{ "episodeId": "SLP87", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "per_bylund": { "name": "Per Bylund", "role": "guest", "tag": "PER" } }, "segments": [ { "speaker": "stephan", "time": "00:08", "start": 7.71, "text": "Hi and welcome to the Stephan Livera podcast focused on Bitcoin and Austrian economics. Today I've got a great episode about Austrian economics with Per Bylund, but first, let me introduce the sponsors of the podcast. Firstly, Kraken. Over my years in Bitcoin, I've been really impressed with the way they operate. Kraken have just such a strong focus on security. They've really tried to act ethically in the space. And they are one of the longest standing Bitcoin exchanges. They are consistently rated the best, they've got a really high quality platform, they offer some of the best liquidity in the industry, and they've got really high trading volume with low fees and no minimum or hidden fees. Remember Kraken have twenty four seven support. If you're a corporate client, you receive full access to the Kraken OTC desk for personalized service on high volume trades. Institutional clients also receive the highest available API rate limits. There's also Kraken Margin and And futures trading and Kraken offer five fiat currencies, so to learn more and sign up, go to the Kraken link in the show notes. My other sponsor is Unchained Capital, they are a Bitcoin financial services company offering a really cool two of three keys multi-signature vault product. You can use Trezor or Ledger wallets, and you still maintain control with your two keys and reduce that single point of failure risk. And this solution has also been open sourced as well, and I've set up a vault with Unchained, I found it super simple and easy. If you create an You also get three free months of access to SafetyNet's Bitcoin Standard Research Bulletin, which is a fantastic resource. Unchained also offers Bitcoin collateralized loans, so you can get USD liquidity without selling your bitcoins, meaning you don't trigger a capital gains event. So consider your scenario, but that might be more efficient for you. So while that loan is outstanding, your bitcoin is stored in a dedicated multi-signature address under collaborative custody with Unchained holding one of three keys, you would hold a second key, and Unchained's independent third-party key agent would hold the third key. Third key. To learn more and sign up, go to the Unchained Capital link in the show notes. My guest today is Per Bylund. He is the Assistant Professor and Records Johnston Professor of Free Enterprise at Oklahoma State University at the OSU School of Entrepreneurship, and he's also a fellow at the Mises Institute. So Per first joined me on episode SLP thirty-eight. So this episode is more about his book, The Problem of Production. And so in this discussion, we talk a little- A little bit more about the theory of the firm, firms as islands of productivity. We discuss Austrian capital theory and what happens to some of these firms over time, and it's also an interesting one from an entrepreneurship point of view, so I think you guys will really enjoy it. So, onto the interview. Per, welcome back to the show. It's a pleasure to have you back." }, { "speaker": "per_bylund", "time": "02:53", "start": 173.43, "text": "Thanks for having me again." }, { "speaker": "stephan", "time": "02:56", "start": 175.84, "text": "So, Per, I, really enjoyed reading your book, The Problem of Production. I read it a couple months ago, but, and I was thinking I've got to get you back on and we can talk about it, because I think a lot of my listeners are essentially Bitcoiners who are interested to learn more about Austrian economics, and so I think this book is, a really good one because it deals with some of these different theories that they can Kind of pull together around, you know, Austrian theory of capital, and entrepreneurship. so let's, let's set the context. Why did you write this book?" }, { "speaker": "per_bylund", "time": "03:30", "start": 210.07, "text": "Well, I think there were pla-plenty of different things coming together at once, in a sense, these are the ideas that I developed in my dissertation. but I sort of took those ideas and I, I ran with them, and continued to think about them and, in a sense, I, to paraphrase Joe Salerno at the Mises Institute, \"Your dissertation should be your worst work.\" And what he meant by that was, was, was not that, it wasn't that the dissertation should suck, that's not what he meant. What he meant was that you should get better after that." }, { "speaker": "stephan", "time": "04:04", "start": 244.19, "text": "yes." }, { "speaker": "per_bylund", "time": "04:05", "start": 244.61, "text": "And continue to develop your ideas, right? So, starting out as an Austrian and doing some organizational stuff and doing entrepreneurship, I sort of put those things together, and I was schooled in, in grad school in transaction cost economics and, and that sort of analysis. And And I never really found it very convincing, so I, I realized that there must be something else there, and there, there's plenty of theories of the firm and what, what is a firm and, and Frankly, economists don't know what a firm is, they just assume that it's there, and they basically start with it. if you use the perfect, the competitive model, it has Numerous firms. That's where all the production happens. they're not self-employed entrepreneurs, those are firms. but what is a firm? Huh. Don't really know. and those theories that exist, they all suffer from the same problems that most economic models suffer from, namely they start with equilibrium and then they look at a problem, how, how can that be fixed, and how do you maximize and so forth. And you can throw in a firm there and that Solve some type, some type of problem, but to me as an Austrian, viewing the market as a process that sort of evolves and progresses It wasn't clear to me how is the firm actually formed and what is the function that it has, over time. I mean, obviously it needs to provide some kind of value to the economy. What is that value? It can't simply be saving a certain cost or, or solving a simple problem and then switching back and forth between a firm and not a firm depending on How, how cost, the cost situation changes over time. It's, it's not that easy, right? If, if you wanna, if you wanna organize something in the economy, it takes time and you, you plan it, you, you see it through, you invest, and I mean, it's, it's a long term commitment. So obviously there must be something more to it. So that's why I felt I, I had to write down my