Elon Musk, Sam Bankman-Fried, and Adam Smith's Impartial Spectator

What Do These Books Tell Us About How the Economy Works?

Going Infinite will leave anyone—but especially economists—unnerved that someone as broken and unmoored as SBF could somehow acquire so much wealth and power. I tell my students that markets reward at least a certain kind of virtue. In the well-ordered market economy of my dreams Bankman-Fried would never have lived in a $37 million condo and crisscrossed the world in private jets. If he’d tried really hard to become a better person, maybe he’d have found useful work as an assistant fry cook at a Waffle House.

You might come away from Isaacson’s book thinking that Musk is his own kind of broken and unmoored. I think that’s wrong or at least too simplistic, but that’s not the most obvious thing for economists to take from the book. What matters is that whatever kind of crazy lives inside Elon Musk, the stuff that Musk made possible is glorious.

Economists need to think about how our economic system worked so spectacularly well in harnessing the talents of Musk and seemingly failed so miserably in dealing with Sam Bankman-Fried.

Start with Musk’s most obvious success, Space X, which launched its first rocket capable of safely placing useful objects into low earth orbit in 2006. Before then rockets were the business of Boeing and Lockheed, government contractors designing and building for NASA and the military on cost plus contracts. Before Space X, rocketry was about as far removed from the market as any massive government project could be.

That worked about as well as you’d expect. In 2006 thirty-six objects were launched into space from the United States, just one-third of the world-wide total. In 2022 there were 2478 objects launched, with 1939 from the United States. Most of these objects rode on some model of Space X’s Falcon rocket. It once cost $65,000 to launch one kilogram into low earth orbit. To launch something on a Space X rocket now costs about $1500 per kg, with a realistic promise of even more dramatic price drops to come.

So, did Space X do such great things because our economic system harnessed Musk’s self-interest in service of the greater good? Could a modern-day Adam Smith have written about the butcher, the brewer, and the rocket maker?

Absolutely! Whatever drives Elon Musk—Gordon Gecko like greed, ego, or a maniacal impulse to make the world a better place—his ambitions and desires have been channeled by the same invisible hand that made it possible for Adam Smith to have a beer with his steak sandwich.

The cover of Elon Musk is filled with the steely face of the Great Man, the genius iconoclast unconstrained by convention. Isaacson reports that Musk constantly told his employees that “the only immutable rules were those decreed by the laws of physics.”3 Musk may have believed that, but it’s certainly not how he ran Space X. Like any business, Space X was enmeshed and constrained by the invisible hand of the market.

Musk set out to build a vastly more efficient launch system. Scientists and engineers have their own definitions of efficiency, but that’s not the kind of efficiency that mattered most to Musk. Space X needed to build rockets that were commercially viable, which is just another way of saying that their rockets had to be economically efficient. And the only way to strive for and measure that kind of efficiency is in reference to prices and other market signals that respond to real and meaningful information.

Isaacson’s book has lots of stories of Musk’s maniacal push for better materials, designs, and building methods. Falcon rockets, for example, are full of stainless steel, a material once considered unsuitable for powerful rockets. Without Musk’s relentless bullying of his design team, Falcons would have been made with titanium and aluminum. Yes, of course, Musk pushed for stainless because he’s a brilliant iconoclast who understands the “immutable laws of physics,” But he also knew the relative price of metal and the relative productivity of metal workers. Falcon rockets are a triumph of determined genius. They’re also a triumph of well-functioning markets sending valuable signals.

Contrast that with SBF. Suspend disbelief for a moment and imagine that he was something other than an arrogant con man. Is what he did still ok? Did FTX, Alameda, and his other businesses depend on well-functioning market signals to direct resources in an efficient manner? That’s a complicated question but dig deeply enough and you see that the answer is no.

SBF’s customers on his crypto exchange, FTX, speculated in highly leveraged derivatives tied to hundreds of different, mostly lightly traded, forms of crypto. Those trades made sense only to those who thought that prices were misaligned. Without the promise of trading profits that rose out of some sort of market failures, FTX would have been about as interesting and profitable as a well-run community bank in West Texas. In other words, unlike Space X, which needed well-functioning markets to know how to build rockets, FTX depended on a certain kind of market failure.

Not that there’s anything wrong with that.

Moving commodity prices back into alignment with real economic forces is a useful and honorable business. Commodity prices signal important information. Speculators make that information more accurate. A modern-day Adam Smith could have also written approvingly about butchers, brewers, and commodity speculators.

But crypto was never a normal commodity. The prices on FTX didn’t signal much of anything real or meaningful. Whatever information was driving the relative prices of all those crypto currencies was not anything anyone working in the real economy needed to know. Elon Musk would not have changed the design of a single fastener on a fuel line because of the relative price of, say, Ripple XRP and Chainlink.4

At first glance crypto markets look a beehive of self-interested trader-drones working to profit by helping to correct tiny markets failures. But shine an economist’s light and you realize those “market failures” are in fact the result of government failure.

