Wisdom from the 42nd Page

When Giants Fall

On the forty-second page of “When Giants Fall: An Economic Roadmap for the End of the American Era” author Michael Panzner wrote (emphasis added):

To try and avoid the economic and social challenges posed by growing resource constraints, countries around the world have raced to find alternatives. Among the options they have chosen is one that will almost certainly have unwelcome and unintended consequences. Without meaning to, they have heightened the risks in a world already destined to become more dangerous and violent.

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(John Wiley & Sons, February 2009. Hardcover, 264 pages. ISBN: 047031043X; EAN: 9780470310434.)

The Mirage of Social Justice

On the forty-second page of “Law, Legislation and Liberty, Volume 2: The Mirage of Social Justice” author F. A. Hayek wrote (emphasis added):

this does not exclude the possibility that we may later discover cases to which, if we had not commited ourselves, we should wish not to apply the rule, and where we discover that we had thought to be quite just is in fact not so; in which event we may be forced to alter the rule for the future. Such a demonstration of a conflict between the intuitive feeling of justice and rules we wish also to preserve may often force us to review our opinion.

We shall later have to consider further the changes in the recognized rules which will be necessary for the preservation of the overall order if the rules of just conduct are to be the same for all. We shall then see that often effects which seem unjust to us may still be just in the sense that they are necessary consequences of the just actions of all concerned. In the abstract order in which we live and to which we owe most of the advantages of civilization, it must thus in the last resort be our intellect and not intuitive perception of what is good which must guide us. Our present moral views undoubtedly still contain layers of strata deriving from earlier phases of the evolution of human societies—the small horde to the organized tribe, the still larger groups of clans and the other successive steps toward the Great Society. And though some of the rules or opinions emerging in later stages may actually presuppose the continued acceptance of earlier ones, other new elements may be in conflict with some of those of earlier origins which still persist.

The significant of the negative character of the test of injustice

The fact that, though we have no positive criteria of justice, we do have negative criteria which show us what is unjust, is very important in several respects. It means, in the first instance, that, though the striving to eliminate the unjust will not be a sufficient foundation for building up a wholly new system of law, it can be an adequate guide for developing an existing body of law with the aim of making it more just. In such an effort towards the development of a body of rules, most of which are accepted by the members of society, there will therefore also exist an 'objective' (in the sense of being inter-personally valid, but not of universal—because it will be valid only for those other members of the society who accept most of its other rules) test of what is unjust. Such a test of injustice may be sufficient to tell us in what direction we must develop an established system of law, though it would be insufficient to enable us to construct a wholly new system of law.

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(University of Chicago Press, October 1978. Paperback, 210 pages. ISBN: 0226320839; EAN: 9780226320830.)

Empire of Debt

On the forty-second page of “Empire of Debt: The Rise of an Epic Financial Crisis” authors William Bonner, & Addison Wiggin wrote (emphasis added):

of property rights or the division of labor. Things got simpler, more brutal, mean, and nasty; lives were shortened. It was not a time to be in the insurance business.

What caused the periodic invasions no one knows. Perhaps good weather out on the plains produced population explosions that caused the nomads to expand. Perhaps bad weather caused famine that sent hungry mouths in search of someone else's meat and grain. Historians don't know. But fear of the barbarians from the steppes has been a chronic theme of Western history—particularly among the Teutonic tribes that were most exposed to them.

The Great Khan

Perhaps the most successful empire builder of all time was a leader of one of those periods of barbarian expansion—Genghis Khan. Since the time of the Romans, it has been fashionable to put a civilized mask on your face when you put the imperial purple on your back. You are bringing religion to the heathen. You are bringing civilization to the indigenes. You are bringing culture, education, and technology. Even Alexander the Great thought he was doing the world a favor. Conquerors do not like to admit—even to themselves—that their instincts are no different from those of barbarians. They have better table manners. But they are subject to the same urges as Genghis or Attila. Bloodlust, prestige; power, status—who can deny that it would be a thrill to conquer a whole city or an entire nation? But empire builders typically put on the imperial purple like a set of angel's wings, leap off the balcony, and come down with a thud.

Genghis Khan needed no mask. The man showed his face as it really was. He united the Mongolian tribes in about 1129 and beginning with a series of attacks on northern China, he embarked on a spectacular epic of mass slaughter and rapine from which two empires were derived. One of them, the Ottoman Empire, lasted until the end of World War I. The Mongol hordes overran northern China, Tibet, Persia, nearlly all of central Asia and the Caucasus, Korea, Burma, Vietnam, Anatolia, and much of Russia. They attacked India and eventually, in 1526, Babar, one of Genghis Khan's descendants, set himself up as emperor of the place. In China, too, Genghis's descendants founded the Yuan dynasty, which ruled until nearly the fifteenth century.

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(John Wiley & Sons, September 2005. Hardcover, 370 pages. ISBN: 0471739022; EAN: 9780471739029.)

