Starting in chapter 5, Thomas Sowell begins the second part of the book, talking about Industry and Commerce. In this particular chapter, Sowell explains the purpose of businesses, the cycles they go through, and how they affect society at large.

Chapter Summary

The first thing to understand about business isn't just the money-making aspect that most people think of. Instead, we must accept the idea that businesses go through cycles. Some succeed, some fail, and many do not make it in the shifting tides of an evolving society. Thus, profits and losses play an essential role in the area of business.

Profit rates often change with the times. When a business is first to make a new product, they are often able to make larger profits. But those larger profits will attract new investors into other companies to make competing products. When this happens, competition drives prices down, and thus profit margins (i.e. the difference between what the item sells at and what it costs) often decrease. Sometimes, these prices go so low, that some companies won't make a profit, and go bankrupt. If the industry is to survive, the supply and demand levels must balance so that businesses can eventually profit again.

This has happened in virtually every industry, from steel production to airlines. Remember CDs? That industry took over vinyl, before being replaced largely by music players (e.g. iPods), which were largely replaced by smartphones. These technological changes are often what come to mind when we think about industries changing across time. And while businesses are often presented to us in impersonal ways, we must remember that every business is run by real human beings who must adapt to these changes.

Yet, sometimes, these changes are social. The main example given is A&P, a grocery chain in the United States that was once the largest retail chain in the world. But, after World War 2, when automobiles and suburban populations boomed in the United States, because A&P was located in central neighborhoods where walking to the local grocer was the norm, other chains became more popular. A&P's management never adapted, and as population shifted away from its stores, it slowly lost business, until today, where it is almost unheard of in a world of Walmart and Amazon.

There are a couple key things here. First, while profit is important, loss in businesses is what drives change in economics. This is because loss is what actually forces companies to either adapt or lose out to other competitors.

Second, it's important to realize that, even when the businesses fail, customers who have free choice are the ones who benefit over the long term. This is because all consumers benefit from the lower prices made possible by “the more efficient allocation of scarce resources which have alternative uses”. When governments control prices, either to save a business or appeal to consumers, the public is tricked with false knowledge about the underlying costs of goods and services (see Ch. 4).

No central entity has the ability to coordinate the vast amounts of information and knowledge required to make economies work. Instead, it requires individuals with their own specialties, attempting to make the best choices possible with the information that they have. Since businesses are made up of these individuals who are attempting to make the best choice possible for their locale, they know when to cut prices, how to compete, and how to adapt. If they don't, then their inevitable fall paves the way for consumers to get better prices from competitors.

Businesses also must adapt to economic changes. Examples of economic changes include things like the development of credit cards or an economic recession. As with social changes, businesses must learn to adapt to shifts in the economic landscape, or fall into irrelevance. Given the similarity, Sowell here drives home a point:

What is important is not the success or failure of particular individuals or companies, but the success of particular knowledge and insights in prevailing despite the blindness or resistance of particular business owners and managers.

This is an incredibly important insight. Free markets aren't about businesses controlling everything in society. Instead, it's the fact that, the freer the market is, the more we can allow prices to tell consumers accurate information about costs, so that ideas and innovation can freely drive society forward, even when businesses fail. In this free society, a farm boy can go to Detroit to build Ford Motor Company and change the face of transportation in the world, forever. Because investors are looking for financial winners, it's not about whether that person has an academic degree or even if they have lots of money themselves. It's simply about inspiration and, eventually, results.

A free society can always tap into its diverse population, and the real winners will come on top, rather than relying on central human authority to determine which ones will make it. Such central planning will inevitably make mistakes.

Finally, businesses must inevitably adapt to leadership changes. This includes cycles where businesses compete to be the best of their genre of competition. No business is guaranteed to be at the top of their category for any amount of time. In fact, there are often times when a very successful older business fails because they don't understand the change in environment for their businesses, and thus don't adapt.

Additionally, as people get older or more experienced, typically, they move on from the businesses they began or were a part of in their youth, and into other industries or even competing enterprises. When the leaders in a business change, they often bring different insights, leadership abilities, focuses, and other things into the picture.

In this way, a free market economy weeds out individuals and businesses who don't use the scarce resources of a society well. Losses are the way that economies force introspection. In other words, people must look at what they've done, and see if they can adapt or leave. Even in a business which has gone public (i.e. has public stock offerings), investors who have a controlling stake in the business will oust inefficient managers for better ones.

My Thoughts

I think that one of the most important things we can learn in life is to not take things too personally. Often, when we go get a job, or start a business, or even do generous work like starting non-profits or community gatherings, when these things fail, it's easy to take these things personally. It's easy to believe that, because I didn't get the job (or got fired), I'm somehow worthless. Or perhaps my startup business failed within two years, and somehow, it means I'm a failure.

But these things aren't true. Unlike what society presents to us, work, jobs, and money cannot tell us what our value is as human beings. Instead, our value comes simply because we are human beings, and what we can do by simply being human can lend value to society. We can't give out what we don't have, but we also can't stop giving out of what we already are. Since we are all intrinsically valuable, what we give has value, whether or not it is accepted.

