[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:16] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And today, it’s Friday, so happy Friday, everybody. On our Friday shows, of course, we take something that’s in the news and go one step deeper. And because I’m me, it’s gonna take us a second to get to where I want to. But I’m gonna start off talking about a book I’ve read. You might have heard of it. It’s a somewhat popular book called The Wealth of Nations by my boy Adam Smith. And in that book is where he outlines the ideas that we eventually turned into what we think of as capitalism. There’s a couple things that are worth noting though. Like Adam Smith himself was not necessarily an economist; he was a moral philosopher. And he has another book other than The Wealth of Nations called Theory of Moral Sentiments, in which he lays out his moral theory of which The Wealth of Nations was the next iteration of that type of thinking. And if you’ve ever seen a copy of The Wealth of Nations, it’s actually a huge book. And if you can make it your whole way through — and I will be in full disclosure mode here. I didn’t sit down to physically read it. I’ve listened to it on Audible. But the point is it’s an interesting book and is so foundational to how we think about economics, how we think about markets, how we think about a lot of our own lives. And, in fact, when you get into conversations about Adam Smith, it so often will break down into people with saying Smith supported this or Smith supported that. And it reminds me a lot of religious discussions between different denominations where they’re cherry-picking different ideas from people to justify their opinion. And, of course, I believe this is part of what it is to be human. Like we tend to hear what we want to. But one of the things that Smith says other than the idea of the invisible hand of the market, which he only says once in the entire tome that is The Wealth of Nations, is that if essentially left alone, markets will start to optimize for society. And it’s actually kind of interesting when you understand that idea because it’s not the optimization of commerce or of profits or of wealth. It’s the optimization for society and that’s one thing that a lot of Adam Smith scholars will agree on — that Smith is looking at a society, not any of the individual players within it. And so, the idea that markets will optimize is this core organizing principle within our economic understanding of how we’re supposed to go about our daily economic lives. 

[00:02:50] And I’ve been thinking a lot about this in recent history simply because in my entire research to be able to do my episode on ChatGPT, I was exposed to just a lot of ideas of how robotics, RPA applications, automations — interesting algorithms, we’ll call them — have helped to optimize for business. And I was thinking about this the other day simply because in my current line of thinking, particularly with this show, I spend a lot of time considering the idea that we live in this anti-human society; that what is actually ailing us as a people, as, you know, individuals but also collectively as humanity is the effects of a domesticating force in our life, which is how society is set up and that domestication is anti-human because we’re not meant to be domesticated. We’re not meant to live in our little boxes. And so, as society has optimized, my question was: are we optimizing? Is that good? Or is optimization actually anti-human? And the entire idea came up because I was talking to a client and one of the things that they were saying was, “Well, I’m worried about trying to sell my house and get a new one because I’m trying to optimize for the taxes and the location and the potential return.” And I just stopped for a second and I was like, “Hey, like what do you need for your life?” You know, the optimization you’re going through isn’t actually great because you’re trying to optimize for the returns on your apartment or condo or house or whatever, then you’re not optimizing for where the fuck do you wanna live. 

[00:04:31] And I’ve come to this idea — it’s not a fully-formed thought in my head — that optimization’s great for business but it seems to be terrible for literally everything else. And as I was thinking about this, as I was driving into my job, all employment is the result of an inefficient part of a business. That is to say that that is why businesses hire people. We hear a lot about this idea that they’re job creators, but that’s actually not true. They only hire you when their demand for their business has become so great that they actually need it. If they could get away with not hiring you, they totally would. And if they could find a way to automate your job away, they absolutely would. And a great example of this is when you talk about like fast food workers and the whole fight for $15 an hour type of thing. And people say, well, if we gave them $15 an hour, then, you know, the price of labor’s too high and it would cost massive unemployment and they’ll be, you know, businesses will be incentivized to automate. Well, here’s the deal. If you’ve seen the kiosks at the McDonald’s recently, what you should understand is that the cost of operation for that kiosk is about $3 a day. When you add in all of the things, the depreciation, the maintenance upkeep, the electrical costs, the licensing, all that stuff, it’s about $3 a day, whereas the current minimum wage is $7.25 an hour. They’re already priced out of the market because those machines are more efficient. So, the employment is actually part of an inefficiency within the business and that’s why they actually hire people. Because if you stop and think about it, a perfectly efficient machine is a perpetual motion machine that requires no inputs to continue to operate. 

