Ben Landau-Taylor and Wolf Tivy deal with industrial growth. Standard economic theories model growth as continuous marginal improvements, and seek stability. Schumpeter explains growth is a destructive “history of revolutions” which cause chaos.
Transcript
Intro (00:00)
Wolf: Welcome back to The Students. I’m Wolf Tivy, joined again by my colleague Ben Landau-Taylor. So Ben and I have been, through a lot of reading and discussion, studying this problem of our current political economy, various aspects of it, and ways to get out of its current decline, ways to get out of its current dysfunction. We previously talked about Carroll Quigley’s works. We’ve talked about Veblen’s works.
Today, we’re going to talk about Schumpeter’s “Capitalism, Socialism, and Democracy,” which is this legendary tome written in the 20th century, maybe at the height of American capitalism and functionality. About what that—
Ben: I wouldn’t say the height, but—
Wolf: Maybe not the height
Ben: well, it was still working pretty functionally.
Wolf: Well, it was still working. So, yeah. So Ben, welcome back to the show. Thanks for coming on.
Ben: Yeah. Always good to be here.
Wolf: So I guess you’ve been reading this stuff. I think we always have an interesting conversation if we just dive into these matters, kind of summarize what’s going on in the book, why should people be reading about this, what are the big ideas that we’re taking away from it, and then we’ll just discuss that and see what kinds of insights we can extract. So yeah, I’d love to hear from you. What is he writing about?
Capitalism, Socialism, and Democracy (01:23)
Ben: Yeah. So “Capitalism, Socialism, and Democracy” comes out in, I think it was 1948. And honestly, I can’t recommend the entire book. The analysis of capitalism, I think, is some of the best analysis of capitalism that I’ve ever read. Extremely important, in particular, his concept of creative destruction—which many of our listeners have probably heard of.
This is where it gets—
Wolf: Yeah, we’ve all heard that
Ben: that’s mostly what I’m going to be talking about. This is where it gets articulated and developed. And then his analysis of socialism and democracy, I don’t think it was very good and he’s a Marxist who’s like, “And here’s how capitalism is inevitably trending towards socialism. Here’s how democracy is going to fail and be replaced with this more advanced technocratic utopia in the Marxist tradition” sort of thing. I don’t think that has been—
Wolf: And as we all know, that’s exactly what happened. We live in a technical utopia—
Ben: No
Wolf: with everything working really well.
Ben: Yeah. So like many Marxists, certainly not all Marxists, but the better type of Marxists, I think, are really good analysts of capitalism and then have a bunch of utopian, airy whatever about how they imagine things are going to go because wouldn’t it be nice?
Wolf: Yeah. Well, isn’t this a very common pattern? People have also remarked that about many different thinkers. I’m thinking of Curtis Yarvin in this case. People will say he’s got a great analysis of the Cathedral, of the problems of the modern system, but the solution’s always much harder to come up with than a good diagnosis of the moment.
Ben: It’s a very common pattern. So I highly recommend the first sections of the book where he’s diagnosing capitalism. In particular, the chapter on creative destruction.
It’s been one of the most important concepts within all of economics.
Wolf: Okay. So let’s—
Ben: Economics
Creative destruction and natural monopolies (03:35)
Wolf: dive into it, then. What is his diagnosis of capitalism? How does he view it? You’ve mentioned these concepts like creative destruction, but what’s his big thesis—on the matter?
Ben: So his big thesis is, a lot of the economists, they have this very sort of marginal view of what’s going on, of everything is incremental, everything is—
Wolf: Right. It’s all in equilibrium, and you kind of look at things on the margin. You use calculus.
Ben: Yeah. And it’s like, okay, this guy has managed to be 1.5% more efficient than the other guy, and so that’s going to take over, and the other guy’s going to be out-competed into nothingness. And—
Wolf: The simple model of economics. Yeah.
Ben: And Schumpeter looks out over the economic history, and he’s like, “That’s not really the story of what’s happening.”
Wolf: Yeah. You actually need to be 10 times better to displace the other guy.
Ben: Right. And yeah, it’s not that someone has figured out a 2% better way of making steel, and so the other guy slowly bleeds out from 1,000 cuts, and over time eventually withers to dust. It’s that some new guy comes in, and it’s like, all right, we have invented the iPod and so the previous tape cassettes. It’s not that they’re like, “Oh, no. Now we’re 2% less efficient, and we have to struggle.”
No, the cassette players are just done. That’s it.
Wolf: It’s revolutions. Capitalism is revolutionary.
Ben: Yes. His phrase is that it is a history of revolutions. And one of the implications of this, which he doesn’t dwell on too much there, but which I think is extremely important, is that revolutions are contested. This sort of thing tends to provoke a lot of political opposition. In 1948, this opposition wasn’t allowed to come to a head in the way that it often is today.
But the normal state of mankind is that when you try to revolutionize things and just creatively destroy people’s livelihoods, they don’t like that very much, and they’re going to try to stop you.
