374: Trying to Understand a Schizophrenic Economy

Buck: Welcome back to the show, everyone. Today my guest on World Formula podcast is Per Bylund, an associate professor of entrepreneurship and Johnny de Polk, chair in the School of Entrepreneurship in the Spears School of Business at Oklahoma State University. He’s the author of How to Think About the Economy A Primer. His website is Here by Lancome.

Buck: Per, Welcome to Wealth from your podcast.

Per: Hey, thanks for having me.

Buck: So really, I think one of the things that we really want to talk with you about is, you know, I think as a professor, one of the questions I have is how does economic literacy explain how society works?

Per: Yeah, let’s let’s start with the small questions. You know, I think it’s really important to understand what economics is and what the economy is, because to me, society and the economy are like two sides of the coin. You can’t really separate the two. So if you if you understand how the economy works, you understand how to position yourself and how to start a company and all that stuff, of course.

Per: But you can also evaluate and assess policy. So economic literacy just gives you the insight into how the housing diet in a sense works and how the economy works. And unfortunately, there’s very little of this quality and surprisingly little, I would say to that people tend to have all kinds of ideas of how the economy works, but they tend to be all dead wrong.

Per: So economic illiteracy tends to be the standard, unfortunately.

Buck: Yeah. I mean, I think that that’s pretty common probably globally, right? I mean, Sahadi, I mean, when you talk about economic literacy, what are you talking about? Like, are you just talking about a basic understanding of macroeconomics, microeconomics? What do you mean by that?

Per: Well, it’s a little bit of both. I mean, it’s about understanding how how things actually happen. Where does economic growth come from? What does it mean? Business cycles. How do they function? What does value come from? What the heck is a price anyway? And what is the role of money in the economy and all of those things that we tend to use every day.

Per: And then we have sort of some kind of understanding for practically.

Buck: So I know you’ve talked a little bit about this concept that our we are in a period of economic neglect. Tell me a little bit about that.

Per: Well, I think it’s I mean, it has to do with economic illiteracy we just talked about. And I think in a sense, politics is really the art of offering things that are impossible. You know, the economist Thomas Sowell once said that the first rule of economics and I’m paraphrasing, but the first rule of economics is that things have a cost and there’s always a trade off.

Per: And the first rule of politics is to is to overlook that rule of economics. Right. Right. So in a sense, I think politicians do that when they sell the area or they sell a policy and they sell themselves in a campaign that they tend to offer and promise things that are not possible to actually provide. So having some economic literacy means that you’re not going to be able to fall for those things and you’re going to be able to really hold politicians more accountable.

Per: I mean, that’s just one application of of understanding the economy much better than that, that you can you can tell what is possible and what is not. And the same thing, of course, in your own life.

Buck: Do you think that that’s a that’s a that

‘s an American thing? Or do you think that that’s something the you know, the people have a better grasp on economic literacy in Europe or or China or anywhere else? I mean, I’m just curious, what’s your take on that?

Per: No, I don’t think it’s an American thing. I think it’s rather a I mean, I think all societies have basically a lacking economic literacy. I think in general, people who are closer to the market and exposed to the market themselves, they would have a better grasp of it. So one thing that I often I’m surprised when talking to entrepreneurs, for instance, that they tend to understand the economy much better than other people simply because they deal with it every day and they know what they can do and what they can’t do.

Per: They know such things as well. The customer is boss. They can try to offer whatever they like, but at the end of the day, whether they buy or not is really their decision. They can’t the entrepreneur can’t really decide for the customer. They can. They can try to persuade the customer to make purchases, but the customer will decide, is this worth it for me or not?

Per: Right.

Buck: So there is much more of a practical literacy, you know, because you look at what’s going on, you know, let’s say, you know, academics like Janet Yellen economically, obviously very literate. But I mean, recently claimed her policies, which, you know, massive money printing, COVID lockdowns, you know, those kinds of things that they did in terms of recovery there, that they were not creating inflation.

Buck: Right. So is there a discord between academic or is there a difference, I should say, to an academic literacy of economic matters and practical literacy of economics?

Per: Yeah, I think there is, I mean, in the sense that the practical literacy that entrepreneurs have, they don’t typically have the words for it either. They don’t have the theoretical framework. They just have sort of an intuition, but they can address it in words. I mean, I don’t know about Janet Yellen. If I in her, she’s just acting as politician, right?

Per: So she’s trying to to promise things, whether she understands or not, that what she’s doing. Will it have a certain impact on inflation or the inflation statistic? That’s a different matter. I mean, politicians, they tend to not necessarily be truthful. Let’s put it that way. Yeah. In their predictions, because they hope that, well, first of all, they want support for what they’re doing right now.

