[00:03:01] Allen Farrington: Like it is, it is this idea. I think it’s a very good idea. I was very excited when I had, I’ll take slight credit for saying it was my idea to put it right at the start of the book because I thought that the ideas that introduced were important enough, but also accessible enough. And a lot of the book is not very accessible.

[00:03:20] Allen Farrington: Before going into the MMA bit, though, I also wanted to mention that the praise you gave it in that little introduction, which was very kind, by the way, thank you very much. We’ve never, at least not publicly, at least not to me, I don’t think I’ve ever had exactly that praise before. And I realized as you were saying it is because of what your background is, but I’m so glad that you, that you did say that way that I will be able to quote it verbatim, but like, you know, like MBA should now read this and like unload all of that, which is very nice of you to say, because I think that was largely on purpose. This is maybe something we can get to in a bit. I don’t want to go too far off the quest because you want to talk about the MMA quip, but why I wanted to mention that, give Sasha credit as well, and highlight where we used to work.

[00:04:03] Allen Farrington: It is very much a reflection of the ethos of our, well, his current employer, actually, but I’m a bit more liberty to discuss it, I suppose, given I’ve left. My former employer, their attitude towards, it was an investment firm, and their attitudes towards investing, towards financial markets as a whole, you know, how best to approach them, how best to think about them.

[00:04:27] Allen Farrington: A lot of the book, probably not the MMA part, but a lot of the rest of the book is kind of a distillation of conversations that we’ve just been having with each other for about four or five years. As I mentioned, the MMA angle was kind of incidentally amusing that we managed to get that in, but it’s, it’s very much It’s come from a place of sort of frustration, if not hate, in some cases with, you know, what we were seeing in our jobs.

[00:04:52] Allen Farrington: And, I mean, obviously there’s a whole other, I’m going to tie that in too.

[00:04:56] Preston Pysh: It comes out in the book that, and hate is such a strong word, right? It comes out in the book, but it comes out in such a deep, critical thinking, just bludgeoning.

[00:05:09] Allen Farrington: I’ll try to reuse that, yes.

[00:05:10] Preston Pysh: Of these past… like mantras that you just hear from business schools and just like.

[00:05:18] Allen Farrington: That people believe because everyone else believes them. And very few have actually thought about why it might be true. And, you know, we like to think that we have, and we’ve discovered they’re false. Yes. But should I get back to the MMA part?

[00:05:31] Allen Farrington: Yeah. I wanted to make sure that before we potentially moved on. Sasha’s idea about MMA, which which he told me a very long time ago, we spent a lot of time teasing out, I encouraged him to find a way to set up the rest of the ideas that we go into in, as I said, kind of less accessible detail later in the book.

[00:05:48] Allen Farrington: His idea about MMA is that it is a truly free market. And in particular, it’s a free market of historical interest because until, was it 92, 93? Until UFC was set up. It’s actually, it’s more UFC than MMA, just to be clear. It’s like the forcing together of all the, of all the different styles to see what actually wins.

[00:06:12] Allen Farrington: Prior to that, there had really been no way to know which fighting style actually was superior because of the way that. Almost all of them were taught and more gatekept, I suppose, like the way the competitions would, would run almost what’s, what’s kind of nice, what’s interesting, what’s unique about UFC is forcing all of them to come together and to actually finally find out which one is the best.

[00:06:43] Allen Farrington: And so. The reason we include it is that, I mean, the rest of the book is basically about, Bitcoin, that’s kind of a clickbait, but it’s about capitalism and it’s about free markets. And I think it’s as much about the philosophy of these, like how to think about them and how to evaluate knowledge within them and what the role and importance of knowledge is in these systems. And so that’s really the focus in the, in the chapter about MMA, that this UFC was an experiment in attaining knowledge.

[00:07:16] Allen Farrington: Because this, it forced this knowledge to the before that had never really previously existed. I think it may be an interesting way to kind of weave war, or I guess weave away from MMA itself weave towards. Whether it’s economics or whatever other topics we talk about is that it couldn’t have been settled any other way.

[00:07:34] Allen Farrington: I think that’s, that’s like the nice clean way of describing that one particular angle of thought that we have that you could not have deduced the answer to this. There’s nothing intellectual you could have done to arrive at basically which is the best fighting style. You had to run the experiment and you had to, you know, have some kind of appreciation of what it was you were watching to then infer the knowledge that came out of it.

[00:07:58] Allen Farrington: And so it’s, it’s all those threads, practicality versus intellectualism, kind of dynamism in terms of forcing the issue rather than just static analysis, being very clear about what you do and don’t know, like these are the threads that we then take into economics and capitalism and so on. But we really like that MMA is a great kind of accessible introduction to that.

[00:08:21] Preston Pysh: I recently read this book called The Infinite Game by Simon Sinek and.

[00:08:26] Allen Farrington: That’s been highly recommended. I’ve never read it, but yeah.

