 Okay, it is now my pleasure to introduce our speaker for the FA Hayek Memorial Lecture sponsored by Toby Bexendale. Patrick M. Byrne, CEO, launched Overstock.com in 1999 with revenues of $1.8 million. In 2014, Overstock.com had revenues of $1.5 billion and net income of $8.8 million. Forbes magazine named Overstock.com the number nine best company to work for in the country for 2010, and Byrne, the CEO with the highest employee approval rating of 92%. Byrne received the 2011 Ernst and Young National Entrepreneur of the Year award. In 2001, Byrne began World Stock Fair Trade, an Overstock.com division selling handicrafted products from artisans and developing nations. The department distinguishes itself by returning 60 to 70% of the proceeds to the artisans. In addition, all World Stock net profits are donated to fund philanthropic projects in several countries. World Stock and Byrne have funded the building of 26 self-sustaining schools internationally that currently educate thousands of students. Byrne is a classical liberal who believes that our nation's success depends on a sound educational system and a healthy capital market. Since Milton Friedman's passing in 2006, Byrne has served as chairman of the Friedman Foundation for Educational Choice, an organization leading the national debate for school vouchers. In 2004, Byrne as a citizen journalist began a vigorous campaign against abusive Wall Street practices, including focusing on regulatory capture, hedge fund insider trading schemes, settlement system failures, systemic risk, and the possibility of economic warfare against the U.S. by organized crime and foreign governments. Byrne's website, deepcapture.com, has received much recognition, such as Web Blogs Award Best Business Blog in 2008. Business pundits Best Business Investigative Journalism in 2009, and Xmark's top site on corruption in the USA in 2010. Before founding Overstock.com and serving as chairman, CEO, and president, Byrne held the same three positions at Centricut, a manufacturer of consumables for industrial plasma torches, and held the same three positions at Fetchheimer Brothers, a Berkshire Hathaway Company, manufacturing police, firefighter, and military uniforms. And this really blows my mind. Byrne received a bachelor's degree in philosophy and Asian studies from Dartmouth College, a master's in philosophy from Cambridge University as a martial scholar, and a doctorate in philosophy from Stanford University. He's taught at the university level and is a frequent guest lecturer discussing internet commerce, capital markets, wall street practices, education, leadership, and ethics. So I introduce to you without any further ado, Patrick Byrne. Thank you, Dr. Salerno. You rock well, ladies and gentlemen. It is a great honor and privilege, actually, to be invited to speak with you. I can't tell you how many evenings I've passed going on YouTube and looking up talks that have been made here, and I'm amazed that it's quite an honor to be asked to address you. I'm going to be talking about the influence of Austrian economics on my past entrepreneurship and something I'm working on these days. Let me just check my, so first, whom I wired magazine this profile on me about a year ago saying, meet Patrick Byrne, the Bitcoin messiah, by the way, a messiah of nothing. I'm a fellow traveler, such as we all are. Bitcoin, you'll see my commitment is really to something called the blockchain, which is the technology underlying the Bitcoin, and it has other applications which I think are going to be of great interest to people from the Austrian school and the scourge of wall street. That guilty is charged. I will mention, I'll just say, one story. I feel like a fair warning, so you know who you're listening to. In January 2007, I was invited to meet with a hedge fund manager, a well-known hedge fund, the back story. If you don't know anything about my fight with Wall Street, I'm not going to really go into it. In 2002, we went public. Overstock went public. When you're a public company CEO, you're out there mixing it up with hedge funds, prime brokers, regulators, and it became very clear to me the system was bent. Within a year or two, I just started swimming around and trying to figure out how it was working. It was pretty easy. Actually, there's this great science fiction trilogy called The Hitchhiker's Guide to the Galaxy. You never read that anymore. It turns out that there's all these species on earth that are actually extraterrestrials, and they are here studying us. The smartest, the most brilliant species of extraterrestrial, there was, were the little white lab mice. It turns out they're the smartest beings in the universe. What they were studying us by coming here and being our lab mice, they would exhibit certain behaviors and then see what inferences these humans drew. Well, that's pretty much what I was doing. I didn't have any real reason to do it, but I started going out and meeting with hedge funds and swimming around these guys and going to these conferences of hedge funds, just kind of studying. Ostensibly, it was that they were there to ask me questions, but I really just wanted to map how it was all working. It was very clear how dirty it was that there was everything you read about now. Insider trading based on expert network systems and market rigging activities centered on a guy named Stephen Cohen, and basically a constellation of about 15 hedge funds who operated with some degree of coordination. So I started talking about this publicly and was pretty much ridiculed for a few years until 2008. So that's why I'm the scourge of Wall Street. And some people credit me with or blame me, depending on which side you're on, this great federal investigation that got launched into Wall Street. Eventually, pretty much everyone you saw me name 10 years ago as being the bad guys are the names that the feds some years later figured out, looked into and said, yeah, and started arresting. But what I'm going to show you today, I think makes that small potatoes. What we're about to do to Wall Street is small potatoes compared to what happened five years ago. So and just to calibrate us, in my view, the essence of the Austrian approach is there's an audience I don't need to explain Austrian economics to this audience. So just go through this quickly. The subjectivist theory of value, including