So when he invited me, Kiri had made the terrible mistake of saying I could talk about whatever I wanted to, which is why you get the topic today. And I was working on this even last night, so I'm actually going to read it, even though I realize that's maybe not terribly lively. The chattering classes of all nations are telling us that the U.S. and China now face each other as rivals. Economic rivals, cultural rivals, systemic rivals. The U.S. system we know well. It is the market system, a very Eden of the innate rights of man, where alone rule freedom, equality, property, and bentham, in the words of Marx. But what is the Chinese system? There can be little doubt that if you were alive today, Karl Marx would see in contemporary China things meeting with his disapproval. Nonetheless, from the name of China's ruling party, we expect that his teachings have more purchase on thinking in Chinese official circles than do his teachings in the U.S. Neoclassical economics serves the U.S. state as court astrologers. Chinese politicians are more eclectic. Although they likewise take advice from neoclassical economists, they also lend their ears to Marxist economists, even American Marxist economists. Today, when stagflation is back, when climate catastrophe looms, and when global politics is becoming again legible as a Cold War between a nominally capitalist and nominally communist power, is a good time to remind ourselves what points of economic theory capitalists and communists in fact disagree on. Now it's not the occasion to summarize competing schools of thoughts in economics. I limit myself to mentioning the names of a few, and then some just very overview comments. So neoclassical economics we can call supply side, Keynesian economics demand side, and Marxian economics profit side. So the neoclassical school believes it is supply that constrains the socioeconomic possibility space, whereas for the Keynesians it's effective demand, and for Marxists it's the profit motive that regulates what is feasible in a capitalist economy. I find the Marxist perspective persuasive for two reasons. One, Marxist economics explains the stability of long-term relative prices, which to my knowledge neither neoclassical nor economic economists attempt, and two, Marxist economics explains the limits of Keynesian stimulus, limits witnessed in the stagflation crisis of the 1970s. The Keynesian economists were famously dumbfounded by this crisis, and the neoclassical economists explained the failure of Keynesianism but only crudely with the claim that all unemployment is voluntary. I here set aside these advantages of Marxist economics, and instead focus on its reported Achilles' heel. According to its critics, the weakness of Marxian economics is the labor theory of value, and as such I take a moment to explain this theory. So the first section of the paper is the labor theory of value. In a competitive capitalist economy there are forces that drive wages to be equal among workers of the same skill, and forces that drive prices to be equal across commodities belonging to the same class and the same quality. On the one hand, if workers find that they are underpaid by their employer relative to the options that are available to them, elsewhere they will seek to move to a different firm. On the other hand, if consumers find that by going to a shop two doors down from where they usually get something, they're able to purchase it for less than they're used to paying, then they will start shopping at the cheaper shop. This flexibility in the labor market drives employers to offer similar wages, and the flexibility in the commodity market drives merchants to charge similar prices for similar wares. These forces are known as the law of one wage and the law of one price. These two laws, which are assented to by neoclassical economists, are together sufficient to motivate the labor theory of value. So that's where I go next. So suppose I am feeling hungry and find myself in front of a café. What constrains my willingness to pay for a sandwich? On the one hand, I will not pay more for the sandwich than it would have cost me to purchase all of the ingredients myself, and then to prepare the sandwich if I were being remunerated at my normal hourly rate. No one except Elon Musk or Jeff Bezos will pay 500 euros for a sandwich. On the other hand, even if the café somehow was lucky enough to just be given all of its ingredients, they would not charge any less for the sandwich than the cost and wages of the employee who makes it. So to the extent that there is a competitive labor market, the upward pressure of the sandwich maker's unit wage and the downward pressure of my unit wage converge at the price of the sandwich. So now we look at how these constraints on producers and consumers act for commodities that require different labor inputs. Suppose that a certain sandwich takes 15 minutes of labor time to make and that a certain cake takes instead an hour of labor time to make. So the price of the sandwich cannot be lower than 15 minutes worth of the sandwich maker's wages and cannot be higher than the cost of the ingredients plus 15 minutes of the consumer's wage. Similarly, the price of the cake cannot be lower than one hour's worth of the cake maker's wage and cannot be higher than the cost of ingredients plus the wages of one hour of the consumer's. So to state this more succinctly, if a cake takes four times as much time to make than a particular sandwich does, we expect the cake to cost around four times as much as the sandwich. The relative price of the commodity is governed by the labor times used to produce them. That's the kind of short version of the labor theory value. And then if you're worried about this trick I did with the ingredients costs, so because we've so far been exploring the lowest possible price that a commodity could be produced for and the highest possible price that a consumer might be willing to pay for it, I have assumed that the producer of the sandwich doesn't have to cover materials costs but that the consumer would have to. But by applying the same logic to the components of the sandwich, including that assumption, we're able to then get rid of the assumption. So just imagine jam, for example, which could be an ingredient to a cake and to a sandwich. Well, the jam won't be produced for anything less than the wages of the workers who made the jam and won't be bought for anything more than the materials costs, plus the equivalent of time of the wages of the consumer. And then you can go backwards and do the same operation to the fruit that went into the jam and so on. And then basically get rid of the input costs altogether and replace them with the same argument in terms of labor time. So this gives us the result that commodity prices are accounted for by vertically integrated labor time, the vertically integrated labor time embodied in the commodity. And this is the labor theory value as presented by Adam Smith. But now we turn from Adam Smith's version to Karl Marx's version. So far we have imagined only concrete instances of labor processes, the making of a particular sandwich or a particular cake at a particular time by a particular person. But one person will make a particular cake more slowly than another person will. Nonetheless, the slow cake maker is not paid more for her cakes than the fast cake maker is, despite the fact that the slow cake maker has spent more time in the kitchen than it has embodied more labor in the cake. So if differences in actual labor inputs led to different prices for commodities of the same type and quality, that would actually violate the law of one price, so we're not going to do that. So we have a problem in our definition of value as vertically integrated labor times. And this is why with Marx we should distinguish between concrete labor and abstract labor. Concrete labor is the labor peculiar to cake making, and that makes a cake on a particular concrete occasion. Abstract labor is the labor that is identified across commodities when four concrete instances of sandwich making are identified with one concrete instance of cake making by the fact that the same price is paid for the four sandwiches as paid for the one cake. And I just want to emphasize that it's this social mediation of exchange that performs the abstraction of changing concrete labor into abstract labor. So Marx identifies value as the socially necessary abstract labor that goes into the production of the commodity. In these very first pages of capital, it's really like in the first three or four pages that he makes that definition, Marx has not yet developed the conceptual machinery needed to specify socially necessary with sufficient precision. In particular, his frequent use of the word average I think is misleading. For example, he writes that labor is abstract so far as it requires producing a commodity no more time than is needed on average. It would be a mistake to understand average here as a true arithmetic mean of concrete labor. If Marx meant average in this sense, then one extremely lazy worker could throw off the commodity value of the whole society. So his own illustrative example makes clear that this is not what he intends. So he says, the introduction of power looms into England probably reduced by one half the labor required to weave a given quantity of yarn into cloth. The handloom weaver, as a matter of fact, continued to require the same time as before. But for all that, the product of one hour of the labor represented after the change only half an hour of social labor and consequently fell to one half of its former value. So the transition from one technique to another redefined what constituted socially necessary labor time. The transition was relatively sudden. The technique prevalent at a given time determines the social norm. If socially necessary labor time were determined by what is average, an hour of handloom weaver's time would have reflected rather more than half an hour of social labor even after the introduction of a power loom because the hand weaver's time would contribute to the calculation of the average. Similar caution should be taken whenever Marx uses the word average. I think they just sort of be alert. I don't think we should understand average as arithmetic mean when Marx uses it. For example, in the term average profit rate. All such cases are more prudently understood as normal or prevalent. Marx's example of the power loom, replacing the handloom, makes clear that the abstract labor socially necessary with production of a particular commodity is the amount of labor required to produce it in accordance with the regulating conditions of production to use the term of Anwar Shake. The regulating productive techniques have the lowest unit costs among the generally reproducible techniques available. Some generally reproducible techniques are not low cost. Marx imagines a capitalist spinner who has a hobby of using golden spindles rather than steel spindles. Nothing stops capitalists from using golden spindles rather than steel spindles, so