Wolf: Right. Yeah, and this gets to kind of the politicization of the economy. That is sort of one of these key problems of modernity, is how much can you keep it technocratic and apolitical versus how much does the economy actually get substantially politicized?
Ben: Right. And it’s certainly a lot more politicized today than it was in Schumpeter’s time, and it was—very far from apolitical in the aftermath of the war, obviously.
Wolf: Yeah. They’ve just undergone an extremely political event.
Ben: Right. With literal command economies in—every single one of the major combatants, basically.
Wolf: Yeah. Okay. So he diagnoses capitalism or the history of capitalism as this kind of sequence of revolutions. You’re adding this element of contestation to those. But where does he take it from there?
Okay, so he introduces, I guess the revolutions themselves are the events of creative destruction. But where does he go with that?
Ben: Yeah. So there’s a couple of places where I think one of the most interesting is that he turns it into a defense of what we today would call mega corporations. Of the gigantic conglomerates as—
Wolf: Monopolies, effectively
Ben: Yeah, monopolies is the term that he’s using in his day, where his claim is that these are necessary to creative destruction. That in the middle of the 20th century, when you see the sort of like, “Oh, we’ve invented the CNC machine tool,” or whatever, this sort of thing does come out of the big mega corporations. It doesn’t tend to come out of the little mom and pop—guy tinkering in his garage.
Wolf: Right. Because—
Ben: In our day, we have seen them come out of the guy tinkering in the garage, and then they become new mega corporations. It’s kind of the natural form if you are this much better. So a lot of these ideas have been sort of repackaged in the sort of Silicon Valley—ethos.
Wolf: Well, I was thinking in particular of Peter Thiel’s Zero to One, which—
Ben: Zero to One is very much a recapitulation of Schumpeter’s ideas. I find it kind of funny how people talk about Thiel as a disciple of René Girard, when it looks to me like his most important ideas are basically Schumpeter’s.
Wolf: Interesting. Yeah. And maybe because Peter Thiel’s not a communist, he gets a little more traction in the capitalist world.
Ben: Yeah. And also people just really like things that are new. No one wants—to go crack open some thing that’s 70 years old when like... So, I think that Thiel has done a great service in making a new sexy version to get a lot of these ideas—into people’s heads.
Wolf: It seems to be something that’s sort of a reliable source of alphas. You just go back 100 years in time or 50 years in time, read the books, and then popularize their insights for the modern audience.
Ben: I mean, I’m happy to keep doing videos where I go and read the old books.
Wolf: Right. All right. So let’s continue with it. Where does he go? Okay, so we got mega corporations that are able to...
They have the internal surplus to basically engage in the kind of research and the kind of disruption needed—to get these items.
Ben: Right. And then these new things, it’s not that no one else has the idea of, “Oh, I should also make an iPod.” It’s that the thing that is being done, especially in its early days, is actually just very hard.
Wolf: Right. It’s a lot of just optimization, figuring out how to make this new thing work.
Ben: Right. And no one else can do it for a while. And eventually, it’s going to sort of spread and diffuse. And in the early days, Henry Ford is like, “I’ve got my assembly line process. I’m making the cars just at a pace and in a way that no one else can do.”
Wolf: Yeah. And no one else [inaudible].
Ben: It takes a while. Eventually, that diffuses out. If you were to go back and look back at the assembly lines that Henry Ford had, a modern automaker would be like, “These are primitive nonsense because we’ve continued advancing on that. It’s all diffused out.” But this takes often a decade or so, and in the meantime, you’ll have something like ASML is making these photolithography machines, which just, it’s really hard engineering work that no one else in the world can actually do.
Or Amazon is just extremely good at logistics, and someone else, in principle, could just make another Amazon, and for example, in China, they have. But like—
Wolf: It takes China to do it.
Ben: Right. Because here, no one except for Mr. Bezos wants to just actually grind through all of that and is good enough at logistics to do it.
Wolf: Well, there’s also the kind of monopoly aspect of it, right? Once you have a network effects business like Amazon taking root in the economy, how would a competitor to Amazon even get started in the West?
Ben: I mean, ask the Chinese because they—in fact, have multiple competitors who are doing that right now.
Wolf: Yeah. Well, they didn’t have Amazon, from what I understand.
Ben: They did have—
Wolf: Or did they?
Ben: They did have Amazon, and then Amazon eventually just left China because their lunch was getting eaten by the Chinese equivalents.
Wolf: Interesting. Yeah, I wonder how they did that. But maybe Schumpeter can shed some light on it or maybe not. So this is supposed to be a kind of a total diagnosis of capitalism. Right now, we’ve kind of remarked on some interesting features of it, though.
Ben: Right. Yeah.
How natural selection works in capitalism (11:09)
Ben: And so the big thing is that, so he has a wonderful phrase in what he’s looking at here and how this theory is aimed, where the problem that is usually being visualized is how capitalism administers existing structures, like how you run a company and what’s the right way to run this company or—et cetera.