When we step back and look at things this way, the idea of loss and business cycles become much less emotional, and just a simple principle we can use to understand economics and situations in society, both past and present.

Cryptocurrency and Business

A lot of what the crypto industry has gone through, especially since 2017 with ICOs and 2020 with DeFi, can be seen through the lens of business cycles. Hundreds, if not thousands, of cryptos have come and gone, and the ones that adapt to the very quick evolution of blockchain have stayed, while others have gone.

And it's not all about technology, either. After all, Bitcoin is the oldest coin, with the most basic tech of all of them, and yet has stayed on top all this time. I think it has done so because of its legacy, and until a token comes where its advantages and ease of use completely outstrip Bitcoin, there just won't be anything to take its place.

But I don't think that means that Bitcoin (or whatever crypto one is a fan of) will stay at the top forever. Instead, what I quoted above from Sowell is incredibly important: the whole point of a free market is so that the best ideas come to the top.

I believe the rise in governance protocols in crypto is going to be the next step for blockchain. And this principle is sure going to have effect. The cryptos that will succeed are the ones in which the best ideas (e.g. apps, protocols, etc.) come out on top.

We can already see this in Ethereum. Despite that particular chain's slow transaction rate and constant network congestion, because it allows basically anyone to develop on it, it has become the biggest elephant in the DeFi space. Lots of people are trying to copy it, but it is the number of developers on Ethereum's platform that gives it the advantage. So while the freedom of Ethereum has allowed for pointless apps like Cryptokitties, it has also led to the development of the likes of MakerDAO and Compound, which are pioneering the new industry of DeFi.

That's it for this chapter! See you in the next one!

Continuing with our overview of Thomas Sowell's book, Basic Economics. We've already finished the first three chapters (Ch. 1 | Ch. 2 | Ch. 3), so now here is the fourth!

Note: Previous to this post, I had been (unknowingly) been using an older copy of the book. I am now using the fifth edition of Basic Economics.

Chapter Overview

While the title of the chapter is “An Overview of Prices”, which might seem redundant to some, in the fourth chapter, Sowell now endeavors to explain the methods and purposes of economics, namely, looking at the cause-and-effect relationships inside economies. While economics may have moral or philosophical applications, it isn't based on those principles. The application of economic principles can have a lot of consequences, and so we must take those head on.

Cause and Effect

There are many different ways causes and effects materialize in an economy.

Systemic causation poses an interesting dilemma. It is the idea that, within a system (i.e. society), there isn't just one simple cause that happens, but multiple, and even reciprocal causes. For example, buyers and sellers will adjust their demand and prices, depending on each other's supply or demand.

However, in economics, the concern is about outcome rather than intentions. For example, in many low-income neighborhoods, there are high costs for things like groceries, gas, and other store-bought goods. People often look at a situation like this, and blame 'greed' or 'capitalism' for exploiting people there. What they don't recognize is that, due to higher rates of crime and vandalism, the cost for doing business in low-income neighborhoods, including cost of insurance, security, and other legal issues, is much higher as well. If these businesses didn't charge the prices they did, they'd go bankrupt, and then move out of these neighborhoods.

So it isn't a good idea, or even true, to blame intentions like “greed” or “discrimination” for what we see in society. Instead, we need to understand economic principles and their effects, even if it doesn't feel as moral or have the same emotional hook.

Economic principles are not complicated. Even though consequences may be complex, the source can often be very basic or simple. For example, the climate, seasons, plant life, animal migration patterns, and even human psychology are all different and very complex things. Yet, each of these are inherently affected by the Earth's tilt towards the Sun—so much so that if the Earth were pointed straight “up”, we would have a completely different version of Earth. In the same way, easy-to-understand principles like supply and demand dictate how economies function, so that even if people were to put in things like price controls, these principles still apply.

Because of these cause and effect principles, there is rationality behind any given economic problem. Even decisions made by politicians and bureaucrats, whom many like to lambast as “stupid” or “ignorant”. This is primarily because incentives generally govern human behavior. And when different incentives exist between different institutions, a person who was successful in one area (e.g. business) may not necessarily be in another (e.g. politics).

A point brought up in an earlier chapter—Russia is one of the most resource-rich countries in the world. However, in the Soviet Era, many local Russian officials kept food from moving freely around their local boundaries, so as to keep food prices artificially low, and thus win political support for themselves. This resulted in rotting food surpluses in their locales, while other areas had massive food shortages. But these policies were implemented due to wrong incentive structures, not irrationality. In a free market, this wouldn't happen. As Sowell points out:

The difference is that one system involves each individual making choices for himself or herself, while the other system involves a small number of people making choices for millions of others.

Scarcity and Competition

Since everyone's desires can't be satisfied completely, competition is basically inevitable. Everyone must compete to get what they want, no matter what economic system is used. But, that system being used has a lot to say about what happens as everyone competes.

