December 27, 2021
Serious investors care about more than the markets. They care about the freedom that makes those markets work, and the wisdom behind that freedom. Serious investors also care about the things that threaten market freedom – such as foolish politics and ideology.
Having investments is like having kids. You want them to grow and prosper, with liberty and responsibility. You don’t want them ruined by bad ideas… like getting a face tattoo.
But being a serious investor often means a lot of reading. Sometimes it seems like you need a 48-hour day and an eight-day week to peruse all the research and analysis that’s available.
Today, I’m going to suggest that you do even more reading – reading that won’t make you a penny… (But may save your sanity.)
Free to Choose
By Milton and Rose Friedman
Nobel Prize-winning economist Milton Friedman (1912-2006) possessed the wisdom behind market freedom. He was the 20th century’s leading academic theorist of free-market economics.
But Free to Choose is a book for the general public written with his wife Rose, also an economist and with a degree in philosophy, too.
The Friedmans explain why the free market is good for the rich, the poor, minorities, majorities, the disadvantaged, and those who (as politicians tell us) have so many advantages that regulatory agencies and the IRS need to take some away.
The free market is not good for politicians. The free market distributes power to individuals. Politicians want that power for themselves.
Free to Choose originally accompanied a 10-part PBS series of the same name, which began broadcasting in January 1980.
After a decade of “stagflation” and idiotic economic policies from Presidents Richard Nixon, Gerald Ford, and Jimmy Carter, America was suddenly exposed to clear, concise common sense about what market freedom means.
It means every freedom we have. Freedoms are physical things. All the physical goods and services of the world (including freedom of speech and belief) are traded in a marketplace.
“If,” the Friedmans say, “an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.”
That’s the free market.
When the market isn’t free, the exchange may not be voluntary. The exchange could take place under threat of force, even though you know you won’t benefit from it. You could be sold into slavery.
The second message of Free to Choose is that we should avoid, as much as we can, all kinds of government interference in free markets – including (and sometimes especially) “beneficial” government interference.
We live in a democracy, and, because we freely elect the people who govern us, we may think that government actions are extensions of our own freedoms.
The Friedmans warn us to be careful about thinking that way:
Every accretion of government power for whatever purpose increases the danger that government, instead of serving the great majority of its citizens, will become a means whereby some of its citizens can take advantage of others.
And don’t think poor people are the exception:
The poor tend to lack not only the skills valued in the market, but also the skills required to be successful in the political scramble for funds.
Even when we have “good government” we’re giving up our individuality. We have to conform to what the government tells us to do. In the free market all parties are unanimous about the deal being a good deal. In the un-free market, produced by government threat of force, somebody’s being coerced:
The ballot box produces conformity without unanimity; the marketplace [produces] unanimity without conformity. That is why it is desirable to use the ballot box… only for those decisions where conformity is essential.
The third message is that economic “fairness” is equal parts sham and danger:
A society that puts equality of outcome ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.
The Friedmans use a number of public-policy issues, current in 1979, to make their points. Every one of those issues is still with us and causing more trouble than ever – cradle-to-grave welfare programs, pollution (as “climate change” was called back then), consumers’ rights, income inequality. There’s a chapter titled “What’s Wrong With Our Schools?” and another – about to become all too relevant again – called “The Cure for Inflation.”
Free to Choose was written 40 years ago, but instead of seeming out-of-date it reads like something you hope somebody will write tomorrow.
The Road to Serfdom
By Friedrich Hayek
Austrian-born economist Friedrich Hayek (1899-1992) was another powerful advocate of free markets. He saw central planning as the greatest threat to economic liberty and argued that the danger exists whether the central planners are dictators in China, bureaucrats in Europe, or Democrats and Republicans in Congress and the White House.
You can see the threat in the name of the thing. “Central” means that the decisions we make about working, spending, saving, investing, and minding our own business (and businesses) won’t be made by us. We’re scattered all over the place. Those decisions will be made in a central place, such as Washington.
What will the politicians and political appointees in charge of that centralization do? They’ll plan how we work, spend, save, invest, and do business.
We’ll be told what to do, how to do it, and where the benefits of our labors will go. We’ll become our government’s serfs.
Politicians claim that central planning is necessary because we face a lot of problems and government is the biggest and most effective tool to fix those problems. The hazard in making politics the way to fix problems is that once politicians start promising to fix problems, they have to promise to fix every problem. (Just listen to any candidate running for Congress this year.)
