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The Wealth of Nations by Adam Smith.Send us feedback at MetagnosisPodcast@gmail.com. [Transcript by Bob, our AWS robot secretary][0:00:13] Yuta: Okay, So this week, we read beginning of Adam Smith's The Wealth of Nations. And we only read about 5 to 7 chapters. But I found this personally. Very, I thought it was great. I was very entertained. And I think I learned a lot even though it's very old and its at the beginning of a long tradition of economics. But I thought it held up. Really well,[0:00:48] Henry: do you remember what year it was[0:00:51] Yuta: 1776? OK, it's just kind of crazy. Yeah, it's the year of the Declaration of Independence, and I think it's the year  critique of pure reason came out. So, oh, around that time? Around that time, I think. I might be thinking of a different book but it's around that. Came out right after, anyways, yeah. So I thought we would talk about the 1st two parts of what we read, which I would divide into basically an explanation of how markets and specialization work and how that creates wealth and the second part is going to be about what money is and, how labour on wealth relates to money or commodities.[0:02:00] Henry: it's kind of about how value works in the market, right?[0:02:03] Yuta: Yeah. Yeah. So, first, just to summarize it really quickly. I think it was basically, you know, we just talked about intro economics classes, but it was basically what you would get in an intro economics class. Now I think I was really surprised by how modern it was, and the writing was also, like, very readable. I really appreciated that. It's kind of rare for something, so old, but yes. So it explained that, you know. Okay, so one example I really liked was that in, like, poor tribes, basically, everyone is employed in a way because everybody is useful. Everybody has a way where they can contribute. But in wealthier countries, a lot of people are totally unemployed. And a lot of people who don't work at all like consumed 10 times more than people that work a lot. so it kind of it's kind of a weird situation, but yeah, it works out that way because of, he says specialization. I guess there's a lot of ways to go at this. But this is one way. With specialization, someone can focus on one task and get very good at that. And then through the chain of production, you can focus on your own task and create basically much more than, you would be able to on your own. So he has very concrete examples, which I really appreciated. His biggest example was with pins where he says, he actually described really in detail, the production of pins and it kind of surprised me. It's kind of, you know, trivial in a way. But I know it was told in a compelling way. and yeah, he very convincingly shows how factories can be so much more productive than a single person. I think in his example of something like 200 times or something on that massive scale[0:04:28] Henry: and even at that time before we have, you know, factories that we think of today assembly lines and things like that.[0:04:36] Yuta: yeah, not even talking about robots. They're competing. I think this is just people laboring but organizing that in different ways, not having massive returns,[0:04:50] Henry: and I think that just to recognize a point you made. It's a common theme throughout the book that he brings up lots of concrete examples of each of the concepts that he talks about. And if you are familiar with the idea, then it's sort of a little bit redundant. But it's super useful for learning and getting to know exactly what he's talking about.[0:05:13] Yuta: Yeah, so, yeah, I was going to bring up it reminds me it was very redundant to me. I felt like and also, I think, to a lot of people, like for someone who I mean, I think intro economics classes kind of are pretty redundant for a lot of people. I mean, if you read the newspaper and you kind of understand how trade works, things like that, it's not a lot of new concepts, but yeah, I guess it was also interesting. Interesting to see how this would be thought through from a perspective where it's not obvious he's, you know, probably most of the reason it's obvious to us now is because, Adam Smith and people like that discovered this, and it's kind of filtered down to everyone. Basically,[0:06:14] Henry: Yeah. I mean, this is not really a work of science, per se. It's I wouldn't know exactly how to describe the genre, but he's going through and he's giving an explanation of these things that are so commonplace that most people involved would already have some sort of intuition about, you know, their place within the system. But what he's bringing together is an overall explanation that accounts for the way that everything is already set up.[0:06:43] Yuta: Yeah. So I thought it was science because, he poses a theory about how society works. And then it's, you know, it's falsifiable? you can make predictions about specialization. His predictions would be like a country with more specialization has more wealth. Someone thought that, and then he you know, he has the empirical data that he looks at. So it is theory. So, yes. So what made you think that it isn't science?[0:07:22] Henry: okay. Yeah. Maybe it was a little bit too strong in claiming that it isn't a scientific work. I don't think that it practices the rigor that we would expect from social science in the time that we are talking about now. Yeah, but it was probably a very good work of social science at the time, for sure.[0:07:43] Yuta: Yeah, yeah, yeah, I totally agree. It doesn't resemble like a modern economics paper.[0:07:49] Henry: Yeah. I mean, not that I expected there to be a modern economics papers there. Yeah, so I guess that in terms of the standards of science today, it wouldn't be considered science. But at the time, yes, it would be a good work of science.[0:08:03] Yuta: I think it would. I don't know. I think it's still a work of science, but it's just that economics has adopted heavily mathematical formal methods. And Adam Smith didn't, which I mean, that's something. I mean, maybe in the rest of the look, more of it comes in. But it wasn't obvious to me that it would be like this. I thought maybe it would be have more formal work, but, not that that's a criticism.[0:08:35] Henry: Yes. And that's an interesting point.[0:08:38] Yuta: And it does make sense that it is less formal. Yeah, it is kind of less scientific, in a way it's more philosophical. Yeah, I get your point. Yeah, because you know, he is a philosopher and it's not like there was this long established tradition of economics. He's kind of creating the field largely so, I mean, that's how I see what the role of philosophers as being. It's looking at new aspects of reality that haven't been explored in a rigorous way and then creating the methodology to be able to that. And so that's definitely a philosophical process. Yeah, it's not a scientific process. You need a methodology to do science, you need to come up with the methodologies. At this primitive stage, it's more philosophical.[0:09:38] Henry: Yeah, I guess this goes beyond our original motivations for talking about this. Yeah, that is an interesting point. And putting this in the context of, like, how exactly should you read this? You're not looking for like, oh, he had this experiment that he observed where these people were trading these things or using this thing is money. But it turns out we found this evidence that it isn't exactly the way he said it was. So therefore his theory is wrong. Like that's not how you should be reading this[0:10:07] Yuta: Yeah, and I mean, so far, I think he's, he's been born out pretty right about, you know, this first part that we've been we've been talking about and I think it makes sense to talk about most of the aspects a little bit because it's, you know, the, of the founding of discipline. But yeah, we can talk about the more another time.[0:10:37] Henry: Yeah, I also want to say, so maybe getting back onto the core material. You were mentioning how first he observes that in a poor tribe, right was the example. But everyone is basically employed end in that way. Everyone is not completely self sufficient, is pretty self sufficient. They can get their own food and they maintain their own shelter, and they get whatever the resources they need directly. They don't rely on other people for necessary. Resource is. But one of the aspects of this is that if you weren't self sufficient, not only would you not be employed that you would be dead like it's not really a matter of the everyone decides to be employed. It's more that you can't not be employed.[0:11:29] Yuta: I think we'll Another thing is even went in communities that are highly interdependent, like poor communities that are highly interdependent. I think everyone is still employed just because it's easy to be useful in a city where, I guess, more There isn't, like, a huge inequality in the returns to labour. Something we thought.[0:12:00] Henry: Yeah, this is another point that he brought up it. Was that all right? Uh huh. It was, according to his observations, it doesn't seem that people very and natural talent Teoh a very significant degree, or at least not to a significant degree in comparison to the ah possible differences and returns the labour that adults seem to have. No. And the explanation for this is that are the justification for how this could be the case, while still there is such a discrepancy in return. So labor is that in fact, under certain circumstances, specialization being allowed will allow you to provide much more value than if you weren't specialized.[0:12:48] Yuta: Yeah, so yeah. So how that would apply to the poor tried, I think, is even if people are you know, their specialized like it's the tribe where you know, you have the hunters, and then you have They're gathers. You have people tending to the food, growing crops and people hunting like that's specialization, But they're still going to be poor, and it's still going to be very high, great or ratio of people that are doing useful work. So it's not, just being, you know, self sufficient, even like kind of interdependent societies can be poor. Ah, and have high employment.[0:13:43] Henry: I think there's a difference between interdependence and ah specialization because you ca NBI interdependent and still not be specialized. You conduce a lot of different tasks, but not all the tasks. So I guess that maybe what it is is that we're creating a false dichotomy between no specialization and being specialized. It's more where along the scale of specialization is allowed in your society.[0:14:12] Yuta: Yeah, Okay. And I would definitely yeah, the tribes air less specialized,[0:14:21] Henry: right? Yeah. It's not that they have no special visions, just that they're less specialized. And that has something to do with the reason that they're not as productive.