Wolf: Yeah. What’s the marginal profit motive—and use of resources and so on.
Ben: Whereas the relevant problem is how it creates and destroys them. So it’s taking this sort of almost Darwinian, sort of the thing that’s being observed is the selection process on how the companies come to be and how the new products come to be. What is the mechanism that is selecting them? And the claim is that the sort of very marginal, we haven’t come up with a thing which is 8% better at providing utility is just like, that is not, in fact, how the—selection process actually operates.
Wolf: It’s not marginal changes. It’s these bigger changes. It’s like a whole structural re—reorganizations of either production or of what the product even is, or coming up with some new product. And because they are big and involve a lot of changes that have to work together, they’re not being done as these incremental processes.
Ben: Right. And so this selection process, it ends up putting in place what he calls the perpetual gale of capitalism, of how the big mega corporations, the big monopolies in... I think this was more true in 1948 than it is today. Because in 1948, they were actually much more at risk of destruction. And today, the Federal Reserve is going to—cut off everybody’s arms before they’re going to let a big mega corporation actually just die.
Wolf: Right. Like Boeing’s not going anywhere, for example. Even if they are terrible.
Ben: But this was much less true back then. And so the idea—as he was talking about it was that, people would even try to creatively destroy their own businesses and product lines, not because they were like, “Oh, man, this specific competitor has the thing, and we have to keep ahead of the specific thing that they have.” They were like, “No one knows where any of this is going to come from. We could get knifed by anyone at any time, and so we have to keep moving.” And—
Wolf: This reminds me of, the innovator’s dilemma that Mark Zuckerberg’s often talking about.
Ben: Yes. And you do still see software companies in particular still doing a bunch of this. Like Amazon, they introduced their, like, “Oh, we’ve got a really good logistics thing. We’re taking over American retail, but we’re still going to introduce this new third-party seller platform. We’re still going to get into cloud computing and try to do some creative destruction over there.”
And Netflix, they didn’t start as a streaming thing. They started as, “We are going to physically mail you DVDs.” And then they were like, “I can see how the DVD is going to eventually become obsolete, so I’m going to creatively destroy my DVD mailing business with this new streaming thing,” which—they have then taken and ran with. And for some of the stuff that we touched on in one of the previous video, you see the software sector is much closer to the sort of competitive, the thing that people meant by capitalism 100 years ago—than is most of the rest of our current economy, and this is one of the many ways in which that’s true.
Wolf: Uh-huh. And so what’s the implication of this model in Schumpeter’s eyes? Like we lay out a model of these kind of disruptive changes of mega companies or monopolies, that are the ones that are actually doing this, are able to take advantage of this or are the result of this. But he’s kind of, again, trying to make this bigger diagnosis of where this is going or what its limitations are, and what does he actually sort of say with this?
Clearing out the dead wood (15:11)
Ben: Yes. So one of the big things he’s looking at is the cycle of booms and busts, which was one of the really big topics for—the economists, especially around the time of the Depression, of course.
Wolf: Right. This is only what, 10 years after the Depression or—15 years after the Depression.
Ben: And so his contention is that depressions are, in fact, a very important part of the life cycle of a healthy economy. Because as you have these revolutions, as you have these things being obsoleted, like there’s just a bunch of stuff that is a big load-bearing part of the economy that needs to be gotten rid of.
Wolf: Right. It’s like the 2008 financial crash where they all got so hopped up on derivatives that they crashed the entire world economy. But—in natural capitalist terms, that means that all of those companies should have gone bankrupt.
Ben: Right. And that like—
Wolf: But they got bailed out.
Ben: At the time, a bunch of the automaker, like General Motors was going bankrupt and then got bailed out and—I think that they have just not been very good at making cars, and so—that could have been a good time for them to just fade away. But instead, they got bailed out, and so now they’re just still making cars and they don’t seem to be doing very much, while the electric car makers are just sort of creatively destroying the whole internal combustion thing, and—they’re just kind of standing there. And—
Wolf: Standing there taking up resources and their time.
Ben: Yeah, taking up what, probably hundreds of billions of dollars worth of capital equipment or something. And incredible amounts of skilled engineering, which from the sort of Schumpeterian, why don’t we just have all of the smart people allocate the resources efficiently sort of view, could be better spent on other uses. And—
Wolf: So is that what he’s trying to do with this? Is this another one of these kind of Marxist critiques of capitalist economy in terms of redundancy? Or like he’s trying to sort of lead this to propose a more stable managerial model where you have the managers running everything? Or what’s the—
Ben: So this is the reason why he thinks it will eventually turn into all of the managers. One of the things that separates him from a lot of the communists is that he is really... So like one of the things that Marx says, which Schumpeter takes very seriously, is that you need capitalism to provide the foundation and to provide the infrastructure which is necessary for the transition to socialism. And—and Schumpeter takes that very seriously. He’s really awed by the beauty of this capitalist production, this sort of great dance of all of the companies competing with each other.