Even when we simply buy things at a grocery store, we're participating in a competition. But what prices often do is prevent this competition from being explicit. If two religious groups are wanting to build a sanctuary for worship, they are unlikely to think they are competing for the same resources through the prices with which they buy building materials. But if the government builds these sanctuaries, and then assigns them to various religious groups, that competition becomes obvious. This same idea applies to all areas of society.

In this way, prices actually empower conscious decision-making. When there is a personal cost, people will think before they act, whether what they're doing is a waste or not. Price controls, subsidies, and even luck or corruption don't actually remove cost. Instead, they allocate that cost to intangibles that still have real manifestations, like bread lines and wait lists.

We're often torn between two choices, and the comparative value between them. Even in politics, when a figure says they want to “set national priorities”, it actually tells us that the thing they are focusing on has more importance, and thus value, than other things. But a government's 'categorical priorities' have more power over individual ones. Each individual knows how much some action will cost them, but an overall authority (i.e. government) who spends taxpayer's money will not necessarily count these costs individuals must make. Thus, regulation often makes situations worse in the name of good intentions.

There lots of talk today about subsidies and special tax laws or deductions. But, as given from previous chapters, we understand that prices are a simple indication of value. When people or groups (like corporations) ask for these things, even if their motives are benevolent (e.g. humanitarian help), what they're actually asking for is a forced mislabeling of value (i.e. supply and demand). When politicians act to help special interest groups—even if they have benevolent intentions—their favoring of particular groups through changing prices will create a situation that often will benefit those who are far better off than the average person, since those particular people are the ones who can take advantage of subsidies and tax laws the most.

To understand this better, and in a sense 'bring it home', we need to understand what “costs” really are. Or aren't.

When politicians campaign on bringing costs down, they're often talking about bringing the prices that consumers pay for goods and services down. But by doing this, they're often neglecting the actual costs to provide the product or service. For example, bringing down the prices which people pay for medical care doesn't bring down the cost of training doctors and nurses, building hospitals and clinics, and the millions of dollars of research that goes into medication and other medical tools.

And so, we understand that cost and prices are actually not the same thing, even when if is sold to us as such. Instead, once again, prices convey information about value, without requiring someone to know everything about the good or service they are trying to buy. As Sowell explains:

The most valuable economic role of prices is in conveying information about an underlying reality—while at the same time providing incentives to respond to that reality. Prices, in a sense, can summarize the end results of a complex reality in a simple number.

My Thoughts

I think a lot of this chapter explains itself quite well, so I won't have too much to say about it.

Competition is Key

In this chapter, Sowell again impresses on the reader how important the concept of scarcity is. I have previously redefined it to “limited access”, which I still stand behind. Here, it's primarily because I don't believe that the inability for everyone's desire to be fulfilled, which Sowell professes, is a problem of lack of resources. Rather, it seems to me to be a more spiritual malady. After all, there certainly are people who require very little of the world, and are perfectly content to live with much less than the plethora of material possessions most of us are used to. So it seems this is a trait of will, rather than a lack of resources.

Regardless of that change, it seems that both ideas result in the same outcome—namely that both scarcity and limited access result in competition. And here, at the end of the first part of the book, Sowell makes an extremely strong case against centralized control over an economy. I would even say that the ultimate conclusion being drawn is that a free market is the only real choice for an ever functioning economy.

A lot of people may balk at this. What about people and their labor being exploited? Isn't this the result of capitalism and free markets? Aren't monopolies inevitable if a market is completely free because of corporate greed?

Actually, if we sit back and think about it, this combination of ideas (i.e. free market capitalism partnered with exploitation and monopolies) may be a result of media and cultural association or expectation rather than fact. We've all seen movies, or heard of stories, like the Wolf of Wall Street or the Big Short. A lot of people walk away from these works believing that corporate greed (which is what is often explicitly shown) is what drove people to be exploited or monopolies to continue to have power over the world.

What people don't see, and what the movies don't often show, is the centralized government acts that allowed such things to happen. For example, the Big Short (one of my favorite movies of all time, by the way) is a movie about the 2008 financial disaster that led to a global recession that is still being felt today. It lays the blame on the banks and conniving real estate agents that gamed the mortgage system to earn money, while taking advantage of the average person.

But what they don't show you is the laws which incentivized such behavior. Prior to 2007, there were several laws enacted in the United States that incentivized banks and real estate agents to give out loans to people who did not show the ability to pay back these loans. These laws were proposed on the basis of helping poor and low-income people, without recognizing their inability to repay those loans. But, because the government encouraged and even gave benefits to companies and banks to do this, it was almost inevitable that they did so. And thus, the mortgage crisis happened.

Even when we look at things like slavery, we recognize that it was a problem of central governments, not the economy. Now understood by almost all economists, slavery in the United States was actually a prohibitively costly thing. Buying and selling slaves had to be balanced with the feeding and treatment of the same, in addition to whether they could or would work well. But it because the government allowed and even incentivized such practices that this immoral tradition continued on for so long.