[0:14:31] Yuta: Yeah. Yeah, let's exactly. And that's yeah, to move ahead. Yeah, that's yeah. Basically this point here. I think that the more you specialized, you can, kind of a choir mastery in this very specific thing because you're doing it, you know, for hours, every day and even begin to invent tools to, help with that. And yeah, I mean, his explanations. I really liked one of them here. They're so concrete. When here is about a boy, he seems to say it was an actual home boy, but it's boy like to play with his friends a lot. And so his job was to like this play fellows. Yeah, his I don't even know what this was. But some something with a furnace. You know, I I don't know e I live in the person chain. I have worked in, whatever factory, but so he had some task to do other furnace. And then he figured out a way to, like, open the furnace or something if he attached to rope to it to another part of the contraption. And then So he did that. And then he went out, went to play with his friends, So yeah. Adam Smith. Yeah, besides status as an example of, I guess ingenuity, and someone having with specialized task, allowing for, more productivity. All right. Yeah. And it's although it's not more productivity if you're just playing, if you show someone your invention them, that's definitely very useful,[0:16:17] Henry: right? So he describes. This is an example of specialization where it's not that your specialized in doing a particular form of like, the work that needs to be done to produce the thing. It's that there's a specialization in other directions as well. And I think that he calls this class of people philosophers right. There's a quote I highlighted. Many improvements have been made by the ingenuity of the makers of the machines when to make them became the business of a peculiar trade and some by that of those who are called philosophers or menace speculation, whose trade is not to do anything but to observe everything and who, upon that account, are often capable of combining together the powers of the most distant into similar objects in their progress of society. Philosophy or speculation becomes, like every other employment, the principal, our soul, trade and and occupation of a particular class of citizens. And that was one sentence.[0:17:14] Yuta: Yeah, and, of course, Smith Bottoms of himself. I mean, he was a philosopher going on and on an economist[0:17:23] Henry: e. Well, I think that I sort of read this as, ah, he calls them philosophers. But maybe today we would call them academics, scientists and philosophers.[0:17:36] Yuta: Oh, I thought he meant philosophers in particular. But[0:17:40] Henry: But, I mean, if he was looking at, like, if he was to, you know, come to the 21st century, I think that he would identify those people as what he meant by philosophers as well. Do you[0:17:51] Yuta: think? I don't know. I mean, well, Adam Smith in particular was a false for, you know, as we would think of a false for right. But yeah, maybe. Yeah, I didn't. Yeah, Mom, What I read isn't telling me, but it's but yeah, I think you meant probably philosophers. And you could maybe in include some of what scientists do inside of that. But it seemed like you meant fosters. Just be. Is he talked about them being, kind of most associated with ah, ideas in abstraction. He says he kind of has Ah, He takes the Shawna from when? he says that people are like you mentioned, you know, broadly similar in talent. But once they kind of specialized, they can convince themselves, Like philosophers convinced themselves that they're just, like, totally different than it. Just like a different kind of, you know, being force. yeah. You know, that would be an interesting thing to look into. How? And I'm also interested in how yeah, when people started thinking of themselves as economics Oh, muscle. I mean, like, why did he write this book? Like, you know, his previous work was pretty well received. Was about, you know, on the sentiments off moles. There's something thought look on that very straightforwardly philosophy and mean. I mean, it's in that tradition on directly sites fosters when he writes this thing, it is about, wealth.[0:19:54] Henry: Yeah, I guess I I see. It just sort of him musing about like, these are a ton of things that I've been thinking about, and it actually fits together pretty well. So I'm gonna write this book about it like it's a very it's a neat thing, cause it's, you know, written in the style of the sort of philosophical texts of the time that air read a lot in false E, But it's about, like, you know, the real world. Very normal things that happened rather than very up shark things.[0:20:29] Yuta: Yeah, there is. Yeah, there's like like we talked about that level of abstraction, but he always like, and he usually having starts with the abstract statements, like, you know, specialization brings wealth. But then he uses the extremely concrete examples. Well, which makes it beyond that part is very different from philosophy. Yeah, maybe his fall self goal of training paid off. I'm son. Yeah, I think that was a good point. It's definitely structured in the way that there, Yeah, that philosophical works were Yeah, like, Yeah, a lot. Like, David Hume.[0:21:10] Henry: Brian? Yeah. Exactly. Also[0:21:11] Yuta: as old since yeah, as always. You know Smith earlier where[0:21:16] Henry: I think they both have Hume and Smith, both of Scottish ancestry as well.[0:21:21] Yuta: Yeah, I think. Yeah. I think they're both in in Scotland for the most part. And then Anna Smith studied at Oxford, but yeah, I think they were in the same basically group of people[0:21:33] Henry: uses Scotland for a lot of examples. Really funny. you[0:21:38] Yuta: also England, England. Like the shining? yeah,[0:21:43] Henry: all right. Yeah. All their confusing names for different amounts of money. Anyway, so Okay, this So this first section is about Ah, what was your delineation of it? Again?[0:22:01] Yuta: It's about specialisation or how wealth is created through specialization, right? It's 11 Other point is I'm He says that specialisation is, biggest in manufacturing and that agriculture is kind of similarly productive. Basically everywhere.[0:22:24] Henry: Oh, yeah, that was I didn't really understand exactly what the purpose of thought section was. Yeah, So he says that it doesn't really matter where you drive your culture. It's not gonna be any more efficient in different locations.[0:22:38] Yuta: Yeah, And he says, like wealthier countries put more resources into their agriculture. But like, per unit of resource, more labor, if they're not any more efficient than in a poor country.[0:22:54] Henry: Right? And you were first back to this later actually to say that certain agricultural products are good, stable values to measure things by but also in regards to this point. Hey, does talk about it in terms of specialization, which I think is like the way that you would think of a specialization. Is that its different people deciding to focus on particular kinds of work rather than doing many different kinds of work. But he also, relates this really closely to I think this is a good insight to specialization of time, in place as well. But, ah, he refers a lot to opening not necessarily global, but a larger marketplace so that you can have certain areas that are better doing certain things, Ah, to do those things there and then you can transport it over to another place. And as long as the transportation is ah, you know, not as costly as the efficiency gain. Then it's, ah, role. Better to do in that other location.[0:24:02] Yuta: Yeah, Yeah. This geography plays a large role in his explanation in other places as well. Like he identifies that cities in the coast and then just, the wealthy regions in general tend to be along coasts or along like a a river. That, is very good for transportation on, right? Yeah, he says, Yeah, that's because if you, well, if there, then you can transport your wares to a lot of different places and convert it to things that are useful to you. Weaken specialize more basically BZ Evo access to a wire market,[0:24:45] Henry: right? Exactly. So it's and more Special Edition leads to more efficiency. More wealth?[0:24:51] Yuta: Yeah, I think the word eases. It's like the extent of the market is greater in those areas. Yeah, you're able to sell toe wide range of people is if you like, live in China. Yeah. Yeah. So if you live in the middle of a country and you don't have access to ports, then if you make you know 10 million pins, then you have no no one to sell them to. It's it's kind of pointless to make that many pins. So you have to kind of make a few pins, maybe to say you can sell to your town. But then you have to spend your time on other stuff if you want to be as productive as you can and then you're specializing specialising less. So, yeah, everyone's were[0:25:38] Henry: soft overall, right? Right. Yeah, that's the That's a major theme of specialization is that it's ah, very collaborative effort. Specialization is not to help certain people of the expense of others. It actually will make everyone better involved. Our every everyone will be a better off who's involved in the specialization, you know, game.[0:26:00] Yuta: Just about a month. Yeah, he talks about it's collaboration, but it's based on ah, self interest. Everyone's working based on self interest without at this point, I feel like this. I mean, this is kind of reveal, right? But yeah, it's, but it's like, surprisingly, I think a lot of people don't. Yeah, they don't like this idea or agree with it. What was just kind of always spice to me it because I think it's almost like a political topic now, but I think it's something that's empirically correct. So it should. It should be me on debate.[0:26:46] Henry: Well, in terms of the modern contacts. First of all, here's a quote that, you know, we can't not to say. Ah, but man has almost constant occasion for the help of his brother, and and it is in vain for him to expect it to be there. But by their benevolence on Lee, it will be more likely to prevail if he can interest their self love in his favor and true them that it is for their own advantage to do for him what he requires of them. And then there's the quote about the Baker is a little and the junior that's really famous. Yeah, it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self interest. We address ourselves not to their humility but to their self love and never talk of them of our own necessities. But if their advantages and what I was so yeah, those were good coats. But what I was going to say is that, I think that in the modern context, it's it's interesting to think about this as I was reading, because he gives all these examples and it's sort of like trying to justify, ah, specialization and you know, lots of other things that will get you. But it's so weird because we just take it really for granted in modern society, like you just take it for granted that you can go to the score to get food, and you don't want to make your own food like let's just I couldn't have ever amounted to any other way it would. It just seems ah, like completely different life to have to grow your own food, you know? Yeah. And for[0:28:27] Yuta: for him, that's also the truth, right? Oh,[0:28:31] Henry: yeah. He's living in a society that I don't know exactly where he's living at the time, but there is also this specialization already, but yeah, I couldn't imagine, like only being able to get food from my town. Are you something even?