[00:08:28] Preston Pysh: It’s really good. But in essence, he’s just getting at like a lot of people have convinced themselves that they’re playing some type of finite game. And I think when you’re talking about like martial arts, They have bound themselves, like if you’re doing karate, or you’re doing you name it, right, they’re bound by the rules, the movements, the whatever, and they were playing this very finite, bound game, and now they were being forced to go into what Simon Sinek would refer to as an infinite game, where there’s really no rules, the rules are you, you just gotta win, right?

[00:09:03] Preston Pysh: Like you, you gotta get out there and you gotta beat your opponent. with whatever mechanism or whatever school of thought you want to apply to it. And it’s so representative of free and open markets, right? Which is where you go in the book next. And so, yeah, you go into the next chapter, then you’re talking about the efficient market hypothesis, which Holy Lord, man.

[00:09:26] Preston Pysh: Like, you have a quote. I want to read this quote because I, for me, this just like really represented what you were really getting out with this chapter. You say, prices reflect all available information. If you believe that you’ve already been hoodwinked. So get into that idea and really kind of just some of your broader thoughts on this idea of the efficient market hypothesis, which is basically a religion in these schools. Right?

[00:09:54] Allen Farrington: Like I don’t mean to put you on the spot too much. Well, I kind of do because I don’t want to put myself on this.

[00:10:04] Allen Farrington: I can try if you want. I’m not trying to, it’s not like a gotcha or anything, but if you define the efficient markets hypothesis first. Yeah, I know exactly what I’m arguing against, because that’s another thing that it’s, I think you’re right. It’s kind of become so much of a religion that a lot of people in finance, I should say, obviously not in the wider world, they operate as if it’s true and will repeat sort of some of the very downstream consequences of it, but without actually addressing what the hypothesis is itself.

[00:10:34] Preston Pysh: So I just want to make sure that we’re being clear about what it is I’m attacking. I would maybe even take it a step further. I think that the mantra that’s repeated in academia is around the efficient market hypothesis is all available information the market has already synthesized. And therefore it’s impossible to outperform the market.

[00:10:54] Allen Farrington: So you might as well not even try it. So, so yeah, so this, this idea that you can’t. I’d make it a bit more formal just because it makes it easier to attack that not just you can’t possibly outperform, but that any outperformance is luck. I think it’s also a key part of it. Yes, because all the information is in the price.

[00:11:17] Allen Farrington: Like that’s what the market does is turn it all into, into something that nobody could possibly know more than I guess, which does have. It does have kind of a nice appeal to it. This is, I’m maybe interested in your thoughts on this, Preston. Actually, I’m going to defend it. I mean, I love this, that I think the reason a lot of people fall for this is that it superficially resembles a lot of I wouldn’t say mantras, exactly.

[00:11:44] Allen Farrington: I’d be a bit more positive than that, I guess. Truisms, let’s say, about free markets in general. It kind of taps into a lot of the same sentiment around objecting to central planning, say, that, you know, the central planner could never possibly know anything approaching the combined knowledge that emerges when people engage freely in a market, which I believe I would subscribe to that as a proposition, but it sort of, it superficially uses something like that as a starting point in its own argument, but it arrives at something that I would argue is just complete nonsense.

[00:12:19] Preston Pysh: Well, and you, you get into this idea of what I value and what you value are, are very different. And if I have a ton of buying power behind this thing that I value, which might be somewhat nonsensical, right? The reason why I’m buying a particular stock or I’m buying whatever in the market, free and open market.

[00:12:39] Preston Pysh: My actions don’t have to be efficient, right? They might actually be extremely inefficient. And if I’m applying a ton of retained earnings and buying power behind that incentive, that self serving incentive, Which isn’t, you know, if you lined up a hundred people, they would all greatly disagree with the rationale behind why I’m doing something.

[00:13:02] Preston Pysh: There’s no way that the overall system that we’re talking about can possibly be inefficient if an actor like that exists inside of it.

[00:13:09] Allen Farrington: And so I go even that I go further. I’d say that the, the way in which the word efficiency or efficient or whatever is being used in this context basically doesn’t make any sense.

[00:13:20] Allen Farrington: And that’s kind of the root of it. This manifests in a number of ways. I think one being that if you subscribe to this, you kind of have to think something like all of the data that markets generate. Somehow perfectly captures it like you don’t need any more information like that is the information about what’s happening, which I think is kind of insane.

[00:13:42] Allen Farrington: And I think the alternative approach, like the first principles place you need to start to unravel all of this is realizing that there is nothing in a market that hasn’t originated with just people making decisions, individuals. deciding what to do with their time, money, whatever, right? And you have to start there and build up rather than start at the data and build down because I think what this might be a little bit harsh, it might be a bit of a straw man in this case, but I think what proponents of the efficient markets hypothesis would, they probably wouldn’t do it publicly, but you know, what they would be thinking privately when they’re trying to explain this to themselves is that if you start with the data.

[00:14:22] Allen Farrington: And you work down and you see that people are doing things that sort of go against whatever the aggregate of the data suggests they ought to, whatever they even mean by that, I mean, even that I think is kind of silly, but they’re, you know, they’re, they’re outliers in some particular direction. They would pathologize that behavior as inefficient.