Market Decentralization and Crypto

It's difficult to read this chapter and not think about crypto. After all, the very principles of free market and lack of price controls is what cryptocurrency (namely Bitcoin) was founded upon. The lack of need to have any central authority in order to transact is a valuable thing which we shouldn't take for granted.

Yet, there is a worry here. While the crypto markets are still growing, there seems to be a lack of awareness of centralization of another kind—whales.

In crypto, the term “whales” is used to refer to entities which have large portions of a certain currency. Because these whales have such a large portion of it, they can influence the price of those currencies through their selling or buying. This has led the entire crypto market to become almost completely correlated to one another. If Bitcoin goes up, so goes the rest of the market. When it goes down, again, so goes the rest of the market.

This is dangerous territory, and one in which I don't know how to really fix. Do we really want banks and financial institutions to step in? After all, if they do, they'll just become the new whales. Do we want federal regulations to come in? But, as demonstrated above, governments and centralized authorities are horrible at this.

The only way that this can be fixed that I can see is through DeFi stablecoin, like DAI and Kava's USDX. The price of these coins is pegged to the US Dollar, and so aren't as subservient to the buying and selling of whales. And in DeFi, these stablecoins are often the ones with the greatest interest rates across time (at least so far). But, of course, they are still pegged to a certain asset, one in which is in the control of a central government.

Thus, it may be required that there are several different kinds of stablecoins. For example, there will be those that are pegged to fiat, those that are pegged to precious metals, and those that are pegged to securities, among others. In this way, the prices of those assets are what determine the prices of the coins.

But there is another danger here. Namely, that it is easier to create a coin pegged to an asset, than it is to obtain it. There may be a scenario where many groups create coins that are pegged to the price of gold, even more than there would be gold available for people to buy. In these cases, how would this all go down?

I predict it would mean that those pegs would be diminished, just as DAI's peg, currently, has been hovering above the US Dollar for a while now (since March, actually). So this may be a tentative solution.

One thing I do know, as given by this brilliant chapter from Thomas Sowell, is that government intervention (i.e. price controls) is not the answer.

In this new 11th episode of Block Stars, David Schwartz interviews Sid John Leopold, an author and serial entrepreneur, discussing the impacts of money and cryptocurrency on the environment, as well as the future of the money as a whole.

As with my previous posts in this series, here are the summary and thoughts I have for the episode.

Episode Summary

The episode very quickly delves into sustainability and money, especially given Leopold's research into the subject back in 2017 (seems like an age ago). In it, he compared Bitcoin, Ethereum, XRP, and fiat transfers through Visa's network. The surprising result was that XRP was not only more efficient than Bitcoin and Ethereum, but also Visa, which was built to be as efficient as possible with fiat currency. In other words, a decentralized, distributed ledger was able to beat out a centralized one.

We know, of course, that Bitcoin uses massive amounts of energy in order to run (more than some countries, in fact). This is a result of its Proof of Work design, by using energy to make it more secure. But this design isn't very environmentally friendly, and is, in fact, the opposite of sustainability.

For Leopold, he began his research into this subject trying to understand how technology has increased our standards of living today. After all, the poorest person today is still living better than the poorest not too long ago. It is the efficiency in innovative tech that has been able to do this. Thus, efficiency is what eventually won out in technological growth.

This is even important in money. The velocity, or efficiency, of money is basically thinking about how long it takes for money to go from one place to another. Historically, money has gotten faster going from one place to another, and cryptocurrency seems to be another jump in that direction.

When the Internet was in its infant stages, many people thought that money would be part of the foundation of this new communications technology. Of course, it didn't. This was primarily because the financial systems at the time weren't ready. Crypto's growth may be a sign of people finally being ready for it, with extraordinarily faster velocity of money. Leopold predicts that, with this, the world economy will expand extremely rapidly.

Schwartz reminisces how in 2012, the initial teams behind various crypto projects thought that 10 minutes was a fast transfer time. In fact, an early design of XRP actually took 30 minutes to transfer the token. This was because they were comparing to traditional systems that took days, even weeks, to transfer money. The initial push to faster transfer times was only because they were just seeing if they could. However, now, with transfers taking less than 4 seconds on the XRP Ledger, is there value for sub-second transfers?

Leopold affirms that transfers will probably still get faster, seeing no limitation or end to increasing speeds. There may be a point of diminishing returns with transfers being only seconds, but that's only because we haven't really experienced it yet. As Schwartz acknowledges, there's a psychological factor in faster transfers, as many people feel nervous until they see a successful transfer. But that doesn't really matter when a transfer is only a few seconds, since it takes time for people to realize that psychological distress.

This psychological factor has a lot to do with trust. While a lot of the 'marketing' behind blockchain tech is this idea of “trustless”, in the mainstream, this is still a nascent concept. The older PoW designs of crypto weren't designed necessarily to be efficient. But with the innovations that have happened, perhaps it is now ready for mass adoption.