it's therefore generally reproducible as a technique. But this capitalist is not paid anymore for his yarn, although it does cost him more to produce. Likewise, some particularly low cost methods are not reproducible. Here Marx gives the example of a factory powered by a waterfall rather than by steam. Because it spares the expense of the coal that would have otherwise been needed to heat water into steam, this technique is low cost, but the technique is not reproducible because there are not enough waterfalls for every capitalist who may want to power his factory with one to get access to one. So the waterfall using capitalists is not paid any less for his commodities, even though they do cost him less to produce. The first hurdle is as reproducible as a technique. The second hurdle is its lowest cost among those techniques that are reproducible. So let us look at the discussion of abstract labor by one of the most prominent living Marxist economists, Michel Heinrich. So he writes, Only labor time that is necessary for the production of a use value under average conditions counts as value constituting. The level of average productivity, however, is not determined by an individual producer, but rather upon the entirety of producers of a use value. So we see here the afterlife of Marx's imprecise choice of words, average. It is clear that Heinrich correctly excludes both golden spindle using labor and waterfall using labor from the constitution of value. But he implies that both would contribute to what constituted average conditions, which they do not. The individual producer is irrelevant, but so is the entirety of producers. It is only those producers using the lowest cost generally reproducible method who determine commodity values. You know, I mentioned Heinrich's not to sort of pick on him, but to say I think that Anwar Sheikh's paraphrase of Marx's intention is extremely useful analytically. Okay, so then we move on from regulating conditions of production to regulating capitals. So just as the productive technique, which is lowest cost among those that are generally reproducible, is the regulating method, a capital which employs the regulating method we can call a regulating capital. These productive techniques and these capitals are the ones that set prices. Although the regulating technique is by definition the lowest cost among the generally reproducible techniques, whether or not the regulating technique is in fact low cost or high cost, relative to other capitals active in the same sphere of investment, depends entirely on concrete factors. So in one sector, for example, manufacturing, the regulating capital may be those that have the lowest unit costs of all productive methods in use. In another sector, for example, agriculture, it may be that the regulating capital is the one with the highest cost of all productive methods in use, but that it is regulating because it is the only method that is generally reproducible. For example, because only extremely infertile land is now available for new cultivation. So we may now understand the labor theory of value as the claim that vertically integrated labor times produced following the productive techniques of regulating capitals are what regulate relative prices. To the extent that we accept Shakespeare's phrase of Marx's socially necessary abstract labor, this is also Marx's labor theory of value, namely that commodity prices are governed by the socially necessary abstract labor time reflected in them. Michael Heinrich rightly emphasizes that the process of abstraction, the conversion of concrete labor into abstract labor, is, if you will, enacted via exchange. So he says abstract labor cannot be measured in terms of hours of labor. Every hour of labor measured by the clock is an hour of a particular concrete act of labor, expended by a particular individual regardless of whether the product is exchanged. Abstract labor, on the other hand, cannot be expended at all. Abstract labor is a relation of social validation. Geltungs Verhältnis that is constituted in exchange. Nevertheless, I think he overstates his case. There is an upper and a lower bound to what any worker applying any concrete labor can achieve in one hour, and this fact holds for every worker in society. As such, the clock very well measures the possibility space for the fixing of social labor into commodity values. Furthermore, clock time expended by workers in the regulating firms, we expect to closely correlate with actual commodity values, since it is the conditions of these firms that are in fact dictating prices to the marketplace. We can use clock time as a first approximation of socially necessary abstract labor time. So if the law of one wage and the law of one price were the only forces that governed the economy, we would expect commodities to always sell at their value. That is, according to the amount of whatever, you know, this whole definition I said, of, let's just say, of labor in them. But there is a third law, the law of one profit, which drives commodity prices away from values. And to explain this law, we must first introduce profit and the profit rate. Okay, so profit first. According to Marx, profit arises from the unpaid labor of workers in productive industries, which he calls surplus value. Here, unpaid labor has a specific meaning of the difference between the labor that goes into producing a particular commodity and the portion of the commodity's value, which reflects the socially necessary labor time embodied in the commodity basket that keeps a typical working class breadwinner alive. So let me just talk through an example, which I hope is clear. So suppose that a worker working in a regulating capitalist furniture factory makes one chair in one workday. I'm going to have it all be ones to kind of keep the math simple. So one chair in one workday. Suppose that the value of the material inputs of the chair, the wood, the nails, the depreciation of any machinery that went into its use, also amounts to one workday of social labor. Suppose that the value of the commodity basket that keeps the worker alive for one day, that is the worker's food, the one day's rent, one day's heating on the apartment, that all sums to one half workday of social labor. Well, if you're the capitalist, you won't be able to sustainably employ people if you don't pay them that, but you wouldn't pay them any more than that. So the wage is one half day of social labor, but you're getting one day of social labor out of the worker. So let's just say the table then sells at the price of two workdays, and then one workday of that price is the previously embodied labor that's in the materials, and one is the living labor that the worker provided, and one half of that goes to pay the worker's wage, and then the one half that's left, that's the profit. So the profit rate is a ratio of the surplus value to the total capital advance by the capitalist, the half day profit over the two days, or no, it would be, in terms of advanced by the capitalist, it's actually one and a half days, right, because the capitalist pays the one day for the materials, the half day for the wage, and then they get the extra half day for free. So the profit rate is the one half day over the one and a half days. So here I'm just going to take this explanation of the source of profit as given, and I will also pass over in silence the extremely interesting discussion of the difference between productive and unproductive labor. And now we look at the divergence of profit rates within one industry. We can call the profit rate in a regulating capital the regulating rate of profit. So within one sector of the economy, those who enjoy access to a productive technique which has a lower cost than the regulating technique, for example those who use waterfalls to power their factories, enjoy a surplus profit over the regulating rate. In contrast, those who have not yet implemented the regulating technique by virtue of employing an unnecessarily costly method such as using gold and spindles, command a rate of profit below the regulating profit rate. They have a negative surplus profit. Assume that a certain amount of yarn sells at 30 euros. Table one offers an illustration of how the costs and profit might break down for the three types of capital under discussion. Okay, so first we have our capitalist who uses golden spindles and steam power is constant capital. That's to say the materials costs in particular commodity is 20 euros. The variable capital which is the wage paid to the labor is 10 euros and the surplus value is 10 euros. I assume a rate of exploitation that's surplus value over variable capital of 100%, just to keep things easy. So he gets no profits. He's not a very good business model using golden spindles. Then if you use steel spindles and steam power, then you have 10 in constant capital because you don't have to pay for the golden spindles. And then 10 in variable capital, 10 in surplus value, 10 in profit. So this is the regulating capital, the one that sets the price in the market. And then if you use steel spindles but you happen to have a waterfall, so you don't have to pay for the coal that goes into producing your yarn, then you only have five in constant capital, you have 10 in variable capital, you have 10 in surplus value, and you have a profit of 15. So you have a profit that's above the regulating profit rate. So in very concrete terms from a societal perspective, within one sector those firms with an unnecessarily costly method are donating the exploitation of their labor force to those firms with irreproducibly efficient methods. In the regulating capital, the math of exploitation, that is unpaid labor, that is surplus value, coincide exactly with the profit with me. So this is in one sector of the economy. So capital intensiveness, the ratio of the means of production, that's the constant capital, to wages, that's the variable capital, is called in the Marxian lingo the organic composition of capital. In table one we assume more or less the same technology prevails across the three firms in question. The only difference among them is that there's one firm that irrationally uses unnecessarily expensive spindles and one firm that has no need to pay for coal. In this case the firm with the lowest organic composition of capital has the highest profit and the firm with the highest organic composition of capital has the lowest profit. This is the situation that prevails when firms either economize on or splurge on their constant capital but have the same labor inputs per unit output. What Marx considers more typical of capitalist development is when firms implement technologies that make use of more and more valuable machinery but less and less labor. So note that more valuable machinery when viewed as contributing to the constant capital that goes into one particular commodity will be very small. If you have a million dollar machine but it shoots out a lot of widgets, the depreciation cost that that million dollar machine is contributing to one individual widget is still