[00:14:41] Allen Farrington: And that’s almost what they kind of construct this definition of efficiency as like aligning with whatever ends up happening on average, which I think if you’re really critical and in, it’s almost like a reductio ad absurdum at that point, you know, I mentioned a second ago that I doubt they would formulate this argument publicly, but if you, if you force yourself to that point, It’s just kind of clear to me, at least, that that doesn’t at all reflect, certainly doesn’t reflect how any individuals behave, but it, given the, all of the top level data and markets as a whole are emerging from the interactions of individuals, it can’t even possibly explain what’s happening at the top level, even though that’s where they started.

[00:15:22] Allen Farrington: And so, once you’re clear about all of this, or at least clearer in my mind, at least what it’s kind of freeing, right? It allows you to just get rid of all of this baggage. Just think about what do individuals do or how are individuals behaving? How are they likely to behave and then build up from there?

[00:15:38] Allen Farrington: And then to go back to something you mentioned a minute ago, maybe a more kind of a tangible way of understanding all of this is the, the idea of just outperformance, right? So basically, can you invest in something that is better than the average? Or can you invest in something better than the average for a reason other than blind luck?

[00:15:55] Allen Farrington: Yeah. It seems to me just completely obvious that you can, because not that you will, obviously, like, it’s probably also definitely true that half the people attempting to do it would end up performing below the average, right? But that some people can, and that it’s not luck because it might be luck as well, but for the people for whom it isn’t luck, what they have done is.

[00:16:17] Allen Farrington: More accurately predicted how individuals are going to behave, what they are going to value, and just kind of run that out. Like, okay, well, and you wouldn’t, just to be clear, like you wouldn’t do it on, you wouldn’t try to model everything. It wouldn’t be like, okay, this person thinks this, this person thinks this, and then kind of, I don’t even know what the approach would be at that.

[00:16:38] Allen Farrington: Maybe literally build a model and like see what numbers pop out of it. It would be more hypotheses and heuristics. about what people in general are likely to do, or even some particular subset, some demographic, are likely to value, how they’re likely to behave, what else is likely to happen. Ultimately, you’re, when you take this approach, you’re just reasoning about humans.

[00:16:59] Allen Farrington: You’re reasoning about other people. It’s not remotely mathematical, or it shouldn’t be, really. It’s clearly not scientific either, and so that, I think that’s another thing that rubs up, that rubs these people up the wrong way. That if you are starting with the top level data, it’s very tempting to do lots of like science, right, or statistics, let’s say, and then pretend that the outcome of the statistics is scientific, when I would say again, you know, nothing intellectually required for that domain exists, right?

[00:17:30] Allen Farrington: You can’t have a, you can’t measure properly, you can’t have a control. You can’t isolate the variables because every individual is like their own infinite set of variables like you is the idea again when you go down to the individual level of trying to mathematize what it is you value is just clearly really silly.

[00:17:48] Allen Farrington: So again, back to this point about our performance, all you’re really needing to do, I say all like it’s easy, it’s obviously not easy, but. For the ones who do it successfully, what they have done is basically correctly predicted what other people will value or predicted it more correctly than the average person who’s also trying to predict the same thing.

[00:18:09] Allen Farrington: And that seems like kind of obvious that you could do it, I guess. I mean, the example we give in the book, you, you may have been going to mention this anyway, but it’s exaggerated on purpose, but just to make the point, like to make it as accessible as possible. Is that the, I think this is true, at least I checked it when we, when we wrote it, that the best performing large cap, you have to make various caveats around this, but the best performing large cap U. S. stock over the 2010s was Netflix. And you could, I suppose, again, go through that like ridiculous process of the top down building the model of who’s going to do this and why, or you could literally just have thought in 2010, streaming is better. It is going to win, which is essentially even free, like phrasing it that way, which is probably more natural.

[00:18:59] Allen Farrington: And, you know, conversational English makes it seem like it’s about technology. Which it kind of is, but it can’t, it’s really just more about people. Like, well, you’re really, that’s a commercial proposition. That’s like, people will prefer to get a Netflix account than, well, renting videos, I guess, but also just, you know, watching regular linear TV.

[00:19:18] Preston Pysh: What’s so interesting about academia and how they’ve tried to develop math around this, one of the most popular models that they have is this capital asset pricing model. And so going to your example of CAPM is what this is called. If you go to business school, you’ll be definitely be taught this model.

[00:19:36] Preston Pysh: You’ll have to do these equations. You’ll have to figure out the math on this. Yeah. And taking Netflix as an example, if we could go back to 2010, there’s not anywhere in that calculation or in that model where you’re talking about streaming that like the underlying assets that’s like going to produce the value prop in the future and competitive mode or none of that.

[00:19:59] Preston Pysh: Like, you’re not talking about the IP. You’re not talking. No, you’re looking at how much the price has wiggled around from a volatility standpoint. And then you’re looking at the price of everything else on the market and how it wiggled around over some made up period of time from past five years or three years or whatever arbitrary time you want to select.