Per: And they will they will want to not take responsibility for the outcomes later on.

Buck: What do you make of sort of the I guess, the widespread detachment of economic fundamentals with I think what for a period of time seem to be really thriving markets like that, that sort of discrepancy between, you know, what’s happening in the economy versus what’s happening in the markets.

Per: Yeah, I mean, it’s it sure makes it harder to decipher and sort of uncover what is going on. I don’t think that the basic economic understanding that it’s always applicable. The issue, though, is that there are so many distortions and manipulations of how it works. And very often it is simply the creation of money by central banks or the banking system.

Per: But with all this new money that creates all this phenomena that do it and do otherwise see, and we tend to think of when we talk about the markets, we tend to think of the financial markets. But the economy is so much bigger. Right. The economy is really the real economy, meaning that it’s the physical things, it’s the production, it’s the businesses, things like that.

Per: Whereas financial instruments are attempts to work with the financing of it. And the laws of finance are typically different in the sense that you’re not actually creating new value, which is entrepreneurs doing production. They’re creating value for consumers. Whereas in finance, you’re moving money back and forth and you’re working with statistics in order to make sort of bundles or whatever seem less risky, and therefore you can charge more things like that.

Per: So it’s a different game in the sense in the finance markets than in the economy overall.

Buck: So is that is that in your view, is that a relatively new thing? I mean, because going back to the Great Depression, I’m certainly no economic historian, but, you know, you start with a big stock market crash and ultimately a bunch of businesses going out of, you know, businesses going out of business and widespread unemployment. It just seemed like there was a much more correlated type of movement between markets.

Per: I think the link is not as obvious anyway. And I mean, that has probably to do with this again, is the creation

of new money, because there is so much more money created and that ends up in the financial markets first. And primarily it leads a different life. And that was not the case before. I mean, you mentioned the Great Depression while we were still in the gold standard.

Per: So even money itself was tied to the demand of gold available, whereas now money is completely untethered from anything, basically. It can they can create them at will and not it’s in their and just another trillion whenever they feel like it or just a few keys on the keyboard. And there’s another trillion dollars to spend in the economy.

Per: So in a sense, it’s different that way. I’m not sure finance itself is different, but it’s the fact that finance gets all this. This created money, makes it different.

Buck: To basically the fact that there’s more debt. Right. There’s more debt available.

Per: Yeah, right. It is to put it like that. Yeah, yeah, yeah.

Buck: You know, in terms of your book, when you talk about how to think about the economy, a primer, give us some thoughts on, you know, some highlights in terms of that. I presume this is written as a primer. So people are you know, people are, you know, like on this show who listen to this are smart people and may want to, you know, start thinking about, well, okay, there’s a lot to think about here is a lot of terminology.

Per: Yeah, and that was exactly the point with writing this primer that there was no good place to start. So people often ask me, So if I want to learn about the economy, if I want to not think very deep, at least gain some some basic knowledge, where should I start? What is a good article three? Two words, a good book to read.

Per: And I didn’t really find any good ones or not good enough. So in a way, if they are good and you can read them, they’re usually very expensive because they’re published by academic publishing houses. So. So in order to buy the book, you need to spend like 80 bucks or something like that. And for most people, I mean, learning a little bit of economics just is not that important.

Per: So so they wouldn’t want to spend that much and then they don’t want to invest all that much time either. And and like you mentioned, there are plenty of terms and jargon and maths and all of this stuff. So the whole point of the the was to produce an overview of the economy so that you can quickly sort of get a feel for and understanding for how it works in all its parts and not spend a whole lot of time.

Per: So you can, you can read it in an afternoon without problem because it’s really short. There’s no jargon whatsoever and it’s cheap. I mean, it’s five bucks or $8. So from Amazon, so.

Buck: So in terms of it, just just to give like sort of just some general ideas, I mean, what do you what do you recommend in terms of where do people start? I mean, in terms of the when when you start talking about the primer, what how did you decide what to talk about in there?

Per: Well, it was no, it’s really difficult because it seemed pretty obvious because the problem with with economics is that you have to think about I mean, it says that we’re talking about people acting and people reacting. And the whole economy is really based on how people value different things and how they make choices. I had to start talking about how we need a framework to understand what is going on before we can start measuring things.

Per: So it it’s really not suitable for using the same methods as in physics, for instance, where you can you can measure the weight and mass and so forth of things. But since we’re talking about value and what people value personally and it’s subject to values is core to it, you really don’t have a metric for it. And even money itself is an economic concept that it requires some understanding.