And he does believe that eventually we’re just going to be like so we could also just do this in a less stupid and wasteful way without these depressions, or at least without them being nearly so bad if we just had some guy at a desk whose job is to figure all of this out. And, he recognizes a bunch of the problems of like, “Well, but you don’t take as good care of the stuff when it’s not your stuff,” and all that. But he’s like, “We’ll eventually figure out some solution to that.” “We don’t have it yet.”
Wolf: So you think he’s just kind of hand-waving his way through these problems of interest and the calculation problem and so on?
Ben: Yeah. As you were saying earlier, he’s just much more clear-sighted about the current stuff than how do you solve these future problems.
Wolf: Right. And so he’s giving us a great kind of diagnosis of what is going on with capitalism contrary to prevailing marginalist economics or something.
Ben: Yes. And so if you just sort of bracket these things he’s hoping are going to happen in the future and just look at his diagnosis of what’s happening in the present, in the last 50 years as of the time he’s writing, he is saying that as of this point, when we have not yet achieved true socialism, we actually do need these depressions. This is in fact a load-bearing part of how this inefficient stuff gets reallocated and obviously it sucks for the people involved in it when your business goes bankrupt, you lose your job and—
Wolf: Well, it’s sort of like forest fires in a fire-prone ecosystem. You want them basically early and often.
Ben: And people have often used the metaphor, I don’t think I recall Schumpeter using it himself, I might be misremembering, but people often call this clearing out the dead wood—is the term that gets used for this idea of all of this skilled effort and valuable equipment, and just money is locked up in these inefficient things, and if those things are dissolved, then people can buy the machine tools, the engineers can get hired by someone else—and this can end up in, even if we’re not doing the one guy at a desk is like, “Okay, you should move from this factory to that factory,” you have this messy process, which then ends with people working at SpaceX instead of Boeing.
Wolf: Yeah. The interesting thing here, the irony, is that the valence of what actually happens with those problems is kind of inverted from what he’s suggesting. So for example, he proposed this kind of government bureaucrats or something, some kind of managerial bureaucrats deciding basically which companies are going to survive and which companies are going to get wiped out. And presumably, they’re going to sort of clear out the dead wood in some non-catastrophic way before it becomes catastrophic, right? Someone would’ve had to identify GM as a weak company before the financial crisis revealed it, and take action to kind of dissolve it and redistribute its capital.
And if you look at the closest thing, there’s sort of two social roles that kind of match that description in rough terms in two different ways, that exist in our economy today. So the first social role is the kind of hostile takeover private equity capitalist who comes in and says, “Oh, this is a weak company. We’re going to destroy it for profit.” Right?
And so it’s interesting that the sort of deadwood clearing economic planner bureaucrat ended up being actually this rapacious capitalist of maybe the type that he would hate the most. And then—
Ben: A lot of other Marxists would hate them, but I think Schumpeter himself would not.
Eliminating depressions has slowed development (22:17)
Wolf: Interesting. Yeah. So maybe he’s a little bit more of an open-minded Marxist on that point, which many of them often are, they’re very, very intelligent critique. But the other big archetype of this is sort of what you might call the bailout bureaucrat, who is the one who actually, instead of clearing out the dead wood, they’re preventing the depression—
Ben: Yeah. He’s like, “Oh, no-”
Wolf: and allowing all of the dead wood—
Ben: “... that dead wood votes.”
Wolf: Yeah. That dead wood has political connections. It has value beyond the economic. And so the actual evolution we saw with this managerial stuff is not clearing out the dead wood so much faster as preserving the dead wood against these economic shocks, making the economy more and more sort of ultimately, I would think, fragile or weak.
But by preserving the dead wood rather than by preserving the working stuff.
Ben: Right. And so much of the goal of this stuff is stability. It’s like avoiding short-term pain. Where, if you had—
Wolf: Right. Because that’s sort of the politician’s job is make sure nobody gets upset, make sure the—boat’s not being rocked.
Ben: And in fact, if GM had been allowed to go bankrupt in 2008, then that depression would have been worse than it was.
Wolf: But the American economy would probably be stronger now.
Ben: Yeah. By now, yes. It’s the long-term versus short-term optimization and—if you are aiming for short-term stability, then that is going to trade off against the sort of high variance outcomes that lead to the largest long-term growth. There’s a little bit of a parallel, to go back to some of Quigley’s economic models. When he’s critiquing the Roman economic system, one of the things he says about why the Romans kind of punched below their weight when it comes to economic production and technological development was that—their economic system was largely based on these large slave estates.
And in the early Republic, they were still run by the owners, and Cincinnatus is found—on his farm when they go to appoint him the dictator and—then he returns to the farm. So he’s still involved in it, but by the late Republic, by the Empire, it’s these absentee landlords who just appoint some freedman to manage the thing. They just want the income streams. They’re not really involved. They just want stability from it.
