker 2: Baron's also basically sided with us in an essay called
Speaker 2: the Fed Can't Fine Tune the Economy. JW. Mason's a
Speaker 2: very important hederodox economists who's often on the cutting edge
Speaker 2: of a lot of these kind of theoretical developments. Interestingly,
Speaker 2: the first fellow though, Matthew Harris at Rethink Economics, he
Speaker 2: actually found a study which I was not aware of,
Speaker 2: which is why I love these. When we started all
Speaker 2: these conversations all over the place, people dug up stuff
Speaker 2: that we didn't even know about. There was a study
Speaker 2: done by the National Bureau of Economic Research by two
Speaker 2: professors from the University of Chicago, but notably they were
Speaker 2: not University of Chicago economists. They were in the University
Speaker 2: of Chicago Business school. And as many people have pointed out,
Speaker 2: you know, capitalists started business schools because economists are basically
Speaker 2: just propaganda. But like you actually also need people who
Speaker 2: know how the world actually works in order to run
Speaker 2: your companies. So that's why economics and business schools are
Speaker 2: two separate schools.
Speaker 1: This is like a real like I remember this on campus.
Speaker 1: This is like, this is a real thing, where like
Speaker 1: if you're so the business school, if I'm remembering correctly,
Speaker 1: the business school is like is most I think it's
Speaker 1: I think I only be a grad school for han
Speaker 1: sot me let me look this up. Yeah that was
Speaker 1: my memory of it.
Speaker 2: Yeah.
Speaker 1: So so this is a real thing because because the University
Speaker 1: Chicago doesn't have an undergrad business program, you get people
Speaker 1: who want to do business who go into ECON, and
Speaker 1: the ECON people fucking hate them because they see them
Speaker 1: as like like they see them as sort of like
Speaker 1: like these like inferior like fly by night people who
Speaker 1: don't care about like the sort of deep like the
Speaker 1: deep math and like the deep sort of like you know,
Speaker 1: like intellectual like political pursuit of economics. They just want
Speaker 1: to like go be a business person. And this has
Speaker 1: really interesting effects because it means that like you know,
Speaker 1: like the business school. I say, it's not like the
Speaker 1: business school is like a bastion of leftist or whatever.
Speaker 1: But they don't agree on stuff a lot because they're
Speaker 1: like like the University of Chicago Economics program. It it
Speaker 1: produces basically two things. It produces like a bunch of
Speaker 1: people who go on to be investment bankers where you
Speaker 1: don't actually need to know how a firm works at all,
Speaker 1: and then it goes on to produce a bunch of
Speaker 1: people who become economists. And so like it's it's actual
Speaker 1: sort of ideological purpose is is specifically it's it's a
Speaker 1: school that trains other economists, right, it's a school that
Speaker 1: teaches like the ruling class what to think, whereas the
Speaker 1: business school is like the school that teach And this
Speaker 1: is like this is a very very very explicit It's
Speaker 1: it's something that like when you're there you can like
Speaker 1: watch like in practice, the fact that these aren't the
Speaker 1: same thing and the fact that like you know, they're
Speaker 1: they're they're they're going to produce different conclusions because you know,
Speaker 1: the the like because like because their actual like purpose
Speaker 1: is different. One is ideological, the other one is like
Speaker 1: making money.
Speaker 2: Yes, and and and this is a great case study
Speaker 2: of it because these folks at the Business school their
Speaker 2: names are Nil's, Nils Gormson and Killian Huber, they actually
Speaker 2: went and asked companies what they do when credit gets
Speaker 2: more expensive. Now, according to the theory, and this is
Speaker 2: the most sophisticated theory the theory that people at the
Speaker 2: FED will tell you, which is, you know, you might
Speaker 2: need to put a few drinks into them first, but
Speaker 2: you know, it's like we have to induce a partial
Speaker 2: recession in order to make it so that people have
Speaker 2: less spending money in their pockets and prices get bidded down.