[0:28:49] Yuta: Yeah, that. I mean, that would mean you're living in a basically try, bring like like, there's a few in in the Congo or something,[0:28:59] Henry: right? Yeah, ya. But when you talk about the sort of political arguments that are happening, I almost wonder if it's that it's become such a baseline toe have all of the structures of specialization that the arguments are about very minor differences. But since everyone just accepts the baseline, they've seen relatively large,[0:29:26] Yuta: I think. Among economists, that's definitely I think the case. I think pretty much every minute stuff just yeah, I think that any economist will say, kind of this specialization and markets are do a pretty good job of, Verity of things on. Then they'll argue about, you know, some of the limitations of markets. But I think in the general public, the general polkas in anywhere near at that point. But yeah, that's Simmons. Another discussion. True? Yeah. Okay. Ah, but but you do hear you know all the time about you know, the invisible hand. People just like take downs of the invisible hand of the market or people or kind of greed and selfishness being just basically bad things that are basically bad for people without any acknowledgement of some of its benefits at times.[0:30:37] Henry: Yeah, I agree. But it also seems justice intuitive that people do expect to be compensated for their efforts like they'll argue about, Ah, you know, being nice and not being selfish when it's about things that are, like, special. But when it comes to going to work, you're like, yeah, I want to get better pay check if I can. Like, I don't feel bad about that.[0:31:05] Yuta: I'm and have anything. Some of these people. Okay. Okay.[0:31:11] Henry: Yeah, maybe. Maybe we're talking about different groups, but it seems some majority of people are sort of on board with the whole, like exchanging labor for money and that sort of[0:31:21] Yuta: thing. Yeah. I mean, yeah, perspective. This very messed up from being a crazy liberal arts college. Okay, of anyways, so should we talk about the second part?[0:31:39] Henry: Yeah, yeah, let's do that.[0:31:42] Yuta: Yeah. So the second part, he goes on to talk about what basically went wealth is and how it's transferred between people and the form that it's transferred between people, which is basically commodities on. Then eventually money. And he identifies of money like the value of money. It's kind of it's an interesting question. Like what? How does money have value when it's so what? He and then fights this, that the value behind money is the labor that goes into the goods. So when you buy, I guess[0:32:27] Henry: I think that's the value of the goods, right?[0:32:32] Yuta: well, it's the value of the currency as well, he says. It's It's the value of the labor that goes into producing the goods that your purchasing[0:32:46] Henry: well, that's the value of the goods. But how do you determine how much the value of the currency is[0:32:53] Yuta: by how much something costs? And then,[0:32:56] Henry: well, that's what we're trying to determine. How much How much does a loaf of bread cost in terms[0:33:01] Yuta: of literacy? So let's say it's $10. I think Adam Smith would say, Ah, the bread costs $10 because it took $10 of labour to produce the bread.[0:33:20] Henry: Ah, well, maybe you were starting a different places. I'm thinking of like, imagine we didn't have money or we didn't have a centralized system of money. Then how do we get from that to having money?[0:33:32] Yuta: Okay, I guess Weekend, that's a better place to start. So[0:33:36] Henry: we don't have dollars to reference. We just have lives of bread and, you know, other commodities.[0:33:45] Yuta: well, yeah, well, in that kiss, yeah, it's I mean, trade is a lot harder. Obviously the most. The easiest way to do it would be to trade another loaf of bread. but then he talks about oxen. Became the next kind of one of the first forms of money. Basically, right. Homer talked about people's armor being valued in terms of money. Someone had, in terms of oxen. I mean, someone had armor worth 10 oxen 100 oxen. Yeah.[0:34:27] Henry: See, you measure things in terms of oxen.[0:34:29] Yuta: Yeah, because I s oxen were useful to everyone. So you didn't. Yeah, I kind of have to, yeah. Come up with some artificial. Yeah,[0:34:44] Henry: it was basically a Barner because you're bartering with something that actually has the value that you're trying to get. Like, intrinsically. Yeah, the difference is that since everyone uses oxen, it's sort of fungible You can you can use as an intermediary value you don't toe like, expect the person that you're gonna be trading to yuta have to want the thing you have already. Yeah, yuta, they will.[0:35:09] Yuta: Yeah. So commodity is something that's basically interchangeable, right? So yeah, basically, oxygen became a commodity which Yeah, it's kind of halfway to a currency, as I see.[0:35:24] Henry: Yeah, they were proto currency[0:35:28] Yuta: on young and from there, yeah, you eventually get to Hey, talks about precious metals have always been very popular. Ah, forms of currency because, says most important beacon split them apart. And then you can also put them back together without altering their value. Easy. Can you refuse the metals? Melton in season[0:35:56] Henry: and they have a really scarcity as well. It's not easy to counterfeit it.[0:36:01] Yuta: Yeah, and then this goes to my original point where talks about when the gold mines in America were discovered over. Uh oh, but I[0:36:12] Henry: just was still happening at the time.[0:36:15] Yuta: Yeah. Yeah, that And let's Yes, 70 76. Yeah, that's where reading[0:36:23] Henry: you and always California. Yeah.[0:36:27] Yuta: Which? I don't think it's happened at this at this point. Yeah, yeah, I'm pretty sure. I think this happens way. But anyways, he says the value of gold in Europe went down to 1/3 of its virginal value because the amount of labor required to produce gold became dramatically less after, the gold mines were discovered because it's easy to find gold and dig it out. And if you have, you know, a scarcity in in nature than you have to work a lot harder to get smaller amounts,[0:37:06] Henry: isn't I think this is. He doesn't mention it in here. But there's another similar story of when Spain was conquering South America. They found a bunch of gold mines there as well, and also got a lot of gold from the Incas and the Aztecs and all that. And they brought all the gold back to Seo hand It was it was, uh,[0:37:29] Yuta: around with. There wasn't original point. yeah. OK, so that wasn't[0:37:35] Henry: even worth it to bring it back to Spain because it was so deep about devalued by having so much.[0:37:43] Yuta: yeah. So that was my point about, you know, labour being force for Adam Smith, the value behind currency of the OCR. Different meeting, you know?[0:37:57] Henry: Oh, yeah, I I agree with that. Yeah,[0:38:00] Yuta: OK. Do you agree with Smith?[0:38:05] Henry: Do I agree that labour is what is money value? Yeah. Ah, yes. But I think that it might over simplify it to say it like that because it's not. It's not the labor. Ah, to be able to make something like that. It's more that the labour required to actually produce a valid one. So, for example, he describes how gold coins were given and silver coins were given stamps of approval by some centralized authority in order to show that, you know, it's ah has the right amount of the metal in it. So it actually I was able to require that much labor to create something I thought, but you could, in theory, counterfeit it by not putting as much labor in it, but still getting a stamp. So there's a little bit of marginal room for, problems with that. But[0:39:10] Yuta: I think that's a little counterfeit. Money is a little different. I think that's saying this is like the kind of currency where there is value to it, but you're kind of I'm faking it. And, like the labor that Smith is talking about, isn't the labor that goes into stamping right? It's it's labor that goes into what you can purchase with it.[0:39:36] Henry: Well, I think that to an extent. Actually, it is the labor that goes into stamping it. It's not the labor of like, actually, you know, taking a stamp and doing that. It's the labor of doing that, validly getting a valid[0:39:48] Yuta: Samp. wait, what's what's not labour?[0:39:54] Henry: Well, it's hard to do that t get a valid stamp. You have to go through some process.[0:40:01] Yuta: But why? Why would that give something? Value it?[0:40:05] Henry: Well, here's here's what I imagine is like Imagine there's 100 gold coins, but only half of them have stamps of approval, right? You know, then only the gold coins was stamps of, well, the gold coins with stance approval have a certain value. And the gold coins without the sensor approval have a lesser value.[0:40:25] Yuta: I don't I don't think so. Because, like, if I just if I got some locks and puts in stamps on them, they wouldn't have value. I mean,[0:40:35] Henry: right, right. Because it's not the value of getting your own stamp on the coin. It's the value of getting a certain valid sample on the coin. And that is limited. Like, let's say they only allowed some 50 stamps. Then it's gonna be really hard to get another stamp.[0:40:56] Yuta: Okay, this is funny, because I actually disagree with Adam Smith. Okay, I also disagree with you, uh,[0:41:05] Henry: might be stretching the term of, like, what? Labour is the flying to here. But what what were you gonna say?[0:41:14] Yuta: And also you're disagreeing with Adam Smith. Ah, yeah, your your, So I guess, Yeah. I mean, I can go with that example. Maybe I get a bunch of people, and we agreed Teoh, you know, agree on a stamp to put on rocks, and then we put them on, you know, a limited number of rocks on 10 rocks not still make those rocks valuable. There's be something behind it. Give value to those rocks. Yes, this is Yeah, This sounds very philosophical. Maybe maybe this[0:41:54] Henry: Well, so what we're talking about by value here is the value of the things that you can trade for. Ah, the rocks, right? Or the labor that goes into the things you can trade the rocks[0:42:05] Yuta: worth. I think that's the question. It's why do why does Currency of Valium? Well, if[0:42:12] Henry: it does have value, that would be the value. Right?[0:42:15] Yuta: Well, that's one answer to the question, but that's kind of assuming an answer already.[0:42:20] Henry: So this is why I think so. I I definitely am stretching it. I didn't reed this anywhere in his book, but going to your example with rocks, right? I think that the reason that your rocks no one would accept them like you would be able to trade them for anything is because it's too easy to create a counterfeit rock. It takes a very little labor Teoh counterfeit one of the rocks[0:42:48] Yuta: in my exit. On my next example, I would I had assigned with the community of people to only recognize this particular stamp, and I'll just say, you know, you can't counterfeit. There's only 10 of the rocks. It's a limited spy.[0:43:05] Henry: Yeah, but you don't know where old 10 rocks are it every time, right? Every[0:43:09] Yuta: time I try to rock some that you do.[0:43:12] Henry: Okay. Well, then I guess that it's really hard to counterfeit because you know where all the rocks are. So it's impossible. So that's about[0:43:21] Yuta: it. That's the set up of the new. So do they have value?[0:43:26] Henry: I think that they would have more value than if they were counterfeit. Herbal? Yes.