Lex Fridman: belief

Transcript context

…Yes. So money is this thing that you can think of it as a notion where people buy and sell stuff, and there’s this fascinating complex dynamical system of people contracting with each other in this beautiful way. There’s so many pothead questions I want to ask here, about the nature of money. Money is fascinating in that way, and I think for Milton Friedman trusting the flow of money is really important and the signals that pricing and money in general provides is really important. Yeah. And I could take some of this back again to Frank Knight. So one thing Frank Knight said to all his students was the market is the best allocation mechanism we have. The market is what allocates resources. In a situation of scarcity the market allocates them the best. And Hayek will add to that by saying, “prices are information signals, and a price sends information to buyers and sellers about how they should act.” And these are two of the strongest arguments for why the government should not intervene in the price system because it will blur information or because it will allocate less efficiently than market allocation will. And so what Friedman is really going to add to that is maybe going up a level and thinking in the macro about the whole economy and how money circulates through that economy as a whole. And so what he and Anna Schwartz do is they construct what are called monetary aggregates. This is adding together say all the money that’s on deposit in banks and all the money that’s believed to be circulating in people’s wallets. And you also have to really go back in time. We don’t have credit cards. There is a stock market, but it’s tiny in terms of the number of people who invest. There aren’t mutual funds. When travelers checks are introduced, this is a big deal. So we have a very simple monetary system. And so Schwartz and Milton Friedman start measuring what they call the monetary aggregates. They focus on M1 and M2 and their favorite aggregate is M2, which I believe is encompassing sort of deposits and circulating medium. The other thing to recall, there’s some fine distinctions between money in savings accounts and money in checking accounts, and money in savings accounts can earn interest and is generally believed not to circulate or money in checking accounts does not at that time bear interest and cannot legally bear interest. And so is thought of as circulating. And then there’s different institutional architectures of postal savings, banks and credit unions. But Friedman is one, taking the focus to these aggregate amounts of money and saying, these really have a lot to do with economic booms and busts. When we have an expansion in the amount of available money, we see an expansion in economic activity. When we have a contraction in available money, we have a contraction. And so he says at this stage, the government through the mechanism of the Federal Reserve and its influence on interest rates can either make money more cheaply available and more freely available in the economy or can make money more expensive and slow things down.…

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