Update No. 60 – 18/05/12

For those looking for something a little longer than the relatively short posts I’ve produced of late, this will be a monster.  I hope it causes you to stop and think about the society we live in, how it came to be what it is and how we, and future generations could be best served by how we might structure our society into the future.

The rambling essay was prompted by this NYT article about Edward Conard a few weeks back.  The book referred to in the article and particularly its author have been roundly pilloried, see Krugman and Salmon for examples.  I read pretty widely across the subject area and came across no-one of note with positive things to say.  Truth is – the article does have a great deal of what is referred to as “apologia for the banking class”.  It should not be overlooked, however that a great deal of the thinking in it is relatively sound:

A central problem with the U.S. economy, he told me, is finding a way to get more people to look for solutions despite the terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money. For proof, he looks to the market. At a nearby table we saw three young people with plaid shirts and floppy hair. For all we know, they may have been plotting the next generation’s Twitter, but Conard felt sure they were merely lounging on the sidelines. “What are they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure those guys are college-educated.” Conard, who occasionally flashed a mean streak during our talks, started calling the group “art-history majors,” his derisive term for pretty much anyone who was lucky enough to be born with the talent and opportunity to join the risk-taking, innovation-hunting mechanism but who chose instead a less competitive life. In Conard’s mind, this includes, surprisingly, people like lawyers, who opt for stable professions that don’t maximize their wealth-creating potential. He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs.

It is an aggressive viewpoint, I have far less problem with these ‘Art History Majors’ than Conard does, I am probably a little sorry for them that they will spend their life on cruise-control, all the while capable of achieving more.  However, as a proponent of liberty, I generally believe people should be free to be ambitious, or cautious, or whatever their preference is, though as I demonstrate below, I do prefer a societal structure that fosters ambition for the benefits it brings us all.

The key problem we (almost all) have when reviewing such an article is our natural prejudice towards the very wealthy.  We are invariably inclined to think they are feathering their own nest, which as often as not they probably are.  Given that my personal wealth can presently be measured in what I expect is only a fraction of 1% of “Conard’s”, perhaps I can make the argument without the suspicion of ulterior motives.

I think the point that bears remembering that the principle driver of the continuous improvement in how well we have lived since the industrial revolution is innovation.  Those societies that have best fostered innovation have best prospered.  There are obviously countries that have location and resource advantages (among others), but for every Australia, Canada, Russia or China that seem to have a large part of their prosperity driven by these (particularly resource based) advantages, there are examples like Japan, Switzerland and Germany that have prospered without many such advantages, chiefly instead by fostering innovation.  Likewise, there are countries with ample resources that have managed not to improve their citizens lot in life substantially, often because of exploitation by powerful and corrupt officials, and a lack of an innovative economic system that rewards entrepreneurialism (if your government is apt to take what you create, why even bother? – innovation and freedom obviously go hand in hand).  So innovation must be seen as ‘the’ key driver of prosperity on balance, after allowing for other factors, and as unpalatable as it is, a system that allows certain people to become fabulously/ridiculously/obscenely (depending on your view) wealthy, for innovating and taking risks is OK by me when as a consequence of that, the lot of that society as a whole is also improved.

My personal take on this is that there is an innate need inherent in mankind that drives these behaviours.  An almost unstoppable need to build empires drives humans.  For the 50,000 years or so before the industrial revolution, this ‘empire-building’ action was undertaken by tribal leaders, then by Genghis Khan, Alexander the Great, Hannibal and various Romans (list obviously not exhaustive).  Napoleon and Hitler are more recent (post industrial revolution) examples that show the empire building instinct through war is not completely extinct.  However, it must be noted that the primary empire-building technique over the last 200 years has been one of economic means.  The Genghis Khan’s have been replaced by Carnegie, Rockefeller, Edison, Ortega, Albrecht, Jobs, Gates, Bezos, Zuckerberg and Walton (to come up with a list of people who substantially changed their respective industries off the top of my head).  The majority of people think of an individual like John D. Rockefeller as the ultimate example of a disgraceful ‘robber-baron’ whose activities repressed his workers and whose monopolistic development of ‘Standard Oil’ somehow repressed or disadvantaged the US economy.  Whilst there were a great many unethical actions taken by Rockefeller, the primary result of his ‘repression & monopoly’ was that the price of his outputs including kerosene dropped by over 80% over the life of the company through innovation and efficiency.  Given the natural inflation over the same period, the ‘real’ cost of Standard Oils output was likely over 90% lower by the time the monopoly was broken up compared to when Rockefeller commenced business (the drop in real-terms in PC’s has probably been greater over a shorter timeframe and was coupled with substantial improvement in their function).  It is intuitively obvious to me that any social harm incurred by Rockefeller’s actions were infinitely outweighed by the social benefits created by innovation and efficiency.  It further seems intuitively obvious that a society which best harnesses the social-gains of such innovators whilst simultaneously legislating against (or somehow otherwise preventing) the greatest social-harms stands likely to substantially advance its citizens overall living standards by the greatest margin, even if that person becomes unbelievably wealthy, society still wins.