Speaker 3: Right.
Speaker 2: Theoretically, the mechanism by which this works at the individual
Speaker 2: firm is that the firm sees that the cost of
Speaker 2: capital goes up and they invest less, you know, or
Speaker 2: just outright go out of business. Right, But in fact
Speaker 2: future investment is only weekly correlated to the cost of
Speaker 2: capital because of the limited transition into discount rates, you know.
Speaker 2: In other words, like basically, there's no real effect. So yeah,
Speaker 2: they go around and do business service.
Speaker 3: Sorry, go ahead, companies. Yeah, they do a good amount,
Speaker 3: if not perhaps most, of their capital investment from cash
Speaker 3: on hand before going before seeking out finance.
Speaker 1: Yeah, and that and that, like and that means that
Speaker 1: it doesn't have an effect.
Speaker 3: And then even if you need financing their non debt finance.
Speaker 3: So there's like equity finance, either private or republic that
Speaker 3: you have as an option site alongside the debt options.
Speaker 2: Exactly. So we go from like a situation where we
Speaker 2: publish this article in twenty twenty two, right, and it's
Speaker 2: got a title that for a mainstream economist, even a
Speaker 2: very sophisticated one, is unthinkable, like do interest rates hikes,
Speaker 2: you know, cause inflation to get worse or even just
Speaker 2: don't matter for inflation. But then suddenly, like you have
Speaker 2: a bunch once it gets taken up by a larger discussion,
Speaker 2: you have a bunch of quite reputable people saying the
Speaker 2: exact same thing, citing this directly, and even in one case,
Speaker 2: six months after our article comes out, Lo and behold
Speaker 2: that a certain little known economist rights in the Guardian.
Speaker 2: In fact, raising interest rates could do more harm than
Speaker 2: good by making it more expensive for firms to invest
Speaker 2: in solutions to the current supply constraints the US federal reserves.
Speaker 2: Monetary tightening has already curtailed housing construction, even though more
Speaker 2: supply is precisely what is needed to bring down one
Speaker 2: of the biggest sources of inflation housing costs. Moreover, many
Speaker 2: price setters in the housing market may now pass the
Speaker 2: costs of doing business onto renters. You know. So in
Speaker 2: other words, like maybe higher interest rates can actually induce
Speaker 2: price increases as the higher interest rates, and do businesses
Speaker 2: to write down the future value of lost customers relatives
Speaker 2: to the benefit of higher prices to be sure, a
Speaker 2: deep recession you know, parenthesis like the kind of they're
Speaker 2: trying to induce. That's my parenthesis. Back to the quote,
Speaker 2: a deeper session would tame inflation. But why would we
Speaker 2: invite that, you know her own Powell and his colleague
Speaker 2: seemed to relish cheering against the economy. Meanwhile, they're friends
Speaker 2: in commercial banking are making out like bandits now that
Speaker 2: the Fed is paying four point four percent interests on
Speaker 2: more than three trillion dollars a bankers or balances. Blah
Speaker 2: blah blah blah. Now, this little known economist writing for
Speaker 2: The Guardian is Joseph Stiglitz, who won the Nobel Prize
Speaker 2: in economics. Now does he cite our article who's talking
Speaker 2: points he's basically going through point by point? No, does
Speaker 2: he cite any of the better known places that cited
Speaker 2: us that are header box. No, he basically presents it
Speaker 2: as if it's his own idea. Now, maybe he did
Speaker 2: have this idea six months after we started.
Speaker 1: Extension in like Stingletz has not had a single idea
Speaker 1: in like fifteen years. Like that man, Oh, that man
Speaker 1: is a transpe parent medium through which the stuff that
Speaker 1: he reads appears on a page. I'm going to be made.
Speaker 1: I'm I'm sick of doing this bullshit.