Hayek points out the stupidity of these promises:
There is an infinite number of good things, which we all agree are highly desirable as well as possible… That these things cannot all be done at the same time… can be appreciated only by a painful intellectual effort.
Our politicians can be accused of a lot of things, but making “a painful intellectual effort” is not one of them.
We individuals, on the other hand, don’t have to think hard to know that Hayek is telling the truth. We can look in our bank accounts.
Another case that’s made for central planning is technocratic. Government will get things done by putting experts in charge, by delegating centralized power over various aspects of life to the most eminent specialists in each field. Hayek demolishes this notion:
There could hardly be a more unbearable – and more irrational – world than one in which the most eminent specialists in each field were allowed to proceed unchecked with the realization of their ideals.
Hayek admits that economic freedom can cause difficulties. He says, “In a competitive society most things can be had at a price – though it is often a cruelly high price we have to pay,” but the alternative to paying a high price isn’t free goods and services…
The alternative is obtaining what we need and want from a political authority issuing “orders and prohibitions which must be obeyed.” And, says Hayek, “in the last resort” our needs and wants will depend on “the favor of the mighty.”
The “mighty” will, of course, claim that they’re using their power in the interest of social justice. This means they’ll need more power. As Hayek says:
Once government has embarked upon planning for the sake of justice, it cannot refuse responsibility for anybody’s fate or position… There will be no economic or social questions that would not be political questions.
Even your SAT scores will be federally mandated.
As Hayek notes, government overreach inexorably results in bad government:
… neither good intentions nor efficiency of organization can preserve decency in a system in which personal freedom and individual responsibility are destroyed.
And bad government leads to worse government:
… equality before the law is in conflict, and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people… distributive justice must lead to destruction of the Rule of Law.
The laws of our country may remain the same under central planning, but the rules and regulations will proliferate – even more than they have already. Instead of a nation obeying “the rule of law” we’ll live in a nation obeying “the law of rules”…
The difference between the two… is the same as that between laying down a Rule of the Road, as in the Highway Code, and ordering people where to go.
And democracy is no guarantee that we’ll avoid tyranny:
… it is not the source but the limitation of power which prevents it from being arbitrary.
The sphere of politics will expand to encompass all of life. The only way anybody will be able to get ahead (or stay afloat) will be to depend on politics.
As Hayek asks, “Who will deny that a world in which the wealthy are powerful is still a better world than one in which only the already powerful can acquire wealth?”
Hayek wrote The Road to Serfdom in the midst of World War II, when the planet was beset by freedom-murdering ideologies – German Nazism, Italian and Spanish Fascism, Japanese Imperialism, and Soviet Communism.
Hayek predicted that these would be defeated. But he worried that another threat to liberty lay ahead in Britain’s Labor Party, FDR’s New Deal, and the political coalitions that would impose welfare-state “social democracy” on post-war Europe.
Hayek dedicated his book “To Socialists of All Parties.”
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
New Ideas From Dead Economists
By Todd Buchholz
Todd Buchholz provides us with the whole scope of economic thinking from Adam Smith to Alan Greenspan. He tells us what the great thinkers thought, and sorts through which ideas were wise and which were stupid. He shows us how to use the great thinkers to think for ourselves about the economy. And he does it all in 287 pages of clear, quick, and often very funny writing.
Buchholz is an accomplished fellow. He has a degree in law from Harvard and a degree in economics from Cambridge. He’s a former managing director of the Tiger hedge fund, a successful entrepreneur who holds a number of engineering and design patents, and a founding producer of the Broadway show Jersey Boys.
He was also director of economic policy under President George H.W. Bush, so… if you recall the small economic snafu at the end of the “Bush 41” administration… Nobody’s perfect.
But, as Buchholz says in New Ideas, “Economics is the study of choice. It does not tell us what to choose. It only helps us understand the consequences of our choices.” The consequences of our choices in 1992 presidential election were the Clintons in the White House.
Unlike the Clintons, Buchholz knows that the purpose of a good economy is not just to make politicians popular or a few cronies rich. A good economy has a moral purpose – to improve the lives of all people by letting individuals employ ingenuity, innovation, and creativity.
What’s good about capitalism is human capital.
Buchholz points out that Adam Smith regarded himself as a moral philosopher. For Smith, economics was an extension of morality – making human life better by making human capital more valuable.
