Uncovering the Truth About Capitalism: Brett Christophers & Mo Gawdat Expose the Real Estate Game

32:53And then I think the second thing is something I mentioned earlier, which is there's no coincidence in the fact that problems around housing affordability, both on the ownership side and the rental side, have become considerably more pronounced during the period of time where, as I said, governments have exempted themselves from being active participants in that process. So if you look around the world, if you look at the UK, you look at Sweden, where I live, you look at Germany, you look at France, you look at Canada, from the beginning of the 1980s, governments basically said you know we capitalism will take over neither neither nationally or locally are we going to be in the business of building new housing and managing new housing and we're going to leave it to the private sector on the premise that the private sector can do this kind of more efficiently and more affordably and so on and there's no coincidence that those two things have occurred at the same time there's a direct link between them that's a very very interesting question, really, because if you want to think of the extremes, a democracy will say we're enabling the people to do what they can.

34:02Capitalism is part of this. You know, the government taking over and building all the houses is communism. And in a very, in a very interesting way, I think the Western societies have chosen to stay as far away from that as possible, but in a way also forgetting that it's not my job as a capitalist to solve the people's problems. It's, you know, it's my declared responsibility as a capitalist to maximize shareholder return. So there must be a middle point somewhere where... Well, let me kind of come back with one immediate thought in response to that. I mean, I think one of the really interesting things right about the kind of prevailing ideology that we've been kind of touching on here and there and what we've talked about so far is that it's actually so at least when it comes to the question of government investment and so on it's actually so far removed from what was written by the person who many people who would have espoused that ideology would see as kind of the founding father of their doctrine, which was Adam Smith, right?

35:16If you go back and read The Wealth of Nations, he has a long section when he's talking about things like housing and infrastructure. And he says, look, this is a classic case, this will be a classic case in capitalist societies of what we call market failure, by which he meant that it will often not be in the interest of private capitalist actors to provide provide public infrastructures, including but not limited to housing, because there won't be profits in doing that. And in those cases, we should and must rely upon governments to do these things in providing what he called public works more generally.

35:54So Smith was completely aware of that. And it was that thinking, of course, that was central to, for example, the New Deal under Roosevelt in the 1930s and 1940s in the US, where investment in infrastructure was publicly funded and it was publicly owned infrastructures. But we've just kind of come so far away from that. And as I say, the kind of the disjuncture between those kind of original arguments from the likes of Smith and the arguments we hear today about, you know, none of this should be something that governments are doing has become huge. Yeah, which I think is, again, I mean, I go back to the people.

36:33So are you saying now that the government's not providing this and that the private sector's sole interest is to continue to increase their profitability, that maybe the individuals should just accept that rent is going to be their reality and that the economy is turning the other way around? I think whether or not individuals should or can or do accept that, I think that is the reality. And the two best examples of that, I think, are firstly the one we've been talking about, which is housing. But I think the other one is the one I focus on the newer book, The Price is Wrong, which is renewable energy generating infrastructure.

37:13So I mean, in both what we see around the world today, with a few exceptions, of which China is easily the most interesting and important example, is that in both those cases, so housing on the one hand, and solar and wind power on the other. In both of those cases, what governments are saying is this. They are saying, firstly, we need much more of both of them. There's innumerable instances of policymakers around the world saying, look, we have this huge infrastructure gap, both on the housing side and on the renewable energy side. We need huge amounts of investment. That's the first thing they're saying.

37:54But the second thing they are consistently saying is that we, the government, it's not our job to do those things. It's not our job to finance this and or therefore to own and control these types of infrastructures. It can and must be left to the private sector. And the reason for that is, and this is them talking, not me, is A, the private sector is better at doing it than governments are. So governments have kind of persuaded themselves that they're not. Maybe, maybe, particularly if the expertise has been hollowed out of the public sector, then that is probably true. But they're saying, first of all, the private sector is better.

38:35But secondly, we don't have the money to do it. I mean, this is classic kind of fiscal conservators and fiscal orthodoxy, which is that we need to tighten our belts and we can't be borrowing because the bond markets will punish us, will put up the cost of our debt if we start investing willy nilly in these types of infrastructures. And so that's the reality we face in the world today, which is that we are essentially relying on private capitalist interests to solve both the housing crisis and the climate crisis. And as I say, that is true pretty much everywhere in the world, apart from, I think, in terms of significant exceptions, China.

39:15And I guess on the climate side, the whole argument of the book that I make is basically that, well, it's not really working. And it's not really working for a simple reason, which is that in general, investing in solar and wind farms is not a particularly profitable, not particularly attractive business. And therefore, this will not do it to the extent that we want and need them to, simply because the economic incentives for them to do that are not sufficiently there. Can you explain this a little more? I mean, one of the areas I've been really pondering is, you know, I live here in Dubai. In Dubai, there are two telcos.