Speaker 2: And you know the worst part is, like, you know this,
Speaker 2: this is something that happens a lot. There's an orthodoxy
Speaker 2: that says certain things that are nonsense. The heterodoxy goes
Speaker 2: through the hard work of like figuring out the reasons
Speaker 2: why it's not true and presenting an alternative model. It's
Speaker 2: denied at first, but then increasingly it's just plagiarized, you know,
Speaker 2: perhaps accidentally, probably not, you know, like like and that
Speaker 2: it's presented as if actually, this is what the theory
Speaker 2: has always been all along, you know, and like, how
Speaker 2: can anyone think differently? And it's this, it's this unfortunate
Speaker 2: thing because since the neoclassicals control the discipline, they control
Speaker 2: advancement through the ranks of the economists, so they're always
Speaker 2: wrong and never right, but they're never punished for it,
Speaker 2: and they control all the leavers of who gets to
Speaker 2: be an economist. So it's this sort of like continual sad,
Speaker 2: unfortunate thing. But on the bright side, we were right.
Speaker 2: We were right early A bunch of people picked it up,
Speaker 2: and our talking points ended up making it too very
Speaker 2: very distant and well regarded places to the point where
Speaker 2: now it's it's a viable alternative that exists out there
Speaker 2: in the world in terms of like, you know, why
Speaker 2: keep raising rates. It's not doing any good. It could
Speaker 2: even do bad. And that's the talking point that I
Speaker 2: don't think would have existed if it hadn't been for
Speaker 2: Democillo's research, which depended entirely upon the supply chain theory
Speaker 2: of inflation framework that Steve developed out of Fred Lee's work,
Speaker 2: which is basically a research program that now the magazine
Speaker 2: has put out there in the world that and it
Speaker 2: is continuing to build up on that. That actually makes
Speaker 2: it make more sense.
Speaker 1: Yeah, And I want to just sort of like take
Speaker 1: a second to highlight like how impressive it is had
Speaker 1: this happened, because like again like like a year and
Speaker 1: a half even like like like even like even like
Speaker 1: a year ago, right for the entire time I have
Speaker 1: been alive. If you tried to say that raising interest
Speaker 1: rates raises inflation, like people would have thrown bananas at you,
Speaker 1: like like volleys of tomatoes, like they would have like
Speaker 1: you would you would have gotten sixteen contracts to be
Speaker 1: a professional clown Like this. This was a thing that
Speaker 1: like you could not you couldn't even like suggest this,
Speaker 1: and you know, like within a pretty rapid span, suddenly
Speaker 1: like Stinglets is being like, ah, what this is really
Speaker 1: really maybe this is a plausible thing. It's like, oh my,
Speaker 1: like I don't know, I think it's I think it's
Speaker 1: it's really it's really impressive watching how fast I don't know,
Speaker 1: like how fast the combinations of like reality and having
Speaker 1: an explanation of reality that actually like lines up with
Speaker 1: it has been able to change, like has been able
Speaker 1: to actually just sort of like change what the discourse
Speaker 1: at like the highest levels of power and sort of
Speaker 1: like what what has actually been happening in the economy
Speaker 1: like has shifted. And that's wild, Like I would not
Speaker 1: have guessed that that that was a thing that was
Speaker 1: even remotely possible, And and yet we are now here.
Speaker 3: Yeah, at the Overton windows has shifted so far that
Speaker 3: like the idea that interest rates just don't seem to
Speaker 3: have any discernible effect upon the price level is kind
Speaker 3: of like becoming the base case.
Speaker 2: Yeah.
Speaker 3: Yeah, so like the entire yeah, the entire spectrum has shifted, like, yeah,
Speaker 3: it could be a strong form and have like I'm
Speaker 3: starting to use that phrase now by the way, and okay,
Speaker 3: people won't be throwing a ton of They'll still throw
Speaker 3: some things at you, but like it's it's like manageable now.
Speaker 2: I mean, you can always point to that argument from authority,
Speaker 2: but Stitz says it might be so yeah, so you know,
Speaker 2: it's like.
Speaker 1: Question he won the Nobel Prize prize too.