[00:20:18] Preston Pysh: And then you’re plugging that, this data into the, and you’re looking at the risk, quote unquote, risk free rate of treasuries. And you’re plugging these, these numbers into this model and then it’s telling you potentially how much outperformance Netflix is going to have.

[00:20:35] Allen Farrington: Again, it assumes, I’m glad I touched on this briefly, it assumes that that is a scientific domain.

[00:20:39] Allen Farrington: It’s for that to make any, not even be right, because it could be right by accident, right? But to even make sense. That assumes that everything that went into all those numbers popping out over whatever period you’re drawing them from will also be the case in the future. And I actually find it kind of baffling.

[00:20:58] Allen Farrington: I’m sort of just, I’m thinking aloud now that none of this is in the book, but if you believe that, like, if that made sense to you as a methodology, why would you want to be an investor? Like what is it you even think you’re doing? I don’t know. I honestly don’t know. Well, this is the world a bit less facetiously though, right?

[00:21:15] Allen Farrington: I can, I can link this to a couple of things we’ve mentioned already. So that approach to the CAPM approach, it assumed to be a bit more rigorous about like why the methodology is really silly. It assumes a couple of things other than just kind of being, you know, I called it not scientific, right? It assumes a kind of a static environment.

[00:21:31] Allen Farrington: It assumes nothing is going to change. Yeah. Whereas I would say this is like a more, a nicer interpretation of that. And so I ended on there is that what’s fun about investing or one thing that can, that can be fun about it. is thinking about what’s going to change, right? Like it shouldn’t be, I don’t think, I mean, I feel really bad for anybody in this position, certainly professionally, that their investment decisions are just the result of like running an Excel or something, just whatever pops out.

[00:21:57] Allen Farrington: It’s like, Oh, I guess that’s what we should invest in. I mean, I have never done that. Sasha’s never done that. You know, we, we like our jobs because it’s really interesting thinking about the human angle to like Netflix, for example, but basically anything, right. Which is far more dynamic. So you’ve got a dynamic versus static.

[00:22:17] Allen Farrington: It requires a what would you call it? Like a bottom up analysis rather than a top down one. So the CAPM is exceptionally top down. It’s only giving you the numbers, right? You, so all these numbers that you have to plug in, there’s no required understanding of where they came from in the first place.

[00:22:35] Allen Farrington: It’s almost like a non sequitur to even ask. It’s like, what are you talking about? Like, there’s no variable for that. Where, where do we put people’s values or feelings or whatever, whereas. The bottom up approach is obviously starting with thinking about people like, what will people want? What will they value?

[00:22:50] Allen Farrington: And it’s just, yeah, it’s both more appropriate and more interesting as well, I think.

[00:22:56] Preston Pysh: The next chat, we could talk about that topic. I could, I could literally go on for

[00:23:00] Allen Farrington: hours on that last topic. We could just go through every one of these CAPM, EMH You, you, you did the, the risk free, right? You made fun of that for half a second or so before.

[00:23:12] Preston Pysh: Well, I guess if I was going to, we aren’t going to move on. So from a first principle standpoint, like if I’ve worked and I’ve retained buying power, right. And I’m going to invest that buying power into something. I want to invest in something that is going to produce a product or service. that adds efficiency, makes people’s lives better because they’re freeing up their time.

[00:23:36] Preston Pysh: And if I’m looking at it, not from a, cause that’s more of like a VC lens, right? If I’m looking at it as a business that already exists, And I’m saying, this business is just really saving people a ton of time. It’s adding value to way more people and my projection is that it’s going to continue to outpace their previous amount of efficiencies that they’ve added to people’s lives.

[00:24:00] Preston Pysh: And the rest of the market’s priced here and this is priced there. I should probably own this because it’s going to perform great. Like that’s investing to me.

[00:24:08] Preston Pysh: And I know that sounds like really basic, it’s highly controversial, but it is controversial. It’s not the norm, the norm on Wall Street and people that are actually allocating capital.

[00:24:19] Preston Pysh: It is so abstracted away from what we just described, and at least in my opinion, it’s been abstracted away.

[00:24:26] Allen Farrington: But anyway, yeah, no, no, I, I completely agree. I think it’s This might sound a bit harsh. It might require a little bit of elaboration, but it’s basically a cargo cult. I, you know what I mean by that?

[00:24:38] Allen Farrington: No, explain that more. Yeah. It’s applying methodologies that work in a completely separate domain that seem like they work in this domain, but actually they don’t. And actually they don’t capture any of the causality that is required to understand this domain. But they seem very serious. They seem very scientific.

[00:25:04] Allen Farrington: Basically, that’s, that’s the word I keep coming back to this. I think that is actually really key to unraveling a lot of, not just this efficient markets, but other things that we talked about too. I maybe even try to link it back to the MMA discussion too, that as soon as you let go of the idea that this even can be scientific.

[00:25:23] Allen Farrington: You’re just freed up to, I think, appreciate it far more deeply, far more seriously, even. So, like, the MMA angle would be something like… This, I think this is good both in terms of the accessibility, as I mentioned before, but in this case, it’s like even more obviously ridiculous if you, rather than just getting different fighting styles to fight each other, you did some kind of statistical analysis on them in isolation and then built a model that would turn out who’s going to win.