thoughts on this and, and try to explain what I think could be the, the reason And there are firms, and, and frankly, what firms are, economically speaking." }, { "speaker": "stephan", "time": "06:33", "start": 393.2, "text": "Excellent stuff. And so let's go a little bit into Ronald Coase's theory of the firm. So I know that is probably the, you know, if you're going through, if you're like an undergraduate or whatever, and like they teach you, \"This is Ronald Coase's theory of the firm,\" and, you know, to this day, it is probably one of the most cited papers. How would you contrast your views against the Ronald Coasean transaction cost view of the firm?" }, { "speaker": "per_bylund", "time": "07:02", "start": 421.88, "text": "Well, there, there are many differences. what Coase did was simply say, \"I mean- To, to give him some credit, he wrote this basically as an undergrad, and he got the Nobel Prize for it, so that's pretty impressive. his problem, I would say, is that he didn't really understand economics. Which is a huge problem when, when you develop theory in economics. so what, what he did was he, he learned-- I, I've done some work on, on Kose himself and Kosean theory, and what he did was basically learn economics theory from his friends when he was, in undergraduates, and he learned- Almost a straw man version, that where, well, the market is efficient, the market price mechanism, allocates resources, per-perfectly, so there shouldn't nee-be a need for hierarchies and organizations and so forth. And yet he said, \"Why are there firms? There seem to be these islands of planning, basically just authoritative, kind of islands where a manager sort of directs everything.\" It's laborers. why is that if the market is truly efficient? How could that be?" }, { "speaker": "stephan", "time": "08:20", "start": 499.7, "text": "Yeah. sorry, let's-- Can we just dive into that part a little bit further around islands of planning? You know, so what does it mean that, you know, now obviously I, I've, you know, having read Mises' you know, Economic Calculation in the Socialist Commonwealth, what does it mean to say that you can't economically plan? Like in the general case?" }, { "speaker": "per_bylund", "time": "08:40", "start": 519.71, "text": "Well, I mean, in a sense, you can economically plan. I think Hayek was the, the one who said that it's not a matter of whether there's planning or not, it's a matter of who plans and who plans for whom." }, { "speaker": "stephan", "time": "08:54", "start": 533.62, "text": "Yeah. So," }, { "speaker": "per_bylund", "time": "08:54", "start": 533.98, "text": "I mean, we all, we all plan our purchases, we plan our production, we plan our lives, to the extent possible. The issue is that you can't centrally plan a whole economy, because that excludes entrepreneurship, that excludes, the, the exercise of judgment, and you can't figure out new lines of production, you can't figure out new ways of, of satisfying consumers, to put it very, very briefly." }, { "speaker": "stephan", "time": "09:19", "start": 559.02, "text": "Precisely, yeah. so, I was just sort of getting to that idea that, yeah, you can't centrally plan without kind of having this price mechanism and property rights system underlying the ability that, you know, gives people, an ability to sort of calculate their profits and losses and figure out are they creating a social benefit for society. but yeah, if you could, carry on a-a-and just bring that then into how the firm economically plans, because I guess to an outsider they might think, \"Oh, well,\" How can the firm do planning if it doesn't have an internal market?" }, { "speaker": "per_bylund", "time": "09:55", "start": 595.36, "text": "Right, and that was, that was sort of where, where Co started out saying that, well, it looks like e-every firm is, is a sort of small island of central planning. So how is that possible? And why is it that a market economy has all these islands? 'Cause all, basically all production happens within these islands, and, and he identified that, that a firm is based off of managerial fiat, basically. So it, it is- Sort of a, a dictator pointing, and, and everybody needs to follow, and he said, \"Why is that? Is, is that...\" How could that be efficient since the econ- market economy is supposed to be efficient, right? And he contrasts that and mentions i-in some of his commentary that at, at this time, he, he published this piece in '37, right? So the Soviet Union was a great success and all this stuff, and you had, had the, you had the Great Depression, in the West, right? So there was a crisis for capitalism, and, and socialism seems to be, seemed to be working really well, right? All this stuff, and Lenin had said that socialism- Soviet Union should be organized as one big factory, the whole country, right? So to Koz, it was sort of obvious why, why, why can't a country be organized as central planning, but you have all these huge corporations sometimes who are, that are centrally planned? Why is that? And hi- his solution to this was simply that, well, yeah, the price mechanism is efficient in allocating resources, but it's really hard to figure out the prices of everything, and it's really costly to figure out whether those prices that you get are actually the correct ones. Are those the efficient prices or are they not equilibrium prices basically? So he said that, well, yeah, the market is efficient in terms of allocation, but it's costly to use it. So if you have a manager instead Taking the place of the price mechanism, so the manager gets to, allocate resources within the firm, you don't have the cost of figuring out those prices, right? You just re- depend on the manager, and of course, the manager can be wrong too, but to the extent that the manager is, is Sufficiently, right? you save on those transaction costs, and that's why you have a firm. So, so different types of transactions are integrated within the firm and basically placed Within the power of the manager. And the better the manager, the larger the firm, 'cause a really good manager can, can integrate and basically be a boss over a, a number of transactions, whereas a, a pretty sucky boss can, can only perhaps rule a few workers and a few transactions. So he said that it's cost, as costs Change and depending on your s- your situation and your, your position in the market, the firm's boundaries change too. So you would, you would basically, Divest some transactions when the costs fall in the market, and you would invest and integrate more transactions when the costs rise. So you, so you had sort of a mechanism there