the prices, prices drive costs, not the other way around, which is certainly true on the internet and in our business. An emphasis on markets as a dynamic process versus the general equilibrium theory that we're all taught in economics, what do they call heterodox economics today? Economics as action versus equilibrium. But the entrepreneur, I notice it shares, entrepreneur comes from word latin meaning undertake, discover, recognize, create, it's related to the word prehensile, to seize, recognizing opportunity for profit, and so on and so forth, rivalry, an emphasis on respect for life, private property, contracts, rule of law. In fact, to me, all of Austrian economics embodies respect. That's the common denominator of these things. It's respect for the individual. If value is determined by some objective or intrinsic feature of a product, of an item, then that opens the door for there to be this whole theory of exploitation. If you follow the labor theory of value, well, that leads to a theory of exploitation, and so you need a powerful state to address it, and so on and so forth through all of these, private property, peace, everything, that all really comes out of the respect, I think, for humans. To me, as soon as I understood, well, even before I knew there was a name for it, I was drawn to this kind of approach. I think I should mention, but go back a step and mention a little bit of the history of overstock that you might find interesting. I got started in 1999. That was the days, you may remember, the dot-com bubble when there was stores of people dropping out of business school and on a one-page business plan going in on Sand Hill Road and raising $100 million on just a one-page business plan, any crazy idea, anyone could raise money during the dot-com bubble, and in that, this is the single real light bulb moment of my life, actually, I'm going to tell you, the only moment I really consider a light bulb moment. In that environment, I had actually done a lot of work. I'd run a small company and then a larger company. I'd worked for Warren Buffett and Omaha, we're in a group of his companies, then I'd retired, I was teaching, and I had this idea, which was, and I'm going to describe it succinctly, but you'll get it here, that it came on just one very simple idea. Mainstream American retail is set up for three things, mass quantities of similar goods from a small number of suppliers. That's how the mainstream supply chain is optimized. But in retail, goods become available sometimes in small quantities of dissimilar goods from highly varied supplier base, and that happens because there's bankruptcies, there's canceled orders, there's late orders that can't be accepted, there's rejected orders, there's a factory makes them, they meant to make 20,000 or something and they make 21,000 and so there's these little dribs and drabs that spill out of the manufacturing and retail supply chain, and they spill out in small quantities of dissimilar goods from highly varied suppliers, and it doesn't work for mainstream retailers to deal in them. So there have to be these people who clean it all up, and they're called jobbers, and they tend to be folks like you and me, never meet. They're tend to be bada bing, bada boom, I know this guy, I know this guy, I'm working on this truckloaded tight list, and he's got a, you know, you're running, they got on a street corner in Las Vegas, hey Louis, what's up, hey, listen, I got, you know, a truckload of Sunbeam waffle makers, 217 gross, you know, retail $99, wholesale 40, sell you the whole thing, you do a take, I'll give it all to you for $10 a piece, offer good for two minutes. That's how our, that's how the world of jobbing runs. And I said, well, let's, let's get a company. I bought a flea, a company that was in the flea market industry. And I said, let's, if it had these sort of Louis, Tony, Vinnie jobbers at the heart of it, I said, let's, let's get this going, we'll have a dozen or so of them, we'll buy these goods. And incidentally, if you walk down the street in Brooklyn, and you see all these signs, discount to you appliances, discount to you electronics, that's what's really going on behind the scene. They're cleaning up the dribs and drabs. So we started that business. And it was October 99, we launched. And then, and we were having trouble getting going, and we were selling $40 a day, then $100 a day and clicking along. And then this thing happened, this wonderful thing happened called the dot com collapse. And all these comp, oh, well, no, I should mention, I went with that model, I went with that business idea to Sand Hill Road in a day when anyone could go with a one page business plan, $100 million to start a pet food company. Oh yeah. And I went to 85 venture capitalists. And in the fall of 99 with that idea, which I thought was so obvious. And I was turned down by 85 venture capitalists. And we never got any venture capital money. And so we were clicking along struggling, just trying to keep our head above water when this glorious thing happened, the dot com crash. And we discovered that as all these dot coms went bankrupt, that this supply chain that we had optimized to deal with these kinds of, you know, situations worked really well on bankruptcies too. And we went in and started cleaning up bankrupt.com's we ended up cleaning up buying and liquidating 19.com's who had been funded by the same VCs who turned me down for money. I promise I'm much too mature to take any satisfaction. I was actually when around a year or two later, ABC, Chris Cuomo 2020 came out to do a story when they got actually there was a whole doomsbury series about us called my vulture.com. If you ever saw the my vulture.com, it was based on guy doing just what I was doing. And Chris Cuomo came out from 2020 and they did a story about this kind of funny guys in Utah who were doing this. And he asked me on television, well, how do you feel about making money off the distress of other other businessmen? And I said, well, Mr. Buffett always taught me that the first rule of business is if you're not going to kick a man when he's down, when are you going to kick him? So we got that's how we got going and we got and that's how we got cash flow positive and we rocked and rolled and the rest was history. So that's that's that's the background on Overstock and I applied it to a bunch