[00:25:50] Allen Farrington: Like, which do you think is better? Should, you know, do you, do you do the analysis? I think you just let them fight. It’s superior knowledge that you gain from that. And it’s, you’re freed up to do it if you don’t think it’s remotely scientific. And I think the main difference, cause that maybe does seem a bit ridiculous in isolation, but.

[00:26:12] Allen Farrington: The main difference between that environment and investing financial markets is only really the amount of data there is in the first place. I actually, the reason I think is a good example, right? We kind of went through this already, but from a different angle, the reason we like MMA as a comparison so much is that it’s just such a great example of competition yielding unpredictable results, right?

[00:26:34] Allen Farrington: Like things you can’t model, you can’t know in advance, you have to just see what happens. Obviously none of that data I mentioned, you know, for like building the model exists in MMA. Unfortunately it does in finance. And so this is where I think the cargo call element comes in that people start off just with this absolute flood of data.

[00:26:54] Allen Farrington: and think, Oh, I need to do something with this. Like, I can’t, I can’t ignore this. This is, this is important. This must be important. Everyone else is doing something with it. I have to do something with it too. And it’s, it’s incredibly freeing to just say, no, you don’t. You can just ignore all of it. I promise.

[00:27:10] Preston Pysh: So the next chapter, just the titling of this, I wish I could scream this from the mountaintops, Allen. And the title is, This Is Not Capitalism, and you get into a lot of your opinions on GDP being just such a worthless metric, but it’s the thing that everybody’s hyper focused on among some other things.

[00:27:32] Preston Pysh: But I think that there’s I think this is a really important thing just beyond like some of those in your face metrics from a societal standpoint. where you have these movement movements of very young generations that are looking at the branding of this is capitalism. They, and like, it’s destructive because what they think the label is, is nothing of the sort.

[00:27:56] Preston Pysh: If they actually were able to understand what’s the mechanics of, of all these crazy terms of backstop facilities and quantitative easing and you name it. Reverse repo facilities, like all of this. Give us your down and dirty on what you guys were really trying to accomplish with this.

[00:28:18] Allen Farrington: Well, that’s, I mean, that’s exactly why we named this.

[00:28:20] Allen Farrington: So this was an article before the book. This was, I think actually the first article of any that then went into some of the chapters of the book. And we wrote it in, I want to say April, 2020. And what we were responding to was just massive bailouts, right? It was the start of the COVID money printing extravaganza.

[00:28:41] Allen Farrington: And it was being labeled in popular press, kind of mainstream culture’s understanding of this was that this is capitalism and our, there’s quite a few strands to our argument, I think, but the simplest version, this is more or less a quote from the book, because I remember the line I’m about to say went in because we were saying it in real life so many times that if anything, the article kind of came out of that.

[00:29:07] Allen Farrington: that for something to be capital like, if you’re talking about capitalism, it’s always, doesn’t matter what, whatever, or what you’re in fact, analyzing anything that has the name capitalism for that to make any sense, be an applicable name, surely at least it has to refer to growing stocks of capital. And it can potentially even refer to lots of other horrible stuff.

[00:29:33] Allen Farrington: I don’t think that’s really necessary. That’s almost like a kind of an olive branch to people who wouldn’t necessarily identify positively with capitalism, but, but are, you know, nonetheless seeing the horrors, I suppose. I don’t mean to be too dramatic, but, you know, seeing what is truly awful about endless money printing and, and some other kind of, I’d say more obscure, more downstream stuff of fiat banking.

[00:29:56] Allen Farrington: Those people who are perhaps even correctly identifying a lot of these symptoms are being told that capitalism is the cause in some cases, even by people who, you know, are the champions of all the activity in the first place, a lot of it is kind of apologism. It’s, it’s that, oh, well, this is what capitalism requires. This is like the occasional downside of capitalism is that, yeah, we need to spend a whole bunch of money and save all these people who made terrible decisions. But yeah, our, our claim is, which I don’t think is even really that controversial because it’s not even, it’s more just about language than, than about economics, I guess.

[00:30:32] Allen Farrington: If you’re calling something capitalism, even before you’re criticizing, right, if you’re calling it capitalism, you ought to be mindful of how capital is being treated and very probably that it’s just been lied to you. What you’re looking at is something else. Hence, this is not capitalism.

[00:30:49] Preston Pysh: Well, you do such a great job talking about GDP, right?

[00:30:52] Preston Pysh: And so when you’re talking, you lay this out and you’re to help people understand it better. You’re saying this is the top line. This would be like me looking at a company and saying, well, their top, their top line keeps expanding, their top line keeps expanding, but never, never glimpsing at the bottom line and realizing if there’s any actual value accretion happening inside of that entity.

[00:31:15] Preston Pysh: And from a governmental standpoint, you’re saying that these people that are looking at GDP and it’s the percent just keeps going up. But they never take a look at the value accretion that’s happening and totally ignoring that. I guess the effect of this is a focus on the incentive of consumption as opposed to long term value accretion that is sustainable over time is what I was trying to say.