[0:43:32] Yuta: Why? But they wouldn't like the rocks there. Still useless like nobody want. Right? Why would anyone, yeah, take anything[0:43:46] Henry: for the rocks? Because they have guaranteed scarcity. it's just like how we use dollars, right? The dollar is, you know, doesn't take a lot of material to make a dollar,[0:44:01] Yuta: but there's a lot of things that are scarce but that are worthless. Give me an example. okay. I mean, I could make ah painting a really shitty pain you, and there's only one of them, but it's worthless. Give to anyone but me.[0:44:25] Henry: Well, they might be easy to counterfeit that painting because no one you know, paying attention to your painting so no one's keeping track of where it is and all that only, gosh, paintings are very valuable, and there's a lot of effort put into making sure that you don't have a counterfeit. So that's part of why they have value. If no one could tell which the counterfeit was, then they wouldn't have as much value.[0:44:54] Yuta: It's not OK if paintings were counter for the ball, but they would have less value by. It's not the fact that they're scarce. That makes them valuable. Is I could I mean, I think you you also changed my scenario to I mean, I could just say in my scenario, my painting is not gonna credible. You know? I put it online and it's yeah, whatever. Whatever I put in a bank vault, whatever. so you know, I think it makes it valuable. It wouldn't be valuable. Would still be junk. I[0:45:38] Henry: do get the intuition you're going for, and I'm trying to think of how you would justify the other side. yeah.[0:45:46] Yuta: Let me Come on. The other side could just not have a[0:45:52] Henry: I think, though, that there is something to this, that scarcity is an important part of why certain money has value.[0:46:01] Yuta: No, I I agree. If something isn't scare, Senate can't serve as a store of value. But I don't think that's, uh okay.[0:46:11] Henry: But it's not sufficient to make something valuable.[0:46:14] Yuta: Yeah, and it's almost besides the point I want to say, and I think Smith Yeah, maybe off off reed closer. See what he would say? But if he does it, and five, the labour or the value with the labor.[0:46:34] Henry: Yeah, I think you're right. Ah, that one of the so. Another reason that would sorry. Another factor in determining the value of your painting is how much effort went into Or you know, how much labor went into the creation of the painting, right? And if it didn't really take much effort like you're not a good painter and you didn't spend your entire life on this painting, then[0:46:56] Yuta: I mean, honestly, if I spent 100 hours on a painting, I think it would still be pretty much worthless on the market.[0:47:05] Henry: Well, right, because you're about painter, it's labour's equally valuable. Right?[0:47:12] Yuta: Okay. It's okay. so, yeah, all Aiken explain Smith for for the listeners a little bit on this point where he says, Yeah, it's not just, you know, the number of hours that you put in that is the value behind currency. Uh huh. Okay. yeah, he says, it's labour, but you have to take into account the number of years that you want that went into learning the skill to produce labor and yourself taking to count the intensity of labor. So, like 10 hours of hard work could be more labour than 20 hours of lazy work or someone with 10 years of experience could, used more labour in in an hour that in someone with no experience in towers, eso and this I think, Yeah, I'm Is that Do you agree with that? Um,[0:48:19] Henry: yeah, yeah, that's what I was thinking about. So yeah, I think, but that's how you can differentiate labor. And it's so it's not just the exact thing that you did. It's everything that was required to come to that point that you could do that.[0:48:36] Yuta: Yeah, And I think you made a comment along these lines, but I think this is I mean handing. He massively stretched the definition of labor here. I did not good. Yeah. So this is one of my points of disagreement with him, Which by, by the way, it's totally I mean, I think this was so great of work so far, and I'm gonna definitely reed the whole thing, so I don't mean it's not still see a gotcha. You know, 300 years, I e hopefully reason made progress. That's yeah, it's not impressive at all. You just disagree, but, uh yeah, I do disagree on this point. and this kind of young it kind of starts up this point were he stretches the definition of labor so much that it basically to me, I think he acquits it with value, Basically, because he doesn't If you just talk to like a regular person, Labour is, you know, the amount of effort you put into stuff basically or the amount of work. And if, yeah, if someone with 10 years of experience does just some highly specialize thing, I don't know. To me, that doesn't seem like, a lot of labor went into the exact[0:50:05] Henry: like, if you're a Web designer and you goto work and you sit and watch you two for eight hours, and then Stanton our programming then that's not a lot of labor, even though you're paid a ton of money. Yeah,[0:50:17] Yuta: so, Yeah. Good example. Yes. A Smith would say that person put in. Let's say they make, $150,000 a year and morning working, you know, at a grocery store. Full time makes, let's say, 30,000. Ah, year, Smith would say, My reading is the programmer put in five times more labour than the grocery store clerk?[0:50:46] Henry: Roughly. Yeah. I mean, there are other factors that go into determining your salary as well, but that is one of the major ones.[0:50:54] Yuta: Well, I wouldn't Smith say. I mean, that is what span currency. But then anyways, yes. So he would identify it. Obviously not with, like, the physical labor, which is, I think, kind of what you would normally think of Labour's mean, But he would have been fired with instead. kind of. The programmer spent many years in school learning to program Probably yes, pro four years in college for most rumors, something that I'm not maybe a couple years of experience. while this clerk didn't put in and then So if you have all those up labour of the parameters five times more than the labour of the grocery store clerk[0:51:46] Henry: yeah, that is that is an interesting observation. I I think you're right that Ah, he is equating labor and value. But I I wonder if this is a mistake, though I maybe he intends to do that. And he's trying to show that what we think of us Labour really should be encompassing. What we refer to is value.[0:52:13] Yuta: I I think he's trying to do that. But I think it is confused because he's trying to explain, You know, with book is the wealth of nations. It's trying explain, like, what is it behind? Yeah, currency that has value. Like why do people, care about accumulating these, bits of currency? it's not obvious that, you know, I mean, for a long time, currencies didn't have value yet to actually barter. And so there's something behind it. It's and then he's saying, It's the labor, so that that seems to me. It's like if you say labor, is what gives things, value it. I think it's a specific answer, you know, a clear answer. And then, if you kind of conflate labor with value than it's almost like you're not answering the question at all,[0:53:16] Henry: you might even call his. You might even calls approach a labour theory of value. So yeah, just completely not the lever theory of value.[0:53:29] Yuta: No, it is. I think that's that's when it's going, Yeah, where is going to go next? That actually saw a super spies? Because in a class refreshing, your yeah, I read a lot of capital by Karl Marx, and eating Tree starts off. Basically, this is almost the same exact way, except he starts with, Ah, currency and labour are and value instead of I'll Smith starts with specialization all the time. They're pretty similar. And then, yeah, in my understanding from three years ago, this is, the same argument that Karl Marx gave. He even has the same examples. Basically, I think he made a views diamonds instead of gold. But I think he probably talked about gold to But how? Diamonds are very hard to get. You have to like they're in after our something. And then just people spend. It's like he kind of describes how hard it is to mine diamonds. And he says, That's why diamonds are very valuable on bits. Eso it's the labor. That's the store for the what backs value behind no currency and capital and young. I mean, from there it goes, you know, Ah ha, you is the same argument, which really surprised me. I mean, when I read Marx is book, it just It was just, like, totally ridiculous to me,[0:55:16] Henry: huh? But now that it says it now, it's fine. No, no, I e no. Well, I think, though, so[0:55:26] Yuta: Oh, Adam Smith came way before marks, If I remember correctly, so I mean and I'm pretty sure marks. Yeah. You know, he had the benefit of hindsight a little bit[0:55:38] Henry: to to that. Ah, this is just a tangential point. But this marks. Do you think he also is talking about it in the sense of that, certain labor can be differentiated like some labor is more valuable than other labor.[0:55:56] Yuta: Yeah, he, talks about specialization. I remember that specifically and then talks about Yeah, kind of. And he wrote this 18 67 came out Capital. See, he has almost 100 years on up on Smith. So I think there's more, you know, special efficient at this point. I can't Yeah, I can't remember exactly. I'll look into it. exactly how he explains the differences in the value of labour for, like, information workers. Basically[0:56:39] Henry: Well, what? I always interpreted the Marxist for you to be. But maybe I don't have a clear view, as I thought is that, it doesn't matter what people want. It's not turned by the market how valuable your thing is. It's just determined by how much effort you put into making. The thing that's about valuable it is, and you don't seem too problematic with that is that then all labor is basically of the same value because it's just the same amount of effort there are. You know, it's measured in amount of effort you put into it, but clearly I think that what ah Smith is trying to villainy between different labour's that have different value is some labor is more valuable if it's mawr demanded. Like if more people want it,[0:57:33] Yuta: well, I don't think I mean, I agreed up to that last point. I don't He doesn't bring in whether people want the commodities so far in the book. I think he says, unifies value with labor, and I think he's the same with marks on that point.[0:57:58] Henry: Maybe they differentiate later than I. I guess I would have to read it again. But I interpreted as, that's part of what he meant by not all labour has the same Ah, like, you know, great value. Some labour's worth twice as much of the labour for certain reasons.[0:58:20] Yuta: Yeah. Okay. All of godson quotes[0:58:25] Henry: about reed weaken. Okay, You wanna say some puts?[0:58:32] Yuta: okay, here it is, the real price of everything. What? Everything really costs to the man who wants to acquire it is the toil and trouble of acquiring it. right. The value of any commodity, therefore, to the person who possesses it and who means not user consumed himself. But to exchange it for other commodities is equal to the quantity of labour which enables him to purchase or command labor. Therefore, is the real measure of the exchangeable value of all commodities. Yeah, and that just seems like pure labor theory of value. Mm. Thank you. Yeah. And I agree with your impression of marks. I think that is what Marx says. And I also think that's what it says. Okay.