of well, I'm going to show you how I've applied the Austrian approach in some things we've done with an Overstock that I think you may find really interesting and one of them and for me this was my saw on the road to Damascus moment actually and I feel this way because Thomas Sowell Thomas Sowell and I and Convist at Hoover who's not an Austrian but I think probably quite sympathetic to you find a lot of his views sympathetic. He said that his great conversion moment was reading Hayek F. A. Hayek 1945 American Economic Review the use of knowledge in society and I won't read this whole but the yeah maybe it's worth going over this paragraph I'll never forget this was like the scales fell from my eyes the peculiar care and remember that this he's talking about society but you can apply this to corporation as well the peculiar character the problem of a rational economic order is determined by the fact that the knowledge of the circumstances never exists in concentrated or integrated form but it's dispersed bits of incomplete and frequently contradictory knowledge which separate individuals possess. The economic problem of society is thus not merely how to allocate given resources it is rather a problem of how to secure the best use of resources known to any of the members of society for whose ends whose relative importance only those individuals know or to put it briefly is a problem of the utilization of knowledge not given to anyone in its totality well you could not describe my job better running this 2000 person company and then that so two very influential books on me by soul were knowledge and decisions and a conflict of visions I'm just curious who here has read a conflict of visions I've known a lot of people in who described this book is really that that their conversion experience is that book on the right and two themes he develops is knowledge frontier is very Hayekian this his view of things is very Hayekian he was a student of Milton Friedman's and he's at Stanford now but he's really a great synthesis in my mind between I know that the the purists among you how you how you some of you feel about my great friend and teacher Milton Friedman but soul seemed to have blended the two and he speaks for the knowledge frontier the low and any in any situation there's the frontier of knowledge and there's the locus of discretion which is you know the who gets to make the decision and the farther the locus of discretion is separated from the frontier of knowledge the more information costs you have and some people just see the world as a place where information is cheap to try to do cheap to transfer you can process it centrally and issue order back to the front but if you think of information costs as being high then you want to always try to keep a locus of discretion shifted as close as possible to the knowledge frontier and that so what really comes down in people's thinking is how costly do they understand information to be to centralize and process and as high well as if you ever run a large organization what you find out is it's much more expensive and difficult to keep it's the nature of bureaucracies information does not flow freely it's costly to centralize and process so you will always want to be shifting the knowledge frontier you always want to be shifting the locus of discretion to the knowledge frontier as best you can that leads to two different visions of institutional design in society or a corporation what so-called the unconstrained vision which is if you think that knowledge is cheap to centralize then society you're going to want be more in favor of central planning legislative law and design systems run by experts and by anointed who can run things better for us than we can run on our own that's the dillbert vision of things the pointy hair guy in the corner he's got or an incorporation he's got all the information he's the expert he's going to issue he gets the information and he sends out the orders the other the constrained vision of society is that knowledge is costly to centralize and so we want to save on that cost by decentralizing decision making through markets through the common law which what represents kind of a combined accumulated wisdom of many trials and errors that where the better rules have survived through a Darwinian selection process by the way a fantastic example of that that I don't think I've seen maybe maybe maybe I'm maybe papers on this have been delivered a lot here but but a fantastic example of this is the takings clause and Richard Epstein has written about this the great the takings clause goes back to William of Auckland it's almost a thousand years old and it embodies a certain economic wisdom and it comes down to us in our in our constitution government you know shall not take things without depriving without just compensation that's an example of a principle that has survived through Darwinian selection and Richard Epstein makes a case it's a beautiful example if you're looking for an example in the common law of a principle that's that would give hamlets or villages or counties that followed that principle a competitive advantage versus their their neighbors and would help them prosper over time you should look at the takings clause and Richard Epstein's work on that and self-organizing systems that this all follows from the constrained system so a beehive is sort of a perfect example of of that how I've applied that in our company is there was a book came out 10 years ago called the wisdom of crowds and it was about how there's a certain class of problems in economics that surprisingly crowds do better at solving than individuals if you put up a jar of jelly beans up here and everybody guesses how many jelly beans are in the jar very few people's guess is close but if you take the average of all our guesses it tends to be better more accurate than about 95 percent of the individuals there's a whole class of problems that that have that feature and for a crowd to be wise there are four constraints there has to be diversity of opinion and independence people can't give each other orders decentralization of information everyone gets the same view of the jelly bean jar and a way to aggregate their their guesses well the jelly bean jar it's easy everyone writes on a slip of paper so forth but a whole class of new technologies came out just a book on