small. That's the point. So as a simplifying assumption, just to keep the math simple, in table two I presume that the increased price of machinery exactly balances with the increased output that the machinery permits. So i.e. that the constant capital can be held constant across the three technologies. So the year is 1889. A few beleaguered workers are clinging on to the hand loom. The Lancaster loom predominates and the innovations that will soon lead to the Northrop loom are known only inside of the firm of George Draper and Sons. The price of yarn remains 30 euros. So this is in table two. We have the hand loom workers. They have a constant capital of 10, the variable capital of 10, surplus value of 20, and a profit of zero. The Lancaster loom, which is the lowest cost, generally reproducible method, constant capital of 10, variable capital of 10, surplus value of 10, profit of 10. And then the soon-to-be Northrop loom would have a constant capital of 10, variable capital of 5, a surplus value of 5, and a profit of 15. So in situations such as those shown in table two, the firm with the lowest organic composition of capital has the lowest unit profit, and the firm with the highest organic composition has the highest unit profit. So if the regulating technique has a higher level of capital intensiveness than those inefficient techniques which are going out of use, we have arrived at what we can call the communism of capitalists. From each according to his surplus value to each according to his capital advanced. So you sort of pool together all the exploitation, and then you hand it back out according to who has invested more capital. Over time, the inefficient technique is abandoned. Over time, the technique that yesterday reaped a surplus profit becomes the regulating technique of today, and the productive techniques still unimaginable yesterday come into being today as those attracting surplus profits. These tendencies in no way lead to equalization across the firms. Equalization of profit rates across the firms. You don't get equalization of profit rates inside one industry, ever. However, when we move from the analysis of profit rates within a single industry to profit rates across industries, we do now see an equalization of profit rates. It is here that we meet the famous transformation problem, and so yeah, now that was all sort of background, and then we're ready for the transformation problem. Okay, so equalization of profit rates across sectors. Each sector has its regulating capitals, and their regulating productive techniques. The regulating technique in a given industry will have its characteristic ratio between means of production, constant capital, and labor, variable capital. It's characteristic organic composition, which in turn will imply a characteristic profit rate. So just, you know, if generally speaking, if I have lots of equipment and few workers, there's not very many people to exploit, so I don't get much exploitation. I have a small profit rate, whereas if I have a little bit of machinery and huge work floors, I have lots of people I can exploit. I get a big exploitation pool, right? And have a big profit rate. From a regulating paper manufacturer using large and expensive machinery with few workers, we expect a low profit rate, and from a strawberry farmer with a large work floors, we expect a high profit rate. If such circumstances arose in practice, however, the clever paper manufacturer would sell his paper mill and buy himself a strawberry farm with the proceeds. So instead, it is the possibility that a paper manufacturer could do this and that in practice some paper manufacturers do, it is this mobility of capital across industries that gives rise to a third force in the economy, a drive to make the profit rate equal across sectors. The mobility of capital is constrained. Starting up a photocopy shop at the corner is easier than starting up an international container shipping business. Thus, we expect a certain impeding of the equalization of profit rates across industries to the extent that an industry is hard to enter or hard to exit, which, generally speaking, will be the same industries. Therefore, as Shayk points out, we expect the equalization of profit rates, especially on new investments in each industry. And actually, just yesterday I noticed that Marx makes the same point in theories of surplus value, so I could have cited Marx there. So the new investments will use the regulating technique because if I'm newly investing in something, I'm going to go for the lowest cost technique, but I have to go for the generally reproducible technique. And these new investments will create new regulating capital. So to quote Shayk, it will be the profit rates of these regulating conditions, which will be of concern to new investment in any given industry. Industries with regulating rates of profit, which are higher than the national regulating rate, will experience accelerated inflows of capital, which will drive up their supply relative to their demand, and thereby lower their prices and profit rates. The opposite process will obtain in industries with regulating rates lower than the national average. Since demand, supply, and even methods of production are constantly changing, the end result is an enforced oscillation of regulating rates around some national average. So this is the law of one profit. So Table 3 presents a hypothetical numerical example. We consider products from three industries each with a price of 30 euros. Paper manufacturers stand in for any industry of particularly high organic composition. Strawberry farming plays the same role for industries with a particularly low organic composition. Between these two extremes, we imagine a standard industry that shares the same organic composition with the economy as a whole. In this standard industry, value and profit will be equal. So in the strawberry farm, we have 5 constant capital, 15 variable capital, 15 surplus value, a commodity value, an embedded labor value of 35, but you get a profit of 10. Why? Because the standard industry gets a profit of 10. The standard industry, you get 10, 10, 10, 10, and 10. Fine, very easy. And then in paper manufacturing, you have constant capital, 15 variable capital, 5, surplus value, 5, commodity value, so embedded labor is 20, but profit rate is 10. So it's kind of analogous case where the drive to equalize the profit rate now as a force is kind of pooling up exploitation from the labor-intensive industry and then divvying out profit to the capital-intensive industries. So the three firms sell their products not at their values, but at the price that gives them the same profit rate, which is called the price of production in Marxist terminology. All three industries lay out a capital of 20 euros and all receive a profit of 10. So the presentation in Table 3 is however flawed because it assumes that firms buy their inputs at their value but sell their inputs at their price of production, whereas if firms are selling at their price of production then they will also be buying at prices of production. And this problem is what makes the transformation problem a problem. Let me just reassure you that as a technical problem there is a solution. We can expand Table 3 to encompass all commodities in the economy and we can specify the proportional material components that go into their constant capital for each commodity, for example how much paper goes into making strawberries. Then we can start our calculation like we did in Table 3 and then with the inputs in values apply a standard profit rate, get the outputs as price of production and then we can feed back the outputs into the inputs, apply a standard profit rate again, and then feed it back again. And if we just iterate this process it will stabilize to a particular price of production which you can think of as the actual price of production. So I do not find that this solution very satisfying because it's unrealistic to quote Heinrich the transition from value and surplus value to production price and average that is I think in my terminology regulating profit is not a historical even temporal sequence. You know firms don't do this process of sort of adjusting from value to price production but rather different levels of description. It's just a question of analytically do we imagine that the economy has just the law of one wage and the law of one price or the law of one wage and the law of one price and the law of one profit. So the question that I want to investigate is how values are transformed into prices of production in the daily behavior of human beings. And then I'll just talk you through my answer which you know that's Marx's answer but is basically so to take let's take labor intensive industry first. So I'm a strawberry farmer or something like that. Why is it that I'm willing to sell my commodities under their value? Well because if I weren't willing to do that if I said I'm gonna be paid what these things are worth then some other farmer will come along and charge less for his strawberries and then he'll get all the market share and I'll go bankrupt. So that process is easy to understand. The consumers will go to where it was cheapest and as long as a capitalist I'm getting the return on my capital outlay that I expect then I'll keep in business. I don't care if I'm not paid at the value because after all that's just the exploitation that I've taken from my laborers so if I'm not paid for all of my exploitation who cares, right? That's the easier side of it to understand. Now the question is why do we pay some capitalist over the value of their commodities? And there you have to think of there as being a... you know basically because we have to, right? And so what is the constraint that means we have to? And I think that this is where I think it's useful to turn to Marx's theory of rent and he doesn't quite do this and I'll just talk you through two cases. One is let's say that the regulating technique involves something that's copyrighted or that has a patent on it. Well then someone has a monopoly on that property. So even though it's the regulated technique we have to pay a monopoly price. It's as if... I mean the example he uses in Volume 3 of a monopoly rent is like if I have a vineyard that makes just the most nice wine and I'm the only one who has the vineyard. So for that wine the only question is how high is the effective demand? Because the supply is limited, right? So I think one component of why we pay for... why we pay prices above values is because of monopoly rents. But the other one is what we call to use theory of rent terms is called absolute rent and here's the way you think of it. Okay this isn't quite as nice a vintner but it is a guy who sells... well let's make it whiskey just have to be sort of analytically different. Some product that has a naturally long production period. So if I'm a capitalist I'm thinking do I make whiskey like 20 year old whiskey and then I have to tie up my money for 20 years in whiskey barrels or I could just stick in the bank and