Slavery, An Epicurean Business Model

Early Economics

The world is composed of atoms, which can combine and re-combine to form everything and anything, including the gods, but can never be destroyed. There is no afterlife and creation is simply trial and error carried out over infinitely long times. The only purpose to life is to seek pleasure and avoid pain.

These ideas should all sound familiar to people acquainted with the mores of modern society, all part of a belief system based on the scientific method, even leading to a conception of the pleasure-pain principle that sounds suspiciously like the basis of neo-economics: self-interest. However, these ideas are thousands of years old, championed by followers of the Greek philosopher Epicurus, and Epicureanism didn’t imply capitalism but the only other economic system that has ever had lasting success – slavery.

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On the Invariant Nature of Investor Ineptitude

Behavior is Forever, Not Just For Life

One of our themes here is the unchanging nature of human behavior across time and space.  It doesn’t much matter whether we’re in 1^st century Rome, 17^th century Holland, 18th century Britain or 21^st century America, if you put large groups of people in the same situation they’ll tend to behave the same way when they have money at stake: irrationally.

There’s plenty of evidence from history that this thesis is true, but a recent paper on the seventeenth century’s equivalent of a behavioral finance blogger helps to emphasise the point.  We were irrational then and we’re irrational now, and three hundred plus years of technical advance hasn’t improved this situation one iota.

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Screwed: Fictional Profits, False Accounting and Financialization

Double Entry: How The Merchants of Venice Created Modern Finance by Jane Gleeson-White

 

"So it has come to this. The global biodiversity crisis is so severe that brilliant scientists, political leaders, eco-warriors, and religious gurus can no longer save us from ourselves. The military are powerless. But there may be one last hope for life on earth: accountants."

Are Accountants the Last Hope for the World's Ecosystems?, Jonathan Watts

 

Back in the Thirteenth Century, when Venice ruled the waves, we can find the origins of modern capitalism.  Back then the portents were vague, but the invention of bookkeeping and the introduction of Arabic numerals foreshadowed a revolution based on the stunningly original idea of being able to figure out whether or not your business was making a profit.

Roll forward six hundred years and we find that those inventions, suitably adapted, have not just stood the test of time, but have insinuated themselves into every nook and cranny of modern life.  Welcome to the world of financialization where earnings per share is an imaginary number and money is the only objective measure of everything. Only it isn't.

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Europe, Taxed by Tobin

1808 and All That

The soap opera that is the Eurozone continues unabated, as the intransigence of the UK has caused a split that seems likely to cleave the European Union in two. Regardless of the rights or wrongs of the situation the British appear to have approached the negotiations over Europe’s finances with the finesse of a bulldozer and the subtlety of a sledgehammer.

The UK has calculated that agreeing to the latest half-baked plan to save the Euro, which they’re not part of, is not in their national interest. As this “national interest” appears to be that of the UK’s financial sector, which helped caused most of the problems in the first place, this looks a bit strange. What’s even more strange is the main issue is the imposition of a so-called Tobin tax on financial transactions: which is peculiar mainly because the British already have such a thing and have had it since 1808.

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Stuck In A Weimar World?

Rich and Poor

In many ways the problems of the Eurozone are hard to understand: as the US Secretary of State Timothy Geithner has pointed out:

"The problems that they are facing there in Europe are complicated to solve, but well within the resources that Europe has."

So the sight of the rich asking the relatively poor Chinese to bail them out, or attempting to put the squeeze on the IMF is perverse.  The Chinese wonder, if the weaker Euro countries are such good investments, why don’t the Europeans put their money where their begging bowl is?

Of course, if you delve deep enough, the problem is psychological, and is magnified because the Eurozone is made up of independent countries following their own paths. But at the heart of the problem is Germany, the country that has benefited more than any other from the euro and which is now unwilling to accept the consequences of its Faustian pact. For the Germans it’s heads they win, tails we all lose, because they're stuck in a Weimar world.

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Disruption by Digital Wallet: The Sailing Ship Effect Rewritten

From Sailboats to Digital Wallets

When steamships were introduced they caused a significant improvement in the technology of the sailing ship, as shipwrights worked to increase the capability of their ancient craft to keep the newfangled interlopers at bay.  Of course, we now know this was to no avail, as technology and service improvements to steam-power eventually combined to override the best that sail had to offer.  Disruption happened, but slowly.

In the world of payments we now have more disruption: a payment card in your smartphone, integrating retail payments, mobile communication and digital advertising, with Google simply the biggest new entrant on the blocks.   When your smartphone is also your digital wallet and you can use it to buy stuff in shops faster and more securely than with your credit card then the walls of Jericho are really falling: the question is, who are the modern equivalents of the sailing ship manufacturers?

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Frankenstein’s Corporations

Immortal Corporations

Back in 1819 the US Supreme Court, an august group not usually known as a centre of radical creationism, took the unusual step of inventing artificial life. Moreover they then, in a Frankenstein moment, added the proviso that their monstrous offspring should be blessed with immortality.