for, for The firm and, and changing the boundaries and, and growing and shrinking firm size basically." }, { "speaker": "stephan", "time": "13:20", "start": 800.21, "text": "Yeah. So it's, it's very much driven by this idea of transaction costs, and I think a good point that you make in your book is that cost doesn't necessarily explain how it is that the firm overcomes this problem of transaction costs. and I think that's kind of partly, that's where some of your theory as well comes in. Did you want to outline some of your thoughts there?" }, { "speaker": "per_bylund", "time": "13:43", "start": 822.75, "text": "Sure. I, I mean, to KOS, it's really, it's really equilibrium theorizing, right? So you have one situation where production is already taking place and it's organized by the price mechanism, and when it gets really costly because the transaction costs get high or there's too much imperfect information or whatever it is, you basically just take a little manager and you drop him there, put him in the place of, of the price mechanism, and whoops, there's a firm, right? So the manager's fiat is what rules instead. And to me as an Austrian, it's about the process, right? So how, how does that happen? How, how do you actually go from this market situation with only the price mechanism to start integrating and hiring these workers and, and getting an office and, and all of this stuff? How does this happen and when, when does it stop? And is it really driven by transaction costs or is it driven, driven by something else? And I mean, to, to be, to be blunt, transaction costs is sort of a, in Kosis view anyway, the way he used it, transaction costs are, are Not really relevant. And the reason I say that is that he, he-- I started out by saying that he didn't know economics, and Harold Demsetz pointed this out a bunch of years ago that, that Cosortium assumes that the price mechanism allocates resources efficiently, but then there is this additional cost on top transaction costs. That means you might not actually get to efficiency. Well, the price mechanism allocates resources based off of opportunity costs. Opportunity cost necessarily includes transaction costs too. You don't have opportunity cost plus something else. I mean, opportunity cost is, is where do you find most value, including transaction costs. So you can't use opportunity costs on one hand and then say, \"Oh, there's transaction costs as well.\" So he, he sort of failed Econ 101 there. So t-there's that problem, and then there's the problem of the emergence of firms, too." }, { "speaker": "stephan", "time": "15:50", "start": 950.49, "text": "Yeah, interesting stuff. I think I liked as well around your explanation around this idea of density in the book. And so you're talking about how-- and I think this is coming to how the firm emerges. And I think part of that is we're thinking of, okay, this is our economy, this is our capital stock, these are the firms that we currently have, but maybe we're not quite advanced enough around some certain area to have this sort of firm, and that as the increasing density in a certain industry... You know, grows, then you might see further and further subdivision, and that can be part of the, the driver in your view. Can you outline what you're getting at there?" }, { "speaker": "per_bylund", "time": "16:34", "start": 993.74, "text": "Right, so, so my view, my theory sort of, sort of starts with the division of labor, saying that that's where productivity comes from. and division of labor, then, then we go way back before, before Coase and back to Adam Smith, who spent the first few chapters in The Wealth of Nations talking about this. But to Adam Smith, he, he talks about how when population grows, which is what you're getting at with density, the more people there are around, the more you can sort of- Chop up any production process into smaller bits and pieces and allow people to specialize in those pieces. And then inst-instead of you doing everything and I'm doing everything, you can do the first half and then I do the second half. And then if there are more people around, we can do maybe one fifth each, and we can really be become specialists at each fifth. And we might not know anything at all about the other four fifths, but together we produce a lot of output." }, { "speaker": "stephan", "time": "17:30", "start": 1050.42, "text": "Okay, great. So then we've got this increasing density and we've got this division of labor occurring. And then, now, where does the role of the entrepreneur come in? And as I understand, this is like a Kuznetsian alertness theory as well, right? They sense an opportunity and then they, they go on from there?" }, { "speaker": "per_bylund", "time": "17:49", "start": 1069.35, "text": "Well, you can put it in those terms, sure. or you can say that it's Schumpeter Whether you have a, a, an idea for an innovation or any type of, of, of term you wanna use, really. but the thing is that I think the entrepreneur sees a new way of producing something or something new to produce or maybe, maybe it's a, an employee in a, an existing business who- Realize I said, \"Wait a minute, I can do this in a completely different way that is so much more clever that I can save a lot of, of money if I just, if I just gather a lot of people around, around me and, and do this in a different way.\" Now, doing something in a different way means that you need to figure out exactly how to do this, right? So, you need to put people together, you need to split, the production process in a new way that hasn't been done before. So you can't simply say, I'll just contract this with people in the market, 'cause no one is selling those services. And you might need machines and, and other types of capital goods that don't exist, that you need to produce yourself, so you need to produce blueprints and so forth. Now, doing this necessarily happens outside the market because those things don't exist yet. So if I wanna start a new type of production that no one has done before, I can, I can sort of talk to people who've done similar things maybe, but what I- What I probably will need to do is hire people who have the necessary skills, I think, and then tell them what I had in mind, and we can discover together exactly how to put this together and exactly how they're gonna produce their little piece and then how the next guy is gonna continue producing from there on. Now Obviously these guys aren't in the market, there are no market prices between those employees in this new process that didn't exist before. So they're completely interdependent, and all of us are in this new