[00:06:12] And one of the things about our economy that’s super interesting when you start to really look at it is that where we have these inefficiencies, people will step in. And this is kind of going back to Adam Smith with the market, they step in in order to try to fill in a gap as a result of the inefficiencies within the market or the economy. And these people that are stepping in between those who wish to consume and those that wish to produce, they’re called middlemen and they’re a result of the inefficiencies in an economy. But one of the things — and I just found this book recently, The Rise of Middlemen — it is positing the idea that once middlemen take advantage of a hole in the market, they become impossible to remove. They ensconce and entrench themselves and then purposely lobby the government for laws, rules, regulations in order to continue the inefficiency in the market and the economy to maintain their position as middlemen. A couple great examples of this in the US economy specifically are health insurance companies. Because we know if you look globally at other systems that we in the United States have the absolute worst way to deliver healthcare. We pay more for it and get less from it than any other developed country in the world. And part of the reason for that is that there are so many middlemen in the process between the person who wishes to consume healthcare and the person who wishes to provide healthcare; that there’s a profit bleed across the entire system and, of course, those health insurance companies are very well-pocketed and ensconced. But tax prep software is another great example and so are car dealerships. These are nothing more than middlemen taking advantage of an inefficiency in the market. But now that we have different technologies, understandings, and institutions that could actually do a better job of that, then these other middlemen are next to impossible to get out of the economy. And, of course, when you start talking about cutting middlemen, one of the things you should understand this goes right back to “Why do the middlemen exist?” Because of inefficiency. They found a way to profit from inefficiency. And so, somebody’s job and livelihood is tied now to that inefficiency, so if we made things more efficient, we would lose jobs. And the idea is that that would then by cutting out the middleman, we can lower costs and therefore, increase profits. Note: I did not say “will lower costs, therefore lower prices.” That sometimes happens, but more often than not, the lower costs translate to higher profits but that’s actually only good for those owners of the company, not for the people who’re consuming the goods. Again, I can just point to healthcare and demonstrate that.

[00:08:57] And what’s interesting when you’re talking about this optimization is that if you were to ask an AI — so now, we got ChatGPT and we can clearly see that the machines are coming. But if you ask the AI: Hey, I wish to optimize a school or maybe a hospital based upon success rate. So, in the school it’s graduation rate. In hospital, it’s, say, minimizing death. Okay. So, the AI is gonna look at that and it’s gonna say, “What’s the most efficient way to achieve the optimization goal?” And you might be thinking like, wow! When these machines come, it’s gonna be amazing. The problem is is that the way the machine will choose to do it is they will just exclude people from the system that aren’t gonna make it. So, they will then look at the people, the students wishing to come into school and the people wishing to go to the hospital and ask, “Can this person fit in and go through this institution in the way that we have deemed as successful?” And if they can’t, I’m just gonna exclude them in order to optimize my success rate. That’s inhumane. And that is exactly what could happen if we don’t actually optimize for the right things. 

[00:10:06] So, that brings us to the central question that we need to be asking ourselves. The entire central question of optimization is what are we optimizing for? Are we optimizing for profits? Are we optimizing for employment? Or are we optimizing for human flourishing, or something completely different? And I’m thinking about this in a lot of different ways because we live in this world where we’re trying to optimize every last little thing and squeeze the value out of every last little thing. And then, I’m starting to look around. I’m seeing a lot of construction here in Denver. And I’m starting to think about this idea of human flourishing. And it occurs to me as I’m driving into work today that I see a lot of housing going up, which is good because we want to optimize for the housing because I’ve been told there’s a housing shortage and housing’s a need. It’s, in fact, in the bottom tier of Maslow’s hierarchy of needs. So, that bottom tier of Maslow’s hierarchy, of course, is your physiological needs, which is food, water, shelter, sex, all that stuff. Well, shelter — another word for that would be housing. The thing about everything in that bottom tier of Maslow’s hierarchy of needs is that from a human standpoint, they’re what’s termed economically as inelastic goods. That is, the demand for them will never shrink no matter what the price is. And when you have an inelastic good, it creates weird market conditions because they don’t respond to price signals. If you need to eat, you’re going to buy the food. If you are hurt, you’re going to go to the hospital. If you are unhoused and you can possibly make it happen, you’re going to find shelter. And so, when you have these inelastic goods, the markets in which those goods exist either require regulations on the players that are in them or the regulations have to be on the market in order to encourage competition. And that’s where you get your like antitrust laws and things like that. And, of course, for, you know, any of you who know about economics, you’ll be like, well, hold on a second. There’s also natural monopolies; healthcare, utilities, and telecoms all fall into things that are natural monopolies. And I’m not gonna cover natural monopolies here but just know that they’re out there and that we’ll come back to them at a later. But for right now, understand that housing is this inelastic good and therefore demand, for housing is not going to shrink no matter what the price is. And so, when we look at the market of housing, you think, well, it’s inelastic. People are always gonna want it. It’s a great place for me to get into the market and start getting rent. 