Consider Smith’s most famous quote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”
This isn’t a wisecrack about the selfishness of human nature. It’s a statement of the moral benefits of free-market ingenuity, innovation, and creativity. Buchholz explains:
Market competition leads a self-interested person to wake up in the morning, look outside at the earth and produce from its raw material, not what he wants, but what others want.
Adam Smith was an optimist. He believed economic freedom can make us all richer. His contemporary opposite number was Thomas Malthus. Malthus believed we were all going to starve.
Malthus had logic on his side. The population keeps growing, but there’s a fixed amount of land to farm. We’re going to run out of food. Sooner or later the plowshare will bump into the housing project.
To this day the world is full of “Malthusians” – politicians, academics, ecological extremists, and climate-change alarmists loudly warning that we’re going to run out of things. We’re going to run out of energy, run out of water, run out of air itself.
But if Malthus were alive today, he’d be puzzled. There are more people in the world than ever and, yet… somehow… there’s also more food per person.
Malthus was proven wrong, and modern Malthusians will also be proven wrong. Buchholz tells us why we don’t run out of things in two words: “Prices signal.”
“Prices,” he says, “signal to economic agents [that’s you and me] when to conserve or economize.” Likewise, prices give us signals about when and where to apply our ingenuity, innovation, and creativity. Obviously, we applied them to agriculture.
In a free market, prices send us reliable signals about what to do.
But without a free market, prices send bad signals. Under communism, prices were fixed. Some prices were fixed too low. The message was, “Use it all up,” which was why communist countries had nothing to buy. Other prices were fixed too high, and the message was, “Make lots of stuff nobody wants.” (Atomic bombs, for example.)
This is why Buchholz spends 34 pages detailing how wrong Karl Marx was. I doubt that many American Consequences readers need to be convinced Marx was wrong, but it’s a fun read. Also, some of us have college students in the family. The chapter on Marx is required reading for college students – or it would be if college professors weren’t a bunch of Marxists.
Marxism will always have a certain appeal to kids. It makes complicated economics look simple – good guys versus bad guys. Bad-guy capitalist plutocrats exploit good-guy proletarian workers. In other words, Dad makes you mow the lawn.
Buchholz does say that Marx had some understanding of capitalism, in the sense of how financial capital works. But Marx had no understanding of how human capital works. Ingenuity, innovation, and creativity are why those of us who live in free-market countries have the high standard of living we have, instead of the class war that Marx predicted.
The gas-powered lawn mower was invented by Ransom E. Olds (of Oldsmobile fame). I’ll bet it was because his dad made him mow the lawn.
Buchholz explores every prominent economic theory. We discover how the wisest – and the most foolish – economists concocted their ideas. If economics were a fancy restaurant, New Ideas would be a tasting menu. We get the flavor of, to name a few:
David Ricardo Comparative Advantage – If it weren’t for free trade, we’d get our oil from France and our wine from Saudi Arabia.
John Stuart Mill Don’t worry if you’re confused by his thinking. Mill was confused by his own thinking.
Alfred Marshall Marginal Utility – Why gold is worth more than water even though we’ll die if we don’t get water and all that happens if we don’t get gold is that our fiancée is miffed.
Joseph Schumpeter Creative Destruction – the little pieces of eggshell that always wind up in our omelet when we break eggs.
John Maynard Keynes “Better plan the economy!”
Milton Friedman “… Better not!”
Friedrich Hayek “We’ll wind up with tyranny if we do!”
James M. Buchanan “… And we’ll be broke because government is a business like any other except more crooked.”
Meanwhile, Buchholz never loses sight of that moral dimension of economics – putting human capital first. He tells a joke about what happens if we believe in any theory of economics, but ignore human ingenuity, innovation, and creativity…
During a flood, a pious man runs to his church. The floodwaters reach the top of the church steps. A fisherman in a rowboat rows up to the church and offers to rescue the pious man. “No,” says the pious man, “God will save me.” The floodwaters reach the top of the church alter. A rich man in a yacht sails into the church and offers to rescue the pious man. “No,” says the pious man, “God will save me.” The floodwaters reach the top of the church steeple. A billionaire flying by in his helicopter hovers over the steeple and offers to save the pious man. “No,” says the pious man, “God will save me.” The pious man drowns and goes to heaven. He says to God, “I believed that you’d save me and you let me down.”
God says, “Schmuck! Why do you think I sent the rowboat, the speedboat, and the helicopter?”
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