Per: So you have to start with time. Okay, So how can we at all decipher and uncover what is going on? Well, you need a framework for it

. So I have to start talking about that. And then I could dig into talking about what is actually going on in the economy.

Buck: And what is going on in the economy?

Per: Yeah, but I mean, this is a primer on how to understand the economy, right? So I’m not actually giving any investment advice or anything like that. It just gives you a baseline for how you can then apply this line of thinking. And it means mean there is an economic way of thinking about things. And typically it’s sort of the reverse of what we tend to think.

Per: So when we see something, we see sort of a monopoly or see someone who’s rich and something like that. We tend to think about it in a certain way. But economics uncovers the process that led to it. And if you have just a basic understanding of those processes, you can also uncover where this comes from. And then you can make a much more educated assessment on whether you think it’s right or wrong and not just see it and have an instantaneous reaction, but instead understand it.

Per: And then based on that, you can make up your own mind.

Buck: You know, obviously, you’re an economist. So tell us, kind of, I mean, obviously, we’re heading into a very unusual time right now. What’s your take on what happened here? I mean, just obviously, we had we had this we had the COVID and, you know, basically everything went everything shut down with massive money printing. We had helicopter money. How did we get to where we are without necessarily figuring out what was going to happen?

Buck: You know, I mean, how did that happen? Just as an economist, give us your play by play from your perspective.

Per: Well, I mean, I think there are plenty of bad moves, really, because very often the reaction in terms of economic policy has been to get rid of the symptoms quickly rather than think of the long term. And the economy is cumulative. And the innovations that build off of innovations and build growth over time. And then as soon as there is a hiccup and usually the hiccup is created by interventions in the economy, but you want to quickly get rid of the symptom and just move on.

Per: Which typically means that you and the politicians do and they try to fix the problem or make sure the build in the instance, build another bubble on top of the bubble that just burst.

Buck: Right.

Per: And if that is how you’re dealing with things and you’re so short-sighted in the sense you’re going to build bigger and bigger bubbles to just swallow the previous bubbles that burst. Right. And that’s sort of where we are right now. And eventually, you’re not going to be able to build another bubble and then, well, then we’re going to have a lot of problems because there is one of the implications of my book and what I talk about there is that there is such a thing as an economic reality.

Per: Unfortunately, a lot of people deny this today. So they say that there is no such thing as an economist. Whatever we make it to be. And they’re right in the sense that we make up the economy. The economy is made up of us and what we do. But it doesn’t mean that we are not limited, restricted by economic law and sort of certain the nature of the marketplace, for instance, and so we need to understand this in order to manipulate it, if we will, or use it to certain ends.

Per: This requires that we have an understanding of what we do and create problems that we simply could not foresee. And then I think that’s where we’re at now in the great financial crisis of 2008, when it was really a response to the bubble that was created before then, the

housing bubble, which was created in order to swallow the bubble, it was the dot-com boom before then.

Per: I mean, this is a bubble on top of bubbles, and they’re getting bigger and bigger and bigger. And then of course, now with the pandemic, it was not really an economic bubble burst, but then it created, but it was this they needed a reaction to it. And of course, they chose to just pause businesses. And I mean, as an undergraduate professor, I don’t even know what that means to pause a business is.

Per: There’s no way you can do this because it’s a process, right? And that meant that they had to give people a lot of money in order to just be able to pay their bills, know, because they couldn’t go to work. Right. But that also means you have a lot of people who can demand things and buy things in the marketplace because to get all this money, who is producing this stuff is producing the stuff because they’re all at home.

So that, of course, is going to bid up prices like crazy. Yeah. So everybody has money and everybody wants to buy stuff and no one is producing more stuff. They have less stuff than before and more money to buy it. Yeah, of course the prices are going to skyrocket. And this obviously.

Buck: Interesting. Why do you think that was not clear to the Fed? I mean, what’s your take on that? Do you think they you know, they thought it was transient. Why do you what what did they miss? I mean, there’s a lot of smart people in that room, you know?

Per: Yeah. Yeah, there are. And I, I mean, in a sense, this is going to sound weird, but in the sense it’s it’s a lack of economic literacy. Yeah. Because macroeconomists in general don’t really have the sort of old style economic literacy that I’m talking about. There’s still consumption of entrepreneurs and there’s some conception of businesses. There’s no conception of production or things like that.