them came out 09 called enterprise 2.0 e2.0 is a new class of technologies that we adopted in our company and I spend my time mostly these days in institutional design it's really funny I had there's a woman a colleague of mine runs the company and I spend my time doing sort of thinking philosophically and think about institutional design within the company and where I get to test these theories and enterprise 2.0 is a set of technologies that let us harness this wisdom of crowds in our company and it happens in many ways but one is everybody has a dashboard when they come in has the same I have the same dashboard as the customer care agent the dashboard has all this information all the tools you use to run all these reports on what's happening as well as widgets and announcements and widgets about traffic and weather and stuff and salt lake which is where our company is but and also so we all share the same dashboard and then there are a bunch of tools that I'm always pushing questions and decisions out to the crowd and you would be amazed at how much I'm now able to push out to the company it's made such a difference in the last five years in terms of our ability to innovate one of them is called idea management this came out of some work at stanford some sociologists and anthropologists and economists studied how do ideas float up in a good organization how they float up is I will lose idea management decision management project management idea management and healthy organizations ideas get proposed some of them attract a certain amount of buzz of those buzz some actually get buy in and then of the buy in the top the executives or whatever select some of them to do but we built there were some early commercial steps made towards doing this and none of the packages out there were very good is what we found so we built our own and we now have a system on this on this dashboard where it's like a suggestion box but much more than a suggestion box people can propose business ideas and plans other people come and edit them and adopt them and vote on them and the system measures how much buzz and ideas getting and then how much and people can vote up and down and they can vote with different degrees and such and so eventually the better ideas start emerging from the muck and all that I have to do with myself and about you know 60 colleagues at the you know the leadership team just we have a continuous stream of these ideas coming out and it isn't like I say it isn't just a suggestion box it's much more powerful than that these ideas come out they're well formed very well developed people have been collaborating and building them together and it's made my job so much easier because I'm not I'm not I think that for the first 10 years of the company that truth is I was the source of most of the ideas and I was trying to you know it's just too much to stay up on it's too much you're the Dilbert manager in the corner if you think you can have all the ideas to drive a billion dollar business so I get this kick back now and there's just this continuous stream of great ideas maybe one in 50 that get first proposed actually get through this process and what they when they come out they've had a lot of collaboration together and they get better and better formed and it's just it's a it's remarkable it's changed the nature of our company and then decision management and this is based on the work of Kenneth Arrow at Stanford another fellow so I've you know we can view the hierarchies those who believe in general equilibrium and and then of those they're the Keynesians who think that general equilibrium equilibrium is full of market failures and that needs government to fix them and then there are those who think that they're not full of failures but and I very anyway Ken Arrow is one of the two big I think Ken Arrow and De Bru were the guys who came up with general equilibrium there any economists no anyway so Ken I have Ken Arrow is one friend and Milton Friedman was another friend and but so and I had great great benefit in my friendship with these two men in my life Ken Arrow who is one of the founders of general equilibrium theory also when he was 24 in an afternoon did a proof called arrows and possibility theorem that came out in a book called for what you won the Nobel Prize which he came came out in a book called social choice and individual values and it's about it's sort of the logic of how you can combine in how you can combine well put it this way we used to meet once a year the executive class of our company and everybody has a whole bunch of different projects and priorities so we'd get them all together there'd be a list to say 50 and we'd get in a room like this we'd handle and swap and log role and you've got your list of 40 in the order you think we should do them and someone else has their 40 and so forth and we would just argue and fight until we ended up with a list and never really made anybody happy but what we built is a system that everyone can rank you you're 40 you rank your 41 way you rank your 40 another way you rank your 40 they all get ranked they get fed into a black box with push a button and out gets the social ranking and just like the case of the jelly beans I am shocked at how intelligent this social choice is and it represents it's a very Hayekian notion we have found a way to liberate this wisdom that is scattered throughout the crowd but that no one person has and the list that comes out from doing this and we do this all the time now and the list that comes out is it's it's become such a key part of the way we run run the company we have ordinal one system that uses ordinal we built a more complicated system now that uses cardinal information we'd use this for our strategic project prioritization then project management I'll kind of skip over that there's lots of systems that do that but but there's a couple approaches there's an approach to software development that again I think every time I talk about this or see us work this way I think of Hayek it's called agile development agile development as opposed to waterfall development which is when you have a what if if you work with software developers in most companies for most of few decades that it's been going on it's really a very a process that's kind of central planning the user writes up his requirements they get thrown over the