[0:59:36] Henry: Okay. Yeah, I e think I'm coming to a better idea now. Yeah, I think the differentiation comes later. They do agree that labour is the basis for value, but and, you know, it will come most later where they disagree about some things[0:59:51] Yuta: and also like the beginning part. I think I don't think like Marx understood much of what Smith was saying. First part about specialization from what I remember, and it's kind of weird abuse to me. It seems like if he specialized, it allows you to, Even if he put in the same amount of work, it allows you to be wildly more productive and, you know, better compensated as a result because of you know, how your labor is organized and yeah, I thought the first the entire point of the first few chapters was that how you organized labor can, you know, increase the productivity of a group of people by 102 100 times. And to me, That's just those all seem, like arguments against the labor theory of value. It, you know, taken Teoh, if you just extend those arguments out a little bit. So, you know, I think clearly the first part of that book is very much, not like Marks. And yeah, it was a little confusing to me. Not that second part. Yeah, it seems to me to be in opposition with first part.[1:01:15] Henry: Ah, I guess that so in the same way that having put effort into a skill say, right man will increase the the amounts of labour you're capable doing and given time, I think that he would also say that by being in a some organizational structure that will also increase the amount of value or the amount of labor that you're able to dio here. I can see kind of your original point, which is that he's kind of using labour in a weird way.[1:01:51] Yuta: Yeah, And you're of Freudian slip.[1:01:54] Henry: Yeah, I know. Yeah, yeah. So they're doing the same, like, you know, they're putting in the same Maybe effort and value are better. Words sees. Yeah, So they put the same effort. Uh oh, that's are, you know, I I know. But[1:02:10] Yuta: even less true effort just seems more, clear. We not value. but yeah, yeah, it does seem like Adam Smith's idea of labor or definition of labour becomes very tortured at this point where you would identify just busy specialized. Let's say he's one of those examples like, Let's say, someone makes was a pin maker said he made pins for 10 hours a day and he produced 100 pins. Well, it's I'm all Smith, I think uses 20 pins a day something. What is it? You know, it's a lot of work to participant, and you want to read about that. And so you didn't read the book, and then he joins the factory and then with 10 other people. Let's say he brute. He produces £5000 a day. altogether. Yeah, You? Yeah. So yeah. Hey, became dramatically more productive. And I guess Smith would say he put in more labour into it, but e did not find out with education. Really? the I mean, maybe you needed a little bit of training, but not much. And also, if you just took the counterfactual of whether you go into the factory or on your own. You know, the amount of flirting you need to go on your own is lot closure. but yeah, so I mean, yeah, that definition of flavor where the person working in the factory puts in, you know, 100 times more labour, whatever or whatever numbers is kind of tortured definition of flavor from[1:04:03] Henry: the way that you phrase it is a little difficult. I think it may be. Here's ah way you could say is that hey, puts in it requires more labour of him.[1:04:18] Yuta: Yeah, that I mean, that doesn't seem true.[1:04:22] Henry: Well, I guess that the intuition is that he's putting in the same amount of effort, right? It requires the same on effort on his part. Just in that, those 10 hours what he's doing, he's putting, you know, the same amount of calories towards You don't work. Yeah, try it left. So in that sense, he's not doing anything extra. So what would you call it that is increasing when he's working in the factory?[1:04:50] Yuta: His spot activity, I mean well, that we can all agree on, like Smith and me and you[1:04:58] Henry: so maybe is it that he's conflating effort and productivity,[1:05:05] Yuta: which is the same as conflating labor and ah, value.[1:05:10] Henry: Yeah. Okay, I see your 0.1.[1:05:15] Yuta: Yeah, but then Okay. So[1:05:17] Henry: I think, though, that it's not so suffered because I think that you could conceive like it's possible to conceive of effort and productivity in a unitary concept concept. It's sort of just has those two things as factors.[1:05:36] Yuta: wait. What? Ok, so what? Even this effort. And then I didn't understand your point.[1:05:44] Henry: So I would say that I'm just kind of coming up with us, but I'm trying to work along with how you're describing it. So effort would be the amount of actual physical actions you have to dio in order to complete size. We were actually mean. Yeah, sure. I'm avoiding a labor just because he uses it differently and I don't want to be like this. And then productivity would be the actual results of your actions.[1:06:17] Yuta: I Okay, I agree with that on. Yeah,[1:06:24] Henry: I did hide this sort of a Did you can have this sort of unitary concept. Call it labor, which is something of a combination of the amount of effort and the amount of things you produce per effort.[1:06:40] Yuta: I don't understand what e I mean. Okay, but that's ridiculous.[1:06:47] Henry: Well, so imagine I think of it this way. So imagine you're driving your car, right? Your car is going to go at a specific speed. Let's call it, you know, the speed of the car and you're gonna be driving for a certain amount of time. Let's call that the duration of the drive. Then you can have a concept of Thea Mount of Distance you drove, which is going to be determined by the multiplication of the this, the length of time that you drove and the speed at which you drove. So there's no like, you know, it's all intuitive, so maybe you could have in the same case. Ah, your effort on your productivity is theme, amount of stuff he produced per effort that you put in. And then the results of that is your labor.[1:07:41] Yuta: I think I think we should move on, OK, I mean, let's even let's just be having less and less intuitive. I mean, why, Yeah, that's not really very I mean, you can make up some new concept, but but it's not labour.[1:07:59] Henry: Yeah, I get what you're saying. I think I just kind of, you know, I went along with his trajectory and took it A Z was talking about it, but I agree that it he could have done this better. And he's making a conceptual error to complete those concepts.[1:08:19] Yuta: Yeah, I mean, I definitely I guess I get the idea that, you know, we shouldn't It should be our first move to go with Oh, he's wrong But, yeah, just those defenses I don't agree with.[1:08:35] Henry: So do you think we could just have a Labour prime and say That's what he's talking about? Or do you think he's actually saying something false about labour problem? Even[1:08:43] Yuta: I think he's saying something forth,[1:08:47] Henry: and that's because, what he describes his labor isn't actually what value is,[1:08:56] Yuta: Well, he says Labour. Yeah, exactly. I mean, he says Labour's behind the value of commodities. You know, the quote red so that pretty much exactly. And I think that's wrong. And of course, yuta Cement by Labour, he meant something else than he could be right. But I mean, Labour's labor, you can't just make up your own definitions of words and then be right.[1:09:20] Henry: Yeah. So I guess then, Ah, it could be that were either disagreeing with his definition of labor or were disagreeing with some claim about labor.[1:09:35] Yuta: well,[1:09:37] Henry: so this is back to the definitions are going feeling We're gonna bring this up every single time. E[1:09:44] Yuta: guess it gets a little, you know, model.[1:09:47] Henry: And I find the argument of the definition obviously to be an interesting. So I just sort of accepted that the way he's using it. That's what we're talking about when we're talking about labor[1:09:57] Yuta: way. But that's not way. Oh, no. I just gets even more confusing. The lamer is a word,[1:10:03] Henry: you know, E Yeah, I know. But I find that easier to do when I was reading rather than replace Labour was something else. Every time I thought.[1:10:15] Yuta: I guess you okay, if yeah, maybe this is This makes it clear. if he's right about if he has the right definition flavor, then I would say he's wrong about, you know, equating labor and value. But if he has the right definition or it only have you Yeah. Made up definition than he's right. But also he's not saying anything. I mean, he's not explaining what the value of commodities drives from,[1:10:52] Henry: I guess I might subtly disagree, but that's fine. We can move on.[1:10:57] Yuta: Yeah, but he's an explanation of the value of commodities. Is I'm I mean, if it's a circular definition, that doesn't help, right? You want to bring in something new, that grounds value, and that has some explanatory value. So Labour feels like it. It would, and it would if it were true. But[1:11:21] Henry: right as you're saying, like he's using this word labor as if it was some other concept that he's bringing into the picture. But actually, he's just redefining value to be or redefining Labour to be value. Yeah, and so nothing actually was explained.[1:11:37] Yuta: Yeah, I'm definitely going to read the rest of this, so maybe it'll make things more clear on.[1:11:44] Henry: I got a sense from what we read so far that he was actually talking about something, and that thing, I assumed, was what he meant by labor. Eso. That's why I didn't have as much of a problem with it. But I can see use your position being different.[1:12:02] Yuta: Yeah. Also, I don't know to me. Yeah, the first part. The logical. It's so weird because the first part to me, it just seems like an art. An explanation of why labour isn't what gives value to wealthy society.[1:12:23] Henry: Oh, yeah? And then you completely floats it on time.[1:12:26] Yuta: Yeah. Just example about the poor tribes. Like even. You know, he explicitly says, Like, in poor times, everyone is basically fully employed In rich societies, lots of people are unemployed. but how can that be? I'm in straightforwardly. His explanation seems to explain why. You know, societies with less labor, are wealthier and ideas with basically everyone laboring full time the victim, but yeah. Weaken. We've been circling around this point.[1:13:08] Henry: Yeah. So we've talked about money and we started talking about labour. Is there anything I'll see when it's ah, odd?[1:13:23] Yuta: I think we covered the first. Yeah, the two parts that I am wanted to cover. yeah, I had something, but I've forgetting. Do you have anything final? Teoh?[1:13:42] Henry: There was a section on where he talks about how prices are determined. Do you? Did you go to that part?[1:13:51] Yuta: I don't think so.