All those different cryptocurrencies were created and then traded all over the world. Both the currencies and the exchanges were governed by different rules in different places. The price anomalies that made trading exciting arose from all those regulatory differences. Shine an economist’s light and you see regulatory arbitrage.

Now here it is important to be clear. A simplistic story that there wasn’t enough regulation is just wrong. Governments all over the world were all over those markets. With the promise of buckets of money, the politicians and bureaucrats were never going to take a laissez-faire, “let the boys have fun” stance.

A story about how there were the wrong types of regulations is closer to the truth but still not quite right. Yes, crypto was being regulated by the wrong people in wrong ways, but that wasn’t an accident.

People like SBF were driving the regulatory environment. In 2022 SBF contributed $100 million to politicians in the US. In Dubai SBF tried to convince financial regulators to evict Binance, FTX’s main competitor. FTX paid $135 million for naming rights to the Miami Heat’s arena, $162 million for the right to put their logo on baseball umpire’s uniforms and tens-of-millions to secure endorsements from clueless celebrities. These were more than simple advertising, they were investments in PR that would make the political investments pay off.

In 1962 George Stigler and Claire Friedland published their paper “What Can Regulators Regulate? The Case of Electricity.” That article inspired a huge body of research on “regulatory capture,” including Stigler’s classic 1971 paper, “The Theory of Economic Regulation.” In the years that followed economists have come to realize that regulations are not written by wise bureaucrats maximizing some social utility function. Regulations come from the self-interest of the regulators and the regulated where the most concentrated interests have a huge advantage. In the world of crypto, SBF and a handful of other players were the concentrated interests.

What Would Adam Smith Think?

We can’t know, of course, but I suspect that Adam Smith would have come away from these two biographies thinking more about The Theory of Moral Sentiments [TMS] than The Wealth of Nations [An Inquiry into the Nature and Causes of the Wealth of Nations]. That’s a bit embarrassing for me since what I’ve written about so far—how markets and other institutions channel the energy of people like Musk and SBF—comes straight off the pages of The Wealth of Nations. I don’t think Smith would say my answers are wrong or that I’m asking dumb questions but I think he’d remind me that Moral Sentiments comes first.

Literally. Moral Sentiments was published seventeen years before Wealth of Nations. Smith wanted people to think about human nature before they started thinking about the consequences of human nature.

That’s good advice for economists,5 but it’s hard. It’s not what we’re trained to do. We’re trained to think about human nature as an immutable fact, kind of like gravity.6 Read these two books back-to-back and you see that’s wrong. The differences between people matter. If we’re going to get our economics right, we can’t pretend that people are all alike. Musk and SBF didn’t make different choices because they faced different budget constraints. They made different choices because they were different’ people.

How and why were they different? I’m not sure I’ve got good answers—certainly nothing as good as we’d get from Adam Smith—but let me try.

Let’s start with something very important to Smith, “self-interest”. It’s something that doesn’t quite mean what some people think it means. Suppose that Musk and SBF were good at business.7 Fine, so was Ebeneezer Scrooge. But do Musk and SBF fit Dickens’ description of Scrooge as a “squeezing, wrenching, grasping, scraping, clutching, covetous old sinners“?

Sure. But that doesn’t make them different than you and me. Everybody is greedy. Everybody likes nice things.

Rich guys these days—unlike rich guys in Dickens’ day—can enjoy literally every single consumption good available on earth. They can eat whatever they want, watch every sporting event being played anywhere on earth and sleep wherever they prefer. Musk and the un-incarcerated version of SBF would never have sat in the middle seat of a budget airline.

But the remarkable thing about modern times is that you don’t have to be super rich to get most of those nice things, ordinary middle-class money is enough. If you want sushi and all the sports channels, just finish school, master some useful skills, and show up for work on time. If you want to avoid the middle seat and fly private, work a bit harder, take some risks and get a bit lucky.

The point is that Elon Musk and SBF could have had any material thing they wanted without working nearly as hard, taking as many risks or, in the case of SBF, cheating. In the movie Wall Street Gordon Gecko makes his famous speech about how “Greed is good,” and we’re supposed to see him as a despicable villain. In comparison to the real world billionaires we see in these two biographies, Gecko is just a small-minded, tedious little man. Greed isn’t very remarkable and doesn’t explain very much.

So if ordinary greed doesn’t separate Musk from SBF or the rest of us, what does?

Again, Adam Smith, this time in TMS, gives us a big clue: the Impartial Spectator. That’s the character Smith describes as “The man within the breast, the abstract and ideal spectator of our sentiments and conduct.” The Impartial Spectator is the part of our nature that makes us something other than Dickensian squeezing, wrenching, grasping, scraping, clutching, covetous old sinners.

Fine, you say. We’ve all seen Pinocchio. Everybody knows about your “conscience.” In Smith’s telling, though, the Impartial Spectator does much more than chirping at us when the party gets weird. The Impartial Spectator oversees two very different things: our conduct and our sentiments.