wall into a temple the developers are sitting in the temple they plug away they someday they throw something back over it's never what you ask for you all that's been eliminated in a system called agile where agile I won't go into the principles but it's a very Hayekian approach and we use swarms we come up with projects where people swarm in and again I say Hayekian in the sense of it it it gets rid of the notion that there's experts somewhere who are telling peons what to do it's recognizing that the knowledge the real knowledge of how to get things done is embedded across a whole society so to speak and what you need to do is find ways to organize and find technologies that permit them to collaborate and get rid of the notion of that there's a that your company has a Dilbert or numerous Dilberts who can give instructions to others and these have revolutionized our company I view it as I mean if you think of the ways a a society could be organized authoritarian aristocratic constitutional monarchy republic and democracy most corporations are authoritarian there is a Dilbert in the corner making the decisions we are pretty much a constitutional monarchy at this point you'd be surprised how many so for example we knew at the end of last year we could our payroll was say 80 million dollars and we wanted to give a four million dollar raise will everybody propose how do you want the money how do you want the four million and some people said well I want daycare and somebody else is I want we wish we had better 401k matching we had 50 matching we'd like it to be 100 somebody else says we want more time off so all we had accounts go in price through each policy change how much would it cost the company and then we just put it up to a vote and we let everybody do all use all these tools to vote and they selected and they edit so then we ended up with a social order of what they wanted and we just counted down the price till we got to four million bump and that's how they got their four million dollars but even more than that the strategic direction of the company is more and more being set through these methods and I have to say it's better than letting the executives set it it's especially better than letting me set the strategic priority what by liberating this knowledge that is spread through the company it turns out the customer service agents you know they're the ones who understand hey why is it that we're not taking Canadian credit cards and they're the ones who have to deal with the Canadian customers and we're and they have a they're on the knowledge frontier I'm not in the knowledge frontier I'm not on the knowledge frontier so this this approach I hope someday to be a workers republic I don't think will ever be a workers democracy what I have learned is I mean there is a reason the Greeks direct democracy has problems one year Athens is declaring a war on Sparta the next year they want to surrender to Sparta you have to have some balancing some balancing mediating things so I hope to get us to be a workers republic over the next few years now I'm going to go into the big things we're doing the the Caitlyn Long in the back is quite familiar with we think we're doing something quite disruptive that we're building something quite disruptive and I'll start with there's a conservative writer he's out of Hoover Francis Fukuyama who wrote a book about called trust that says that the reason and this was written in the mid 90s and it was the reason Germany and Japan and the United States do so much better than companies like Italy and China is that in it's a question of trust and in a place like China you can't there aren't central institutions that are trustworthy you only trust people in your own family and so economic enterprises can't get bigger than told there's some okay great can't get bigger than really one big family can run in Italy kind of runs the same way and the same way and the theory Fukuyama said was that that that handcuffs the size of enterprises and hence the the efficiency and the ability of the economy to grow what's left out of his analysis and but what's left out of his analysis is the problem of centralized institutions and the problem of centralized institutions is they get captured regulatory capture is much more a feature of the political process regulatory capture came out in 1972 I think a friend of Milton Friedman's George Stigler wrote about this I think that may it's the first formal description of which I'm aware but it's the tendency we just we set up regulators to protect us from certain industries not remembering that those regulators have a tendency to become captured by those industries and turned against us the SEC being but one example that comes to mind and there's even possibility of deep capture which is that they capture not just the regulator but the political process and the journalists and even academics I have a website called which Dr. Slano mentioned deep capture dot com which investigates this in the US and has won all kinds of awards for investigation of corruption in the United States the problem with captured centralized institutions is that they generate the what uh John Kenneth Galbraith called the bezel and I'm reminded of somebody once said all great economists are tall with the exception of Milton Friedman and John Kenneth Galbraith which the economists will get here Galbraith was a terrible economist but he did have this and he he did have a he uh his idea of the bezel was that at any given point if you could freeze time and ask everybody what they had in the financial system and added up you would get this and you look at what's actually there and there's only this much there and the difference is the bezel it is the amount that has been embezzled from society and has accumulated the bezel well I became a believer about a decade ago that there's quite a bezel built into our financial system the essence of the crypto revolution is that it can solve that problem in fact one way to think of it is for six thousand years of recorded human history we've always faced a choice do we want when we have our consensual exchange do we want to go peer to peer or in which case trust becomes a factor can I trust you I'm trading you this camel for this gold coin how do I know you've debased have you debased the gold coin or not debased the gold coin uh so there's we