Speaker 3: This is a whole.
Speaker 2: The so called Nobel price in economics is not actually
Speaker 2: the Nobel Prize in economics. It's that there's Nobel prices
Speaker 2: in science and you know, literature and all this stuff
Speaker 2: that's administered by the Alfred Nobel Organization and the and
Speaker 2: the fund that he left and whatever. This started in
Speaker 2: the sixties, like I think some seventy years after the
Speaker 2: Nobel started or something like that, and it was started
Speaker 2: by the Swedish Central Bank to imitate the Nobel Prize.
Speaker 2: So technically it's the Nobel Memorial Prize in economics, you see,
Speaker 2: and it's and it's just it's basically like peeling off
Speaker 2: the skin of the face of the Nobel Prize and
Speaker 2: then wearing it, you know, and saying, where we have
Speaker 2: a Nobel price too. Totally basically it's not and you know,
Speaker 2: it puts the loution on its skin or else it
Speaker 2: gets the hose again, you know. And they did this specifically.
Speaker 2: There's a historian of of economics. Oh my god, what
Speaker 2: the hell is his name? The it's it's the it's
Speaker 2: the more heat than like guy. He's Oh my goodness,
Speaker 2: I cite him in the Friendly thing and I can't. Morowski.
Speaker 2: That's the guy. Yeah, okay. So he actually like went
Speaker 2: and like studied the origins of it, and it turns
Speaker 2: out that they specifically did it as a scheme to
Speaker 2: only give the Nobel Prize to people who are basically
Speaker 2: like neoclassical economists, and they mostly have so sometimes they've diversed,
Speaker 2: but mostly they've done it to very reactionary economists in
Speaker 2: order to promote neoclassical economists in Europe. Because it was
Speaker 2: stronger in America than it was in Europe. And in
Speaker 2: order to promote the idea of central bank independence, which
Speaker 2: is a fancy term for uh, you know, a central
Speaker 2: bank should not need to operate under a political, uh
Speaker 2: a democratically controlled you know, legislature that says, actually, we
Speaker 2: don't want more unemployed because that would be bad, so
Speaker 2: don't do that. Like, instead, they should have independence, the
Speaker 2: independence that allows them to technocratically decide that it's time
Speaker 2: for people to get out of work, you know, and
Speaker 2: and and that kind of thing. So you know, that's
Speaker 2: that's the story of the so called Nobel Prize. It's
Speaker 2: really the fake Nobel, yeah, which is I just call
Speaker 2: it the fake Nobel yeah, which is.
Speaker 1: Also really funny if you talk to other people, like specifically,
Speaker 1: one of the things that happened to me when I
Speaker 1: was in the university was like I knew a bunch
Speaker 1: of people who were like really really good at math.
Speaker 1: Like one of my friends was like like like actual
Speaker 1: genuine prodigy was doing like like was doing like like
Speaker 1: graduate level like math in high school. And if you
Speaker 1: talk to these people and you talk to like math
Speaker 1: professors about the Nobel Prizes, they like, they will like
Speaker 1: yell about it for like twenty minutes because the math
Speaker 1: is so bullshit. It's like, yeah, this guy like the
Speaker 1: like the math involved in these Nobel prizes are like
Speaker 1: they figured out too plus two weekos four and they
Speaker 1: gave them like this fucking fake Nobel prize. You look
Speaker 1: at like the fields metal and it's like, I don't know,
Speaker 1: like it's it's, it's, it's it's it's really nonsense. All
Speaker 1: the math people are really mad about the fact that
Speaker 1: the econ people think that they know math because they don't.
Speaker 1: And the consequence of this is you get these like that,
Speaker 1: you get people handing out Nobel prices for saying shit
Speaker 1: like the economy can't miss like the market can't miss price,
Speaker 1: like in like assets that are like the price of houses,
Speaker 1: and then the entire housing market immediately implosed because it
Speaker 1: was all miss priced. It's it's it's a disaster. It
Speaker 1: has been. I don't know. We should everyone at all
Speaker 1: times should be doing anti fake Nobel price propaganda against
Speaker 1: the economics Nobel price because it's it's it's fake and
Speaker 1: bad and we should all say it more.