This innovation includes how certainty is designed into the XRP Ledger, versus the probabilistic design of Bitcoin (and other PoW chains). The more deterministic design of XRP proves it to be easier to trust to continue working, as well as far more efficient.

Interestingly, this wasn't an intentional thing put into the XRP Ledger, but rather a consequence of the Federated Byzantine Agreement system that it was founded on.

As a humorous aside, while many developers and people got into cryptocurrency because of wrongs or inefficiencies in traditional financial systems, Leopold's backstory is different. As a semi-pro gamer, he found some games with skins that could only be sold in Bitcoin. When he decided to stop playing, he had to learn about crypto just to understand how to sell his item skins in the game to earn money.

With the COVID-19 shutdown, the idea of money and loans has become a mainstream topic. The United States is in a unique position today because, unlike other countries, it can print its currency without any immediate consequence. This is because the US dollar is the global reserve currency. However, given how unprecedented the mass printing of the US dollar is, it is a bit more difficult to predict what will happen in the future. Leopold sees crypto as a sort of hedge in this case.

Historically, fiat currencies don't last very long. The current state of the world is actually benefitting from a single, stable currency, but that doesn't mean it will last forever. Leopold hopes that, if the US fiat falls, there would be a better and more efficient system that replaces it, rather than another fiat.

Here, the proposal would be that crypto, being independent of any centralized or national entities, would be easier to trust for a global collaborative system. But rather than one crypto to rule them all, since different cryptos have different use cases, there may be a basket of cryptos that run the world economy in the future.

Schwartz relates this to search engines, and how there used to be many different search engines available. Now, most people use Google (while Bing is marketed, as Leopold points out). But this is not a certainty for crypto.

Leopold relates this uncertainty as a foundation for life. Being uncertain about something isn't a vice, but rather something which helps us be open to learning new things. From search engines to cars, no one really knew the impact that any particular technology would have until infrastructure was built to support it. In the case of crypto, it may be better to remain uncertain as we head into the future.

With more and more people beginning to use crypto rather than fiat, Leopold hopes that centralized entities (i.e. governments) will be forced to account for whether their currencies are of benefit to the public. The fiat that continue to be used will be the ones that are competitively beneficial.

In a sort of final statement, Leopold says, “We have always propelled the tools that are the most efficient and get the job done.” Currencies are simply tools that we use to create. If crypto is that tool that will be better for making the lives of millions of people better, that tool must be a sustainable one going into the future. He predicts that future regulation for crypto will include environmental concerns.

In the end, he recommends everyone to read the book, “How to Win Friends and Influence People” by Dale Carnegie, a self-help book that is largely beneficial to entrepreneurs, businessmen, and really anyone that wants to do better in their relationships.

My Thoughts

There have been previous episodes where the main topic being discussed is environmental stability. Given Ripple's increasing partnership with various entities in this endeavor, I think we can expect this to be a major part of Ripple's push, as well as the company's and XRP's appeal, going into the future.

Despite the title, a surprising majority of the podcast wasn't really about environmental sustainability. Instead, it was really about the efficiency and future of money.

The Psychology of Money

As David mentions, for people, there is a certain apprehensive attitude people have towards money, especially current digital forms of it. We don't like having to wait to see if a transfer happened how we wanted it to. I think this is actually why centralized finance systems have existed. When something goes wrong, we often want someone else to lay the blame for it, so that somehow, we can get the recompense or reparation we want for what went wrong.

This may be the real reason why crypto is difficult to adopt for the general public. Without someone who can provide insurance against a loss (or even a glitch), the idea of blockchain and digital money together may always seem like a “wild west” to people. This doesn't mean that crypto can't be adopted through centralized forces like banks and financial institutions. But the first layers of any blockchain, even in the future, may find difficulty gaining a foothold if there isn't that security for people to feel about using the technology.

Schwartz piqued my interest especially as he talked about how the XRP ledger is now fast enough that the apprehension doesn't exist for most people using it. This hit home for me, because that was my exact experience. When I was first getting used to XRP, I was constantly amazed at just how fast transferring it from one wallet to the next was. As transfers became more frequent, I began to worry less and less. There is still a slight worry, certainly, because copying wallet addresses can, in fact, result in mistakes. But by and large, especially given how fast it is, that psychological factor has been mitigated.

But Machines Have No Psychology...Right?

When it comes to machines, which have no intrinsic psychology, what is the limit to fast transfer speeds?

Actually, I think this is the wrong question. Like both Leopold and Schwartz, I don't really believe there is any limitation to speed of transfer, especially as people continue to build and innovate in the blockchain space. Instead, I think the question should be: what are we going to be able to do with faster transfer speeds?

During the past year, as well as 2019, there were a few high profile cases where flash loans and DeFi collided to allow users to earn an insane amount of money in as little as 5 minutes. You can read about a couple of them here and here. But rather than simply a bug or glitch in the system, I think these exploitations are actually showing an interesting feature of DeFi. One which may have unknown consequences going in to the future.