can go that way or we can have a centralized institution somebody there's a business model somebody who has the monopoly on force and this oasis has gold coins minted stamps his face on them and then if anyone debases that kills them that's a way of that's a business model of monetizing your monopoly on force in a situation that's one business model that's one way to do it what the crypto revolution lets us do for the first time in human history is go back get away from central institutions and go back to peer to peer exchange that is trustworthy fortunately or unfortunately there are a lot of social and political institutions which have as their business model now what I just described and this is going to disrupt them so I think that this is unlike Al Gore I was not around quite for the beginning of the internet but I I was here a few years after the beginning of the internet and we had an idea we were doing something as big as the Gutenberg Bible I think the crypto revolution is going to be more significant than that because of the accumulation of our centralized institutions which in one way or another are in the business of since you can't trust each other you need us and crypto and so you have to you can't have peer to peer you have to have a central institution well we're going to turn them into a buggy whip manufacturers we don't need those centralized institutions anymore I'm going to give you a few examples well there's of course central banking the central counterparty clearing system which I'll be going into here's another in development economics there's a well long education summarized I'll even skip this I used to study development economics and decided it was much simpler than people made it out to be it's not done from the top down it's done from the bottom up grassroots funds are fundable in other words there's a whole lot of money sloshing around in the world of development theory there's so much graph and it's about women if you want to if you want to help the world it's about women if you uh I remember reading papers on an experiment done in India where you take a village and you take the a very good way to measure increase in well-being of families you look at the weight of children in a family you take one village you give money to men and you look for an increase in the weight of children and the truth is you get nothing you get no increase the male income you get nothing but as this economist put it three things an increase in consumption of alcohol tobacco and hookers and I said that to Buffett once and he said yeah yeah and the rest of it they waste but as a joke Buffett is a very square teetoler guy but anyway you take an identical village you increase the income of men of women and you immediately get this increase in the weight of children the women bank calories in their children and the same experiments been done in Africa and South America and such it's developments all about women but there's a missing foundation so an economist from Peru Hernando de Soto who for years argued mystery of capital is his big book that in the west there's a bell jar some people live within the bell jar of formal legal rights and they include rights to private property and with title to property an entrepreneur can uh you can have an incentive to improve your property to you can pledge it to a bank and raise capital you can use the capital expand your business however much of the economic activity in the world goes on outside that bell jar and there isn't an access to and he documents and Haiti and Peru and stuff you know and Haiti to get you may have lived for three generations on a piece of land and built your home and your grandfather great grandfather built the home and you've added on and you don't know you don't if you someday the local generalissimo can show up and say oh so you are you don't understand that's our properties and you never know and if you try to get property it might take you 35 years and 400 steps 400 stamps from petty bureaucrats along the way and everyone knows petty bureaucrats wants to pay off uh that uh so in that kind of a world there is no incentive to improve your land there's or less incentive to improve your land and you certainly can't pledge it to a bank to raise capital expansionist warded the capital is dead he argues that there's if you had good land titling systems around the world it would create far far hundreds of times more capital would be liberated in the developing world and has ever been uh transferred to the developing world through western aid that is all there that all we need to do is create land titling systems well the implication for crypto it is it is possible so by crypto i mean the blockchain if you've heard of bitcoin i assume everyone's heard of bitcoin bitcoin is just one application of a new technology that that arose was described six years ago it's based on the mathematics of cryptography and it's basically just think it call it the blockchain the blockchain you can apply towards currency and you get a current cryptocurrency that's bitcoin you can apply it to i recently was out in silicon valley at a company that's working through this and they have a list of 180 things that the blockchain can be applied towards and that they're just they think they're just going to step through and come up with a crypto alternative to each it's possible to develop a land titling system that would be robust incapable of of being cheated uh and everything would occur within the blockchain why that's uh and who's working on this now no one that i can find closest i can find is katin and line knows some people who work on smart contracts which would be sort of a step towards this but the really big idea is combining finance is combining financial capital with human capital which is to say wall street we can replace we can replace a lot of the functions of wall street or a significant amount of what's done on wall street can be moved into the world of crypto and i'm going to have to go through uh why this is important and why it's possible first you probably all know the efficient market hypothesis even if i hope no one here agrees with it but in the efficient market hypothesis every every security has a has an intrinsic value and over time you know its price is fluctuating around uh and you can imagine under one regulatory regime there's uh that much