then I get interest on it or I could buy a strawberry farm. So in order, almost like as a form of extortion in order for society to have a 20 year old whiskey you have to pay the capitalists enough to keep their capital in whiskey and that is in the theory of rent called absolute rent which in the context of agriculture is the amount of rent you have to pay on the worst land. So you're not paying because it's particularly nice land you're just paying because land is privately owned. So that's what... So anyhow that's the end which is to say like what is the mechanism whereby in the equalization of profit exploitation is sort of pooled up and then divvied out again. Well, on the part of those people who are paid under the value of their commodities it's because that's both the best they can manage and it perfectly satisfies what they want. They still get the profit that they expect from the outlay of their capital and then the reason why we pay for some products above their value is because those are sectors of the economy that either command monopoly rents or absolute rents. So that's my sort of attempt to kind of give a sort of intuitive explanation of the transformation of values into prices of production rather than this sort of more technical way of oh you can do it with matrix algebra. So that's the end of my talk. Everything in the Marxist analysis is historically specific. So like maybe to be a normal working class person in today's society in the West to have your iPhone and you need to drive a car that's no problem at all because he says very clearly already in the first few chapters that the wage is determined sort of social historically. Of course ultimately there's a biological floor. And let's say you can see this sort of social historical determination work across the decade. For instance by breaking the labor movement in the 1980s you can kind of change the profit-wage distribution through kind of social cultural forces if you like. Also the legal infrastructure, right? That's all accounted for in Marxist presentations. Going to utility, the place that this comes in from Marx is what is a commodity. So a commodity is a thing that is produced for exchange rather than produced for the consumption of the producer. And it has a dual aspect. It has a use value which is like the use value of water is drinking it and it has an exchange value. And the exchange value you can think of as the price. And then the thing that links the use value and the exchange value is the value and the value is the vertically integrated labor time. That's the sort of Marxist theory of the commodity, right? Where for instance you have to have a use value a socially sort of valid use value in order to be able to sell your commodities. Let's say, when I hear about the utility theory I sort of think, well, we had this nice distinction between use value and exchange value which you see very clearly in something like the housing market, right? You see homeless people on the street, they would really like to have homes. We have homes, they're empty. That's because the homes are being produced for exchange and not for their use value, right? And I think that's a very useful conceptual distinction. And it seems like somehow the marginal people try to kind of shove their exchange value into their use value. But I'm not as familiar with those economists. Maybe it's fashionable to buy from Mr. Golden's spindle. I think that's totally true. The question is, is it sufficiently fashionable to keep him in business? And I think the way to think of that is it's just a question of product differentiation. So the law of one price applies to products of similar use value where the use value might be to seem fashionable, yeah? But competition among providers will exist specific to that use value. Thank you very much.


This is Startup and Shorthand. Approximately 20% of businesses fail in the first year and around 50% go under in the first five years according to the Bureau of Labor Statistics. The companies that survive do so by navigating step-backs and creating a culture with effective leadership. They build a distinct brand. This is part one of a three-part Bright Live podcast series where we break down how to build a distinct brand. In this episode, we are focusing on leadership and all that goes into becoming an effective leader. On the panel, we have Jacob Pashnik, the founder of Let Us Grow, Manu Sieve, the founder of Alpha IO, and Lauren Brocastle, the founder of Sweet Lawrence. In this segment of the series, we discuss quiet quitting, navigating the hiring process, and doing personality tests with investors only to have them back out on Christmas Eve. Hello and welcome. We are Startup and Shorthand here with Bright Live at Benny Boy Brewing in Lincoln Heights, LA. Today we have a session called How to Build a Distinct Brand. The first hour we'll be talking about leadership, second we'll be talking about culture, and the third we'll be talking about navigating setbacks. I'm Nick. This is Diego. To my right, Manu Sieve from Alpha IO, Lauren Castle from Sweet Lawrence, and Jacob Petchnik from Let Us Grow. Let's get into the topics. First one is how to hire a team. And I'm curious about your experiences in hiring your teams. Are you looking for traits that you don't have, traits to strengthens the ones that you already possess? Manu, do you want to start us off? For sure, for sure. So firstly, thank you for having me. Of course. Yeah. Thanks for being here. Always a pleasure to chat. I think a great leader should hire, you know, according to the things that you're missing. That's what makes up composing a fantastic team.  You have to vibe with these people. They're going to become your family. They're going to give, you know, so many hours. So, you know, for me, yes, hire people that do things that are, you know, that you don't know how to do, but also hire people that you want to hang out with. The one thing I always focus on when hiring is, I say like hire for passion, not for, not for like position. And what that means is like, you really want someone who's going to almost do it for free. Like just be so into it, whether it's social media, like our team here, oh, and Alex here here, they're like, they would do this no matter what, because it's like almost a hobby to them. But it's really hard to find people. We call them like 120% are like people for passion. Jacob, when it came to your, obviously you have a very specific thing where it's almost like people with a green thumb should be someone who joined your team. But in that, they also have to be like really good at certain tasks. And so how did you go about either finding or like even hiring those people and getting them on board with the overall mission? Yeah. Well, the last few years, I think it's been a lot easier because people find us. And I think I can't tell you how many people have said, like, what I'm doing isn't meaningful.  I want to help the environment. I want to, you know, help people. So it's much easier. You know, there's a much bigger pool of talent. I think a lot was the pandemic made people question their value systems. And so it really brought that out. But I'd also started a number of companies in the past and in the past it was a lot harder, you know, to find that. It was a lot, you know, about the salary and, you know, all this other stuff.  It was just like, we're not going to talk about that. Let's figure out if it's a fit. If it's a fit, then we'll make the numbers work. Yeah. But it was really hiring on everything, you know, other than that. Like, is this your dream? You know, is this your dream job? And I like to put it, you know, on the other person. Yeah.  What are some things that you learned just around maybe the hiring process of you teasing that out without asking that directly? Well, I would ask it directly. How would you do that? What would you say? I would say, is this your dream job? You know, or what else would you want to be doing? It's very important. Where does this, yeah, where does this rank and the types of things you're looking at? What are other things you're considering? So you can sort of see when someone's looking for a job versus, like, you know, this is exactly what I want to do. There's nothing else. There's no number two, no number three. And they might not still be the right person, but at least that really filters out. I want people that love, you know, what we're doing and want to be here, no matter what. And then historically, I've had a very low, you know, attrition rate because of just finding the right people. And Lauren, how about you? I think it's a combination of all these things. But I think definitely when you're growing a business and it's you need people that are in it to win it. So like it can't just be about the salary or even that they just love like the business because I've had some people love the concept of what we're doing, but not really be like in it to win it and focused on goals and kind of ROI. And so I think after kind of several years of hiring people, we finally have such an awesome team. And I think we've tried to find the best of the best, each kind of managing their own department. And, you know, it's a combination of all those things. Like they have to be kind of that's even if they're getting paid a good salary, they're scrappy in nature, you know, like they're in it to win it. Like they love this. They're really measuring the results and the results driven and they really care and they're fun to work with. And so it does build that culture. And but then the day if they're not performing, like what are we doing here? How do you suss that out during the interview then? If they are truly in it to win it? Because anyone can say anything in an interview, but like that's the kind of thing to me that only comes through from watching someone do their work, you know, over a time period. I think it's like it's a ton of conversations to try to get to know someone like and hear their thought process and what do they come up with and how do they assess issues and what do they think success looks like. And I think tons of reference checks to like really kind of get to know this person and are they results driven kind of, you know, are they because I think again, like, I don't know, we've had a lot of people that have been like fun, but not necessarily have moved the needle on company. And I think when you're in a fast growing company, you know, just the the stakes are high and expectations are high. I have a small team. We're less than 15 people. So just everyone really, really counts. Yeah. And I think being very, very clear at the beginning, like, or I'm a very goal oriented person and goal oriented company. Are they cool with that? Like, do they like that? Or is that is that too stressful for them or not kind of what they're looking for? So I think it helps us. And I think they need to be in it to win it, but also have seen what winning looks like. That's what I look for. It's like, have they ever seen success before and do they know what it takes to get there? Because I