The ability for ambitious people to use an alternative measure other than ‘geographic expansion over a ruled area’ – that measure being money has led to a substantial reduction in the last 50 or so years of the need to ‘duke it out’ to demonstrate empire-building superiority.  In fact the ‘innovative’ development of nuclear weaponry led to cold-wars and encouraging diplomatic discussion over ‘Mutual Assured Destruction’.  People will point to the bloodiness of WWI & WWII to say the last century was just as brutal as any previous centuries, but I believe if you were to impartially measure the proportion of the population ‘fighting’ in wars throughout the 20th century, the bloodiness of these wars is chiefly due to ‘improvements’ (for want of a better description) in our weaponry and warring means.  The total number of people as a proportion of the average population throughout the period who ‘took up arms’ I remain convinced would be lower than any other century, I would love to be directed to any research that examines/disproves this.

Readers may find it interesting that I agree with much of the sentiment in the article, despite its subjects strident criticism of my favourite capitalist, Warren Buffett:

“During one conversation, he expressed anger over the praise that Warren Buffett has received for pledging billions of his fortune to charity. It was no sacrifice, Conard argued; Buffett still has plenty left over to lead his normal quality of life. By taking billions out of productive investment, he was depriving the middle class of the potential of its 20-to-1 benefits. If anyone was sacrificing, it was those people. “Quit taking a victory lap,” he said, referring to Buffett. “That money was for the middle class.”

Here I think the argument is a little off-track because the philanthropic stock-gifts Buffett has made since 2006 were of capital he already had tied up in Berkshire Hathaway, their sales resulted simply in a changing of the owner of the stock (a different capitalist took ownership).  The argument only hold water in the respect that his charitable gifts would have been all the greater if he’d waited until his death for any donation.  Buffett I’m sure would unlikely have done very much differently in the running of Berkshire had he still owned that portion of stock, so the middle-class still benefited by the array of businesses he has run and acquired over the period.  If Buffett had (like Rockefeller) tithed 10% of his earnings to charity from the time he earned his first paycheck, however, I agree with Conard that the lost judicious use of that ‘donated’ capital would have led to a substantially reduced benefit to the middle class.

It makes sense for skilled capitalists to do their major philanthropic activities at or very near the end of their lives, when they have made maximum productive use of the capital for the longest possible period.  The two alternatives to the capitalist hanging onto their capital for as long as possible are that:

  1. The capital is deployed to eleemosynary activities too soon and the good the capital would otherwise have done society (through innovation and improvement) is lost.  This loss is further compounded by the fact that through retaining the capital as long as possible, the capitalist would inevitably had a substantially greater philanthropic gift.
  2. The second is that the capital falls into the hands of the second-generation, which is probably the most frightening option of all.  Here the capital is likely to be put into some less than innovative ‘safe’ asset enabling an unearned unproductive lifestyle.  This makes me shudder nearly as much as the idea of birthright.

The shortcoming of this thinking (hanging onto everything until the literal death) is of course, the capitalist loses the opportunity to ‘enjoy’ their charitable work (i.e. see its benefits), but it is undoubtedly the way the greatest benefit will come to society – Tony Hansen 18/05/12.

P.S.  The last fortnight has been very good to us in relative terms, though we have declined in value, we have avoided most of the markets falls.  There is no guarantee this will remain the case, but I am hopeful we can continue this outperformance.


April 1st 2011

Jan 1st 2012

Current Price

Current Period

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 4.86%, leading the benchmark by 3.2% since January 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.93%, leading the benchmark by 12.83% all-time (April 1st 2011).