[1:13:52] Henry: Okay. Yeah. Then Weaken Weaken To do that next time. Yeah, but maybe I could just bring him one last thing about the money Example. So I was trying to get to something, and I want to see what you think of it. so this was the thought experiment is that you have 100 gold coins and 50 of them are stamped right, you know, And it's been decreed by the authority. The only 50 of them are gonna be stamped, but they're not, you know, kept track of it all every moment. So it's possible to counterfeit it if you're able to somehow get a sample. But the factor that I want to consider changing is how much or how hard is it to get a counterfeit stamp? I think that if it's really hard, like, practically impossible, then it would be relatively easy and straightforward to use those stamped gold coins as currency. But if it was basically a Z Z is coming up with your own stamp in your house and that would get you a valid looking stamp, then I think it would be impossible to use them as currency or at least they would be severely devalued. Yeah, so I think that well, it might not be the only factor. I think that it's a very important factor for determining the value of a currency is how easy it is counterfeit.[1:15:22] Yuta: yeah. I mean, I think I agree. I would phrase that as it's an important doctor for allowing something to be a currency, Yeah, but yeah, I think where we are basically making the same point.[1:15:41] Henry: But I think what's interesting about it, which will get to I think what you were trying to say is thought, the purpose of having the stamps in the first place was not to somehow, you know, create it as a currency like there wasn't a concept of thought. Even the purpose was to guarantee that that particular coin had been weighed and measured toe contain a certain amount of the metal inside. Right, That was a 1,000,000 stamp. The stamp was not just an empty signal, like we have allowed this many gold coins like I oppose in my experiment. Ah, but it was, ah, measure of how much actual metal was inside of it. Of a certain you know, purity. Ah, so that while you're trading, you don't have to check that yourself. Yeah. So the real value of the stamp is a convenience E, but it didn't actually, the the Salafist the Value of the stamp the purpose of this stamp. But the value of the currency is still in the metal itself and the labour took to create that matter.[1:16:52] Yuta: I think that Yeah, this is Remember what I was going to bring up? And it's It's about this kind of, so, yeah, where do we think value comes from? I think this is a good final topic. And because it's about what Smith wrote about Banana and explaining what he said. So you So you're saying that the value is in the metal, but not in the stand? Yes. All right.[1:17:22] Henry: Yes. I'm sort of trying to disprove my original thought experiment what was wrong with it.[1:17:27] Yuta: And you're also disagreeing with Adam Smith. B is here and fights the value with labour. Oh, really? Into what you can obtain with the currency.[1:17:41] Henry: well, I thought he I thought I was agreeing with him on this point at least, which was that the value of the currency is the amount of labor that went into producing the metal that goes in the currency.[1:17:53] Yuta: Oh, so wait. Oh, I can I thought, by the values in the metal I thought you meant in the physical metal. No. Oh, so it's OK, OK, that sounds like it's not in the metal. It's an the labor that went into Yeah, I[1:18:13] Henry: guess. I mean, the value of the metal meaning the labour took to get that medal[1:18:19] Yuta: okay on this supplies for everything like[1:18:23] Henry: right. But in certain defined Yeah, like he refers the Scotland again. They would trade and nails, sometimes as currency.[1:18:34] Yuta: But then the[1:18:35] Henry: purpose of it was that it took some labour in order to create the currency and that determines the value of the currency. And you can trade that around Ah, based on the value of labor that went into the currency for other labor.[1:18:50] Yuta: Okay, this is a little bit different from Smith because he makes the distinction, but it's the value of the things you can obtain with the commodity. That's the value of the quantity. And you're saying it's it's the value of or its labor that went into obtaining the actual currency. That's the value of the currency.[1:19:15] Henry: Yeah. Overall, Yes. So that would also incorporate counterfeiting.[1:19:21] Yuta: So but then what if you use something like, what's a seashells? Air. Very Ah, easy to obtain initially. But they're in the limited supply. So there a good commodity, then what? But then, you know, they're rare, so they become extremely valuable. How couldn't you? In that case, he couldn't identify the value of the commodity with labor. Right when[1:19:55] Henry: you say commodity or you're referring to the seashell. Yeah, I think I think you would. I think that because it's a rare it's harder and harder to find new seashells. So requires more labour.[1:20:14] Yuta: yeah. Okay, um[1:20:18] Henry: and because that it's harder to find new seashells, you can make it more expensive to get existing seashells and therefore the existing C cells have more value.[1:20:31] Yuta: Yeah, I guess. I mean, I agree that it went become harder and harder to get, you know, more seashells as they become more scarce. But I think that's not where the value comes from because I mean again, this is just the same point. But just be something is scarce. Doesn't make it valuable.[1:20:53] Henry: Yeah, I guess we haven't really addressed that. I think I need to think about that more. I'm not really putting a lot of good content into interesting that more just random rent rambling, but[1:21:06] Yuta: because there are a lot of hard to obtain things that are worthless,[1:21:11] Henry: right? Exactly. Lots of unique artwork that is not worth anything. Yeah, but in terms of the social thing, I actually I like the way of thinking about this, That so it's think of it in terms of, ah, game that you want to get a seashell, right? You have two options. You can either go and look for a seashell, which is gonna take some amount of effort, or you can buy a social by, you know, trading in some way. So let's say you have another thing that's worth amount like that. You put some effort into getting so you can trade that for a special right. So then you will decide what to do based on how hard it is to find Ah, seashell, and how easy it is or how much labor you know, labor value. It costs to buy a seashell. But it turns out that people selling she sells know how much labor it takes to find a new seasonal. So what they'll do is they will make their seashells as's close to that price as possible. And therefore the seashells have that price. Well,[1:22:26] Yuta: if they didn't have the price, they wouldn't bother to find he[1:22:30] Henry: sells right. Well, if they were price lower than a ah, if they were priced lower than it costs to go find a seashell in terms of labour vaccine, then you would prefer to buy seashells rather than go look for new ones. Right? So they can jack up the price all the way to exactly how much labor costs to go find a new one and they'll get the maximout out of their seashell.[1:22:58] Yuta: Wait, wait. I wouldn't, but okay, if the price of the sea shell for the seller is the price to obtain them and it wouldn't be worth them, they wouldn't make a profit. So it wouldn't be worth the time to find seashells, right? Like the value the money that you get from selling the seashell would have to be higher than the value he spent on obtaining official that's the Prophet[1:23:30] Henry: E. I guess that since it's a currency, you shouldn't be really profiting off of it. I think that it would be a pretty matched market,[1:23:42] Yuta: but not proof. Wall. But then, if it's perfectly not so, then you wouldn't get any new seashells we could. OK, we could do this in terms of Bitcoin lately.[1:23:55] Henry: I mean, that's kind of what we've been talking around the whole time. Yeah,[1:23:59] Yuta: I guess it is kind of like an idealized It's like, Yeah, the platonic ideal of currency. Basically, Yeah. So great. Yeah. Yes. as long as the internet exists So I guess you don't even need the Internet. Probably, But, and he was[1:24:23] Henry: don't need the internet in orderto half that coin. But you do need it in order to mind. Bitcoin.[1:24:28] Yuta: Yeah, Yeah. so late? Yeah, When does someone mine the quee

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Henry Elder joins us today to talk about how real estate, one of the oldest forms of investing – around since practically the dawn of human civilization – is getting a fresh coat of paint through the application of blockchain technology and cryptocurrency. Topics Covered in this Conversation with Henry Elder: – Real estate as the ultimate imperishable good – Real estate has built in scarcity – What does it mean to tokenize real estate – Why does real estate need blockchain technology and cryptocurrency – Pain points and friction in the system – Real estate is rooted in the past – How real estate differentiates between haves and have-nots – How tokenization creates liquidity in the market – Initial customers will be institutional investors – Tokenization of a real estate property in New York – Complexity of global market and tax implications for overseas investors – Crossing the educational hurdle – Dealing with the high international demand for us real estate – Maturation of investors regarding blockchain technology – Real estate tokens are securities in terms of regulatory framework – How he fell into the rabbit hole of real estate blockchain – A generational way to change the way people invest in real estate – Examples of real blockchain deals to date in real estate – The Two Token Waterfall – Still in the realm of the theoretical – Fractional ownership vs. fractional investing – Putting deeds on the blockchain – Real estate is an archaic industry – Level of efficiencies from blockchain technology – Closing thoughts Questions and Comments? podcast@gem.co Guest Contact Information Henry Elder LinkedIn | Twitter | Telegram Website: Digital Assets Advisors Resource Links: The Current State of Real Estate Tokenization History of Real Estate Understanding Illiquidity in Real Estate Investing The Tokenization of the St. Regis Resort The Tokenization of a $30 Million Manhattan Real Estate Property Harbor Launches Platform for Tokenizing Private Securities with $20 Million Tokenization of Real Estate This Manhattan Real Estate is Already Tokenizing Property on Blockchain Real Estate ICOs Are Moving In, But Investors Aren’t Floored Transcript: Chitra: Henry, welcome to the program.   Henry: Thank you so much for having me. It's great to be here.   Chitra: It's great to have you. So I would open, I don't know why this show is making me want to use quotes, so I'm going to use a couple of quotes here. The first one is by Russell Sage, the American financier and politician. And he says "real estate is an imperishable asset ever increasing in value. It's the most solid security that human ingenuity has devised, it's the basis of all security and about the only indestructible security". Why is real estate considered a security?   Henry: Well, if I can respond in a quote, Mark Twain said, "Why real estate? Because they're not making any more of it, right?” That's why it's so secure. It is the ultimate imperishable good. There's not going to be any more real estate made. The real estate that you own will be the only real estate that ever exists there for all-time, right? Unless you build up. But the potential to build up on a piece of land just gives that land more value.   