Speaker 3: Uh, you know, there's on the heterodox side of things.
Speaker 3: There's some really promising uses of mathematical economics to create
Speaker 3: like input output matrices. Yeah, and to model, like do
Speaker 3: an io model of the economy that the math is
Speaker 3: very much subservient to empirical data that is coming in
Speaker 3: that trains the model. And then like like to so
Speaker 3: much of economics is well, data fits, data fits the model.
Speaker 3: Data fits the model, like over and over again when
Speaker 3: it should be the other way around.
Speaker 2: Yeah, absolutely, does the model fit the data, because if
Speaker 2: it doesn't, then you got to throw it out. Like
Speaker 2: this whole like raising interest rates is going to control prices? Bullshit?
Speaker 2: When has that even happened? Theoretically happened in the seventies.
Speaker 2: But then you look at it and yeah, it doesn't
Speaker 2: tell you that story, so you know, do they throw
Speaker 2: it out?
Speaker 3: No, Like brief brief callback to Fred Lee's table table
Speaker 3: b was it?
Speaker 2: Oh?
Speaker 3: Yeah, is the Blinder study in there? I forget, Yes,
Speaker 3: yes it is. That's like an instance. That's an instance
Speaker 3: where Alan Blinder is neoclassical economists who like he messed
Speaker 3: up and did real science and what he found was
Speaker 3: was the administrative price theory.
Speaker 2: Yeah, he made a terrible mistake of thinking that his
Speaker 2: bullshit theory would be vindicated, and then it turns out
Speaker 2: that it was not.
Speaker 3: Yeah, there's just like the history of intellectual thought for
Speaker 3: economics is like replete with examples where they kind of
Speaker 3: like they screw up and they actually do real science
Speaker 3: for a change, and like find things like cost plus
Speaker 3: markups happening, and he.
Speaker 2: Tries so hard to explain it away, you know, he's like, well,
Speaker 2: supply and demand exists. It's just that these prices are
Speaker 2: sticky because the cost of changing the price on the
Speaker 2: menu is actually too expensive, so they choose not to
Speaker 2: and that's why prices are sticky. They can't they can't
Speaker 2: change the stickers. You know, it's completely insane.
Speaker 3: It's like the cost of admit, there's a cost to
Speaker 3: administering prices themselves, and that's why they don't change prices.
Speaker 3: Like the price mechanism for neo classical economics would suggests.
Speaker 2: Look for the stickers, and he couldn't find it. You
Speaker 2: couldn't find the costs. So he's like, well, I guess
Speaker 2: it's not sticky because of menu costs. It's like, I
Speaker 2: wonder what it could be. What a mystery?
Speaker 1: Okay, so we should we should start wrapping up because
Speaker 1: this has been this has been a very long episode already,
Speaker 1: but I wanted to ask before we go, what what what,
Speaker 1: what are you all doing next? And what other incredibly
Speaker 1: funny economics discourses can we expect to have giant like
Speaker 1: creators punched into in the next couple of years.
Speaker 3: So one thing we've started to work on, and we've
Speaker 3: discussed a little bit on this podcast, I believe, Yeah, Well,
Speaker 3: Beck was the importance of for X foreign exchange for
Speaker 3: all sorts of microeconomic things, like inflation being one of them.