think there are a lot of people who haven't seen success and then they don't really know that they need to, you know, put it all in and what winning actually takes. And I used to look, you know, a long time ago at people's like where they went to school and things like that. And I would actually put like more top caliber schools higher up. But I'm very, you know, I don't do that anymore. It's like, I look for people who really scrappy and they just, they didn't, maybe they didn't go to school, you know, or they, they did everything they could to rise. We actually have a question about that. Raina, let's bring you up on stage and you can ask. Raina's question has to deal with whether our guests start from within their own networks when it comes to hiring the right person and what other ways they might go about hiring the right candidate? That is an excellent question. If I knew the answer to that question, my job would be so much easier. But what I find and I've found is the people that are willing to give 120% usually come to you. They find a way, you know? I have not found that actually. I think some of my first hires were in my network and I felt comfortable with them because I had a relationship with them. I knew them. It was like a dream if they joined the company. But other hires we've actually, we've tried to do without recruiters. We've tried to save money. We've tried to, and what we found is actually the best hires have been through like very specialized recruiters who have introduced us to people that we would never be exposed to before but who are like top of the game. And I don't know, they were really able to help us like connect the dots like you guys would be a good culture fit. Recruiters, I'm a big fan of, even though they're expensive. I don't know if I know the pattern. I think we get good people from different channels like through the network, people come find us. We use a few recruiters. And then I just look for like super human acts. I remember years ago, someone applying for a job. I think it was back when we used fax machines, faxing the resume, no answer. So like finding our address somehow, from the fax number coming to the office. And I was like, wow, this person's got a lot of hustle. Yeah, agree. And so when I see that, it's like I definitely give those people an opportunity. Of course, look how hard they've worked. It's like you were not there any choice. You were there only choice.  Maybe you'll clash at some point, but there will be a lot of like, you always learn a lot from people that really wanna give as well, because they come informed. Like I had a designer that once reached out to us via email with a full UX UI redesign of our homepage. That was like her email to us. She's like, I would like to do this.  Because like you've obviously put some work into your I know, I love feedback. Yeah. That's the best. You know, if you're gonna build a fantastic product, you need people that are gonna, and that's like a key characteristic on a hire for me. They have to be willing to tell me that I'm wrong every day. Even if they think I'm gonna explode. Like, you know, they have to be like willing to just say it. But LinkedIn is great. Like I use LinkedIn all the time as well to like do deeper research and find patterns, find people that may know the people that I wanna get to, the companies that I, you know, would wanna work with. So if you're looking for a tool to kind of like really go find your dream job, I'd start just researching who your network is and how you can get to these places because you'll see that we are way more connected than we think. You know, the comments you made at the tail end of that where it's like you hire people who are honest with you and can tell you like, when things are going wrong. That's a good segue into our next little topic of trust and transparency like within your team.  How is that set up within your company and like is that anyone can bring up a problem like that or is it just like, you know, you have a chain of command like how do you approach that? It's so funny like it's so funny because there's different personality types, right? Even there's no chain of command, that's the short answer. It's like it could sometimes just be the intern and the intern just has like this voice and they're like, no, this is wrong. We need to change it all. And sometimes it could be like your right hand but then they'll pull you into an office and have a conversation. So it's like, it varies but you have to let them know that regardless of being angry because everybody gets angry. I get angry all the time like on and it's usually more at myself than anything else that your, that their job is never at risk. Okay. That they have like that open door. Yes, yeah. So they're expected. Lauren, do you have any? Yeah, I mean, I think, yeah, the whole reason why I hire a team is to hire people smarter than me and in different ways. So like just today we had a meeting and you know, the team kind of proposed something and it cost a lot of money.  When I could see the team was really upside that it wasn't like an easy yes. And like I have a call with a couple of people after and then I hear like all the reasons why like they've been researching this. They're fighting for this. They're sure about this. And then, and I love that. Cause it's like, I'm normally sold as long as they outlay kind of the argument, you know in a really compelling researched way. So I was like, okay, well, you didn't say X, Y and Z you know, now that you say that it totally makes sense. So I think like hire a team to help guide the company and be specialists and I don't know the answers to everything for sure. All I have is like a deep passion and gut for the business. And I just kind of go between all of those. Yeah. I mean, back to hiring like a key thing for me is self-consciousness. And I'd like to hire people who aren't that self-conscious that are going to be very free to speak their mind. And I want to have an environment where no one ever gets ridiculed. There's no, there's never anything personal and anything can be questioned. Anything could, anything can come up. So, you know, we're doing something new that hasn't been done before. So I don't know the answers. You need the team, you know, to think through. And I don't want to think of all the answers. I want the team to think of it. And I want them to be comfortable to throw silly things out, you know cause only one out of 10 ideas or fewer might work but you need to hear all 10. So I try to encourage that, you know in terms of the chain of command, I think as you get to be a bigger company then that starts, you know, to matter more. And I think we're, we've gone through this transition of like a founder led, you know, company where then the founder is really, you know with all the employees and has that dynamic. And then, and it's easy to kind of run point on everything and to kind of give everyone just like what they need to do to go and do their jobs to once you, you get bigger than you need to go I think to more of a team led company where you have your team members who are head of each, you know, area and you have to share philosophy with them but let them, you know, run with it and then it gets harder if somebody works under them. You know, you want to talk directly and hear that but you have to kind of allow this natural process to occur. So, you know, maybe not step in and do it as, you know quickly, you know, address things but kind of let the team nurture their, their viewpoints on things. How many people are you guys? We're 50 some. How was the transition from like 20 to 50? It's tough. Yeah. It's really tough. That's where you have to like really start setting the culture down. Yeah. And then it's all, it's totally different because when you start small, you need generalists, right? You need people who can do all different sorts of things. And then you need specialists, right? As you get bigger. And so there's like a natural change over and then the leadership again, it's like you're not telling everyone what to do really. You're, you have to really more set a course and maybe change it every quarter or more often, right? But these are initiatives and so it forces you to as a leader to get all that out on paper rather than just have it in your mind and go with the flow.  And that usually the people who were attracted to you, I think at first, they were attracted to that hands-on leadership. They're not gonna do as well without you telling them, really guiding them every step of the way.  And I think you want that because as a company gets so big, you can't be, as a leader, you can't be overseeing everything. Right, yeah. That brings us to our next topic. Like how do you set guidance? Like you just break it up quarterly, yearly, whatever it might be, but there's not always a clear and set path that you need to take. Like, you know, there are things that you might guess it's a 60% chance that this is the right call, 40% chance it's not. And in those moments, like, you know, you as the CEO, it kind of falls on you. Maybe other people will take credit for it if it succeeds, but everyone will look to you if it doesn't. Are you surrounding yourself with peers in maybe other industries or former founders? Do you have a board? How do you go about choosing the direction to take when the direction's not always clear? I think it's a mix of all of that, right? You have advisors that you speak to about certain matters, you have trusted people that you talk to. Yeah, you're gonna have to have a board at some point and sometimes it's not gonna go the way you want it to go. And you know, and sometimes the people that you started the business with are not the right people for you to continue doing business with because the company may have outgrown them. It can happen to anyone. And so it's, you're always being pulled in a million directions. So there's no right way to know which way to go. At the end of the day, you just have to always prioritize the company in every decision that you make. Like what is the path for highest long lasting growth? And you know, pray for the best. Well, in that vein, like when it comes time to part ways with someone, like that's not an easy thing either, especially if they've been with you from the beginning. And so like, have you had that moment and what is that conversation? Yeah, I'm going through it right now. It's horrible.  But like the person is just coming out of it, out of hurt. And so you just once again have to continue thinking what is best for the company in this moment in this situation and just like remove ego and remove any emotion from it and just go forward.  