39:53So theoretically, there is competition. But there isn't. Right. If you think of a utility, I have one utility company that provides gas to my apartment for my, what do you call that? Is gas the right word? You know, to light my cooker and so on. Yeah, gas. So where's the competition in that? There may be six of them in Dubai or three or whatever. I don't know. But there is one that has the pipes to my apartment building. So it's zero competition, whatever they told me to do. And they did say quite insane things like change this and do that and pay for this and do that. I had no choice if I wanted to make a cup of tea.

40:32So it seems to me that the private business that runs a utility, including electricity, has no incentive to invest because they can just hike the prices up. Yeah, that's a really important point. I mean, let me say two things in response to that. And the first of those is a more general point. And then the second of them will be more specific to the types of business you're talking about, which is like utility businesses. So the more general point is that, you know, and again, this will come as a surprise, I think, to many people. But the evidence is pretty compelling that in general, capitalist enterprises do everything they can to avoid competition.

41:12Their preferred situation will always be oligopoly or always better or even better monopoly, because monopoly power is far and away the most reliable source of enduring above average profitability. Lots of competition typically sees that above average profitability being competed away. And so the great, I think he was Austrian, was he? Joseph Schumpeter, the economy, he used this lovely term where he described actually existing competition within the capitalist economy as what he called like co-respective behavior. So very often capitalists kind of on the surface, it looks like they're competing, but actually they're being co-respectful of one another, which is to say that behind the scenes, they're actually not necessarily competing.

41:58And, you know, one of the best examples of that, one of my favorite examples, which I discuss at length in the Rentier Capitalism book, is banking, retail banking, and particularly lending, both lending and the deposits business. So what happens, for example, when central banks put up interest rates and therefore increase the cost of borrowing to banks is that banks immediately pass on those interest rate increases to mortgages, to people that are borrowing from immediately on the same day those interest rates go up. But one thing that's very interesting is they don't immediately put up the savings rate that they give to depositors.

42:41There's always a lag in kind of days, weeks or months before they eventually and reluctantly put up those savings. And that lag, that delay translates into millions and sometimes billions of dollars of excess profit. And then when central banks decrease interest rates, which is what they're typically doing now, you get the exact obverse. So immediately they will decrease the savings rates on their deposit account the very same day, whereas the rates at which they will enable mortgages and other borrowers to borrow from them, they don't come down. And again, it's just entirely co-respective behavior where the banks know that one another are not going to kind of lead the pack in kind of following those interest rate changes from the bank.

43:32And it just leads to these repeated periods of excess profitability because the banks know that that's what one another are going to do and none of them kind of steps out of line. So it's this kind of co-respective behavior in general. That's the more general one. The more specific point about kind of utility type businesses is that obviously things like electricity, things like gas, things like water and wastewater rely upon the delivery of services through networks to people's homes, pipes and wires and so on and so forth, where it makes no sense for there to be more than one such network because it's just a duplication of cost.

44:13So this is what economists call a natural monopoly. And again, back to Adam Smith. Adam Smith's view was that, again, in those types of instances, that's where the public sector should be doing these things. Because if it's a natural monopoly, then, of course, if you hand it over to private sector interests, you're going to end up with monopoly type behavior, which is putting up prices as far and as rapidly as you possibly can. So you might ask that, and again, maybe this is a bit of a tangent, but you might ask the question, why from the 1980s onwards did governments around the world take these types of utility sectors, which at that point were largely in the hands of the public sector, electricity, gas, water and wastewater, and privatise them?

44:59well they in their wisdom they thought that regulation could stand in for competition so they were aware that and for the most part in things like electricity and water and gas you couldn't have competition because it was a natural monopoly but they said okay we're not going to be able to have competition so how are we going to be able to keep prices down how are going to be able to incentivize companies to invest in their networks when competition isn't going to kind of discipline them into doing so they said oh regulators are the answer we'll have regulators for each of these sectors who will kind of keep the companies on their toes make sure that they're investing make sure that they're not overcharging customers but of course regulators dismally fail at doing that not least because they get captured by the very companies that they're supposed to be regulating.

45:54Yeah, I mean, it makes sense that if I am in a business of selling water bottles and then government says, no, water is important for the community, you cannot sell the water bottles for more than 2 % profit, I'll simply say, okay, I'll go sell something else, right? The freedom here is, if I make money, I'll stay. If I don't, you know, this is someone else's problem. That's exactly right. And what you therefore see is, and the water industry in the UK is a classic example. 100%. It's in a shambolic state at the moment. And so periodically, the government and the industry regulator, which is an entity called Ofwad, will come out and say, look, we know consumers have been charged too much.