Speaker 3: Like if you're a small country that that does not
Speaker 3: have hegemonic monetary authority like the US do is to
Speaker 3: get people to use its currency and you have to
Speaker 3: go out and import things and some other currency, how
Speaker 3: does that affect your ability to socially provision yourself as
Speaker 3: a nation state and like do development work. And we're
Speaker 3: developing a theory of for X essentially that is it's
Speaker 3: a it's an extension of the chartlist framework that informs MMT,
Speaker 3: but with some important criticisms about how like the central
Speaker 3: MMT insights sort of is like you can create if
Speaker 3: you're the sovereign issuer of your own fiat currency. You
Speaker 3: can always provision enough of it to you can always
Speaker 3: spend as much of it into existence as you need
Speaker 3: to to do productive things. And yes, that's true. You
Speaker 3: can create infinity of your own money, but your own
Speaker 3: not other people's money. Yeah, So other currencies like if you're.
Speaker 1: Like, uh, really Sri Lanka for example.
Speaker 3: Problem if you're Sri Lanka or Mexico or whoever, most
Speaker 3: of most of the world, basically you need to maintain
Speaker 3: and augment your balance of like the trading the major
Speaker 3: trading currencies US dollars, yen, the euro, to name three,
Speaker 3: and have balances of those. You need to maintain your
Speaker 3: balance of payments and your balances of specific currencies in
Speaker 3: order to meet the biophysical obligations that your whatever your
Speaker 3: development strategy necessitates, because in most instances, not all, but most,
Speaker 3: you're going to need to Like no one's going if
Speaker 3: you're Sri Lanka, no one's going to want to to
Speaker 3: transact in your currency for major purchases of like staple goods,
Speaker 3: You're going to need to use like dollars or euros
Speaker 3: or end or are you on perhaps you know who
Speaker 3: knows exactly one of the major trading currencies, and this.
Speaker 2: Also raises the question of how it currency becomes a
Speaker 2: major trading currency, and that almost invariably takes you in
Speaker 2: two directions. One is which countries are powerful and able
Speaker 2: to industrialize and make capital goods that nobody else has
Speaker 2: that everybody wants a piece of. And two, which are
Speaker 2: the powerful imperialist great powers. And it turns out that
Speaker 2: those are the nexus that's created between imperialism, development, and
Speaker 2: the balance of payments. Those three things can't even be
Speaker 2: discussed independently of each other. And the politics of what
Speaker 2: is going to be used as the what Steve and
Speaker 2: I are tentatively calling the international means of payment, in
Speaker 2: other words, what you can use in international transactions across
Speaker 2: a whole region or across the entire planet. That is
Speaker 2: a hugely political question that all the major great powers
Speaker 2: in their interimperial conflict or constantly fighting over. So right
Speaker 2: now it appears that China is attempting to make a
Speaker 2: bid for a global UoN. First they tried to do
Speaker 2: it through the digital UoN. Now they're seemingly trying to
Speaker 2: do it through bricks by getting the other bricks countries
Speaker 2: to agree to a kind of EUON gold standard, mirroring
Speaker 2: the Breton Woods Agreement that was basically the dollar piggybacking
Speaker 2: off of gold to reach global pre eminence. Will it work,
Speaker 2: will it not? Nobody really knows. It's a total mess.
Speaker 2: But in theory, that could be one way that you
Speaker 2: could suddenly have, like the YUON, at least in a
Speaker 2: certain currency zone, be used as the main way of
Speaker 2: doing imports. And if the US suddenly needs an import
Speaker 2: from that zone, which hypothetically, if it existed right, they
Speaker 2: couldn't use dollars anymore, or or maybe dollars would be
Speaker 2: at a high disadvantage, you know, in the exchange rate
Speaker 2: between dollars and that currency at that point, or maybe
Speaker 2: they would just be banned entirely from using dollars. They
Speaker 2: have to get it in that currency, which means is
Speaker 2: suddenly the US, which has basically been able to print
Speaker 2: for X, to print the international means of payment for
Speaker 2: some fifty years now, would suddenly have to actually hold
Speaker 2: reserves of this thing. Now, if we have to hold
Speaker 2: reserves of it, that means that we have to sell
Speaker 2: something to the people who issue that currency. That means
Speaker 2: that we suddenly have to worry about which firms are
Speaker 2: the most profitable exporters. And I bet you anything that
Speaker 2: none of our listeners know what the most important company
Speaker 2: in America would become if that situation happened. Is it Luber?