It'll make you have to find other outlets, as you said, like other board members have to find investors. My investors have been amazing during this whole thing. Like they've been a resource of information. They've been a resource of time. They've intervened several times. They've, you know, they've just been there to be on, be neutral and listen, because, you know, we're in the same team. Yeah, yeah. We want the company once again to be as big as it can, yeah. You chose them for a reason. I would say it's hard, but like as we were just saying, like the business, you know, grows and its needs grow and the type of personality of the person who the company needs or is attracted to the company changes too. So, you know, for sure we had people the very early days that aren't with us anymore because they love the idea of a business, but like they didn't really, they weren't in it to win it. Like they, like, you know, this isn't easy. Like sticking out with a company for several years to go from idea to, you know, Uber's success, it takes a certain personality type and also at the beginning, you know, needed more generalists that just like, you know, lead a small team. So like, hey, you just kind of, you're the person that does everything in the office, you know, and there's some people love that. And then, you know, as a company grows, you know, you're like, wait a minute, I need like the best salesperson possible or the best marketing person.  Like they want to be in an environment where they're going to thrive and become their best. And there's so much, there's so many businesses out there and opportunities. So I think you do have to be a little bit less emotional about it. And it's like, it's to a point where it's like, it's just a business decision.  It's like, there's, if there's not a fit happening, like, you got to make a change. Yeah, but sometimes there's like contractual obligations, right? Sometimes the person holds a lot of equity in the company. And so it's not a one-sided situation, which means it can also escalate for no apparent reason. Yeah. Well, I think also that's why we try to get really clear on like OKRs and goals for everyone for the year. So it's very black or white. Like here are our expectations. You've signed on to do X, Y or Z. They've helped even set up these goals. So we're not just like giving it to them. And so if things aren't starting to be met, even if they have a lot of equity or not, it's like, okay, like there's something missing here. You know, like we're upset about X, Y and Z. And so we hope to try avoid it. Have you gone through a co-founder breakup? No, I don't have co-founders. Yeah, it's different. I was referring to a co-founder situation. Well, that's different than employees. Yeah. But I think that was just the question. Sure, difficult all the same. Yeah, difficult. No, for sure. But employees, even though it's like, it could be somewhat emotional of someone that was a very, very early hire, they don't have much to do about it. You know, like the contracts are very clear. So why did you break up with the, we just, we turned into a massive tech company. We were an art company before. So the idea of the company changed. The idea of the company was always to be a giant tech company, but I think there was some romantic elements of being an art company at the same time. And which at some point we just had to break away to once again do what's best for the company. And to be one of the earliest blockchain players in the market, because we built the certification tech as a tool to certify our artwork. And we unwillingly came up with an incredible API. We have questions coming in. Susanna, we can see one of you, you can see your questions that we're gonna bring you on stage. Susanna asks, before you have to fire someone, are there any strategies that you can take to see if you can get them back on track before you make the final decision to let them go? I know Manu's answer, so we'll let Manu. Manu's gonna say there's no way out. What's the ideas there?  I set out very clear goals. It took maybe four or five years for the whole thing to complete itself. So you gave them a chance to show their value. I think for me as a person, I need to have clear conscience that I tried everything in a situation that I knew that I could sometimes bring some sort of solution to it. And so that's how I approach every problem. And it's like, it's the nature of founders. They're like relentless. We don't wanna let go. It's like, it's never giving up. And it was, I do not regret doing any of the programs. I recommend all of them. From like understanding or enneagram to see if you're compatible or not, to actually doing some counseling because you'll learn a lot about yourself and about your leadership styles, which was like really unbelievable. And yeah, and just really keeping the lines of communication open. I think when the lines of communication shut down, that's when you know there's no path forward. You've never dealt with this? Yeah, I've never dealt with a co-founder or something, but a high level employee or something where you really wanna make it work. Again, I try to set really clear goals and okay ours with everyone so that it shouldn't be a surprise of like there's a disappointment here or there, but I always like to do like a warning, like have a meeting and having this not be a surprise to the person, like okay, like we're seeing this issue. Are you seeing it too? Are we on the same page about why it's happening? Do you wanna fix it? Like really understanding like, are they already like one foot out the door or like they really wanna fix it and then trying to get really clear about what I'm expecting, what my goals are, get them to sign on and say okay, in the next 90 days, like if X and Y happen, then I think we'll both feel like this is moving in the right direction and if it's not, then we're gonna have to make a change. And I think, I don't know, then I feel like I'm being as honest as possible. I'm giving them a real opportunity to turn around. There's no confusion about what I meant or what we thought and it's up to them. I think communication is definitely key and handling the situation immediately. One of my tenants is, yeah, correct hiring mistakes immediately because that can fester and, I hate breaking up with anybody or anything and that's like one of the worst things that I could do but if you hold off and you don't do anything about it, the other person, let's say in the work context, they realize they're not adding value. You realize that and then there's like resentment or frustration builds and then that just gets to be, could be destructive. So I think communicating and we'll do like a performance improvement plan, something like that. But I would say generally, like for me, when I have the gut feeling it's not gonna work out, it almost never works out. You know? So then I agree, I think it's hard. I think it's impossible. Every time I've had a company and I've had the situation, I think the better senses of being a human are put them on some path to success or like try to work something out, but it's never worked. It's always eventually failed and so it's always just kind of a big bummer, unfortunately. Also, there is a bad apple, like if there's someone who's just like- It poisons the whole bunch. Yeah, like not really happy or like they will start talking, they will start nitpicking the company instead of looking at all the positives, they look at the negatives and like that really kills morale. Like we've had bad apples and then like we let them go and all of a sudden I'm like, oh my God, I feel lighter. Like the whole energy is better. So it's really important. You have to protect the culture and the vibe of the company because people are influenced. Thank you for your question. We have another one coming in from Claudia. Claudia asks that sense strategy is always changing in startups. When you have to make the call to change course, how do you optimize that in a way that doesn't affect the team in a negative way and also keeps them motivated? When I had my first startup, we went through Y Combinator and we went through Y Combinator, we had all these amazing people giving us all this advice and the team was basically a bunch of coders and me. And so at one time, we have this very clear conversation where we're trying to raise capital and we're trying to work on our product at the same time. And so what's happening was three people were coding, one person was doing sales, me. And as soon as we start getting to this level, Michael Siebel, who's this amazing YC partner, basically said, how many customers do you guys have? To all of us, and we go zero. And he goes, great, you're all sales people now. And the coders were all very scared about this situation.  And it was this very clear moment of, the company, especially at an early stage, will have very pivotal moments where you have to do the one thing the whole company needs. And his argument was, if you have no customers, then you're coding for no reason. And the coders' argument was, we can't have customers until we have a product to let's code. But Michael Siebel looked at it very clearly. We're at the time, at that specific moment of our company, it was about getting customers first and building a product for them instead of coding something that we thought they would like, but in reality, we could be totally wrong. And so that's just a quick story of a very early stage. You kind of do what's required as a team in that moment. And those priorities shift over time, but... I think if you're in a startup, it's expected. And I tell this to everybody that I'm gonna hire, that if you need structure, a clear definition of your role, a set of things that you're gonna do in a daily basis, you are at the wrong place. That is not what we do. We are running around like headless chickens with processes, of course, but we are always listening to the customer. So if the customer is telling me to build a sports platform today, which I am doing, but at the same time, there's someone down the street telling me that I actually wanna use your exact same structure and do a restaurant loyalty platform. I'm gonna do that too, which means my team is gonna have to figure out how to make it work between those two very adverse use cases and that's okay because we gotta listen to the client, right? We gotta listen to the market. I mean, strategy changes. I think of like, this Let Us Grow and my previous companies probably went through three or four iterations of the business plan until we got it right. And that's just a part of it. And you need people who are flexible to do that. As you then start to get to be, I mean, I would say we're startup but more a little bit past that where we're getting, where we have to set the vision and say, this is what we're doing this year, which seems like so long for me, but then if we change strategy, that's a little bit of a bigger deal. It's really navigating a bigger thing, but it's just part of it. And that's also what makes the successful company successful that they read what's going on and they adapt quickly. Marky Andreessen has a great quote. He says, strong beliefs loosely held. And I think that's like that startup in a nutshell. You have to kind of know where you're trying to go, but in that, be very willing to be wrong and then be very willing to apply the new thing. And until you have like product market fit, like it really is like humming and you figure out exactly what, how to market it, package it, what the product is, with all of that, like, you know, there's just so much tweaking. So again, the early years, like you need a team just like obsessed with the customer and like improving the product and okay, switching all the time and learning. And then once you have product market fit, it's really like, I think there's more than a strategy of like, okay, let's focus on this and grow. But yeah, I think you always need to be flexible because like the world's crazy. Look what happened in the last two years. Like no one expected COVID, no one expected supply chain issues. Like you just gotta like, you gotta be able to roll with it. I wanna touch on this fun topic that's all over the headlines, which is quiet quitting. Have you guys dealt with this?  