46:43We know that the companies that have these regional monopolies are not undertaking the investment and the maintenance that they should be. And that's why we've got these terrible leaks. Effluent is being discharged into rivers and so on. And they say, OK, we know this is happening. So we're going to toughen up our regulation. We're going to toughen up regulation. We're going to make it harder for these companies to kind of abuse the consumer. And you know what happens? The next day, the companies come out in the media and say, we'll stop investing. We're going to take our money and just go to another country if you toughen up the regulatory regime and the government goes oh okay then we better not do that after all and of course the reason that governments are in that quandary where they can't toughen up regulation for fear of scaring investors away is that they've discounted the possibility of public ownership if you as a government are not willing to say look if you don't do this the way that we think it should be done, we'll do it ourselves, then you've lost all your negotiating leverage.

47:48Correct. I want to go back to that idea of housing, because when you said that, I don't know if you wrote about this, when you spoke about housing and the idea that you can manipulate pricing if you own enough of it, I found out that BlackRock, Vanguard, and State Street own 88 % of the S &P. Did you know that? They own a very significant share. I don't know what the number is, but yeah, they do. 28 % of the S &P and they own the majority of the Dow 30. And suddenly it hit me so strongly why since the year 2000, when those markets should have absolutely collapsed, right? Is there ever going to be a market collapse if three players can agree between them not to sell?

48:33I mean, it's not an economic market anymore. It's not capitalism anymore. Again, it's sort of like a friendly monopoly. First of all, what do you think of that? Is that crazy what I'm saying here? So here's the thing, right? One thing that I think it's important for people to think about is that we're talking about there is a whole array of different business models here. And the way in which the kind of black rocks of this world operate is actually quite different from the way in which Blackstones operate. So the likes of Blackstone are very active investors. When they invest in things they typically take majority or controlling shares in whatever it is they're buying whether that's an apartment block or a private company or whatever or a network of solar farms or whatever and they're very actively involved in managing that asset and setting pricing for the delivery of associated services and so on so they're very active investors and they typically hold those assets privately rather than those assets being listed on public markets.

49:34The Blackstones and the Van Goghs and the State Streets are very different entities. They are, for the most part, passive investors. And what I mean by that is that the funds through which they invest are typically what are called index tracking funds, which as I'm sure you know, but perhaps lots of listeners don't know, simply means that those funds automatically make investments, which means that their investments replicate a particular index, like the S &P 100. So for example, if Microsoft represents 2 % of the total value of a particular stock market index, then that BlackRock or Vanguard fund, 2 % of it will be invested in Microsoft, yes.

50:20And so they'll replicate the index. And they are very passive investors in that sense. And so they merely track the indices and the way they make money is different. So their fees are actually very, very low. And so it's a volume business. So what they try to do is attract as much money as possible, but charge relatively low fees on that. Whereas Blackstone, it tracks much less money, but charges much higher fees because it's much more actively involved in doing the investing. Now, I say all of that because there's actually a big debate out there. And I'm not really sure where I sit in this debate on the question of how we should think about the kind of black rock state street vanguard model.

51:02So some people say, and I think this is what you were hinting at, what some people say is, look, it's crazy that so much of the economy, so much of the capitalist enterprise in its totality is owned by just these three companies. crazy because they can kind of collude with one another between them they can kind of dictate to the boards of these companies what they are or aren't doing if they own collectively so much of the share cap that's one argument the other argument kind of follows on from what i was just saying which is about this fact that they are relatively passive investors so think of it this way blackrock owns shares i don't know in like 20 000 different companies and so some people will say that the idea that they are kind of like actively worrying about what each of those companies are doing and that they're kind of talking to the state streets and the vanguards about what those companies are doing is actually a bit far-fetched because if you look at the number of people employed at BlackRock who are actively engaging with those companies it's like a handful there's not many people that actually do it and so there's that counterpoint which says yes the likes of BlackRock are powerful but their power consists not in their ability to control what the companies they invest in are doing but here's their power their power exists much more in terms of their ability to influence policy makers by virtue of the fact that they control so much money and I personally tend to lean more in that direction I actually don't think that they and the state streets and the vanguards are kind of like behind the scenes kind of controlling what all these companies do through their collective shareholdings i think their power is much more in terms of the ability to influence policy making by virtue of their sheer weight in the economy and the fact that you know one of the things that's interesting today is if you read, you know, who are the companies who have the ear of government, who are the financial institutions that have the ear of the Democrat and Republican parties in the US, it's not the Goldman Sachs and the Morgan Stanleys anymore.