Instead, they’re dealing with aggregate statistics. So talking about the unemployment rates, they’re talking about the price level and things like that. And they’re assuming that there are certain relationships between this aggregates. But any sort of real economists, quote unquote would say, well, the unemployment rate is really a bunch of people not who cannot find a job compared to how many have jobs, but why can’t they find jobs while there is something in the economy that that leads A, to not start businesses or not expand the business and therefore not hire people?

So there are sort of in academia, we talk about the micro foundations of these things. There’s individual actions that give rise to these phenomena, these economic phenomena. But we can’t really understand that phenomena without talking about how they came out or what people were doing. And macroeconomics, typically they ignore these things.

Buck: I’m curious on something that, you know, again, this is an unusual economy and where I feel like it is, you know, the the the I feel like the problems are being more felt and a top down basis this time. Whereas, you know, with with large with businesses having trouble, maybe getting, you know, good financing. And certainly in the apartment space, we’re seeing that big multi family apartment buildings and complexes.

Buck: Meanwhile, great jobs numbers, Right. What’s how does that happen? I am so confused by this, I have to tell you, because it sounds to me like I’m hearing like, you know, that the number of businesses that are declaring bankruptcy is extremely high right now. I keep hearing and I know from personal experience as a business person that it it, you know, lending the lending markets, making it very challenging for everybody.

Buck: Inflation is a problem for businesses. Why are there so many jobs being created in this economy? Because that seems to be part of the problem in terms of inflation.

Per: Yeah, I mean, you’re right. Nothing that really seems to make any sense, right? Yeah. Yeah, but but when we’re talking about unemployment, we’re talking about a lot of people who left the job markets. I mean,

unemployment is how many are actively seeking seeking jobs and don’t have one compared to the people who have jobs. And a lot of people left the job markets because it was simply they couldn’t find jobs and end what they got to retire or I’ll just live off of mom and dad or whatever it might be.

Right. So so people left in that way that if like in the statistics you write that many businesses went under. So there were fewer jobs in absolute numbers, but also fewer workers in absolute numbers. And at the same time, you have plenty of new money that you give to people as consumers and also that you invest in new businesses so they can hire people, but they’re not.

Are they actually producing for consumers? Well, they’re producing for the new money. So it’s not people earning wages in the same sentence as before and then economizing on the other purchases. Instead, you have people getting more money than they earned from both and spending that in the economy. And then you have venture capitalists investing much of this new money got in financial markets into businesses that they wish to scale up.

Per: So you have plenty of businesses where businesses don’t really make any money, but they’re expanding like crazy anyway because they think that later on, if they get into a monopoly situation or they are not the only one that will deliver groceries or whatever it might be, and all businesses, all the stores use this platform to do it, then they can start to make money off it. So they’re sort of starting and expanding based on debt and not really having sound figures. And then they’re hoping to find a business model later on.

Buck: Really good. Last month, I believe, there were 339,000 jobs created, soaring way past expectations.

Per: Yeah. How much of this is simply that the economy is functional again after the pandemic? Yeah, but you’re right. I mean, none of these statistics make any sense. And of course, the statistics are, I mean, how truthful are they? That’s also an issue always.

Buck: Well, and then the problem is that’s what the Fed is going to base decisions on, right? Really? Yeah. Like and then so what’s your take on interest rates? Do you think they need to continue to go up? Do you think that, uh, I guess it depends a little bit on what you think the medication that the economy actually needs is, right?

Buck: If you want to get us a “soft landing,” you want those rates to stabilize, maybe go down a little bit. Versus if you want to sort of clean house, you probably let them rise. So what’s your take? And I think, you know, just for clarity, I think you kind of come from more from the Austrian economics school.

Buck: Right. So I’m guessing you’re going to say, let those rates rise, right?

Per: Yeah, you’re right. And for the simple reason that they have been kept artificially low for so long, and when you keep interest rates too low or lower than they otherwise would have been, it means you get a lot of investments that are not really being made because there is value to be created for consumers. But is that because there seem to be value? They seem to be profits to be made because the interest rates are lower than they otherwise would have been? So, yeah, so overinvestment in some sectors, which means your relative underinvestment in other sectors and what drives this is the interest rates rather than the expectations of what consumers will buy. So in this sense, I wouldn’t say that necessarily clear house, but there are plenty of businesses that are producing things that consumers are not really expected to demand and there are businesses that should be operated then they should be started but have not been because these other businesses have hired the people and have used the resources. So there’s sort of a distortion in the overall economy that is structural. So maybe we would have seen the same number of jobs, but the jobs would have been in other businesses if the interest rates had been allowed to reflect the actual fundamentals in the marketplace.