I just learned of this myself two days ago. Oh yeah, Nick had no idea what this was because he's been quiet quitting for four years now. No, but have you guys gone or like, does it worry you, this thing in the marketplace where I just had a high level, right? People can now be remote, which means if your managers aren't managing, you know, it's easy to hide, so to speak. And so how do you guys as like a leader kind of go without micromanaging people? Oh, I think I've gone through it. Through quiet quitting? Yeah. You had somebody do it? Okay. I say it like it was, you just feel it when the person isn't there anymore. And like, regardless of you having to like, be up to ask if they stopped delivering things is what she was saying about setting clear results and goals.  I think like our team is still small enough and like to be attractive to the company, you have to be a passionate go-getter. So I think those people aren't attracted to the company and I think it'd be, it's quite obvious if someone's kind of not in it to win it and then we really immediately kind of close that because we need winners. I could imagine it with much bigger organizations where like people can do the bare minimum just to get by and they're not really passionate about what they're doing. They're just trying to get a paycheck and they really want to spend their time traveling or with their family or whatever brings them happiness. So like, I think, I don't know, we're probably all attracting people that are probably pretty passionate about their jobs because it requires that to build something, I think. There's a subjective line to, you know, early on in my life, I was like all in.  Why didn't you take us out? I wouldn't ever. Are you out? Oh man. You're quitting on stage. Yeah, I'm quite quitting. I'm quietly quitting. Yeah, I mean like our brand and everything that we do is about like improving the quality of life, right? And so it's kind of hard also to say, well be in the office, like our work, so much more. I naturally as a leader, and I have a lot of, I'm so much passionate for the company. I want things to happen faster and do more. You know, but I also want people to have like a healthy life, right? In balance, and I want them to have vacation and time with their families and things like that. And sometimes it's hard to tell like, is somebody fully in or should I push more or should they, you know, have this time? And so I think that's, I know I think then when you have remote working that just gets a lot more challenging. Yeah. And it can be demoralizing if you actually do think someone might be quite quitting and they're not. You know, it's just like you're not seeing their work product. But normally if multiple people comment, I think on someone or say, hey, what's this person doing? Then it's a pretty good. Yeah, hey, what's this person doing is good. Yeah, it's a pretty good career. What's their role? But I think also like not that it's, like I take responsibility for it, but I think as the leader, like you do need to make sure you're constantly like pumping people up and like figuring out what makes people passionate or what they're most interested in to get the best out of them, you know? And so, and if you can't do that and this person is not the right fit for you, but you know, I find that like, that's probably what one of my best assets is. It's just like being the passion and the vision and like, you know, the reason that we all work so hard, you know? Do you guys do any personality test? We're starting to. You are starting to, okay? Is it Myers-Briggs or are you doing something else? We're doing something else. We're doing with the leadership team right now, but I'm curious like maybe we should do it with everyone. But I think it's already, I just hired a president. Like that was one of the first things we did because, and then the coach who gave it had a session with him, had a session with me and it was like, she likes to work like this, you know? And he likes to work like this. It helps both of us like really understand how people like to be communicated with and their strengths and how their brain works and how to appreciate, you know, how we work together. I just joined a board and it was very much like that, which was really interesting. It was like the very first board retreat was personality test. And then we set up into four groups of each different personality and it kind of blew me away, honestly. Because I was in Myers-Briggs, it was, yeah. But I just like associating myself with the people that have my personality, which is so self-serving, but it really taught me like the value actually of having every different personality type, which I think prior to that board meeting, I would have never valued it. And so it was actually eye-opening to me, very eye-opening. He had a crazy fond once that only invested in women. Call us in for a week of due diligence in Boulder and their headquarters.  And first thing they do as well is before we get there, everybody has their enneagram. So we have our numbers and we're arriving, et cetera. And it was a week of kind of like a crazy, like psychological pushing of boundaries. Everybody cried.  What we're made of, it was like, it was crazy. But I learned a lot about myself during the process. Did they invest? The worst part was they invested and then on December 24th, they called me up and they're like, we're gonna have to cancel the investment. Merry Christmas. Merry Christmas. This is a final question we'll take. Rachel, if you wanna come on stage and ask your question. Rachel wants to know if there are any books or documentaries or anything in any other medium that inspires us or that we just really enjoyed. Jacob, we'll start with you and then we'll go this way. Favorite book or documentary or just media? Inspiration. Back when I started my first company, I was 24 and there was a book called Rules for Revolutionaries. It was like the top 10. It was Guy Kawasaki, who's one of the marketing. Yeah. 10 simple rules. Correct hiring mistakes immediately is one of them. That was like immensely helpful for me and I think it still holds a lot of value. And there's only 10 things you need to remember. So. Two, my two favorite books are the biography of Steve Jobs. It's just such a good book and then also Shoe Dog, which is a story of Nike. And I just, you just hear about all of the issues and problems that these founders face and like they figure it out and they keep going and it's inspirational. I feel like I have to go a little poetic right now. We're living a very, very interesting historical moment with everything that's going on, the technology and what blockchain means in terms of creating these decentralized organizations that could really change the way that we think of leadership as a whole, right? So I have to say Atlas Shrugged, Ayn Rand, because it could go either way. Read it and you'll understand. I'll say, I just read The Hard Thing About Hard Things by Ben Horowitz and it's very instructional in a way that other entrepreneurship books aren't necessarily. I love Shoe Dogs. It was very story-based as opposed to Ben's book which is just like, look, you're gonna come up with this problem, this problem, this problem. Here's how I dealt with it and here's how I recommend dealing with it. And so I thought that was like a breath of fresh air in terms of reading material. Mine's very different. Mine's called The New Earth by Eckhart Tolle. It's a book more about personal development. The thing I take into business is more about, it's about your journey.  And so I kind of start with the work being about you. The business stuff I think is like more clinical. It's like, I can learn math, I can learn accounting, but the hard work is the mirror. So that's, I don't know, that's what I go with. So that'll wrap it up for this leadership topic. We have culture coming up and navigating setbacks coming up. Please stick around and tune in for our next topic. Hey you. Yeah, you listening. Thank you so much for making it to the end of the episode. Make sure to follow us on Instagram, subscribe on YouTube and we cannot wait to see you next week for another great episode. Cheers.


Can anybody guess what kind of reaction this is? Without looking at it? How do you know it's an SN1? How do you know it's not an SN2 reaction? It's tertiary. Because it's a tertiary alkyl haline, very good. So not only that, you've got a weak base, or a weak nucleophile, I guess I should say.  Just like you guys said, since we've got a tertiary alkyl halide, and this being on the benzylic position makes it reactive and faster as an SN1 reaction. Because, as you can see up there, we've got a lot of resonance structures, which I'm not going to draw for you in this reaction, but you can figure them out yourself. Solvent in this reaction is water, as you guys saw, which is a polar product solvent. So that's going to pull that alkyl halide apart. So the first step of this SN1 reaction is going to be the leaving of the leading group. So the leading group leaves like that. The solvent is water, so there's a lot of it. If these two substituents were different, we would make a stereocenter here, since they're both methyl groups we're not going to. Sb2, so it can react from the top or from the bottom. And of course, I guess we still have the v on minus with the rim. Probably not that. That's the base, probably another water molecule. But you can think of that as the base, whatever you want. The probability of it being another water molecule is much higher, though, because of the concentration of water relative to Br minus on it. That's going to give you your problem. Then, of course, we've got H3O plus Br minus, which is the same thing as HBr. So if it asks for the organic product, everybody cool with that? So again, I know you guys know SN1 reactions. They happen quite readily on tertiary alkyl halides, especially benzylic ones, because this intermediate, the carbocation intermediate, has a lot of resonance structures where you can push that positive charge to this carbon, this carbon, this carbon. So make sure you're able to push that around. I may ask you some question like that. Why is benzylic cation very stable? Think about things like that. Is everybody OK with this one? Can we kill it?