Speaker 4: Is it?
Speaker 2: Is it Amazon? Is it? Is it? All these like
Speaker 2: Fortune five hundred companies and whatever?
Speaker 4: No?
Speaker 2: No, I mean, it's one of the Fortune five hundred,
Speaker 2: but it's not like towards the top of that list.
Speaker 2: It's Boeing. Boeing is by far our single greatest exporter firm.
Speaker 2: It would be, in a situation like this, the national champion,
Speaker 2: so to speak, to use language that's usually reserved for
Speaker 2: less developed countries than the US. And this is exactly
Speaker 2: the kind of like thinking that is important because you know, obviously,
Speaker 2: the other thing that would happen if dollar hegemony ended
Speaker 2: is that it would be a huge economic crash in
Speaker 2: the US, Like suddenly the import the costs of importing
Speaker 2: anything that we're in that zone would skyrocket, and it
Speaker 2: would mess up, you know, our balance of payments, and
Speaker 2: it would cause inflation. Depending on how quickly it happens
Speaker 2: and how how little, how much or how little time
Speaker 2: firms have to adjust their supply chains and stuff like that.
Speaker 2: So it's, uh, this is exactly what you need in
Speaker 2: order to understand everything from the decline and fall of
Speaker 2: the Roman Empire to current geopolitics today. And and and
Speaker 2: I'm hoping that that Steve and I, through developing the theory,
Speaker 2: will create a general framework that can be used to
Speaker 2: tie discussions that people usually have in purely political terms
Speaker 2: about interimperial conflict into economic questions so that there's no
Speaker 2: longer a kind of division of labor between between economics
Speaker 2: which denies the existence of imperialism. And then the people
Speaker 2: who study imperialism as historians or political scientists or whatever.
Speaker 1: The stage stay tuned for more theories dropping at some
Speaker 1: point in the future.
Speaker 2: Oh and we should do our marketing pitch. If you
Speaker 2: like the stuff that you hear, you should seriously consider
Speaker 2: checking out the magazine which is at Strange Matters dot
Speaker 2: co op. And also please consider if you have the
Speaker 2: ability to subscribe or donate subscription storty five dollars. And
Speaker 2: it really it really helps because all the money that
Speaker 2: we get that doesn't just go to our capitalist overlords
Speaker 2: for basically like you know, paying for the services that
Speaker 2: we use to keep the website going. And the magazine going.
Speaker 2: All of it goes to our writers, and we try
Speaker 2: to pay them a both market rate for little magazines
Speaker 2: of our size. So if you want to see more
Speaker 2: of this stuff and more arts, philosophy, anthropology, history, all
Speaker 2: the other kind of stuff poetry that we publish, definitely
Speaker 2: please consider.
Speaker 1: Yeah, well we'll we'll put we'll put a link to
Speaker 1: the magazine and the description. Yeah, Steve gen C, thank
Speaker 1: you so much for thank you so much for being
Speaker 1: on the show and for yelling at the Econobo priced
Speaker 1: with me.
Speaker 3: It's been a pleasure.
Speaker 2: It's been great mana thank you.
Speaker 1: Yeah, and you can find us at it could Happen here,
Speaker 1: What that Happened here pod on Twitter and Instagram. Yeah,
Speaker 1: we have a website where you post our sources. It's
Speaker 1: cool Onmedia dot com. There's other stuff there. You should
Speaker 1: go there, and yeah, go into the world and make
Speaker 1: life worse for mainstream economists. It could happen here as
Speaker 1: a production of cool Zone Media.
Speaker 2: For more podcasts from cool Zone Media, visit our website
Speaker 2: cool Zonemedia dot com, or check us out on the
Speaker 2: iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts.
Speaker 1: You can find sources for it could happen here.
Speaker 2: Updated monthly at cool zonemedia dot com, slash sources.
Speaker 3: Thanks for listening,