So he uses security in that sense and it kinda sounds like he's talking about investable securities, but I really think that he's talking about the security of, what's the word that I'm looking for? Bitcoin has the exact same characteristic in that it's scarce, it's scarce.   Chitra: So there's built in scarcity.   Henry: Yes, there is, it's the original built in scarcity. They're not making any more of it.   Chitra: So what does it mean then to tokenize the security?   Henry: So basically it means that you're taking the ownership interest, you are putting that ownership interest in some sort of a company and you're selling ownership of the company. And instead of investors taking that ownership interest in the form of a paper share, like you typically do, you're taking it the form of a token running on the blockchain.   Chitra: So I want to go to my second quote here, which is from President Franklin Roosevelt, and he says "real estate cannot be lost or stolen, nor can it be carried away, purchased with common sense, paid for in full and managed with reasonable care. It is about the safest investment in the world." If that is the case, why do we need blockchain technology and cryptocurrency to secure this form of real estate? What are the pain points? What's the friction in the system now? And how does blockchain technology make it safer?   Henry: So let's get back to that idea of security that the first quote brought up. It's sort of like Troy and the Trojan horse. Real estate is such a secure investment and the people who have been investing in real estate are so secure in that scarcity that they allowed in this Trojan horse of complacency thinking that look, I don't really have to worry about what goes on in the world outside. As long as I own this real estate, I'm secure.   And the problem is that the rest of the world continue to advance. And we live in this highly digital, instantaneous world now. Whereas real estate is stuck with these paper processes that are mired in the inefficiencies and a high friction of the 1950s. I mean, you could go back five, six, seven decades and talk to somebody who works in real estate back then and they would recognize nearly all of the processes that we're transacting real estate with today. It hasn't changed.   And so if you are, it's basically you divide it now between the wealthy and not wealthy. And if you're wealthy, you can go out and just purchase real estate wholesale or you can become an investor in a syndicate. And to invest in a syndicate you usually need to have in the order of hundreds of thousands of dollars at a minimum. And if you're not wealthy, your options are either crowdfunding or REITs (real estate investment trusts). And crowdfunding is not liquid and REITS, which are actually the only one of those four that I just said, buying real estate outright, investing in a syndicate and crowdfunding and REITS, REITS are the only one that's actually liquid. But the problem is that REITS are a cumbersome and expensive way to access the market for the people who actually own the real estate.   And so the only types of deals that you see hitting the market are very large deals on the order of hundreds of millions of dollars or more.   Chitra: So how does tokenization solve this problem and what does it mean to tokenize this real estate in that context?   Henry: Sure. So going back to what we were talking about before, it's you're taking the ownership of a company that owns the real estate. And this is totally normal in the real estate process. Typically if you're buying real estate, you're buying it through some sort of company. You control, if you're buying the real estate yourself, you spin up a completely new company. You create a new company, it's called a single purpose entity. And that company purchases the real estate and that company's name is what's actually on the deed. And then you own 100% of the company.   When we're tokenizing it, what we're doing is we're taking that ownership of the company and we are a encoding it into blockchain tokens and then selling those to people. In that process, what you're basically doing is you're combining the best parts of a REIT and the best parts of crowdfunding and mashing them together and creating a more efficient, less expensive process for you to access investors that's still liquid.   Chitra: And is this true for retail investors or is this primarily for institutional investors?   Henry: So it's true for both. The the adoption of this, I think, will primarily be driven by institutional investors because the companies that are doing this, that are sort of paving the way here are taking a lot of risk, right? They're trying a new technology. They're blazing a path, as they say, the pioneers take the arrows. And the safest investor for them to target first is the institutional investor.   There's a saying in the crowdfunding world, that's basically the guy who puts in $100 into your crowdfunded deal is going to be the most expensive client that you've ever acquired. Because those people, there's such a high level of education and customer service basically that they require, because they're not familiar with the tenets of investing. Whereas when you go and you find an institutional investor, they know how real estate investing works and they'll probably leave you alone for the most part to go do your thing.   So a lot of these people that are sort of blazing the trail with tokenization, I think they're probably going to be pursuing those institutional or high net worth investors first. However, the pipeline that they're creating, the technological rails effectively that they're creating to be able to do that, can easily start onboarding more retail investors once those companies have reached the size where they can deal with those investors.   Chitra: You've said to me before that tokenization is going to both globalize and democratize the real estate investing process. How is that going to happen? Especially the globalization piece?   Henry: Sure. So the globalization piece is particularly exciting for me. Earlier at the beginning of last year, actually spring of 2018, I was part of a team that tokenized a commercial real estate property in New York. And we took a $5,000,000 piece of that property and we sold it to international investors. We did that basically to prove the concept that you could use the blockchain to more easily access these investors and to allow them to more easily access real estate here in the United States.   Chitra: And how did you do that? Just simply, what was the process?   Henry: So that process, this was a little bit complex. It's interesting because, so first of all we had to build, we had to create that special single purpose entity. But the problem is that when you have international investors, they're subject to all kinds of different tax laws when they're investing in domestic US real estate. And so you have to build somewhat of a complex offshore structure in order to shield them from the effects of those tax regulations.   And so we had to build that whole structure. And then we had to go out and find these investors. Since we were one of the first people to do this there was a high educational hurdle that we had to surmount in order to get them to come on board. It's sort of funny because what we eventually ended up doing is, first of all the thesis that there is this massive unattended demand offshore that is trying to access US real estate, but that is unable to for whatever reason was proven out because every investor that we talked to was like, I want to invest in that real estate. I want to be part of this deal.   But nearly everyone that we talked to got hung up on the blockchain part of it because in early 2018 everyone was still thinking about ICOs. Everyone was still thinking about exchanges getting hacked. And Bitcoin being used for money laundering and human trafficking and whatever. And they didn't understand that the underlying technology was completely different. I mean, people get scanned on the internet all the time. That doesn't mean that email is not a good form of communication. But that connection was not there yet.   And so a lot of our investors just ended up coming in a without really caring about the blockchain side of it. Even though it did make it easier, not a lot of them realize that they were just like look, you're selling US real estate. I want real estate, US real estate, let's do it.   Over the past several months we've started to see that conversation change and we've started to see a maturation in those investors understanding of the differentiation between blockchain and ICOs and whatever stuff they're afraid of that's going on with Bitcoin or whatever, all of which I think is unfounded anyways.   Chitra: So when you do the tokenization, does that consider it a form of security?   Henry: Absolutely.   Chitra: And that's different from the traditional ICO, the utility tokens and things like that. So what's the legality of the stuff? Is it going to fall under the same kind of regulatory hurdles that have confronted utility tokens and ICOs?   Henry: It will fall under them in a different way. The difference is that ICOs and utility tokens primarily we're trying to argue that they were not securities and the SEC disagreed with quite a few of them and said no, these actually are security.   Chitra: And therefore should be regulated by the SEC or else they're illegal.   Henry: Exactly. They should be regulated by the SEC. They should either be registered with the SEC or they should comply with the registration exemption, which is also a controlled by the SEC.   The difference is that security tokens, whether they're real estate or art or equities or debt or whatever they are, from the get go we said are securities and therefore they will comply with all of the necessary SEC regulations that regulate securities. And so there was no are we security, are we not a security, but it's just these are securities and we're going to do everything that security is needed to do.   Chitra: So in terms of legality, people can feel free to invest?   Henry: 100%. They're totally legal. It's exactly the same thing as when you go on, trying to think of familiar crowdfunding websites. I know all the real estate ones. There's Fun Rise and Realty Mogul and Peer Street. And then on the other side of the equation, there's Start Engine. Indiegogo I think also does regulated crowdfunding. Those are all completely legal and those all fall under registration exemptions for crowdfunding, for accessing retail investors without having to go through the incredible hurdles of doing a full IPO.   Chitra: So how did you get involved in all of this, because I know you were kind of going about your own way and all of a sudden you saw the light on all of this real estate and tokenization and then you kind of went down the rabbit hole and then you said oh, I'm giving everything else up and this is my life. Talk a little bit about how that happened.   