Buck: We’ve lived in this period of time where the Fed has been so reactive to the markets. That part of me thinks that the reason for those jobs is that the real economy doesn’t believe the Fed, that they’re essentially saying, “Yeah, they’re not going to keep raising rates. And before you know it, we’re going to be back booming again, and we don’t want to get caught behind when they’re bluffing about continuing to tighten things up.” What do you think?

Per: Yeah, I think that is right. And I mean, in any business, you can’t really base your decisions on the past. You have to base your decisions on the best possible expectations

. And that’s true when you start a business. You can’t know what people will buy from you or if they will. You have to make an expectation and then make investments based on your best guess. And it’s the same thing with the Fed. If your business depends on interest rates doing this or that, being high or low or what have you, then your expectation is what you’re going to basically make your decisions based on. And this is also why when we have the Fed going out and saying things, not because they’re actually going to do it, but because they think that saying it will create these differing expectations so that the behavior will be what they actually want. They might say that they will increase interest rates, and they know that no one is going to believe them. But if they say that they’re going to keep interest rates the way they are, then people might invest even more in certain things. So they better say something that they know is not going to happen and it’s not their intention whatsoever. But they think that the outcome will be a certain behavior. Yeah. Which of course is really, really weird because you can’t really foresee how businesses will react to this. It’s like you are trying to second guess and play that game instead of setting interest rates and then just using the tools like…

Buck: One more question for you, which is this is, you know, I know you have no crystal ball, none of us do. But what do you think’s going to happen? What do you think is going to happen? I mean, this is kind of another strange period in American economic history. You know, this slope of these rates going up so fast. It’s remarkable to me that we have not seen that much destruction yet. What do you foresee happening?

Per: Well, I don’t really foresee the Fed raising interest rates because I don’t think they’re able to. As soon as they try it, they try to reduce the money supply a bit, and then, of course, the reaction is swift. So what I’m looking at really is entrepreneurship and the creation of value for consumers.

Per: And what is it is the economic structure in terms of actual production, actual use of labor, actual use of resources and things like that, Is that actually in line with where entrepreneurs would put them? Have they not been subject to all these manipulated signals since? Right. And from that perspective, the economy sort of out of whack that the structure is wrong.

Per: It’s just distorted by all of these signals and that requires a correction. Now, does that mean that we’re going to see a depression in the next year or five years? Not necessarily. I mean, it’s going to be correcting and a distorted economic structure will require I mean, it’s going to be costly no matter what, but it could be that it’s a sort of an extended process with businesses moving, going out of business or some producers shifting to another industry, but they’re not doing it on mass.

Per: And so they’re doing it a little bit here, a little there, which means we’re going to have much less economic growth. So maybe we will see stagflation as a possibility, like the extended stagflation. I mean, I’m not saying that’s going to happen. Who knows?

Buck: Because stagflation is so high. A high unemployment. Right. You know, without economic growth, Right?

Per: Yeah, high inflation. Right. Inflation. And no economic.

Buck: Growth. No economic growth. Right. So yeah, so that’s kind of what your thought is. So maybe you don’t maybe it’s not a big, you know, blood in the street, you know, that type of thing that you think of with a big crash but just sort of a prolonged period of stagnation like Japan or something.

Per: It’s not a crash, but I mean, it’s not yeah, it’s not impossible. And I mean, the way it is looking now, I mean, if you want to put on sort of a pessimist hat, then it’s not looking good at all in terms of the structure of the economy and what was going on. So it could turn into a depression because it seems like the Fed and politicians are definitely focusing on getting rid of symptoms and thereby extending the crisis rather than actually letting the market sort itself out and becoming so back into its right track.

Per: So the issue now, though, is that the depression happened under a gold standard for money, and so it was tethered to something was now money is what it’s nothing at all. So the question then is, well, what what is the bottom? Is there one I mean, worst case that this could be hell. But typically I think we underestimate the market economy is much more resilient than we expect from it.

Per: So I’m hopeful that we’re not going to see chaos, but there’s no way of telling.

Buck: Yeah. Again, the book is How to Think About the Economy. A primer pair is available on Amazon, the usual places pretty much everywhere. You can get a book. Or is it or is it just at your website?

Per: No, I mean, Amazon would be probably the easiest place to get it. As usual, you can also download it for free. So the PDF version and the audiobook are both free and you can download it from the sister slash primer. Mississauga Ignoramuses dot org slash Primer.

Buck: Fantastic Para. Thanks so much for being on Wealth Formula podcast.

Per: Thanks for having me.

Buck: We’ll be right back.