project that we're starting. It's obvious that if one of us fails, the whole project fails, the whole production process fails. So we need to stick together, that's one thing, right? We're completely interdependent. And there's also no pricing going on between us, because there aren't several sellers and several buyers within the firm, that, that simply doesn't happen. so this happens necessarily outside of the extent of the market. So even if we hypothesize that the whole market consists of self-employed people running around and, and just trading using the, the price mechanism, what we're up to isn't, guided by the price mechanism. And our little production process will necessarily be treated as one sort of blob, that the whole thing will either produce a profit or a loss. But exactly, exactly who is doing the profitable thing and who isn't, we can't tell. We just know that we need to put all those pieces together or the whole thing will fail. And that's what I call a firm, because this is integrated production in a, a way that you can't accomplish in any other way than being together and sort of In a joint fashion, together, discover exactly how to do this, and then probably refine and improve the process as well. So the first the first version isn't gonna be the best version, but maybe it's good enough, to, to make a profit. And then of course, if, if I make a ton of money doing this, others gonna say, \"Wait a minute, I can, I can do similar things,\" a-and maybe even do it a little bit better, so others will follow suit and try to compete with me. And then, of course, I mean, to-- this is sort of the, the short version or the speedy version, of the theory, when others follow suit and copy Or imitate what I'm doing outside of the extent of the market. Obviously, other firms can start to try to poach my employees who ex-have experience doing this stuff, and I will try to get their best employees too, which means we're basically bidding for these, specialized labor services. Well, that is the creation of market prices. So in a sense, the, the, the firms dissolve into the market. Right. So, what I'm doing in, in a sense is Turning everything upside down, 'cause Coes and, and all these other guys talking about the theory of the firm, they're saying, \"Oh, let's, let's pretend there's a market,\" and then why do people choose firms? And I basically said, \"Well, first of all, this is a process of economic development. This is, the market progressing.\" And I'm saying it happens through the firm, but it's not the case that the market goes to firm and the planning is so much better than the firm. It's the other way around. So market is a refined, and the mature way of, of producing, 'cause you have full information through the price system and you have, have good, effective allocation of resources and so forth. But then if you wanna do something new, you need to do that outside of this, this market organism. And that becomes a planned island, necessarily planned to begin with, right? And then you populate it with workers. And then when others try to do the same thing, we create prices between our firms. And those prices mean that we can start outsourcing parts of our firms, which means we can benefit, we can benefit from the prices that we create between us, right? Through competition. So the firm is sort of a, a means by which the market's extent grows. The market expands and becomes more specialized through the firm." }, { "speaker": "stephan", "time": "23:39", "start": 1418.55, "text": "Excellent. And, yeah, so I like the way you explain it as well. Here in the book, you say it's, it's like this economic phenomenon that overcomes the inertia of the interrelated market order. And then later we, we sort of get into what that becomes as it becomes more kind of commodified, if you will, or more kind of commonplace, and then it be-just beca- it sort of subsumes back into the normal market. Another really cool topic that would be awesome to touch on is capital. So it's- You know, obviously as Austrians, you know, there's this belief of, capital accumulation and that you, you need these various goods to help you produce the new goods. but then there's also a very subjective part to it as well. And I really like this part, you quote, Ludwig Lachmann, and you say, \"Something is capital because the market, the consensus of entre-entrepreneurial minds regards it as capable of yielding an income.\" So it's sort of like, beauty's in the eye of the beholder, right? There You have to subjectively determine, oh, yes, this piece of capital equipment is what I need for my business, that's why I'm willing to pay x, y, z dollars for it. And I think the other part is you, you'd really touch on this idea of capital structure and accumulated capital and how it's kind of ever shifting. Can you touch on that for us?" }, { "speaker": "per_bylund", "time": "24:58", "start": 1498.0, "text": "Sure. And, I mean, in a sense, the, the specialization deadlock is sort of the fulfillment of what is possible without any innovation or entrepreneurship, right? So, so there might be capital goods and so forth, machines and, and whatnot else. But what the entrepreneur does when establishing a new firm is figuring out a new way of doing things, but also a new way of using resources and, new skills and skill sets for, workers, but also new types of machines, that support this new type of process, refined versions of old machines and so forth. So, it's really from, from Locke's, book Capital and Structure, where he says that, that the role of the entrepreneur is really in the constant adjustments to the capital structure of the economy. and what he means by that is simply that what entrepreneurs do is trying to figure out the best best way of satisfying consumers' wants. And the best way of doing that is always to use some sort of capital, 'cause capital has one function, it, it makes labor, more productive. So basically we get more output per labor hour invested. but capital can of course be used in many different ways, but it's not unlimited, so we need to figure out the best way of using it. And of course, should we be using this at all? So an old, old type of machine, maybe? Say it's made out of steel or something, maybe we should just take this to a smelting plant and produce something completely different out of it, 'cause it's not very efficient the way it's being used now. We can use the steel in, in some other way, right? And entrepreneurs make these decisions, so they're constantly figuring out ways to, to better use those, scarce resources that we have in the economy to satisfy consumer