Henry: Yeah. And I did that after the market started going down. At the beginning of 2018 I was like, you know what, now's the time for me to jump in full-time. And I haven't looked back. I've loved it. But, so 2017 I think three security token issuances, Blockchain Capital, maybe there were four, but Blockchain Capital, Protose, Science Blockchain and I can't remember if Spice VC was 2017 or early 2018.   But so those sort of said all right, this is possible. But nobody really caught on because ICOs were going crazy and people were just making insane amounts of money in this more unregulated market. It wasn't until early 2018 that I saw real estate security token offerings starting to come down the pipeline. And the first one I saw was Slice. And so hopped on the Slice team [crosstalk].   Chitra: And you were in real estate at the time?   Henry: I was in real estate. I was working at a private equity fund in Beverly Hills doing value add commercial real estate deals all over the country. Which means that we would work with a real estate owner who wanted to buy a 200 unit apartment building and fix up all of the apartments and then sell it three years later for more money. I mean, it's the same thing as if you have a house and you fix up the the kitchen, right? You put in a new kitchen for $20,000 and the house was worth $50,000 more, right? Exact same thing just on a larger scale.   Chitra: But then you got involved in the whole tokenization piece.   Henry: Right.   Chitra: So what was the light bulb moment?   Henry: So the light bulb moment was a little bit something that's somewhat a little bit personal to me. And then also just the incredible opportunities in the blockchain space. But my family's been in real estate in Los Angeles for four generations.   Chitra: Wow.   Henry: And so real estate is something that I was always going to go into. I was doing this job, I was loving it, I was really good at it, but as I got further and further down in the blockchain rabbit hole, I was like wow, this technology and the protocols that underlie it are basically providing us with a new opportunity for humans to change the way that they interact in a business sense. And that presents a generational opportunity for us to change the way that people do real estate. And there was no way that I was going to be able to be a part of that conversation unless I just jumped in feet first.   I loved what I was doing beforehand, but it's something that I would have just done for the next 40 years and nothing would have changed. Or if it changed, it would have changed without me. And if the conversation was going to change, if it could change, I wanted to be a part of that. I wanted to be a driving force behind that.   Chitra: Now you try, you successfully did this New York deal to show that this is possible, but it seems like a lot of this stuff is still very much esoteric in the realm of the theoretical. How many real deals that have gone down using blockchain technology and real estate and where do you kind of see, what's the trajectory for this?   Henry: Yeah. So with blockchain and real estate, I think that ours was the first, the Slice deal. But then there were a couple of follow ons. There was the St. Regis deal, the St. Regis resort in Colorado, they tokenized $18,000,000 and sold that to a syndicate of investors. And then this group out of New York called Propeller teamed up with Air Swap to create a platform called Fluidity. And they created this two token waterfall basically taking the real estate capital stack and slicing it up in this innovative way. Because typically real estate is debt and equity. And then there are different ways that you can sort of cut that up, right?   With debt, you can have mezzanine debt, you can have junior debt. With equity, you can have preferred equity, you have common equity, you have LP equity, you have GP equity. What each of them are isn't pertinent to this discussion. But what Propeller realized is that with tokenization, since you're changing the way that people do business and you're opening their mind up to different ways of doing things, you could take those different pieces of the capital stack and combine them in ways that hadn't been done before.   And they demonstrated this with their white paper called the Two Token Waterfall. And then they put it into practice on a condo project in New York for I think it was $30 million dollars, which I thought was super interesting. And then another group, Cold Harbor did a $20,000,000 tokenization of a student housing property in South Carolina. And so all of those were I think in the second half of 2018. And in total, I mean, that's like what, $100 million less of, of deals.   So like you said, we still are sort of in the realm of the theoretical. Here are people who have done this, but they've been typically just single asset tokenization and they've been fairly small on the grand scheme of things. And so a lot of the benefits that tokenization can offer have not been fully realized yet because we don't have a large enough market to realize those things.   Chitra: So I don't want to go too in the weeds, but I think maybe we should talk a little bit about the difference between fractional investing, which I guess this falls under and fractional ownership, right? There's two different things. So is it relevant and is it important for people to understand the difference and the context?   Henry: Yes. So that's an interesting conversation because like you said, what we're talking about right now is fractional investing. And when you hop on Crypto Twitter or a Medium Post, a lot of them talk about how they're excited about the advent of fractional ownership. But that is very different in the context of real estate.   Ownership means that your name is on the deed right? It means that you are the owner, you're not an investor, you're not somebody who just put in money to see that money grow and get it back. You are the person who's making the money grow. And the difference particularly in real estate in the US is that if you are the owner and you make a bunch of money on a real estate project, then you can sell that project, take all the money that you made and use it to buy another project and you don't have to pay taxes on that, but you can only do that... You do have to pay taxes eventually, but you can basically continue doing this process and defer your taxes forever.   Chitra: Indefinitely, yeah.   Henry: You could do it until you die and then your children will inherit all of that property at a stepped up basis and all of it is wiped out. They never have to worry about that deferred tax bill. And this is all... do your own research. I'm not an attorney and I don't want anybody to jump in the real estate space and come back to me later.   Chitra: We're not in the advice business.   Henry: But that can only happen if you are an owner of real estate. It doesn't happen if you're an investor. And in real estate, there's two ways of ownership. There is direct ownership and there is tenant and common ownership. In order for that to happen in the tokenized world, what you need to start doing is representing deeds on the blockchain. And once we start doing that, that opens up a fascinating new world of real estate investment and ownership.   And there are people who are working on that, on putting title on the blockchain, but it's a long process. If I think real estate is archaic, I mean title is the most archaic part of it. I mean it's literally like, so title insurance, which I'm sure you're familiar with, there are these title companies, right? And these title companies maintain a record of the ownership for a bunch of different properties. And they work in concert with the county recorder's office, which holds the original record, but the title companies have had their records as well.   And what you're basically doing is you're paying the title company insurance against the fact that their record is wrong. And it's because this is a paper-based, high friction, manually verified process. It's totally ripe for disruption. But you have this mix of public, private, which is very difficult to, you've just got a lot of bureaucracy that you have to like weed your way through in order to start moving title onto the blockchain. But once it happens, you do open up that form of fractional ownership.   Chitra: So I guess to sum up, no area of investment is probably better suited for innovation like real estate and could really use the benefits of blockchain technology. But given how archaic everything is, it could take a while.   Henry: It could take a while.   Chitra: You could be a gray beard by the time it actually [crosstalk].   Henry: I love that, that term gray beard. But I certainly hope that I'm not, although I already have quite a few gray hairs, I'm very proud of them.   Chitra: All brought on by this.   Henry: Yeah. And I'm also like almost entirely incapable of growing a beard. I've tried several times. It's not something you want to see. But I would like to think that once people start to see the efficiencies, and was actually just talking about this yesterday at a real estate conference. I don't think that blockchain is necessarily going to give us 10x or 100x process efficiencies in real estate. But I am absolutely 100% certain that it will give us 5%, 10%, 15% efficiencies. And when you extrapolate that across the hundreds of trillions of dollars of real estate across the globe, that's a massive amount of money. That is huge. Like unfathomably huge.   And so once people start to realize that and they see oh wow, I can do this 10% better, I think the change is gonna come pretty quickly. The title thing is different, but the transactional part of it, tokenizing securities in real estate, I think that once you hit that hurdle of terminal velocity, I mean it's just like, it's going to go crazy from there.   Chitra: Great. Do you have any closing thoughts or key takeaways for people?   Henry: Yeah. I mean, number one is I jumped into this space eight or nine months ago and it feels like it's been multiple lifetimes. But I have to say I could not be happier that I did that. You hear a lot, like you'll go on YouTube and you'll see influencers and whatever and they're like oh, quit your job, blah, blah, blah, you'll be fine. And it's really difficult to make that leap and be like oh wow, maybe I really should do this thing.   But if you create a plan, save some money and you have something that you know you're really good at and you think it's gonna change the world and you can make a difference, I would definitely say, maybe you don't have a mortgage and you don't have kids. I noticed that I do, I do have those benefits. Then go for it. Go for it. There's no better time than now. And if you want to change the world then you should probably start yesterday because either you do it or somebody else is going to do it and you're just going to get left behind. And it's better to just be a part of that.   And so yeah, I'm happier than I've ever been and super excited to be a part of what's going on in this space.   Chitra: That's great to hear. That's a great closing thought. Where can people learn more about you and the work that you're doing?   Henry: Oh sure. On LinkedIn, I'm LinkedIn/in/henry_elder. And then my company's website, which is www.digitalassetadvisors.io or daa.ninja if that one's too long.   Chitra: Awesome. Thanks so much. Great having you.   Henry: Thanks Chitra. Yeah, awesome to be here. Thanks.