The object of this life-giving largesse was the hitherto humble corporation, which was suddenly invested with superhuman properties. Unfortunately the lawmakers couldn’t artificially imbue corporations with morality or a sense of justice so having made them indestructible they left the rest of the world to deal with an ethical dilemma that sees companies given human rights without needing, or expecting, to behave so as to deserve them. Back to the courts …

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Book Value

Dark Age Done

The printed book has a strong claim to be the most important invention humanity has ever made. To be able to clearly record information for posterity, to hand it down from generation to generation, and to disseminate that information widely and quickly provides the modern world with advantages that are hard to understate: a replay of the Dark Ages is unimaginable.

The economic importance of the book is also hard to understate, as the evidence of economic growth in the pre-industrialised world demonstrates. Yet we're now in the midst of a revolution in the printed world which is changing our society, our behaviours, our economy and our future. Book value is changing, by the day.

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Economics & Psychology: Reconciliation?

Continued From Economics & Psychology: The Divorce …

By the early 1970’s, as the long bull market of the post war years collapsed in a welter of unforeseen problems, financial professionals confronted the real meaning of risk on a systemic basis. As markets crumbled in the face of economic uncertainty trading companies turned to economists in academia in the hope of finding a way through the mess, or at least some excuse to get people to buy stocks.

What they discovered was a way of measuring risk that appeared to offer the option of quantitatively managing investments in a rational way, rather than relying on the intuitions of individuals. This approach has come to dominate the securities industry ever since. At the same time, though, a small revolution was brewing in psychology. And it's been fermenting revolution ever since.

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Economics & Psychology: The Divorce

Self-Interest’s Not Interesting

For a long while economists worked hard to cleanse their subject of any trace of psychology which, on the face of it, was rather odd as the main assumption for the subject is that people act in their own self-interest, a psychological principle if there ever was one. The argument in favour of such an approach is that it doesn’t really matter whether the assumption of self-interest is true or not as long as the reality is matched by the theoretical predictions.

Well, as we know, the reality has a nasty tendency to go off and do its own thing and the idea that economics can exist without taking account of psychology has taken a beating in recent years. What’s odd, though, is that the idea was ever even considered. Understanding why that happened is a critical step in creating a new economics, one that actually has some genuine predictive capacity and which can avoid screwing up the world in its efforts to get economists invited to all the best parties.

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Copernicus, Muddling Through

Revolutionary Ideas

The story of how Nicolas Copernicus overturned centuries of dogmatic adherence to an Earth centred cosmos is well known – too well known, perhaps. Copernicus’ ideas didn’t come out of the wide blue yonder in a sudden revelation; they arose out of the careful work of earlier scientists, paving the way for his final proposition.

Although our preferred methods of storytelling give preference to dramatic tales of sudden jumps the truth is nearly always much more gradual. Just as in science, corporations and industries tend to change slowly. Generally when they don’t there’s something either badly wrong or about to go badly wrong. We’re usually at our best when we’re incrementally muddling through, not trying to re-invent the world anew.

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Cardano’s Gambit

Gamblers ‘Nonymous

Investing is, up to a point, gambling. Most of us don’t think of it in that way but if we conceive of the universe of stocks as a gas of randomly moving particles buffeted this way and that by forces largely beyond their – and certainly beyond our – control then there’s no other conclusion that can be drawn.

However, we don’t really believe this. What we generally believe is that although randomness is pervasive in stocks there’s a pattern that lies beneath the surface which we, in spite all evidence to the contrary, can pick out. For the idea that there are repeatable patterns hidden within apparently random games of chance we can thank one of our more unlikely heroes. Meet Girolamo Cardano, medieval physician, professional gambler and mathematician extraordinaire.

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Breaking the Guild of Macroeconomists

Economic Entertainment

In an entertaining piece Economics is Hard. Don't Let Bloggers Tell You Otherwise Kartik Athreya of the Fed in Richmond has suggested that financial bloggers are a mentally incontinent bunch, pathologically incapable of stopping themselves from opining on financial matters on which they actually offer no insight. Now, leaving aside the question of whether we want our professional economists to be entertaining, this opens up the question of whether untrained commentators can provide any useful insight into matters financial.

The answer, speaking as an economically untrained scribbler, is almost certainly no: the vast majority of financial blogging opinion on any matter of prediction is worthless and that which isn't is indistinguishable from the rest. Unfortunately this is a conclusion of limited usefulness, because most trained economists can't actually offer any useful predictions either and following Athreya's prescription would almost certain deny us any opportunity for useful advances in the world of macroeconomics.

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Moats, Unbundled

From Wheelwrights to Press Barons

Imagine yourself as a fourteenth century European knight: safely tucked up in our crenulated castle, defended by our deep filled moat, we’re the confident lord and master of all we can see. Yet we’re on the cusp of a technological revolution that will overturn our beliefs and destroy our way of life. Cannon are coming and our moats are about to become prisons, not protection.