noise that much fluctuation under a different regulatory regime there's that much fluctuation and if you add up all the area under the in yellow you and you add up all the area in green the area in green is less than yellow meaning there's less noise in the system so regulatory regime b is considered to be more efficient that's the dominant paradigm of our regulators these days that's their paradigm however and in that paradigm it is not possible to rig the market you can't manipulate the market any more than a uh any more than people at a horse track who are playing games in the betting parlor and i suppose they had some technique in the better that of course doesn't affect the underlying horse race that follows from efficient market hypothesis turns out it's not true and i'd like to show you what this is supposed to be out this is that scene in the matrix remember when neo says you can or morpheus says you can have the red pill or the blue pill and you take the blue pill you wake up in bed believe it and you want to believe or the red pill i'll show you deep the rabbit hole goes there was a massive scheme there has been market manipulation has become a regular feature of our markets and to give you just one example if you haven't been reading the papers and reading about the live or scandal and the foreign exchange scandal and the benchmark rigging scandal and so on and naked shorting etc one of my favorite examples is these are two lawyers bill arach and marvin melvin weiss they ran a law firm called millberg weiss then in 2000 and they were the originators of the plaintiff strike class action suit these suits you hear about where a stock share of stock goes down in a law firm files a suit and against the company on behalf of all these plaintiffs well it turns out that they were using shill plaintiffs and the doj indictment from 2006 refers to the and you can't in the u.s. law firms can't you can't pay people to be shills well the the law firm the doj indictment on page 29 says the played pain of purchase securities at issue anticipating the securities would decline in value in order to position themselves to be named plaintiffs and security security class fraud fraud class actions well there's something very odd about that sentence you think about it for a minute the paid plaintiffs those are the shills they purchase securities anticipating the securities would decline in value how'd they know turns out these people were being directed to go out and buy by stock in certain companies weeks or a month before suddenly they melted down and these lawsuits could be followed how'd they know if the market's efficient that you could never have done that and these guys bilirac and marvin weiss you know they they're not stock investors but they were able to send people to specific companies ahead of time weeks or a month ahead of time and buy their stock and then what do you know the stock melts down and they could file the lawsuits because they were part of they these guys went to jail the law firm it was the eighth largest law firm in america melted down greenspan in october 2008 when everything was melting down and he testified to congress and they said what's going on here he explained to them this thing that the left has jumped on this quote from greenspan the left jumped on it to say oh look greenspan shows that markets don't work there are additional regulatory changes at this breakdown of the central pillar of competitive markets requires in order to return to stability particularly in the areas of fraud settlement and securitization the real problems were particularly in the areas of fraud say burning made-off securitization that's mortgage backed securities but settlement settlement is this really important issue and there's someone here katelyn law who knows an awful lot about this about settlement it's dull is dishwater but i hope you'll stick with me for five minutes because first who here owns any stock in any publicly traded company america raise your hand raise your hand every single one of you with your hand up is incorrect none of you own any stock it's not how the system works how the system works is suppose you've got grandma buying some stock from a hedge fund who i represent is gordon gecko you think it works like this money in stock change hand that's called settlement but in fact of course we know that they don't speak to each other directly oh well the systems are divorced in the us by which the system by which money changes hands and stock changes hands that each are represented by brokers and we think well the money in stock goes between accounts between them that's not even really how it works all the broker dealers in america are plumbed into a central organization you've never heard of called the dtcc and the dtcc is is where the money in stock changes hands but the truth is it's not even that simple what's going on is it's all within the dtcc and it just changes hands and accounts within the dtcc and in fact it's even one step more removed from that which is there's a company a subsidiary of the dtcc which owns all the stock in america nobody owns any stock but this company it's called cdn company this was all set up in 1973 because there was a paperwork crisis on wall street and it owns all the stock and then it issues i it issues contractual rights i or use that stock and so when you when you have a broker telling you you own 100 shares of IBM what you really have if you read your broker statement the fine print you have a client you have a contractual right to some you have a contractual right to a contractual right to a contractual right to a company that actually has the property rights we laugh at the soviet union for having tried to run a society without property rights how could you possibly do that but in our society our property rights have have been turned into this system in the last 40 years and they've become our property rights have been sliced dice circumcised hypothec digitized hypothecated rehypothecated and the systems are losing track of who owns what and this shows up this is the common denominator of a number of the scandals you've heard about in the last seven years it comes back to the systems are losing track of who owns what i skip the why that had there is fault tolerance in the system and some criminals have figured out how to abuse the fault tolerance to play