Let me explain. First, I'm not advocating for the exploits used on these platforms, nor saying those users acted virtuously. But the basic premise used by them is actually used by most financial systems today.

1. They borrowed money against collateral, used part of that money to bet against their own collateral, then bought that collateral with the rest of the money.
2. Because of how large the short position was, various bot protocols began to automate transactions, thus proving the short position correct.
3. Then, with the money bought on the now “discounted” collateral, the value of it goes right back up.
4. The user can then take that and sell it to get their original collateral back, while making a profit.

All this in under a minute.

Technically, no law was broken. It being done so quickly is what is new, and perhaps a bit startling. Furthermore, it can all potentially be automated.

A Vision of the Future?

I'm going to do something that I rarely do, which is speculate about what the actual future may look like.

If all the above is true, then we can expect the role of money to completely change. Money, for a long time now, has been a representation of capital, including products, services, and otherwise unquantifiable labor. In other words, because it's difficult to know how to exchange a chair that a carpenter makes with a barrel of rice that a farmer harvests, we use money to represent things so we can conduct trade.

With crypto, this problem is about to be solved. Virtually anything can now be tokenized, and those tokens each have their own subjective worth, because each token can be valued differently, depending on which other currencies you're measuring against.

This means that I can now trade my rice barrel tokens for your chair tokens, and have it be a legitimate representation of those items without needing to bother with any central currencies.

Of course, I don't know if anyone would want to tokenize barrels of rice or chairs. But then again, before the Internet was popular, people couldn't imagine why they would give up their photo albums to centralized entities that will sell those things to advertising agencies. For FREE.

What's interesting about this scenario (where anything can be tokenized) is that now I can take worth loans on my chairs, tables, and other various things around the house. And I can leverage them to borrow money, to earn interest, and to pay for utility bills. All of which can be automated.

I hope this is turning some gears for inspiration and innovation. But what's even more interesting is that there would need to be other, third-party cryptos that can be used to safely swap between all of these tokens, so as to reduce slippage and (perhaps) some other on-chain fees. These third-party cryptos would need to be extraordinarily fast, and unburdened by the hundreds of millions of transactions happening in local chains and smart contracts.

My bet? XRP is going to be one of those.

If you haven't read my first two chapter summaries for this book, here they are (Ch. 1 | Ch. 2). Like those previous posts, I'll be giving an overview, and then some thoughts and analyses based on the chapter. And so, without further ado, let's get into it!

Overview

This chapter begins to talk about price controls, which is what happens when a government begins to keep prices from varying freely with financial laws and policy. When prices rise due to demand being higher than supply (i.e. a shortage), sometimes government will step in to keep it from getting to high. On the other hand, if prices fall due to supply being higher than demand, the government often comes in and provides a minimum. These controls, while seemingly benevolent, can often have disastrous consequences for people.

Rent Control and Shortages

Let's look at apartment rent control. Rent controls are often enacted under the guise of preventing greedy landlords from taking advantage of and making otherwise well-to-do people homeless. But rent control doesn't mean that there are more apartments available, just that prices of the current ones are being kept artificially low. What often happens then is that more people who normally wouldn't rent an apartment do so, even when they don't need to. They then take up the space of those who actually do need it. After all, need comes at different times for different people (depending on age, family status, jobs, etc.). And thus, the people who were meant to benefit from rent control actually are hurt by it.

The examples given in the book include both Sweden and the United States after World War 2. Because of rent control, there was a massive housing shortage, even when the government began to sponsor and build houses. It was only when the rent controls were repealed that the housing shortage stopped. Additionally, due to the repeal, private businesses began developing lands, and they produced housing that the people wanted, leaving the government-built houses a vacant waste of tax-payers' dollars.

The above example also helps us understand how rent control reduces supply. While rent control tells potential residents that renting is cheap, what it's telling land developers is that the land which is under the law is unprofitable. Furthermore, landowners are also less inclined to maintain their properties, because rent control prevents them from benefiting from maintenance. Since populations typically increase, what happens then is that there is an ever-increasing demand, while the lack of development and maintenance holds or diminishes supply. As Sowell concludes,

In short, a policy intended to make housing affordable for the poor has had the net effect of shifting resources toward housing affordable only by the affluent or the rich, since luxury housing is often exempt from rent control.

In this way, almost all economists agree that price controls (e.g. rent controls) are a bad thing. The problem is politics. Rent control is often sold to the public as an effort to quell wealthy people so as to help the poor (who outnumber the rich, and thus get the law passed). But the landlords of rent controlled areas that poorer people own are not always rich, and have mortgages of their own or need to spend time maintaining these properties. Thus, these middle-income people are also hurt by rent control, since they must split their time, and often can't continue maintenance. This leads to worse and worse conditions for those who live in these rent controlled properties.

There are lots of other examples that Sowell gives, but I think the rent control one is a good enough example to understand why rent control is bad, and how extensive it is in influencing an economy, despite its good intentions.