[00:31:42] Allen Farrington: Yeah. No, I’m really glad that you made the comparison to companies financial statements. I would have done it if you hadn’t. And I think actually given, you know, your likely audience, right? People with, if not working professionally in finance, I guess, with some kind of background, like highly financially literate, it’s, it’s an extremely useful comparison to make, I think, because maybe similarly to, to the MMA example that is for most people, it’s more accessible, right?

[00:32:07] Allen Farrington: That GDP as a macro term feels I don’t know if it feels distant. It feels beyond being able to analyze straightforwardly. Again, it’s one of these things where we argue, well, no, if you have the right tools, if you have the right methodology, it’s not at all. And in fact, it compares very, very nicely to the equivalent terms for a company.

[00:32:29] Allen Farrington: So just to tease that out a bit further. Yeah. What you’re I push your argument a little bit further than just leaving it at revenue versus profit. Yes, it’s basically saying, Oh, revenue’s going up. Therefore, that’s a good thing. Like that’s our, our metric for success. which is kind of obviously silly in its own right.

[00:32:49] Allen Farrington: Profit would clearly be better because that means that revenue, if you’re thinking like really first principles terms, revenue proves that somebody values what you’re doing. Profit proves that you are providing that value efficiently. You’re producing more than you’re consuming and delivering that value.

[00:33:09] Allen Farrington: But the thing you, even profit, we would argue is not enough. The thing that you really need is returns. Because it’s, it’s profit going back into your stock of capital, creating the assets that when operated, create revenue. It’s that cycle that’s important. And so this is the distinction between, I guess, the stocks of capital on the one hand, in a company, it’s, you know, it’s pretty straightforward to calculate these ratios.

[00:33:36] Allen Farrington: It does become a bit more abstract in the case of, well, everything, a country, I don’t know, an economy, I guess, but sticking to the right principles, I think, is still fairly straightforward. I think the difference is basically you can’t really know what the numbers are, but you can still distinguish between, you know, what you’re identifying as good or bad, basically.

[00:33:54] Allen Farrington: So GDP, is purely the revenue and it’s purely consumption. It says nothing at all about what I would argue is just real wealth. I think that’s the kind of the cardinal sin here is mistaking GDP for wealth. GDP is the effect of the real wealth of a stock of productive capital. It is not itself wealth and it certainly doesn’t cause wealth.

[00:34:20] Allen Farrington: So just being really clear on these distinctions, I think is. I think is really important. There’s actually, there’s, I don’t know if you remember this or if you have this sort of noted in detail, there are two other critiques that we have of GDP that made this even worse. So like that’s everything I just went through there that it’s like measuring the wrong thing in the first place is only part of the other thing?

[00:34:38] Allen Farrington: Yeah, yeah, please. Yes, sir. Anyway. Yeah. Okay, cool. So the second one is that And actually, I’ll say even before this, the listeners will pick up a lot of the same threads like again and again, I won’t deliberately go back and link it to MMA every time, but again, the reason we introduce MMA is that the more accessible points in that discussion just come up over and over and over again in a really nice way.

[00:34:58] Allen Farrington: So the second one is that because it is such a top down metric. It obscures the individuals it actually refers to. So it’s an average that doesn’t really exist in terms of the average person it describes. And the reason is basically that it’s weighted by consumption. So first of all, it’s bad enough that it’s just consumption, but it points to an average individual weighted by the consumption of all the actual individuals.

[00:35:28] Allen Farrington: As opposed to a median, just to be really clear, right, like, because that probably sounded all kind of fluffy and abstract. It’s entirely possible, just to like really make the point, it’s entirely possible that everybody bar one person got poorer or consumed less, but one person consumed so, so, so much more that they made up for everybody else’s losses and then GDP would still have gone up right? And like our GDP per capita would still have gone up, whereas obviously the median would have, would have gone down. And so it’s, yeah, it’s kind of not, it purports to be more democratic, I suppose, democratic in a very loose sense in speaking for the average rather than just, you know, the 1 percent or whatever, but it’s actually highly skewed towards the already rich.

[00:36:14] Allen Farrington: And, and the example I gave the kind of deliberately ridiculous example, Isn’t even that far off reality. I don’t think if you look over certain, you know, if you, if you, if you find the right periods, there are indeed times where more than the growth in GDP goes to just some upper percentage. So the entire X percent down have in fact gotten poorer.

[00:36:40] Allen Farrington: But the X percent up have gotten richer faster than they’ve gotten poorer. Again, GDP per capita has gone up. So that’s another reason. I wouldn’t maybe read too much into that kind of ethically. You could. One could be very offended by this. My point is more, you can only make this mistake in the first place, again, if you’re thinking, if your starting point is very much top down data and you’re not clear about where that’s leading you.

[00:37:08] Allen Farrington: So that’s point number two. Point number three is maybe the most interesting of all, that it changes over time in a way that is essentially unmeasurable. This is never really a big deal from, for example, one year to the next. It’s still, I’m not claiming like, Oh, it just doesn’t tell you anything at all.