wants, satisfy more wants, satisfy other wants. satisfy them in, in a, in a better way. All of these things, but it's, it's always about the adjusting of capital and of course using labor as part of the process as well." }, { "speaker": "stephan", "time": "27:10", "start": 1629.98, "text": "Yeah, and the other component is just that in order to have that capital, people must have foregone some kind of consumption, or they must have saved up their profits, and that's the only way in which we can, as society, can build our capital stock, right? I think if you look at other schools of thought, they don't necessarily have that way of thinking about it. Can you outline a little bit around the importance there of first foregoing consumption?" }, { "speaker": "per_bylund", "time": "27:39", "start": 1658.58, "text": "Sure. I mean, very often Austrians take the example of Robinson Crusoe, that he-- I think Rostberg talks about how he picks berries, they're apparently, they're, they grow off, on, on trees, so they're very high up, so it's a lot of work picking those berries, but he needs those berries to satisfy his hunger and, and stay alive and so forth. and maybe he spends his whole day picking those berries. and but how does he, in, in, how does he improve his con-s, his, production? Well, he needs to invest in, in something. He could, say, produce a stick so he can stand on the ground instead and sort of hit on the branches and get those berries instead. But producing that stick takes effort and time as well, so he, he needs to, to release that effort and time somehow. And how does he do that? Well, he can't starve to death. He can't just say that, \"Oh, The next few weeks, I'm not gonna eat anything. instead, so, so then he's gonna starve to death because then maybe he will be able to produce more in the future. That doesn't make any sense. Instead, if he, if he postpones consumption a little bit, says, \"Well, I'm gonna eat a little less every day, \"or \"I'm gonna work harder now, \"but not consume all the berries right away. Instead, I'm gonna save those berries. I can use them. Say, I save up berries over a whole week, and And I, I lessen my consumption so I don't consume all of it, and then I can ha- I have enough berries to survi- survive a week, and during that week, I'm gonna try to produce a stick that I can, I can use. and that stick of course is capital. and the reason he can create this capital is because he saves or he forgoes consumption, because if, if he kept on, consuming a hundred percent of the berries that he, that he, gathered, then, then he wouldn't be able to produce that stick. But with the stick He will be able to collect a whole lot of berries in, in much less time. So there you have the, the, the role of capital, which really makes his labor much more productive. So you can get a whole lot of more berries in shorter time and less effort as well. And that, that of course also releases more time for him, 'cause then suddenly he doesn't have to work as long hours with that stick. instead he can, he can use that time, to- To produce maybe a better stick or, or, I mean, this, this example doesn't hold for too long, but-- Yeah, yeah, yeah. But, but still, the, the, the point I think is clear that by not consuming everything right now or consuming less, we make more available for investment, and that investment in, in turn, improves our ability to produce in the future. So this of course is exactly the opposite of Keynesianism, right? Where Keynesianism starts with consumption, that the more we spend on stuff, the more people will want to produce, which completely reverses, well, reality in a sense, that because production takes time. So what entrepreneurs do when teaching entrepreneurship makes this obvious that Keynes was just full of it, That, what entrepreneurs do is try to figure out what do consumers want later. I mean, what I start to produce now, I might be ready to offer to consumers in six months, a year, or whatever it is. I can't know exactly what they will want, so I will need to bear that uncertainty myself. I will need to make all the investments and create jobs and whatnot else, whether or not anybody will want my product, 'cause I can't know that until I'm done. And during that time, I need, I need to have enough capital in, in terms of money and food and all this stuff to pay for the resources and survive myself, And then I can offer the product, and then we'll see if there will be spending. Right? So, the, the whole thing that spending drives the economy is Well, it's ludicrous, really. I mean, what drives the economy is, is production, and then offering that to consumers. And consumers, they don't choose to buy something just because it's valuable, they choose to buy something because it's valuable, and it's more valuable than what others are offering. Right? So there's the competitive element as well. And since production takes time, this is, this is-- there's enormous uncertainty for entrepreneurs, both demand side Will consumers value what I, I offer and will they value it enough? And on the supply side, will I have competitors offering the same thing or will I have competitors offering something that is better and cheaper? That, there's no way of knowing, right? So we need to forego consumption and so cut back on our spending right now so that we have enough resources for these projects, to be realized. So that we can then later on consume what they offer." }, { "speaker": "stephan", "time": "32:44", "start": 1963.69, "text": "Excellent, I love the explanation there, Per, because it's like, there's, there's all this uncertainty, and the Austrian school and some of the contributions that the Austrian school makes around entrepreneurship are very much around recognition of decision making under this uncertainty. Another point I really like is with capital, right? We don't believe capital is homogenous, we instead believe it is heterogeneous, and there are different- Forms of capital, and another theory is around, Bombarwick's roundabout theory, and the idea is that as you expand the timeline of production, and you can start doing more and more advanced meth-methods of, say, berry picking and so on, maybe you start making a machine that goes and automatically picks the berries and things like that, and that takes- That might at first look like you're being not productive or just wasting time, but actually it's that you needed that roundabout production process to be able to get you to that new level. Can you articulate, can you explain a little bit of your thoughts there?" }, { "speaker": "per_bylund", "time": "33:49", "start": 2029.18, "text": "Yeah, exactly. In a sense. The theory of the firm that I, I, I try to flesh out in the book is an application of that, right? How do we get to more roundaboutness? And if you think about it Roundaboutness, it, it's not necessarily the case that the more time it takes you to produce something, the more you get. I mean, obviously, you, you can be a complete dumbass and, and, and spend a lot of time and not produce much at all. so, so, so that's, that's not it. It's not a matter of, \"We need to spend time, we need to waste time.