And so there’s just much less effort and attention into optimizing and maximizing production, and getting the best use out of the capital. And I think in the managerial system, and with it being so financialized, we no longer have the owner/operator of like Henry Ford is in charge of how the factory is run and owns most of the whole thing. That’s quite unusual these days.
Wolf: Yeah. Or we do have it, it’s cases like Elon Musk and Jeff Bezos, but the norm with these big companies is something more like Boeing. Where it’s you have a bunch of managers who are trained as MBAs, not engineers, and they’re managing the thing like a portfolio of assets rather than a working—capital concern.
Ben: And the thing that is best for their careers is stability—rather than maximization.
Wolf: Yeah, or if they’re maximizing something, they’re maximizing capital efficiency in this narrow way that maybe neglects the underlying production function. This is one of the big criticisms of private equity and general financialization of the economy, is that it has tended to hollow out the less immediately legible parts, less—financially legible parts of the economy.
Ben: Most dramatically, you were mentioning the ‘80s corporate raiders who would often come in and get a lot of profits by reneging on unwritten social contracts of—there’s an implicit understanding that we’re going to employ you for a long time and keep promoting you, and—that’s why you were working like a dog when you were 28, and now you’re 58 and the new guy bought it, and that was never in writing, so goodbye.
Wolf: Yeah. And it seems like however we choose to solve this problem, whether it’s with some kind of development bureaucrat or corporate raiders, you end up with some pathologies. There’s this inherent kind of difficulty to the problem. And I wanted to comment one more thing about the 2008 financial crisis as this outcome of the stagnation bailout bureaucrat to the existence of them. Because of course, part of the financial crisis happened because they knew they would get bailed out.
And the result of that is that today, the interesting thing is the people saying the same thing that he’s saying about the big crashes and depressions being a necessary part of the ecosystem of the economy, those are tending to be the more capitalist people. They’re arguing against the state intervention, against the managerialism that tries to preserve that dead wood.
Ben: Right. And of course, like any system, this also has its pathologies, which in this case is you get the really bad depressions. Like the Great Depression, we call it the Great Depression now, but it was one of the... And throughout the late 1800s, which is the most capitalist period that we’ve had, and also the period of the most rapid technological advance that we’ve had, these really bad, Great Depression-level depressions. I think the original term Great Depression had first been used for one that was in, I want to say the 1870s, and then it got reappropriated later for the one in 1929.
Wolf: Interesting. I didn’t know that.
Ben: There were just tons of these crashes every 10 or 15 years. And then since FDR’s reforms, we’ve basically cut the rate of them about in half.
Wolf: Right, which means we’ve cut the rate of economic development maybe in half.
Ben: Hard to do a one-to-one, but it seems like both of them have gone down.
Wolf: There’s some kind of correlation there.
Ben: Yeah. And I don’t think it’s a coincidence that in the period when—you’re getting your trains and antibiotics and automobiles and electricity, you also had... With all of this was happening at the level of, you see the first airplane take off when you’re a kid, and then when you’re old, you see the moon landing. For most of that period was also the period of just having tons of—the really bad depressions.
The degenerative ratchet in our political economy (28:57)
Wolf: So this raises the question. It’s like, okay, Schumpeter, maybe there’s trade-offs involved, but if we favor the development of wealth in society or the development of our industrial power and various things, we want the economy to actually be more dynamic, big companies more prone to failure, nothing too big to fail. We want to let things burn when it’s time for them to burn. And this will be sort of a more chaotic and disruptive economy, but maybe a more robust economy and a more productive economy. But actually getting there seems to be quite difficult.
What actually happened in political economy is that this proves not necessarily to be economically unsustainable, but politically unsustainable. That these kind of collapses and depressions create too many constituencies for economic stagnation or lockdown or stabilization is maybe a more neutral term for it. Because the people who lose their jobs, especially in the Great Depression, a lot of people were in a really bad situation as a result of that. And then also the capital owners who faced ruin in these events also want to preserve their position. And so there’s all these political constituencies for stabilization of the economy.
And I wonder, is that a normal and healthy thing that maybe we actually should dial back the dynamic chaos of a sort of unregulated economy? Or is that actually a degenerative ratchet where once you kind of go in on a little bit of stabilization, the deadwood just piles up further and requires more and more stabilization over time until your economy’s kind of choked out the way I think a large fraction of the American economy now is kind of just choked out, fake, fraudulent, deadwood.
Ben: Yeah, I think it is exactly a degenerative ratchet where—I think that if you don’t have any substantial constituency for the, let’s call it stabilization, I think it can continue for quite a long time. And in fact, we saw we had in this sort of hyper-capitalism was something like 70 years or so, which is quite a good run. But then once you have it, then yes, it becomes this ratchet where you have the constituency, which is approximately impossible to reverse. There’s just no practical way within—the system of turning it down. So it can only ratchet up or pause for a while and then ratchet up later in the future.
Wolf: Right. Once GM and Boeing are sort of on the retirement plan and they’re just sitting around being deadwood—it’s very hard to get out of that.