[00:37:27] Allen Farrington: It’s still clearly does tell you something, but the problem is that every year, and then this is clearly truer on longer and longer time horizons. There are new inventions, right? There are new products. There are new services that come into the overall calculation of GDP, and then there are old ones that drop out.

[00:37:45] Allen Farrington: And if you roll your period of time forward long enough, eventually nothing in the old GDP calculation will be in the new one in terms of what is being consumed year to year. It’s not that big a deal because most of it’s still the same. And then the argument, the kind of, I would say somewhat fallacious argument against what I’m not putting forward would be over that’s fine because there are, you know, it’s still, the things are repriced, right?

[00:38:10] Allen Farrington: There are exchange rates. So you can see how much people value the new thing. by how much they’re willing to pay for it, which is true in the moment, but it becomes meaningless when everything has changed. And on a long enough time horizon, everything will have changed. So an example that we give in the book, I’m going to get the exact stats wrong here, but it’s kind of along the right lines is that the GDP of, I think it was that we chose, I think it was the GDP per capita of Vietnamese today, I believe is around the GDP per capita of Americans I the late 19th century. We would also argue it’s kind of ridiculous to say that therefore they are as wealthy. Vietnamese today are as wealthy as Americans were then because every single part of their lives didn’t exist for those Americans.

[00:39:06] Allen Farrington: And, and you would argue is maybe not every single aspect is better, but everything they consume is of a higher quality, I suppose. And you can, it’s almost definitionally true because they’re choosing to consume these newer things. So like, I think probably one of the more pronounced examples we, we gave, I believe was something like penicillin.

[00:39:24] Allen Farrington: There’s no, and this, this kind of winds its way towards like a, a nice catchy slogan for this, which is that there’s no exchange rates to the future. So you can say, Oh, but you can still reprice these things when you do the new calculation. So you can see how much people value them, but you can’t, they need to exist before you can value them, right?

[00:39:42] Allen Farrington: You can’t value something that doesn’t exist yet. And so to use GDP. As which is how it’s almost always used as well, just to be clear, like, I don’t think a good way out of this is like, oh, just don’t use it that way. Like, this is all it exists in order to like, this is the only point anybody ever makes with it is, oh, GDP went up.

[00:39:59] Allen Farrington: Therefore, we’re better off. Well, the longer you run this out, the more meaningless it becomes. Yes. So that’s problem number three. So it’s meaningless or no, it’s funnier in the other direction. I guess problem number one is it measures the wrong thing. Problem number two is it measures the right thing in the wrong way, in a deeply unfair way, and then problem number three is it’s meaningless anyway, so who cares.

[00:40:21] Preston Pysh: It’s meaningless today and it’s going to be even more meaningless tomorrow.

[00:40:28] Preston Pysh: You have a quote in here, and I’m going to transition the conversation more to Bitcoin topics. You have a quote in the book that for me personally, as a person that served in the military, this quote is just so profound. After a millennia of compounding technology advances taking us from swords, shields, longbows, handguns, fighter jets, and atomic bombs, humanity has discovered a technology that only resists and disincentivizes violence and has no other use.

[00:40:55] Preston Pysh: This is a big deal. And I think for people that are not Bitcoiners that are hearing that it’s almost like an eye roll that there’s no way that this magic internet money could possibly like reverse human nature of using force and all of those ideas. So lay it on that person.

[00:41:17] Allen Farrington: Well, one thing I’ll say up front, I don’t want to take too much credit for the thought behind that line.

[00:41:22] Allen Farrington: I think it’s a fairly, first of all, it’s completely understood. Anybody in Bitcoin is one of the first things you wrap your head around. I think the actual source of it probably predates Bitcoin by quite a bit. And in slightly more abstract terms, I think I’d probably trace this to the sovereign individual.

[00:41:39] Allen Farrington: Although obviously they weren’t talking about Bitcoin, they were talking in slightly more general terms about the use of cryptography online. But obviously Bitcoin is the perfect example of this and I think to a large extent validation of that thesis as well. So if people are interested in this line of thinking, I would go read that book.

[00:41:58] Allen Farrington: I wouldn’t credit me with this thought. But to your point of, okay, so what do you say to someone who just doesn’t take this idea seriously at all? I think probably the best resource for this that I’ve come across is actually extremely recent. Again, because it’s just kind of common knowledge within, within Bitcoiners for a lot of people, you, you know, you probably don’t even really need to write it down or explain it, but Lynn Alden’s new book, Broken Money, explains this very, very well.

[00:42:28] Allen Farrington: Yes. So I’d recommend probably people just go buy, go buy that as well. And she says it better than I will now effectively try to summarize what she says. But her argument where I mean, one of the many, many arguments in that book is that what is different about fiat money with the kind of money that we have ended up with now, what is really historically unique about it is that it has reduced the cost of violence, basically zero.

[00:43:04] Allen Farrington: And to be fair, actually, this is something that we touch on at the very end of Bitcoin is Venice, but I think Lin does a far better job of explaining it. And I think the effects of this are so pervasive that it’s almost like this is water in a way that you can go your whole life without ever actually noticing it.