\" That's not it. What is it is that, that in order to-- when we are producing something, why would we choose to wait for a longer production process? Well, because we know that it will create a whole lot more, right? So we would say that, okay, you know, we'll wait a little bit because this production process will take a whole lot more time, but can produce a whole lot more goods when it's done. in a cheaper way, it's worth it, it's worth waiting because we get so much more out of it. So what Bombardier is really saying, and Austrians in general, is that, well, we will choose these longer processes, basically with more specialized, stages, right? We will choose those longer and longer for the simple reason that they provide us with more and more goods in a cheaper and cheaper way. But since-- and it goes back to the saving bit, right? Because we have- We have to wait for the result. We need to save first so we don't starve to death today, because obviously that, that won't benefit us. But we'll choose ever, ever longer production processes if we can get a little more out of it, and we get enough more that we are willing to wait for it. And that's what entrepreneurs are doing too, right? They're extending the production processes in the economy overall so that we get ever more goods in the future." }, { "speaker": "stephan", "time": "35:51", "start": 2151.35, "text": "Fantastic, I love the explanation there. and I think let's now talk a little bit about how this process, as you were touching on, once-- Okay, so we've got, we've got, we kind of had the market at one level, and then the firm emerged to try and take it beyond that level, as you were saying. And now over time, other, you know, let's say other com-competition comes in, it starts to become more of a common service or product, and then it now- Now kind of subsumes back into the market. Can you articulate a little bit of the process around that?" }, { "speaker": "per_bylund", "time": "36:26", "start": 2185.82, "text": "Sure. I mean, one way of thinking about it is simply that, well, if someone starts a completely new firm producing something, very often there are copycats pretty soon. I mean, if it's a, a successful idea and they're making a, a lot of money, then- Someone else is going to try something similar, or something that they think is a little better, maybe try to produce in a little bit different way, but, in the same way. so Those things that are common to those competing firms, they don't need to be done in-house anymore. Very, very often a business is started with, they have a whole lot, lot of different types of services that are needed to support the production process. But they're not really core, they're not what the real innovation that the entrepreneur is, has realized in the business. So they're all these supportive services, and those are probably the first ones to be outsourced. and, and as soon as you start outsourcing those, maybe, maybe a couple of your employees say that, \"Hey, you know, how about I sell this to you instead? I can start a business and, and produce this cheaper than you're paying me now.\" And of course, then he can probably sell it to a competitor as well, right? So then you start seeing basically chunks of these firms being organized in other firms in a sense, right? So, and this is actually is how outsourcing happens. I, I, I talked with a- A, a, a firm in, in India to which, to which, American businesses and European businesses outsource IT departments. So that, that's, that's a, I think, an illustrative example, 'cause what, what they said to me was that, no, no, we, we don't just sit, sit around and wait for businesses to say, hey, wait a minute, we can, we can probably save money by outsourcing our IT departments. Now what they do is look at businesses and basically figure out how mature they are. So they say, okay, so these businesses are, are huge, they have their own IT department, they have plenty of people hired, and of course- Of course, there's plenty of, of costs involved with that, and, and as any small business owner knows, if, if one guy is sick, then holy crap, the every, it, it hits, hits the fan, right? everybody needs a cover for that guy, and, and imagine if you could buy that service in the market instead, and you suddenly need a little more, need a little less, and you can just adjust your purchases basically, that's a whole lot easier. Right? So a huge firm with a, an IT department is very costly, but they don't probably don't think about, \"Hey, yeah, you know, we can outsource this.\" So these firms in India, they contact the firms in the US and, and in, in, in Europe and say, \"Hey, we, we know that you are...\" Basically mature enough, and you have developed sort of standardized production and so forth, and we can offer you those exact services, and you don't have to care about the HR involved with your IT department, you don't have to care about updating software licenses and all this crap basically. We'll take care of it, and we'll charge you, monthly or yearly or, or whatnot, right? And this is exactly the, the, the process of dissolving the firm, right? Because if, if If this corporation accepts, I mean, it's a cost savings to them and the IT department itself, there's no value in having the IT department in-house if what you're doing isn't actually IT, right? You're producing something else. So you might as well buy it from someone, and that means you can probably pick another supplier if this supplier doesn't do a good job, right? So there, there are plenty of guarantees and, and much more certainty in a sense by outsourcing it. So these co-corporations are usually very happy with, with signing a contract with these guys. and then of course the, the firm is bi-is smaller, the corporation is smaller because it doesn't have an IT department anymore, and it buys those services just like it rents an office, just like it, it potentially, By s- by s- transportation and all this other stuff. You don't have to integrate everything. And in fact, what I argue in the book is that the entrepreneur or