Ben: Yeah. So if we ignore the political constraints and I were just the economic dictator, then maybe the right thing to do is you just have some sort of—
Wolf: Just unplug them.
Ben: Yeah. So I would like something where you unplug it at the level of the companies, and then you still have some amount of safety net for the individuals. I think if it is operating at the level of the individual, then certainly that can have its own pathologies. But when it comes to these sorts of large capital allocation questions, it’s just kind of irrelevant. So if you were to do unemployment insurance, but we’ll just let all of the companies that die, die, then I think that this particular problem would basically go away.
But yeah, I don’t know how you get there from here.
Wolf: Yeah. Actually, when I ended up thinking through this stuff some years ago, I remember the conclusion I came to was actually that the almost Keynesian FDR solution that they did in the Depression was a good solution, which is that you basically have the government provide some economic backstop for a constant floor of labor demand by the means of things like, okay, well, if you don’t have anything else going on, you can go build a trail. You can go build some infrastructure. There’s public works projects—going on that have this flexible, constant background of labor demand regardless of what the capital cycle is doing. And that would seem like a good idea, except that that itself seems to have these degenerative ratchet effects where it’s like, oh, but maybe we should make it a little bit more like welfare.
It’s a little bit less of an obligation to work. Maybe it’s like we’re just going to print money in this way, and then now we’ve got a bunch of Cantillon effect insiders—benefiting from that.
Ben: The Irish did the literal just having you dig holes and then fill them up again. And as you might imagine, a lot of people got very angry about that.
Wolf: Right. And yeah, and then maybe the work gets less useful. But I think when I looked at it, it is useful to do that, the sort of constant labor backstop if the government is able to plan the use of that labor in some kind of productive way, where the benefit is kind of greater than the loss would be from the dead weight.
Ben: Yeah. And I think a lot of the WPA stuff was actually quite good at that. We got a lot of our national parks. We got most of the good archaeology on Native Americans that has ever been done was when they were like, “We’ve got several hundred people who we need to employ. Let’s dig up that mound.”
Wolf: Interesting. Yeah, I did not know that.
Ben: So there was a lot of good stuff that happened as part of that. And because what’s going on is that is not a matter of let’s prop up this company that is doing inefficient stuff that’s been outcompeted. It’s here’s this other thing—
Wolf: No
Ben: that we need done, and this is—
Wolf: It’s just we need this... Yeah, there’s this other thing we need done, and we have this labor surplus, right?
Ben: Yes. So now’s the time to do it. And there’s a sort of general principle of industrial policy here where the best cases of industrial policy tend to be the government is like, “This is the thing that we need done”—and then we are going to turn to basically the market to do the particular thing. We have decided that the thing our country needs is steel plants, so then we are going to provide subsidies, or we’re going to provide tariffs, and then just within this—
Wolf: Yeah. Or just—
Ben: These are the rules, and then—
Wolf: Guaranteed demand, like we’re going to buy—a bunch of steel, right?
Ben: Yes. If you look at the construction of the American Transcontinental Railroad, it’s like the government’s like, “We’re going to pay a whole lot for you to build this railroad.” “But we know this is where the railroad is supposed to go. We’re going to make sure that we can get all of the land, and then we’re just going to turn to a bunch of different companies to just build that out here where we are.” That was done by Leland Stanford, who, of course, the university is named after.
Leland Stanford Jr, his son. So this is the thing that needs to be done. We’re going to set up the rules of how that’s going to occur, and then within that, turn to the market. That’s a lot of what Chinese industrial policy, Japanese industrial policy, Korean industrial policy, the sort of East Asian playbook is very much within this mold.
Wolf: Yeah. Well, the East Asian playbook is kind of a rerun of the American system—that was predominant through the 19th century, basically, is—how America became rich was this American system of industrial policy where the government kind of strategically invested in certain kinds of standardization or building out certain industries, which is, yeah, exactly how the Asians have gotten rich as well. We did a whole Palladium issue on this.
Ben: Yeah, it was very good.
Hope comes from circumvention, not reform (37:00)
Wolf: Again, I want to return to this matter of political economy as it’s easy in a vacuum to say, “Of course, this is how you should do it,” but it’s harder to actually do it, either to get the competence in the government that is able to make those decisions intelligently, or even once you’ve done that, to keep it from degenerating into a corruption scheme. And this seems to be what has actually happened in our economy. We’re now 150 years after the American system, maybe more like almost 100 years after the beginning of the FDR regime, and 50 years after the final failure of that whole economic settlement—
Ben: The point of no return, if you will
Wolf: in the 1970s. And so getting back out of it would seem to be this very difficult problem, if it is in fact a true degenerative ratchet where there isn’t an easy way to just reform the economy. But then there’s this question of, okay, then what? Right now what? I don’t know if Schumpeter has any lessons for this.
Maybe his diagnoses or his prognosis—
Ben: His was socialism, which I don’t think works.