certain games why it matters is you as austrians will recognize this this this is one paradigm of how securities get priced here's another paradigm as their supply demand they meet there's a price if someone can show up and using this fault tolerance create a parent supply in the marketplace they can shift a supply curve and if they can do it enough and especially against a financial company there's ways of breaking the back of a financial stock this is part of what happened in 2008 and everybody was saying from 2005 to 2008 i had you know a lot of people saying i was crazy new york post used to run photos of me with ufo's coming out of my head because i was saying look there's this stuff going on you don't understand and then in 2008 when everything started melting down the sec went and did exactly what i'd been telling them they needed to do for four years it's now become quite a problem the economists isn't writing about it it's actually i think that they i think that in the last two years settlement failures have finally been addressed because it's a national security issue finally some people the national security establishment have gotten that it's a national security issue and you can't count on the sec which in my view the sec is just tall boys for wall street they're not they're not up to the game by the way that's why these guys were part of the ring of criminals who are taking advantage of this and because they're part of the ring they that's how they knew a month ahead of time or two months ahead of time what companies to set their show plaintiffs up in front of so how can this all uh oh i started taking all this data and economists and insiders and people who are really inside baseball kind of guys into explain this on wall street and i went i'm reminded of a line of Bertrand Russell there's a story that Bertrand Russell was once in india teaching uh Einstein's relativity or something and somebody had hindu stood up in the back and said i'm sorry professor Russell you have it all wrong the universe rides on the back of a turtle and Russell said okay well what's the turtle ride on and the hindu cosmology professor said the back of another turtle and Russell said okay well what's that turtle ride on and the guy said i'm sorry professor it's turtles all the way down i started bringing this kinds of information with hard data and respected economists explaining this to the NASD FINRA the SEC the US house banking services senate financial services the new york press corps etc etc and what i discovered is our establishment was turtles all the way down up until 2008 up until 2008 i was just laughed after 2008 i got a lot of attention and there were a lot of changes and all kinds of actions brought it's kind of funny because i'll i'll look at some actions brought against people and they'll include whole paragraphs out of papers i wrote eight years ago explaining to some law enforcement people exactly how a certain thing is being done and you know five years later there's somebody you know arrested and there's whole paragraphs out of stuff i wrote that are used in in their indictments so i'm happy about that um here's a recent you may have heard of the book flash boys flash boys this recent michael louis book about the flash trading on wall street this is how much actual trading how much volume there is on wall street over the last ten years now here's how many quotes there are on wall street the difference this is all the flash trading this this this doesn't represent any actual activity this is all front running people are front running your orders this is this is nuclear powered front running 90 of the volume now in the market is front running of orders by these computers that are talking back and forth through each other 10 000 times a second uh so i don't think this is good have more in buffet referred to this recently see the regulators like liquidity because under the efficient market hypothesis the more liquidity there is the more selling back and forth there is the more those curves get squeezed down to the intrinsic value so any liquidity is good but buffet recently said this isn't liquidity this is volume it doesn't really add anything to the marketplace but it's become 90 percent of the market in fact there was a recent journal finance article that showed the u.s markets got saturated with liquidity beyond which no liquidity has actually helped in pricing sometime in the late 60s so all this stuff paul vulker said back during the crash that the last financial innovation that actually added value to society was the atm machine nothing else you've heard about since then all these fancy complex derivatives and everything they don't really add any value to society uh so the current system and i'm drawing to the end wall street has centralized settlement high frequency trading and its current regulatory environment uh the shortcomings of these are the centralized settlement is easy to manipulate and the bad guys have figured out how to do it high frequency trading is just a master nuclear power front running and our regulatory environment has been deeply captured so the simplest solution is to take wall street as we know it and drag it behind the barn and kill it with an axe it cannot be fixed nor does it need to be fixed instead we can move this to the blockchain and in the blockchain uh the virtues of blockchain would be its peer to peer settlement no centralized settlement no manipulation egalitarian instead of front running and most importantly there's nothing to capture its consensus based it's stateless now we have to get the permission of the state to turn it on but we're building this and it's nearly built and when it gets built we'll be turning it on and it's stateless and there's nothing to capture and this is what trading would look like it would be a bitcoin or blockchain trading would be would look like this it's peer to peer based in the blockchain there's no DGCC to capture there's no uh none of the games there's no flash trading none of the games that are being played in wall street now could be played so this is my next big ambition and I hope you see as a consistent theme through us through this how much of my entrepreneurial activities and drives have actually been informed by the things I've learned over the years from Austria studying Austrian economics so thank you very much