the owner of the business is probably happy to outsource as much as possible because it's less of a headache and it's less of, less cost as well for, for the entrepreneur and for the business. So you would expect to see, or at least according to my theory, you would expect to see firms become start out sort of large and inefficient, and then start to fall apart in the sense that they're outsourcing a chunk here, outsourcing a chunk there, and, and they're refining their production process maybe, and they're- They're firing a few people, they're hiring someone else, they're replacing people with machinery, and basically they get smaller and smaller in terms of what is being done in-house, so they get closer and closer to what their core contribution is. And maybe at, at the very end, that core contribution itself can be placed in the market by simply exchanges. But more likely probably is that you have another entrepreneur with an innovation that completely disrupts the market and the firm has no value." }, { "speaker": "stephan", "time": "41:50", "start": 2509.7, "text": "And then we start a whole new round of the process all over again, right? Exactly," }, { "speaker": "per_bylund", "time": "41:54", "start": 2513.68, "text": "exactly." }, { "speaker": "stephan", "time": "41:55", "start": 2515.02, "text": "So for example, you're doing a service and you're not doing IT, it matters how many IT firms are out there. And part of it is if you're new, there might not be enough of maybe that specific IT service that you really need, right? So that's part of it. and then I think the other key piece is to keep in mind that you don't outsource your key competency, right? So for example, if you're a bank, you might outsource your IT, fine, but you wouldn't outsource your credit assessment and credit intermediation skills because that's what a bank does. So I think that's a very key point that you probably, you would probably read that in many business journals as well. But I think it's a very, it's very aligned with what your theory is and with kind of Austrian ways of thinking about entrepreneurship." }, { "speaker": "per_bylund", "time": "42:39", "start": 2559.06, "text": "Yeah, exactly. And I, I mean, in a sense, the firm has- Value for one simple reason, that it offers value to consumers. And that value isn't in being a firm at all, the value is in producing something, right? The, it, it, it helps consumers satisfy some type of want, and that is the core that you mentioned there, right? The, the bank, the bank's IT department Probably contribute to the whole picture, but does it have to be in-house? No. especially the more IT departments are already being outsourced, well, then why would you have it in-house? You would have it in-house only if it saves you a lot of money, which is probably not the case, 'cause having stuff in-house means that you'd probably lose money, right? Comparatively speaking. So it will go back to that, down to that core, which is how you- Satisfied consumer wants with actual value to consumers, and that's your contribution in the economy, and that's, that's what the firm will sort of shrink to I mean, since that is, is the very core. And, and that, that core, whether that can itself be outsourced in, in parts or not, I don't think that That isn't really part of my theory, but I also think that when you get to that point, you will have been disrupted long ago anyway, so it doesn't really matter." }, { "speaker": "stephan", "time": "44:06", "start": 2645.91, "text": "No, that's a good point. I think another interesting question that just came to me as well is, people are talking about some of these ideas like, okay, the gig economy, right? Like Uber and, you know, Airbnb and some of these other ideas, and also this idea that more and more people can now live that kind of independent contractor life, right? They don't necessarily, like in the past where it was more like, \"No, I have a job for this big company,\" but I, I suppose what you're saying is also- In some sense, you're explaining why it still makes sense for there to be a firm, to, for firms to exist, right? We're not gonna move to this world where everyone's an independent contractor because there is still an economic necessity for the firm" }, { "speaker": "per_bylund", "time": "44:51", "start": 2690.99, "text": "For as long as there is, opportunities for innovation, yes, which I would expect to be always, right? You can, you can always do things better and, and figure stuff out, 'cause I mean, if, if we have any quality, it, it's our ingenuity, right, and, and our creativity as people. So We will always be able to figure out new stuff, new, new ways to do things, and those ways to do things will very often mean that you need, you need to collect resources and people and everything and create those firms, right, to replace what exists already, very often through, through what you mentioned with bomba-bombard, and the longer processes, right? So you, in a sense, you, you replace one stage of production in an already existing production process with a whole process itself. Because that process produces more output, per labor hour and whatnot else, but it hasn't been tried before, so you need to start out outside of the extent of the, the economy, and therefore as a firm, and then you can gradually, start outsourcing and sort of dissolve into the, the market. I mean, in a sense, it's theoretically possible to have a pure gig economy, but I would expect that to be a static economy where we don't have any growth or any expansion anymore. And I don't see why that would be the case. I mean, that would be a dying economy. So, so that we wouldn't wanna live in that world. No, definitely not." }, { "speaker": "stephan", "time": "46:24", "start": 2783.85, "text": "And what about now? Okay, so this is a little kind of going away from your book, but more like the size of the firm and whether we might anticipate, let's say we lived under like a gold standard or some kind of hard money standard, would we anticipate any differences in the size of firms? Would we see maybe- Less gargantuan large firms and more smaller and medium-sized firms. Do you have any thoughts there?" }, { "speaker": "per_bylund", "time": "46:51", "start": 2810.99, "text": "Yeah, sure. I, I think the size of, of firms and especially the size of corporations is To a very big extent, it is a, a result of regulation. So because there are limitations in the market and especially, barriers to entry These firms can grow large and they can still make money, at least accounting-wise. they're still, I would say, inefficient in the sense that had there not been protective regulations, there would be a whole lot of more smaller firms and they would dissolve rather than, than, engage in mergers and acquisitions. 