[00:12:35] And like I said, at the top of the show, we’re gonna take a little while to get to where I want to go, so just hang with me here. Because rent is actually more complex of an idea than you want to give it credit for. And so, if you’re looking at it and you’re saying to yourself, “Well, I wanna have an Airbnb strategy,” or “I’m gonna buy some investment properties,” “I want someone else to pay off my mortgage with my passive income strategy,” you’re — what you’re looking for rents. That’s what you want. You wanna own something that you then can lend to somebody else in exchange for some sort of monetary reimbursement. But rent’s more complicated than that. In the general sense, of course, it is just a payment collected for the ownership of the thing. That’s what rent is. But there’s another type of rent here and this is kind of getting into the Econ 102 class, a slightly more advanced than the opening supply and demand class, and that’s the idea of economic rent. 

[00:13:26] So, what’s the difference? Well, rent generally is just collecting payments for the ownership of the thing. But economic rent is when the money you collect is above what is economically or socially required for that thing. And this is different from profits. Profits are made from a competitive market, but economic rent is where I’m able to charge more than I should for a thing, whatever it is. And it could be labor, it could be a housing unit, it could be a car. I mean, this could go on and on and on forever. But one of the things to note is that rent, collection of rent for the ownership of the thing, is not necessarily good nor bad. It’s a very neutral thing. For example, when I fly to Santa Barbara, California, I’m gonna need a car. There’s somebody who says, “Hey, I can rent you a car.” Cool. So, I have a need, they provided me the service, and we exchange money for that. Economic rent would be them saying, “Well, hold on a second. I slashed the tires and all these other cars over here, so instead of charging you the 20 bucks a day that I was gonna charge you because of your great discount, I am now gonna charge you $400 a day because I’ve created scarcity in the market.” And that’s what we mean by saying that economic rent is when you’re charging money above what is economically and socially required. Economic rent is considered unearned because it’s due to an imbalance in the market, not because of your positioning, not because of your competitive advantage, not because of your innovation, but just because you — there’s an imbalance and you’re now positioning yourself to take advantage of it. The thing about economic rents though is that they will inherently breed a lack of competition and innovation in a market and then they start to entrench themselves because an imbalance in the market is how they’re making those economic rents and if they allowed the market to rebalance itself, they would no longer be able to collect that. And this is super important because we see this when we see consolidation of corporations into ever bigger and bigger entities where they’re able to push everyone out of the market. They’ve created an imbalance by being anti-competitive. When that occurs, they’re now able to collect economic rents on whatever they’re providing. And we see this across the economy writ large currently. 

[00:15:46] And, of course, when you throw COVID on top of this, the entire market’s in flux. And so, like one example of economic rents that you could see were people being able to charge far more for their labor but another example of economic rents that you could see was people saying, well, you know, there’s inflation, so my cost went up by 8% and the cost of your food went up by 20%. That — the difference between the 8% and the 20% is the economic rent part of that. But when we get right down to it, if we’re actually gonna talk about the rent in the housing market, this is where everything starts to become really interesting because we heard that COVID caused a mass exodus out of the cities, which means there’s less people. And I just, like I said, I was driving downtown Denver, you know, to go to work today and I was looking at all of these apartment complexes that have just sprouted like weeds over the entire COVID period of time. And more and more of them are not only going up, but they’re completing. So, of course, with less people in more units, rents in Denver in a market economy that where prices are allowed to be discovered, rents should be dropping through the floor. And yet, rents in Denver are up 45% year over year. That’s weird, right? Like that’s not at all how the laws of supplies and demand should be working and if the market economy is actually functioning, then I should see a decrease in rent, trying to incentivize people to come back into the city and take those units because there’s so many of them. And then when you go and you ask somebody, well, why is this? They say, well, there’s a housing shortage. Really? How many housing units are we down? Oh, 3.6 million. Okay. And so, I’m confused, ladies and gentlemen, because what I’m seeing doesn’t seem to match what I’m reading in terms of rent prices and the real estate market in the city that I live. And I’m hearing that there’s an estimated 3.6 million housing units missing and I’m seeing homeless people on the streets. And yet, I’m seeing apartments go up as fast as we could possibly throw them into the air. And so, I’m asking myself: what’s going on here? And what am I looking at? Because I imagine you, as the listener, if you’re not seeing it in your local community, you at least know somebody who’s being affected by this. And I have to ask myself: did something go wrong? Is there an imbalance somewhere? Or did we optimize for the wrong thing? Because with so many units going up, prices should be coming down and they’re not. 