Wolf: That seems to be part of the pathology rather than the solution, right? It’s like if you do socialism, it’s like, okay, well what does socialism mean? It means handing out more resources in less competitive ways, which is to say more corruption. And so—yeah, the return to competition in society is this really essential problem that I don’t think we have a solution to.
Ben: And if I can return to some of the stuff we were talking about—when we were talking about Carroll Quigley. So Quigley would say that you can’t go back. Time just goes forward. You cannot return.
Wolf: Right. This is just what the aging of a society looks like.
Ben: And so he says that a society has, at the time, one dominant instrument of expansion—which is sort of the economic engine.
Wolf: Industrial capitalism. Yeah.
Ben: And whatever your economic engine is, eventually it’s going to become corrupted. And once it’s corrupted, that economic engine is just, it’s gone. It’s not coming back. You cannot turn back the clock. The thing that can happen is that it can be circumvented by a new economic engine.
So Western civilization had feudalism—which eventually then got corrupted and turned into just weird extraction and odd games rather than a method of managing agricultural land and taxing it in a way to produce military might. That got corrupted. It eventually got circumvented by commercial capitalism, this sort of city-based, guild-based, long-distance, trade-based—thing, which ended up just eclipsing what had been the big landlords, and then eventually that got corrupted and was just turned into this system of guild privilege and state taxation—which eventually got circumvented by industrial capitalism, which Quigley was seeing when he was writing in the middle of the 20th century. It was like, okay, yeah, this seems like it is starting to turn into the corrupted version. And so you can’t go back to the parasite-free version of industrial capitalism.
The hope is that you get a new economic engine that circumvents it, and in the same way that industrial capitalism made the guild craft and long-distance trade thing just kind of not the big game, in the same way that the commercial capitalism made feudalism just not the big game, that something new comes in, and because it is new, it is not encumbered by the parasites. The degenerative ratchet has not had time to act, and then you get several more centuries of your new thing.
Wolf: Right. And it’s sufficiently distinct from the previous thing that the well-developed parasites of the previous thing don’t transfer over, or it’s defended in some way from them. So it’s able to exclude the prevailing parasitism from its own production loops. And one of the really interesting places we ended up with last time was that if this was going to happen, it would be some kind of socioeconomic innovation that would happen probably in Europe—or associated somehow with the core of our civilization.
Where can circumvention come from? (41:26)
Ben: Right, which for the core of Western civilization is—Western Europe, basically, yes.
Wolf: Yeah. And that was a very interesting provocation. I’ve thought about that a little bit. And you kind of ask this question of, okay, what would a new socioeconomic model and a new political model look like in its ability to circumvent the kind of existing corruption, and what features would it have? And one of the things that I’ve thought about in this direction is the development of crypto economics in the sense in decentralized finance, cryptocurrencies.
Those seem a little bit too close to existing financial capitalism, which has its own kind of way it’s being wrapped up in the system. However, if there’s some interesting core to that, it’s that things like Bitcoin being uncensorable and you can’t really be attacked by regulation in the same way. It has this interesting way of escaping out the side. For example, I think some of the traffic through the Strait of Hormuz right now with this war with Iran has been people are paying tribute to Iran in Bitcoin to get the oil through. And so that’s interesting.
It’s like, okay, there’s this thing happening that has kind of escaped the controls of the current degenerating system. And I think another example of this that might be interesting is, to take it away from economics a little bit, is the matter of free speech. So we’ve seen with the internet, with social media, this sort of nascent battle between the freedom of the internet, where it’s like anyone can say anything, and so you’re able to have these conversations that are not sanctioned by the system. You’re able to crack open taboos that the system would rather you not crack open. You’re able to evade parasitism of the current system.
On the other hand, we see the parasitism of the system trying to march into the internet and centralize things, install centralized moderation in Twitter, in other platforms. Reddit is famous for this.
And so we have this battle between the technical possibilities of freedom, the technical frontiers of freedom, and the creeping parasitism of the old system. And it strikes me that it doesn’t quite feel like we’ve reached breakout on any of that, but it’s like maybe there is a possibility. Maybe there’s a technical possibility of achieving some kind of breakout through technical means.
Ben: So the thing that it needs—so in order to have a functioning economic engine, you need the accumulation of capital. You need a particular social class that is accumulating capital—and that is investing it back into production. And what we have here, with the Bitcoin and things like that, we can have the accumulation of capital. But when you look at what happens with it, it does not then get put into production. It gets put into like—
Wolf: Meme coins.
Ben: Yeah. Financial stuff. And when you say, “Oh, it’s being used to get oil through the Strait,” I’m like, “Wow, that is one of the most material things I have ever heard of a Bitcoin being used for.”
Wolf: Right. Yeah. And that’s maybe what it would look like. And I think there’s a way in which, to sort of put on the optimism hat for a minute, there’s a way in which when these things are early, they haven’t yet found their proper application. You’re still working out the technical possibilities.
But as the thing becomes technically capable and establishes itself, then it starts to be able to enable the more impactful, significant kinds of production or exchange or action—that the previous system had locked down, but now this new mechanism enables.