Technological advances beget market dislocations, as old business models are overturned and new ones tentatively created. English surnames tell of such changes – Wrights and Smiths now far outnumber wheelwrights and blacksmiths, vocations long in vogue and now irrelevant. Now a new generation of knights stand watching their battlements blown apart as newspaper barons and music moguls desperately try to shore up their crumbling estates. They’re on a hiding to nothing, of course; the invisible hand is unbundling their once impregnable moats through the medium of the internet.

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History’s Financial Shadow

Wealth Depends on History Not Geography

Jared Diamond in his superb book Guns, Germs and Steel outlined a theory of human economic development that regards Western Europe’s original pre-eminence in this regard as being contingent on geography combined with a large slice of luck. Great book though it is more recent work casts doubt on the main findings. Increasingly it looks like success in economic terms depends less on geography and more on history.

Quite how history impacts differential economic development as seen in the world today is a booming and fascinating area of research. Teasing out the relevant factors from a jumble of data is a difficult and delicate art but one theme seems to be increasingly prevalent. It rather looks like current economic success and failure is predictable from the robustness or otherwise of institutions established hundreds of years ago. History casts a long financial shadow it seems.

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Capitalism Rising: The Lessons of Lepanto

The First Shot

The 7th October 1571 is a date that ought to be engraved on the hearts of free-marketeers everywhere. The naval Battle of Lepanto, between the Ottoman Empire and the Western Holy Alliance, marks the first occasion on which a military battle was won not by weight of arms or tactical cunning but by investment banking.

Arguably the eventual triumph of capitalism was inevitable anyway, but history doesn’t run on tramlines. Had the nascent capitalist powers of the West lost that battle there may never have been the full flourishing of the Enlightenment. An all-powerful and mighty empire took on a fragmented and vaguely farcical alliance of emerging semi-states and lost, because the other side had the best financiers.

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Why Markets Crash

An Unsteady Aim

Oddly there’s little agreement amongst the experts about why markets crash. Although given that experts in fields without objective measures of success are generally less accurate than a drunk in a ship’s urinal during a storm that’s not really surprising. Still, if the best that the world of investment has to offer doesn’t know when stuff’s overvalued then how can we possibly hope for an end to boom and bust?

There’s no getting away from the reality that the inability of analysts to know whether markets are overvalued or not leads to serious problems. Pundits, who have a record of prediction that makes amateur astrologers look like geniuses, are delighted to proclaim the inadequacies of regulators and analysts but, frankly, have nothing better to offer. Sadly, history doesn’t offer much in the way of solace: it’s only hindsight that gives us superior knowledge.

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In the Beginning Were The Accountants

Genesis in a Ledger

In the beginning were the accountants. Mostly people think it was the dinosaurs, or bacteria or bread mould or something. Well, it was all of those things. But mostly it was the accountants.

Despite all the efforts that scientists put into making protons and neutrons go really, really fast in order to achieve the quickest acceleration from nought to sixty, the truth is actually that they’re on a hiding to nothing. The fundamental secret of the universe doesn’t lie hidden in elementary particles. No, it’s in full view for anyone who wants to look: it’s in double-entry bookkeeping.

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Utility, The Deus Ex Machina of Economics

The St. Petersburg Paradox

An economic problem posed over 250 years ago still causes angst for economists, investors and actuaries today; largely because it’s never been satisfactorily solved, probably because it can't be. Despite this, the resolution posed all those years ago has travelled down the ages, insinuating itself into every nook, cranny and other archaic crevice of finance you care to mention, like an elasticated thong on an overweight man.

The problem, posed by Nicholas Bernoulli, is known as the St. Petersburg Paradox after the city of residence of his cousin, Daniel Bernoulli, who was the first person to propose an answer to it. Daniel’s great idea – and it was a truly great idea – is known as utility. Without the concept of utility it’s doubtful that any of us would be here to debate this issue, yet the findings of behavioural finance show that it’s almost certainly wrong. The Paradox of St. Petersburg has plenty of life left in it yet.

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Adam Smith’s Monkey Business

The Theory of Moral Sentiments

Before Adam Smith got round to inventing economics in The Wealth of Nations he invented social psychology in The Theory of Moral Sentiments. Under Smith’s synthesis it’s sympathy that’s the glue that brings people together, underpins human morality and drives the engine of economic progress. Without fellow feeling there’s no basis for any kind of exchange, whether of simple gifts, bodily fluids or physical goods.

Smith, of course, was a man way ahead of his time. However, it’s still rather remarkable to discover it’s taken to the twenty first century to uncover the evidence that his intuition was not just correct as a theory of economics but is actually built into the structure of our brains. If you’ve ever bounced out of a feel-good film, full of effervescent vim you’ll know exactly what Smith was on about: we’re designed for sympathy and thus built for trade.

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