Hello and welcome to this session in which you would look at the CPA simulations that deals with the third taxed asset and the third tax liability. In my opinion, or I strongly believe if you can solve this simulation, solve this exercise, you should be in good shape when it comes to the third taxed asset and the third tax liability. If you want to pause and try it, that's fine, otherwise you can follow and see how we would solve an exercise like this. Atom company purchased a machine costing 90,000 on January 1st, 2021. For financial statement reporting purposes, which is GAAP, the straight line method was used. The machine has a three-year use for life and no salvage value. So if we purchase it for 30,000, there's no salvage value divided by three, each year will take $30,000 of depreciation for GAAP. Atom company used the accelerated depreciation method that results in depreciation expense of 45, 30, and 15 for the three years respectively, which is X1, X2, and X3. So this is GAAP, this is GAAP depreciation, 30,000, and this is tax depreciation, 45, 30, and 15. Net income before depreciation and tax, which is earnings before depreciation and tax, EBIT, 100,000 for X1, 120 for X2, and 80,000 for the X3. What we need to do now is compute net income, compute the income or net income for book as well as for tax purposes for year X1, X2, and X3, and prepare the journal entries for the income tax expense. What I'm going to do, I'm going to switch to Excel sheet and try to solve these questions assuming the tax rate is 21%. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple-choice questions, true-false questions as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. So this is the information that we are giving on the prior sheet. This is earnings before depreciation and taxes for each year, the tax rate 21%. This is the tax depreciation for each year, X1, X2, and X3. And this is the tax depreciation, a gap depreciation for year one, year two, and year three. Notice the same amount of depreciation over three years. What we're going to do, we're going to take a look at each year separately, compute the income tax, income tax expense, then we're going to look at net income. Starting with year X1, starting with tax. Earnings is 100,000, so earnings is 100,000, income before taxes and depreciation. Depreciation expense is 45,000 minus depreciation expense. That's going to give us a subtotal of 55. Now, this is income before taxes. We are told taxes are 21%. So if I'm going to take 55,000, I'm going to multiply it by 21%. And that's going to give me 11,000, 11,550. So all what I did is I took income before taxes, multiply it by the tax rate, which is 11,550. What does this number represent? It represents how much I need to pay to the IRS. This number is income taxes payable. This number represents a credit to income taxes payable. This is how much taxes I have to pay now. So this is the check that I have to write to the IRS, 11,550. Now if I take my 55,000 minus my taxes, which is 11,550, my net income for tax purposes is 43,450. Now for gap purposes, the only difference between tax and gap is for tax, I took more of depreciation, more of depreciation. What does that mean? It means I'm going to have to book a deferred tax liability. Why? For this year, for this 2001, I took too much depreciation compared to my gap depreciation. Therefore I used up 15,000. The difference notice is 15,000. Well what's that going to do? We're going to assume the tax rate is for future years is 21%.  If I take 15,000 times 0.21, I'm going to have to book a deferred tax liability of 3,150. So this is my deferred tax liability, which is a liability of 3,150. Now how do I compute my income tax expense? As I always showed you in the recording in the lectures that income tax expense is the current portion, there's a current portion, there's a long term portion. The current portion is 11,550. This is the current and the 3,150 is the not long term, it's the deferred or the deferred portion, deferred taxes. Since I have to pay now 11,550, in the future I have a responsibility of 3,150, together they're going to give me my income tax expense. Now in your CPA review course, what they might have do, they might give you two income tax expense, one is current, which is the current portion is 11,550, then they might have an income tax expense deferred and they might give you the 3,150. You have two income tax expense, I combine them and they combine to 14,700, which is my income tax expense, which is the income tax expense that I compute for gap purposes. Now my subtotal under gap 100,000 minus the depreciation of 30 equal to 70 minus my income tax expense that I computed here, which is going to give me net income for gap purposes of 55,300. So this is year one, this is year one net income for each scenario, which is the gap as well as tax purposes, let's look at year two. Year two, my revenue is 100,000 for gap, 100,000 for tax. For year two, this is 100,000, my tax depreciation is 30,000, so 120 minus 30,000 will give me my subtotal, which is my income before taxes, I'm going to multiply this by how much by 21%, so I'm going to take 90,000 and the tax rate is 21%, if I take 90,000 times 0.21, that's going to give me 18,000, 18,900. Now my profit for tax purposes is 90,000 minus 18,500, which is, let's see, let me just say I have the number here, 71,100. For gap purposes, again, the revenue is the same, and guess what, for that year depreciation is the same, depreciation for tax and gap are the same, there's no difference, therefore 90,000. Now, since tax and gap are the same, I have no deferred tax asset, I have no deferred tax liability for this year, therefore, so let's first, why don't we do the journal entry for the 18,900? For the 18,900, I have to credit income taxes payable, again, income taxes payable is my current taxes that I have to pay the check I sent to the IRS, income taxes payable. Now I don't have any deferred taxes, it means the debit is income tax expense, therefore my debit is income tax expense and as a result, my net income for gap is the same, so notice, because there is no difference between the two, they are the same. Let's take a look at year X3, starting with tax purposes, my income is 80,000, my depreciation for tax purposes is 15, 80,000 minus 15 will give me taxable income of 65,000, what am I going to have to do? I'm going to have to take 65,000 multiplied by 21%, and as a result, I have to write a check to the IRS of 13,650, so I'm going to credit, let's start with the journal entry, I always like to do the journal entry step by step, income taxes payable of 13,650, that's fine. Now if I look at the difference between my gap depreciation and my gap and my tax, my gap and my tax for year 3, I am taking less depreciation for tax purposes and exactly 15, all what's happening, this 15,000 now that I took upfront, that I took at year 3, now I'm losing it in year 3 and it's reversing. If it's reversing, it means this tax liability that I created, this tax liability that I created, this DTL that I created, it's going to reverse. Well it's going to reverse, I'm going to have to remove it because now I am getting less deduction, therefore I am going to debit the third tax liability to reverse this one, 3,150. Okay, so let me first compute net income for tax purposes, which is 51,350, now what is my income tax expense, well I have to write a check for 13,650, then I'm going to have to reduce my liability, which means I am now reducing my liability, I'm not recorded as an expense because I already recorded it as an expense, I recorded this 3,150 as an expense when I accrued it in 20x1. Now 13, the check minus the reduction in the liabilities will give me income tax expense of 10,500, therefore my income tax expense is 10,500 and my net income is 39,500. Few things I want you to observe from this exercise, I want to make sure you understand this, the first thing is notice total depreciation for all 3 years is 90,000, the 15,000 less that I took more in tax depreciation was reversed in year 3, therefore the difference overall is 0 and if I compute my net income for gap purposes, if I add this number, this number plus this number plus this number, let me highlight them, if I add this plus this plus this, it's going to give me 165,900, the sum of those 3 numbers for gap over 3 years, my net income is 165,900, now if I'm going to add my tax, tax, tax net income over 3 years and it also gives me 165,900, why? Because the differences are temporary differences, the only difference here is temporary difference which is exactly the only difference is depreciation which is it started in year 1, which it gave me the third tax liability, then it reversed in year 3, income is the same for tax and gap, therefore guess what, over 3 years everything reversed and everything equal to each other, so this exercise I strongly believe if you can follow the journal entries, how we did the computation, how we did the journal entries, we only dealt with the third tax liability, obviously you want to work another example with the third tax asset, look at the journal entries and once you are comfortable with this, once you are comfortable with this, you know bring it on, the third tax asset, the third tax liability, but what should you do now? Go to Farhat Lectures and look at additional true, false, MCQs, exercises that's going to illustrate this concept, that's going to help you better, the third tax asset is a difficult topic, if you don't learn it, if you learn it, it's easy topic, bring it on, good luck, study hard and of course stay safe.


Even the way we talk about community, we say, we've got to plug into a community. And it's just fun, we have this technological lens. So a plug, you plug it in to draw power that you need and then you unplug it. There's nothing living or permanent about it. It's by definition a temporary draw from a community. Whereas the community that is formed around living from and with and close to the land is much more like roots. Whereas if you remove it, it causes harm to the root, to the soil structure around the root, to the other organisms that depended on the root.