Ben: Yeah. And so I’m not super optimistic about the cryptocurrency stuff in particular. It just seems—not that hard for a government to in fact target the underlying infrastructure if they actually want to. But if there is hope in that direction, then I think it comes from it being applied to not just accumulating wealth and then putting it into a picture of an ugly monkey, but into actually making physical goods in some way.
Wolf: Yeah. I guess the way I would think about it, it’s not so much making physical goods directly as insulating the production of physical goods from the parasitism of the current system. And I wonder if maybe another example of this is the 3D-printed guns, where people are able to share files on the internet that basically are specifications for products that would otherwise be banned, and use commercial off-the-shelf hardware to manufacture prohibited items. Which is not to say that, okay, we need guns to enable the next political order or the next economic order, but more that the fact that production is, to some extent, using these technical means to escape the censorship and regulation of the current structure. That seems interesting to me.
Ben: Yes. And then the big question is can the things like that end up putting together a full economic engine that can complete the cycles, have more capital, go through the loop, have more capital, go through the loop, have more capital? Which—
Wolf: Right. Yeah. It doesn’t—
Ben: Right now, it doesn’t have the full loop going. It has a few of these shards. Can it be put together into a functioning machine?
Wolf: Right. This is the sort of Marxist MCM cycle, right? Money, capital, money. Each step sort of increasing. And yeah, that does seem like the essential question.
I think political organization and various kinds of social organization are also really key to that, which is why I brought up the free speech matter. I think—
Ben: And these things were very critical for the earlier circumventions I was mentioning. Yes.
Wolf: Right. So if there’s some kind of circumvention of the current decline trajectory, it’s going to look something like that. Some class of people, some sort of faction in society of some sort using new technical means and new social organizations enabled by those technical means to insulate their own economic production and their own ability to secure their various... Well, first of all, secure their existence, but also expand their economic power. Being able to do that in a way that the corrupt systems of the current order are not able to either recognize or intervene on and get their tentacles into.
Extropy (49:39)
Wolf: And yeah. So I feel, again, like this is a very interesting provocation. This is the question, or it’s one of the big questions that we have to be considering with this project, I think. I think we should be reading books around that area and coming back to it occasionally. It’s like, what is that new order, and how does it actually robustly escape from the strictures of the system?
Ben: Yeah. I think this is the most important political question of the next 50 years.
Wolf: Right. And we can basically derive that from pure theory. We’ve come at this a bunch of times. The theorists kind of agree that this is, and the arguments agree that this is where if there’s some new hope, it has to come somehow in this form. And that can be some kind of...
I think Nick Land talks a lot about this. We’ve just been reading “Xenosystems,” actually, chapter four in the Passage Press edition on, what was the name of that chapter? It’s the most recent one. I forget precisely, but... Oh, entropy.
Entropy, where he’s talking about the kind of economic production factors and how entropy is pumped out of the system. Well, this is what we’re talking about, is this kind of catastrophic pumping of entropy out of the system. And this is also what Schumpeter’s talking about. There’s this catastrophic kind of ability to pump entropy out of a healthy capitalist system—which we no longer have. So now—
Ben: The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. Exactly.
Wolf: Right. And the sort of thermodynamic role played by that phenomenon is the ability to remove entropy and dead wood from the economic structure. And when that fails, the dead wood becomes the entire structure, and that whole thing needs to be replaced. And so, Nick Land has been emphasizing in the parts we’ve been reading the sort of need for exit, the need for circumvention, the need for evasion, all these various fragmentation. There’s a lot of vectors that can be looked at there for what exactly is going to enable the system to somehow, or some new system to escape the entropy of the old system, or to pump out the entropy of the old system.
And again, yes, I agree, this is one of the most fundamental problems facing us right now.
Ben: Yeah. And I guess my objection to Land’s framing of it is that exit just doesn’t really feel like the right lens on this for me. When you look at the successful cases, it’s not that they left.
Wolf: They don’t leave. They actually—
Ben: It’s that they build
Wolf: they win.
Ben: Yeah. They win and they build.
Wolf: Yes. Yeah. So I think that’s a good answer to Land. I think circumvent is a great term that we came to through the Quigley reading. You need to somehow circumvent the sort of parasitic order, the existing parasitic order—in some way that creates production in a way that it can’t, well, that even maybe the healthy version of it couldn’t have done, ideally.
But certainly that its degenerated parasitic structures cannot reach. All right. Well, I think I have nothing further to say on that topic. I don’t have the answers. So—
Ben: We’ll keep looking
Wolf: we’ll keep looking. But I think, back to the same very interesting question, the matter of what does the circumvention look like in our time? And I guess we’ll leave it at that. And yeah, thanks again, Ben, for coming on the show. And I think we’ll continue to hit this topic over and over, so let’s keep thinking about it.
Ben: Yeah. I look forward to it. Thank you.
Wolf: And we’ll keep doing the reading.