[00:18:24] And so, in the spirit of Dylan reads things so you don’t have to, I went searching for this and I didn’t have to go far because it turns out, we’re optimizing the needs of life, but we’re not optimizing them for human flourishing. No, no, no. We’re optimizing them for the profits of somebody else. And I’m gonna explain that as I go because now, the landlords who own these units have turned to the algorithms in order to determine what price they should be charging for their units. Because what landlord wouldn’t want to optimize their profit? That’s what they want. And so, they — figuring out what to charge when you have a unit is one of the hardest things. What are the market conditions? What are people willing to pay? So, why not just let the computer do it and I’ll just pay this company and they can tell me what to do? The problem is, ladies and gentlemen, is that those rental algorithms are being used across entire municipalities. So, where it used to be one landlord trying desperately to figure out how to play this game, basically — and this is the important piece — negotiating with their tenants and competing in an open market so the market itself could discover the price. Now, instead, they’re going to an algorithm that is collecting data and advising these landlords across the entire municipality how much to charge for rents and most critically, how many of their units should they make available to the market. And you can see where this is going because this algorithm is not optimizing for rents; it’s optimizing for economic rents. It’s creating an imbalance in the market in which now every landlord unwittingly is colluding rather than competing in the market and also creating artificial scarcity. So while all these units are going up and people are, in fact, moving back to the city — maybe, that’s a different story altogether — there aren’t as many units. It’s an artificial shortage. And the companies that are running these rental algorithms are proud of this. I mean, why wouldn’t you be? They’ve completely overturned the market. Rents in Denver might be up 45% year over year, but like, man. Austin, Texas makes us blush every day of the week and we’re not even the worst ones. Go look at what’s going on in New York City. 

[00:20:54] Again, the companies made this public. They have publicly claimed: Yes, we are responsible for rental increases in these different markets. Yes, we are advising landlords how high they can possibly charge so they can know what the price the market would bear. But the problem is is that they’ve optimized for economic rents, not for what they actually should be renting for. A lot of their costs have not come up and now, what they’re doing is they are strip mining the wealth and production of the people renting those units and not actually providing any more value on top of what was already there. This is what’s called a market distortion. That is some imbalance in the market has caused a price fluctuation that does not actually represent supply and demand. And because they’re all using the same type of algorithms that are sharing information, it creates a form of monopolies to control and because it’s a lot of different landlords across an entire municipal core, it’s functioning like a monopoly but it’s really more of a cartel because there’s a bunch of people colluding, even if they’re doing it unwittingly. 

[00:22:02] And into this reality, ladies and gentlemen, what you find is the St. Louis Federal Reserve, which is where the St. Louis Fed collects a lot of the data that we all make our decisions. In the United States, there are currently 14 million vacant housing units in the United States. Now, remember they told us that there was a shortage of 3.6 and now, the St. Louis Fed is telling us there are 14 million vacant. That means there’s no one living in them. That’s not including vacation homes or second homes. These are just units that no one has lived in for the past 12 months. So, even if the St. Louis Fed was half-wrong, we still have almost twice as much as we need to solve the housing shortage. And why is this happening? Well, because it’s complicated. It happens for lots of different reasons and I’m not gonna go into it on this show. Just know that it’s occurring because the actual thing that is important to understand here is that when people start to collect economic rents, when they become middlemen — and that is what these landlords are — they are the person who has inserted themselves between the person who needs housing and the person who provides housing, which was the builder who built it. Now, the landlord stands in between them — they then create a entrenchment of their position because in making the market balanced and efficient, such that supply and demand could actually determine price, would cost them their jobs. And more to the point, ladies and gentlemen, if you’re a homeowner, you have a horse in this race, too. Because if we did actually pass regulations or we did find ways to bring more balance to the market such that we actually had a vibrant, competitive rental market, it would cause units to flood onto the market. That would cause rents to plummet or houses to suddenly be flooded onto the market. Like for example, did you know the United States government currently owns a half a million homes, and they all sit vacant? They’re the ones that they foreclosed on back in 2008. They’re still vacant. Like the US taxpayer is paying to maintain them. But why has the United States not bulldozed them or sold them or, for the love of God, at least just rent them out at a decent rate? Well, that’s because that would flood the market and depress home values in that area and people don’t want that. But on top of all of this, the same people who want the current entrenchment of these middlemen to hold back housing supply to artificially raise the value of their homes will also say, “Well, we don’t wanna regulate this because that would be against the free market.” Okay. I’ll buy that. I can go with that. I mean, at the end of the day, I do believe that capitalism is one of the best systems to ever come across economically on the planet because it’s one of the few systems, when functioning correctly, where both people on each side of the exchange can walk away better off than when they started. 