'cause I think people in general, they trust economies of scale to explain way more than I think it's, it actually can." }, { "speaker": "stephan", "time": "47:39", "start": 2859.49, "text": "Right. So" }, { "speaker": "per_bylund", "time": "47:40", "start": 2860.31, "text": "So, these huge corporations we have, I think those, they're basically a, they're a product of the state and state regulation and, and limitations placed on the market rather than the market itself. A completely free market would see Lots of very small firms, and local production, you would see, I think different production technology too. I, I don't know how, how, how deep you want to dig into this, but, I, I think The econ-economies of scale, they exist, of course, but it's also the case that they have been sort of artificially-" }, { "speaker": "per_bylund", "time": "48:25", "start": 2905.37, "text": "enhanced in, in several ways. One, one is, subsidies of transportation, so you have the free highway system and, and all this stuff. you have international waters that are basically unregulated, all of this stuff, so you can have one huge factory somewhere in China to, to just pump out goods cheaply, and then you can ship it all over the world, and you don't care about pollution 'cause, hey, international waters and whatnot else, and, and there are subsidies for putting- Putting it on trucks and, and of course, China will subsidize your production in China and all of this stuff. whereas in, in a, in a free market based off of property rights and, and private property This wouldn't make any sense whatsoever, 'cause you would actually have to," }, { "speaker": "stephan", "time": "49:13", "start": 2952.78, "text": "you have to pay for it, right? Yeah," }, { "speaker": "per_bylund", "time": "49:14", "start": 2953.82, "text": "right, you have to pay for all of those things yourself, which means You would probably have local or regional factories instead, 'cause they would be closer to the customer, which means you can also offer, differentiation a little bit, right? You can, you can offer products that fit the people better rather than this sort of super mass production that we have today, that is sort of a In a sense, produced by, state society, because it's, it's so, it's, it's way beyond what is economically reasonable in a sense, right? And this, this has pro-- this has, repercussions in terms of the technologies used too, 'cause When it is the case that you can use economies of scale to these sort of absurd levels, if I may call them that, it means that innovations will also focus on Optimizing and maximizing technologies that produce at this, these gargantuan volumes, right? Instead of, of small scale production, which now appears to be hopelessly costly Which didn't have to be the case, right? If you look at an, a regular automobile," }, { "speaker": "per_bylund", "time": "50:33", "start": 3032.56, "text": "here in the US, the highway speed limit is usually sixty-five or seventy miles per hour. And it just so happens that automobiles are pretty efficient, they, you get a lot of gas mileage at around sixty-five, seventy miles per hour. That isn't a natural law saying that, hey, internal combustion engines will be very efficient at sixty-five or seventy miles per hour. That, that's not the case. It's because the engines have been optimized to the speed limits on, on the highway. Yeah, exactly. Yeah, exactly. And that's the case in, in manufacturing as well, that if it is the case that- Transportation is subsidized so that the more you can produce in one, one location, the better, the better it is. Manufacturing processes and manufacturing technology will be optimized and tuned for those Outrageous volumes. So the technology too, too is sort of distorted because of this." }, { "speaker": "stephan", "time": "51:32", "start": 3091.54, "text": "Yeah, it's, it's, it's just crazy to see how deep it all goes, right? In terms of this, the massive level of government interference that changes the way of so many different markets. but look, I, I think that's just about all we've got time for, but, I just wanna say, just for my listeners, make sure if you're not already following Per, he's got some fantastic, Twitter threads and really great insights. So Per Before we let you go, make sure, you tell my listeners where can they follow you and keep up with what you're doing." }, { "speaker": "per_bylund", "time": "52:01", "start": 3120.77, "text": "Sure. I mean, the Twitter would probably be the, the, the best place 'cause the, well Sad to say, I'm there daily. So, and, and I posed this, what you mentioned, the, the, the threads, which are sort of an interesting phenomenon that long threads on, on economic insights are Are being retweeted a whole lot more than what I think are, are, are clever, short, brief tweets. So Twitter actually works, works for these, these longer conversations. so I, my Twitter handle is basically at Per Bylund, so at P R B Y L U N D. And I have a website too, it's, it's an academic website, so it's not all that much fun, it's not exciting, but it's also my name, so P E R B Y L U N D dot com." }, { "speaker": "stephan", "time": "52:49", "start": 3168.59, "text": "Fantastic. Well, look, I think that's pretty much gonna do it for this one, so look, thank you very much for coming on the show. Thanks for having me. So let me know what you guys thought of that discussion around entrepreneurship, capital theory, theory of the firm, and just doing these sorts of episodes in general. You can DM me on Twitter or email me. also, just a quick announcement, I've got some merchandise available now with Nick Ward, who's running the Layer One BTC store. So you might have seen on Twitter there is this awesome shirt But it is the orange coin good number go up shirt, so I'll put the link there in the show notes for that if you guys are interested to get some of that merchandise. I think there's some shirts and also some mugs. also if you wanna support the show, remember you can rate and review the podcast, you can share it with your friends, whether that's sharing it on Twitter or just telling a friend about the show. You can follow me on Twitter at Stephan Livera if you want, you can also subscribe to my YouTube channel that is under the name Stephan Livera as well. Well, if you're interested to advertise on the show, you can email me, that's stephanlivera at pm dot me. And that is it. Thanks guys, I'll speak to you soon." } ] }