We need the Spectator monitoring our conduct because we’re social animals. We need other people. But to make the essential social connections, others have to judge us. And the only way they can do that is by observing our conduct. The Spectator tries to show us how others see us. When you ask yourself what would your Mom think, or how what you’re up to would look on a 60 Minutes feature, you’re consulting your Impartial Spectator.

But the Impartial Spectator is also supposed to observe our “sentiment.” That’s different than our conduct and, importantly, means something more than our emotional state of mind. To Smith it’s a way of describing what we value and what we want. Russ Roberts, host of EconTalk and author of How Adam Smith Can Change Your Life, is fond of quoting the famous line from TMS, “Man naturally desires, not only to be loved, but to be lovely.” And how can we “be lovely”? By trying to want the right things.

So how well did their Impartial Spectators do with the job of advising Musk and SBF on how other people saw them? Not good at all. Both men were said to lack empathy, something that was attributed to their being somewhere on the spectrum of autism, Lewis and Isaacson are classy writers, but they can’t describe their subjects without using the word “asshole.”

The question of how well the Impartial Spectators did on the other job, monitoring sentiment, Is harder to judge. Even the best biography can only tell us what the main character did, not what they wanted. Still, there’s plenty of evidence to suggest that SBF and Musk wanted very different things.

The most obvious difference is that SBF was a liar. We now know from the trial that he lied about very big things—the promise to look after $8 billion of other people’s money was a whopper. But Going Infinite makes clear that SBF would lie about anything. The first chapter of Lewis’ book is called “Yup.” It mostly recounts SBF’s agreeing to do things—give a speech, attend a meeting and so forth—with no real intent to do what he promised. There is no such chapter in Musk. Not everyone likes Elon Musk but there aren’t many people who think he’s a liar.

Now it may be that Musk was just smarter than SBF, that despite Musk’ lack of empathy he knew it was important to build a reputation for honesty. But it could also be that Musk listened to his Impartial Spectator telling him that he should want to be honest. We can’t know exactly what went wrong inside SBF—maybe his Impartial Spectator didn’t bother to tell him that lying is wrong, or maybe SBF was too busy playing video games to listen.

Once you start looking for them, you will find lots of other contrasts between the character of two men. I think it’s important to note that Musk has 11 kids and-despite the complexity of his personal life—appears to be a good, caring father. The childless SBF, on the other hand, has an emotionally abusive relationship with a co-worker. Read both books and see if you agree with me that, in the language of Adam Smith, Musk was a lovely man and SBF was not.

Someone I respect recommends reading books in groups. That sort of concentrated reading doesn’t just give you different takes on similar questions, it often gives you insights into issues bigger than the narrow topic of the books. Read these two books back-to-back and you’ll see how our economic system allows the creation (and in SBF’s case destruction) of massive wealth. But you’ll also see how important character is in shaping outcomes. Adam Smith understood all of this. Economists should too.

Footnotes

[1] Michael Lewis, Going Infinite: The Rise and Fall of a New Tycoon. W. W. Norton and Company, 2023.

[2] Walter Isaacson, Elon Musk. Simon and Schuster, 2023.

[3] Walter Isaacson, Elon Musk (p. 113). Simon & Schuster. Kindle Edition.

[4] Now some crypto fans who’ve read this far might say—probably with a bit of patronizing disdain—that I just don’t get it, that crypto-markets matter because blockchain technology will revolutionize payments, contracting and maybe even our whole monetary system. There’s not much evidence of that so far—Musk himself was skeptical of blockchain and after a call with SBF said “My bullshit detector went off like red alert on a Geiger counter.” But even if you think that someday blockchain will be whatever the utopian dreamers dream, there’s no reason to think that trading on FTX signaled anything at all about the value of blockchain.

While we’re at it, let’s acknowledge there may be another use for crypto, although not one the advocates are likely to embrace. Even if the market signals coming out of places like FTX don’t matter to real markets, the attention and resources channeled by FTX might still have served an economically useful function: maybe the traders were all just having a bit of fun. Trading crypto is a zero sum game in exactly the same way as betting on football games or any other gamble—the pot is divided between the winners, the losers and the bookie. Musk didn’t depend on the point spread of football games to build rockets, but lots of guys depend on the point spread to get them out of bed by noon on Sunday.

[5] And political scientists, and sociologists, and psychologists, and theologians, and….

[6] This isn’t entirely fair, Adam Smith was hardly the last economist to think about human nature. Some economists—Dierdre McClosky and Mary Hirschfeld come immediately to mind—think about the importance of culture and religious sentiment, important aspects of human nature in shaping economic behavior. And who among us hasn’t enjoyed the just-so stories we get from evolutionary psychology.

[7] SBF clearly was not. He appears to have no grasp of the value of good internal accounting systems, and he’d have flunked my MBA class in risk and uncertainty. But that’s not important now.