53:16It's the Black Rocks and the State Streets. Of course, 100%. They are in that same space those others were in the 1950s and 60s and so on, right? Exactly. Exactly. Yeah, absolutely. That's right. I'm aware of your time. And so I don't want to take too much of it. But when you write a book that's titled Who Owns the Economy, who owns the economy? Yeah, I mean, my argument is that it's precisely those types of actors we were thinking about in particular asset management companies. So that's the generic term that encompasses both the Black Rocks on the one hand and the Black Stones on the other. They're all asset managers.

53:56And there's a very good reason that they essentially, quote unquote, own the economy, which is that the vast bulk of surplus capital, surplus money, money available for investment around the world today is managed by them. And that is something that's very, very new historically. That is something that has occurred principally since the 1970s. Before that time, that absolutely wasn't true. What you need to think about here, I think, is two different things. The first of all is like, who has surplus capital? Well, pension funds have huge amounts of surplus capital available for investment. Banks, insurance companies have huge amounts of surplus capital.

54:42So we all pay premiums for life insurance, health insurance, road insurance, whatever, motor insurance, whatever it might be, because we are worried about the risk of things occurring which we can't afford. So, of course, we pay all these premiums, but the insurance companies sit on those premiums until they need to pay it out, and they invest those premiums. So that's surplus capital. And then, of course, one of the biggest ones that's become much more important in recent decades is sovereign wealth funds. So the governments of Norway and Saudi Arabia and Dubai, where you're based, They all have huge sovereign wealth funds, which are typically based on oil and gas taxation.

55:27Now, in all those cases, the sovereign wealth funds, the pension funds, insurance companies, and so on, go back to the 1960s. To the extent that those different entities existed, they tended to invest that money themselves. So they would decide where to invest that money. So pension funds would simply carry out that investment themselves. But what's happened in recent decades is that the proportion of that surplus capital that is handed over to asset management companies, the Black Rocks and the Black Stents, to be invested by them has increased and increased and increased and increased. And I don't know what the number is today, but it's probably something like 80%, whereas in the 1960s, it was probably like 5%.

56:11So if you're looking at who controls surplus capital around the world today, Who controls the capital that can be invested in capitalist enterprise? It's asset managers. So they, one way or another, have become the dominant financial institutions in the world. Very true. Once again, I mean, the reason why I am doing this mini-series is not to tell our listeners that there is injustice in the world. I think everyone knows that. Okay. There are ways that are not accessible for everyone to make money. Once again, my real question, and maybe I have some ideas, but also I'd love to listen to your ideas.

56:53I think the number one thing that people should come out of this conversation with is to understand that there are undercurrents that are not what you're being told around housing is just supply and demand, and it keeps going up. It's not about, you know, the stock market is operating in a certain way. or when the government tells you there will be major projects in sustainable energy that any of that will follow, right? The undercurrents and my conversation with Brett today is to give our listeners a few examples of that, okay? Are things that we should become aware of, that the reality of what makes the economy is not in the headlines of the newspapers, right?

57:36Now, what would be your top recommendation, Brad, to our listeners on things like rent, on things like savings, on things like investments? How do you thrive in an economy that operates the way you see it? Cool. So when you say thriving, you mean in terms of kind of personal? Yeah, financially, economically becoming successful, you know, like playing this game. that's a very interesting question so other than getting a job at an asset manager which which which is which is pretty short pretty much yeah i mean i think i think a few years ago i read in the financial times that the average salary at blackstone was two million dollars a year that was the average yeah not bad um i said other than that i don't necessarily think that the answer to that question has changed enormously in recent decades.

58:32I think it remains the case that for most people, going back to right where we started the conversation around kind of what is capitalism, for most people, there are ultimately two options that are out there. So one is becoming a capitalist oneself, which essentially means entrepreneurialism, developing one's own business, hoping you can get that business funded, and becoming a business owner and a business manager. And in a way, that always has been, by its very nature within capitalism, the way to riches within capitalism is to be a capitalist. It stands to reason. And the very last thing, hopefully you've realized from reading my books, that the very last thing I am is a kind of a moralist on these questions.

59:16The very last thing I ever say to people is, do this, don't do this. We live in a capitalist society. And therefore, by their very nature, most people will end up working within capitalist institutions. That's just the reality of the world. And to do what kind of some people do on the left, which is to kind of impugn people for kind of being a party to capitalists and strikes me as incredibly short sighted, because most people don't have the option but to work for capitalist enterprises, right, or to be capitalist themselves. So that's That's the first thing I would say. What I would then say is that if you are going to be a capitalist, hopefully you can and would want to be a capitalist that doesn't engage in forms of capitalism that are kind of overly exploitative or overly destructive to the environment.