Floors and Surpluses

We typically think surpluses are good. However, when an artificial floor is set on prices above market demand, these surpluses end up hurting the economy as well.

Price floors are used to artificially inflate low demand items. After all, if those items weren't in low demand, they'd have higher prices. What then ends up happening is that those low demand items go even lower in demand when price floors are put in. This is because customers are even less inclined to buy something they don't really want for an even higher price. This creates a massive surplus, which is must either be destroyed or stored, rotting away.

Given our global economy, what if we took that surplus and sold it elsewhere in the world? In those instances, the surplus must be sold at under the prices of what is normal in those other locales. This creates an imbalance, since the locals in that area can't compete with the prices being offered, and thus are driven out of a job.

The government, when setting price floors, often comes in and buys the additional surplus. While this may create some respite for producers, that surplus is still in low demand, and, especially when it's food, must eventually be destroyed (i.e. burned). Not only do those same producers not know what the actual demand for their product is, but the government goes into more and more debt, wasting more and more money.

This is what a government subsidy essentially is, and this is why it's a terrible idea.

Furthermore, it creates less incentives for producers to maintain a quality product. After all, if the government always is going to buy it at a higher price than the product is worth, why maintain quality? This has even happened in the medical arena, where physicians tend to spend less time with their patients when the government artificially controls the prices of medical and health care.

Like price control through ceilings, price control through floors are also easily sold politically, this time to producers. In fact, government-subsidized health care is a great example of both. On the one hand, poor people want low prices or even free healthcare. On the other, doctors, nurses, and all other people who work in the field (e.g. hospital staff, etc.) need to be paid. It's a conundrum that has resulted in poorer quality healthcare as well as not meeting the actual needs of those who are poor (since they get less and less coverage of what they actually need).

My Thoughts

I love this quote from Sowell in this chapter (about rent control, but it can be easily applied throughout this chapter):

This illustrates the crucial importance of making a distinction between intentions and consequences. Economic policies need to be analyzed in terms of the incentives they create, rather than the hopes that inspired them.

In reading this chapter, it's really easy to see why everyone needs some sort of education in basic economics. When we don't understand how certain laws, even when they seem like good moral policies, actually create a worse situation than the one they're trying to address, we are less inclined to believe our politicians when they promise to fix our problems.

Let's look at the United States stimulus packages that have been given due to the COVID-19 as an example. In May, 15, 2020, the United States Congress passed the HEROES Act, a bill designed to relieve citizens who had been forced to stop working because of the global pandemic. The package gave $1,200 to each single person ($2,400 to married couples), as well as $500 for each additional dependent (i.e. children). The average monthly rent for an apartment in the United States is around $1463 in 2020.

Let's say there's a married couple with two kids (a pretty decent example, I think). They would receive $3,400 from this stimulus bill, which means that their package would help them afford their residency for about two months (not counting utility bills, groceries, insurance, etc.). This gives them up to July in terms of help. Because many cities and states are still on shutdown in the U.S. today, this couple now needs help from the government. Yet, even now, Congress has not been able to pass a bill two months after the deadline for this couple.

This is a simple illustration, and doesn't include a lot of other complications (including what children actually cost, the use of unemployment benefits, etc.), but I think it shows just how terrible government is at allocating resources, even today. Dependency on monopolized centralized authorities that have no incentive to help anyone is a sure path to a horrible life.

**Governance and the Future of Crypto
**I will probably do an entire post on this subject in the future. But, given the trajectory of blockchain, which has gone from the development of distributed ledgers to a foundation of exchanges (including decentralized exchanges) to decentralized financial products and services today, I think the next (very obvious) step for the space is governance.

Governance is something that has existed in all financial spaces at all times. In crypto and DeFi, it is the ability of people who have bought a coin to have a say in how the services which use that coin will function and change over time. The best example of this today is the Maker coin, from MakerDAO. Anyone who owns a Maker token is able to vote on governance proposals that have an effect on things like what can collateralize DAI and savings rates, as well as other things on MakerDAO's services.

New services like this (e.g. Compound, Kava, Aave, etc.) with their own governance tokens are popping up everywhere. While we are in the beginning days, I think it's pretty obvious this is where the market is headed into the future.

Without getting into it too much, I think it's important for people to really learn basic economic principles, especially if one is going to participate in the governance of these chains. Understanding how incentives work, and why certain policies may or may not work, will go a long way into helping you make sure your crypto investment is a beneficial one. Not only for yourself, but also for those who are going to use it for their own financial lives.

It's time for a second round of safaris into the wonderful world of Calvin and Hobbes!

For those who don't know, Calvin and Hobbes was a comic strip drawn and written by a man named Bill Watterson. This comic strip series, which ran from 1985 to 1995, followed the adventures of a six-year-old boy named Calvin and his stuffed tiger, named Hobbes, whom Calvin imagined as a real anthropomorphic creature. While the strip mostly is written from Calvin's child-like perspective, and certainly appeals to children as it did for me, the content, ideas, and philosophies explored are very palatable for adults. In fact, I can say that Calvin and Hobbes is one of the few comic strips that gets better with age.