[00:43:23] Allen Farrington: So I, in some sense, I understand where the eye roll maybe comes from, but once it’s pointed out that to maybe make it a bit more tangible that there is now, or there hasn’t been for you know, 50 years or so, at least definitely for the U S and then less so for. basically the more allied to the US you are.

[00:43:42] Allen Farrington: There is no cost whatsoever to waging war. Previously, like for all of history, to some or other extent, and basically the extent gets less and less the closer you get to pure fiat, a government that wanted to wage a war would require the consent of its populace, the consent of the governed, to fund it by a taxation.

[00:44:04] Allen Farrington: And by and large, people really hate that. Like, they really don’t like being taxed for work. I think a key turning point in all of this, actually, which Saifuddin has done a really good job sort of articulating and actually with some historical research into this as well, like popularizing this previously, apparently just unknown historical fact of what the Bank of England did at the start of World War I.

[00:44:30] Allen Farrington: And so Saif has this great line, which is that Bitcoin is the technology that will finally end World War I. And so this is what he’s referring to that. When, so at the time the pound sterling was the world reserve currency, and in order to finance World War I, the Bank of England had to break the peg to gold, but the way that they, the process by which they went about doing this, and this is what Lynne details in Broken Money, In a lot of detail, she doesn’t just mention it, like, she really examines this episode is that they, in fact, tried to issue war bonds and they were incredibly unpopular, which I guess is in part because of the somewhat unusual circumstances that World War One came out of, you know, it wasn’t like the UK was being invaded or anything.

[00:45:17] Allen Farrington: It’s kind of obvious knowing the, you know, the web of alliances and so on that the British people would not care about this. They would not be interested in it. But the Bank of England just lied. They said that the war bond was massively oversubscribed. They wrote in the Financial Times as well. It took to propagate this official lie And then the F. T. published an apology or like kind of a correction, kind of an apology in something like 2017, you know, more than a hundred years later when the records proving it, which had been hidden at the time were finally dug up from the Bank of England and the Bank of England themselves admitted that this had happened and the F. T. was like, okay, well, we can apologize for it too. And so this is like really pivotal because. The peg to gold was never returned. I mean, no, you know, once any peg to a hard money is broken, you never really get it back, but that’s that you could argue that was the first domino that led right the way up to WTF happened in 1971.

[00:46:14] Allen Farrington: I’m obviously skipping over an enormous amount there, but that’s why you should go read Broken Money anyway.

[00:46:19] Preston Pysh: All right, Allen, such a pleasure chatting with you. This has been a blast, but I’m curious, like what does your next three to five years, like what do you got in store? What are you working on right now?

[00:46:30] Preston Pysh: You always seem to be up to something pretty awesome.

[00:46:32] Allen Farrington: Oh God, I don’t even know what my next three to five months is going to work at this big asset management company, Sacha still works. I left a little over a year ago to start this company Axiom. For now, we have a venture fund that is focused on Bitcoin companies or Bitcoin adjacent companies. We did a kind of a public launch, maybe two months ago now, which, which coincided with just, I guess, maybe some of your listeners will be interested.

[00:47:04] Allen Farrington: It was kind of pitched around a new piece of writing that I had done, kind of an essay, I guess, which is actually the first I’d done since Baker Went to Venice. I’ve been saving it up for a while for the launch. Talking about a lot of the same things. The tagline, I guess, is that the killer app of Bitcoin is fixing the cost of capital.

[00:47:19] Allen Farrington: So it’s, you know, covering a lot of the same topics that we’ve, that we’ve covered now. But I think also part of the point was to set out the vision for the business, because we have we have this venture fund, you know, we’re hoping that we’ll be able to raise and launch, you know, many more down the lines.

[00:47:32] Allen Farrington: So long as there is a need for funding in the Bitcoin ecosystem, we want to try to contribute to that. But we also have plans to launch, let’s say, more exotic financing instruments for Bitcoin companies. I don’t want to say too much more about that now, just knowing the stage they’re at and, you know, how much of a regulatory nightmare basically every part of that is.

[00:47:54] Allen Farrington: I’ll wait until they actually exist before I start bragging about them. But but I’m excited at what we’re hopeful we’re, we’re going to be able to do. And yeah, hopefully contribute to, or maybe even take advantage of, I guess, if we’re successful enough Bitcoin fixing the cost of capital.

[00:48:11] Preston Pysh: I love it.

[00:48:12] Preston Pysh: I love that theme and that branding, by the way, for people that are not familiar with this book that we were talking about, it’s Bitcoin is Venice. Wow. Very, very impressive. I wish I could, to be quite honest with you, I wish I could write like this. Well, I cannot, like, I promise you, I cannot even come close to this, this level of writing skill, but just an honor and a pleasure to get to know you and to have you on the show and to talk about this amazing book.

[00:48:40] Preston Pysh: And thank you for your time for coming on.

[00:48:42] Allen Farrington: Yeah. Thank you for having me.

[00:48:44] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm.

[00:49:13] Preston Pysh: So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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