1:00:02I wouldn't encourage anyone to become an oil and gas capitalist, for example, for obvious reasons. So there are better and worse forms of capital centre. That's the first thing. But other than being an entrepreneur and being a capitalist themselves, typically the only other option is to work for one of those companies. And that hasn't changed. And I think that's why I'm always kind of a bit leery of maybe in this series, you'll talk about some of this, but there's big literature out there that now that says, you know, we've gone beyond capitalism, we now live in a kind of a neo feudal or techno feudal society.

1:00:34I always kind of read those things. And I think, well, no, we haven't. The vast majority of people in the world continue to work for what are plainly capitalist enterprises as wage workers for those enterprises. And that hasn't changed, even though the way in which capitalism works and the types of entities which are the disproportionately powerful capitalist actors, which, as I've said today, I think are typically asset managers, that's changed. But the basic reality from the perspective of the ordinary person in terms of how one conducts one life, the opportunities available to one, I don't think they've changed that much.

1:01:11I actually have to say I'm quite intrigued by the idea of techno feudalism myself. For our listeners, basically the fact that you have to pay sort of a little fee on everything that you do. A rent. Yeah, exactly. Right. So it used to be the Lord in the old days and now it's Amazon and Google and Facebook and so on. And others. I mean, the idea that there is a small percentage of your money that will go out every month to those very specific players. I think that's a topic for another day. I will say, however, that I think I'm with you completely because one thing I don't want our listeners to expect.

1:01:50This is the first episode of this series. I don't think we always have solutions. I mean, the idea of this conversation is to say it's not what they told you. So open your mind and try to figure out what the truth is versus what you're being told. But in the process, I think my answer to all that I've learned about the economic, I don't want to call it manipulation, but the stretching of the economics of capitalism in favor of some and not the other. I think my response to it, like you said, you know, nothing has changed is what I call committed acceptances is normally I use committed acceptance as my way of being happy in life, even if life doesn't go my way.

1:02:33The idea of recognizing this and understanding that you may actually end up more and more in a rentier economy and redesigning your life in a way that allows you to benefit from that. Maybe increasing, if you can't increase your social mobility, increase your geographic mobility so that you can always fall in a place where don't get too stuck to your home if it continues to go up. I personally had a story in 2021 when, you know, Dubai was just booming post COVID and my apartment, little apartment at the time doubled in rent. Even though I could afford it, I just didn't want to play that game and I moved to another place.

1:03:12Right. And I think that kind of mobility, that kind of awareness that rent is going to continue to be on the rise and that home ownership might not be what it used to be in the 50s, 60s, you know, 70s. And I think that flexibility of being aware of what's happening and responding to it, the idea that if the vanguards and state streets and Blackstones are investing in the SNP, then invest in the SNP alongside them, right? There is no revolution here. If you live in a capitalist economy, there is a realization of what the economy is all about so that you can actually benefit from it and play to your favor.

1:03:48Yeah, yeah, I don't disagree with that. Brett, I'm really, really grateful. I hope that you continue to do what you do. I think this is very eye opening. I don't think guys, I don't think we gave enough time to The Price is Wrong. This is an incredibly powerful book and I really encourage you to read it. It is technical, but not too technical for everyone to read. So you will get the idea. And I think it's really important to recognize it so that we don't rely on government in ways that actually is not the way that things are rolling out when it comes to climate change. I know that you have another thing to do, brother, and it took way too much of your time.

1:04:23But I'm really very grateful. It was my pleasure. It was a wonderful conversation. Thank you. Yeah, well, thank you. I really enjoyed it. And I'm grateful to you for having me on. It's been excellent. Thank you. And for all of you listening, this is really my big gift in the closure of my podcast, Before I Take a Short Holiday, is the idea of giving you things to think about. Today, we spoke about how the reality of home equity is changing, the reality of how investment is changing, the reality of what capitalism sometimes promises but doesn't deliver on. And I think an understanding of those things requires more of your attention.

1:05:01It's a topic that is important. I'll bring another guest, hopefully maybe two on the topic of economics, but I definitely encourage you to read Brett's work and just investigate those topics a little more. slow-mo has always been about giving you a tiny bit of time every week to reflect on topics that you don't normally have the time to reflect on i think the economics of our world is definitely one of them so give it a bit of your attention i love you all for listening and i will see you next time