I previously wrote a post introducing some of my favorite strips a while back. This time, things are going to get a bit more sober and philosophical.

Strap yourselves in, and welcome to Round II!

Enmity Sells

Fans of Calvin and Hobbes often talk about how strangely relevant the strip has stayed over the course of the decades since Watterson stopped drawing it (in fact, I believe that's what makes good art good). In a world where everyone in developed countries are bombarded with emails, snail mails, and even supposed friends who want you to buy their stuff, this strip has taken on more relevance than ever.

What makes these endeavors so sinister isn't the fact that there are people who want you to buy their stuff (fund them, which is basically the same thing). Rather, it's the exact thing that Calvin is explaining here. The lambasting of those who disagree with you as evil devils who will “destroy everything you hold dear”, and then riling up that base to stop listening to the other side—that is actually pretty evil.

And also very 2020.

The Important Things in Life

With social media (and general media, really) the way it is, Calvin's first line feels far too close to home than it should. And the problem is pointed out wonderfully in the second panel.

Perhaps it's due to human nature, or a need to be entertained, or a desire to escape from the boredom of the world (or probably, all of those and more). It seems like, every day, I know more and more about the personal lives of people who have no effect on me than what I need to know about myself and my local community.

What's troubling is that this kind of media sensationalization is what is now driving people politically. If I take a step back and look at the present day through the lens of someone living only a couple of decades ago, I'd think the current social climate was some sort of augmented reality TV program, somehow derived from a single person living in the US White House.

And yet, somehow, real governmental policy is still not discussed.

The Dynamics of Interbeing and Monological Imperatives...Wait, What?!

I'm going to be honest: this is how I made it through university.

I remember slogging through essays and other writing assignments in my earlier college years. I was bored, the assignments were boring, and I wasn't getting what I thought I would learn from my classes (i.e. what I thought they had promised). I remember sitting one morning, a couple hours before an essay was due, looking at my blank laptop screen, trying to come up with some inspiration for a civics class essay. And I couldn't, because I just didn't care.

And so, I remembered this comic.

I can't say I wrote the essay title anywhere near as eloquently as Calvin did here. But I do remember finishing up less than half an hour before the class started. And I do remember actually passing that assignment quite handily.

And I never put any serious effort in my university classes ever again.

As an aside, I do have to say—there are certain parts of society right now that follow lines of thought eerily similar to what is being presented by Calvin here. Eerily similar.

The Problem with Superheroes

Most kids (and many adults) I know love superheroes. A friend's daughter recently did a birthday party where everyone in attendance was some form of MCU superhero (she was Doctor Strange, which was the cutest thing).

Even Calvin has his own superhero, called Stupendous Man, who he pretends to be from time to time. Superheroes offer a sort of escapism and fun from our seemingly dreary world. They make us feel empowered, righteous, and understood.

But in our own world, enemies are not always easy to spot, and evil often resides within rather than without. These are difficult things to express in visual media, let alone explore. Watterson himself famously said he didn't like comic book superheroes, finding them rather absurd. Unfortunately, especially in the short term, the visceral will always outsell the contemplative.

But I'm glad he was able to shift that very medium on its head to delve into these themes. I certainly feel like I've benefited from it.

TVs = iPhones

While he didn't have an iPhone, and the Internet wasn't anywhere near as widespread as it is now, Watterson nailed popular culture's obsession with consumer entertainment.

I think there's an argument to be made, not just on how social media has affected us in an addictive way, but how media in general is pushing information on us faster than we can truly process it. It doesn't matter much if it comes from an old tube CRT or the always-connected screens we hold in our pockets and wrists. The constant flow of information, especially those designed to keep us stimulated emotionally and neurologically, and thus addicted to our devices, is having a detrimental effect on society, en masse.

Maybe I'm old school, but I don't think the human heart, mind, and soul was made to be so overwhelmed by today's technology. We weren't ready for instantaneous communication with people that aren't living anywhere near us, and it shows.

Advertising...Advertising Never Changes

This one is probably very relatable to Coil users, as well as many who have sat through the atrocious increase of ads on Youtube, or those who now use ad-blockers and web browsers like Brave.

I once heard a version of this applied to music today. In a small interview, the interviewee said that most pop music today is not produced to be musically pleasing or harmonically rich. Instead, it's made to be repeatable and quick to digest. That way, even though most of us don't really like the music on the top charts, when advertisers and other mediums constantly push it on our ears, because of familiarity, our brains are tricked into believing we like it, and thus, we buy, download, and listen to it. As we do, we continue to propagate that exact familiarity to our friends and family, who in turn do the same.

I must agree with Hobbes here. I don't know about you, but if I hear another Postmates Pad Thai advert on Youtube again, I'm pretty sure I will swear off food delivery services for life.

The Question We're All Asking Unconsciously

I remember reading this as a kid, but not really understanding it very much. Perhaps I was lucky with the schooling I got (and certainly with the a