[00:25:06] But I got a question: what are free markets exactly? And what are they free of? So, when we say it’s a free market, I mean, obviously, I’m gonna be spending money, so it’s not that type of free, but what is it free from? Freedom from what? And this is where the fighting normally starts because this is not really something that Dylan should be answering. This is something we can turn to Adam Smith and say, “Hey, what did you mean?” Because there’s a copy of The Wealth of Nations sitting right behind me. And so, flipping through my copy of Adam Smith’s The Wealth of Nations, one of the foundational texts of capitalism, we find that when he talks about free markets, he’s not talking about markets free of government interference or regulation because he actually spends a lot of time talking about why that’s absolutely necessary. Because remember his whole thing wasn’t the business owners or even the workers. It was society. So, what is his market in his ideal world free from? It’s free from rent-seeking behavior. It’s free from rents and economic rents specifically. The rent-seeking behavior is seeking profits without adding any value into the market. That is, oh, I own this home. And so, I stand between the person who wants housing and the person who provided housing, which was the builder. And I’m gonna collect profits from this person, but I’m not adding any extra value. Maybe I renovated the home but, I mean, a home is a home, like the value is the actual domicile itself. And in our modern context, we call this passive income, which is people, oh, I wanna have a passive income strategy. Well, okay, so you’re engaging in a rent-seeking behavior, which means that you would be in direct opposition to the idea of free market capitalism. And, again, you don’t have to take my word for it. You can go ask Adam Smith and The Wealth of Nations. Because at the end of the day, Adam Smith was a moral philosopher who wasn’t on anyone’s particular side. He was on the side of society as a whole and believed that good functioning markets that were free of rent-seeking behavior would allow societies to flourish. Because in his mind, rent-seeking would stifle innovation, competition, and the vibrance that can come out of a fully functioning market. 

[00:27:19] And it’s not just housing because rent-seeking behavior includes seeking government subsidies. Because stop and think about how oil companies, wind energy companies, and the list, of course, goes on where they lobby the government to get subsidies to increase their profits so they can lobby the government to get more subsidies and the cycle goes on and on and on. Profits due to regulation. I mean, how many different meat-packing companies have been allowed to consolidate because they lobby against antitrust legislation that would’ve created a more competitive market? Or they’ve argued, well, we need to have regulations but the USDA inspector here in the slaughterhouse has to have his own separate bathroom, which, of course, raises the price of doing business, thus shutting down the mom-and-pop butcheries. And that is a very real example. Or more modern times, rent-seeking behavior because of a public perception that there’s supposed to be inflation. So, we’re expecting prices to rise. And prices did rise. They rose 8% and they’re now charging us 20% more for our food. That’s all rent-seeking behavior. It doesn’t actually add value into the economy. It just pads people’s pockets with nothing actually exchanged in addition to the thing we were exchanging anywhere because it fails to add value. That is to say, ladies and gentlemen, it’s a very optimal system. It just optimizes profits over people. And at the end of the day, the people are more important.

[00:28:55] Ladies and gentlemen, thank you so much for listening. I would love to know what you thought of today’s episode. So, if you could go over to Instagram — and on your way there, stop and leave me a rating or review. That goes so far to helping getting the show out — and let me know what you think. I’d love to start a discussion on this. And as we’re walking away from this show, ladies and gentlemen, I want to ask you: what are you optimizing for in your life? When you look at how you’ve worked, what is it that you’ve optimized for, and is it the thing you wanted? Because I think that’s a question worth considering.

[00:29:31] Outro: Thanks for listening. If you like what we do here, please hit that subscribe button. Leave us a rating and review. And share the content with somebody who would benefit from the message. You can follow us on Instagram, Facebook, and Twitter, all @fiscallysavage. And head over to fiscallysavage.com to get our free tools, suggested reading, and everything else you need to take control of your financial life and live free.