Crash-Proof

On the forty-second page of “Crash-Proof: How to Profit from the Coming Economic Collapse” author Peter D. Schiff, wrote (emphasis added):

The GDP started out as the GNP (gross national product) during World War II, when it was used to measure wartime production capacity. It was never intended to be used as a measure of the country's economic well-being, and its shortcomings are laughably numerous.

By definition, the GDP is the sum total of the monetary value of all final goods and services bought and sold within U.S. borders in a given year. The distinction between GDP and GNP, incidentally, is that GDP doesn't care about the nationality of the producer. It includes everything transacted within our borders, even BMWs manufactured in North Carolina. (GNP, which is almost never used, would exclude foreign manufacturers in the United States and include goods and services produced by U.S. firms operating abroad.) GDP this includes the totality of consumer, investment, and government spending, plus the value of exports, minus the value of imports.

One big problem with GDP, although represented as a measure of economic health, is that it makes no effort to distinguish between transactions that benefit the nation's health and those that subtract from it. Destructive activities are included as well as productive activities. The GDP may not have been designed to measur economic well-being, but since it is used for that purpose, everything it includes—every monetary transaction that takes place anywhere and anytime within its time frame—is, by definition, progress and a contribution to the nation's economic health. Thus Hurricane Katrina added to the GDP despite tragic losses to the populace, as do other negative expenses, such as crime prevention costs, expenses incurred in divorces, medical costs, and national defense expenditures.

Another serious shortcoming is that it ignores everything that doesn't take place under the rubric of monetary trade. Money has to change hands. Functions performed in running a household, for example, are excluded because no money is

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(John Wiley & Sons, February 2007. Hardcover, 272 pages. ISBN: 0470043601; EAN: 9780470043608.)

Saving Capitalism from the Capitalists

On the forty-second page of “Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity” authors Raghuram Rajan & Luigi Zingales wrote (emphasis added):

on firm value. There are ways of ruiling this explanation out. When a company is included in the S&P 500 index, many mutural funds simply replicate the index and invest in the company. The higher institutional ownership in these "index" companies does not reflect the value judgment of institutional investors but simply the application of a mechanical rule. Even institutional ownership driven by such mechanical considerations has a positive effect on firm value.

More evidence that institutional ownership is beneficial comes from examining the consequences of regulatory changes.³¹ Before 1992, if ten or more investors in the United States wanted to discuss the performance of a particular company, they had to file a report with the Securities and Exchange Comission, detailing the purpose of, and participants in, the discussion. These requirements made it onerous for institutional investors to coordinate their actions. In 1992, this rule was done away with. The relationship between institutional shareholdings and firm value is twice as large after 1992 as bfore, consistent with the idea that institutional investors force companies to be better managed. That institutional investors help reduce waste in companies flush with cash is bolstered by the finding that the relationship between institutional shareholding and firm value is especially strong in firms that generate more free cash flow.

For mature firms, therefore, financiers play the role of policemen and undertakers, preventing the theft of resources and burying the dead. In other instances, however, they play the more creative role of midwife. Young firms need a very different kind of assistance than established, mature firms. Young firms have tremendous growth opportunities, and in an economy with good laws and decent accounting, most managers of young firms ahve the incentive to succeed (rather than steal or waste investors' money). Top management runs the company in trust, not just for shareholders but also for junior management, which expects to succeed top management. The rewards for a growing firm come not from misappropriating current free cash, which is meager, but from the prospect of running a larger, more profitable firm. So managers can be relied upon to keep obvious wrongdoing by other members of the management team in check.³² The reason management needs close monitoring is that management may be inexperienced and headstrong and may unwittingly do the wrong thing.

Consider how venture capitalists (VCs) help inexperienced manage[ment]

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(Crown Business, February 2003. Hardcover, 384 pages. ISBN: 0609610708; EAN: 9780609610701.)

Secrets of the Temple

On the forty-second page of “Secrets of the Temple: How the Federal Reserve Runs the Country” author William Greider wrote (emphasis added):

and his home mortgage payment does not increase at all. The Federal income tax becomes somewhat more onerous, but this effect is far outweighed by the benefits of homeownership. The average middle-income home renters does not fare as well, but overall he nearly keeps up with inflation.

By contrast, Minarik found that upper-income households, then defined as those above $37,500 in income, approximately the top 10 percent on the income ladder, were "left substantially worse off." Their salaries kept pace with inflation too, but their assets were eroded. "The wealthy have no safe and profitable store of value in times of inflation," he explained.

A similar study by economist Edward N. Wolff of New York University measured the effects on wealth caused by the first lag of the modern inflationary spiral, starting in 1969 and ending with the recession of 1974. During that period, Wolff reported: "Inflation acted like a progressive tax, leading to greater equality in the distribution of wealth."

Minarik found that inflation's impact on two other groups—the poor and the elderly—was more ambiguous but also more benign than popular political opinion assumed. Generally, it was believed that these two groups suffered most severely from inflation because they lived on fixed incomes. Minarik found that this was not true. With a lag, government benefit programs for low-income families, those under $9,000, generally increased in time to keep up with prices. Many poor people were sheltered from rising costs in two sectors where prices were soaring—health and housing—because of Medicaid and public housing. "Over a short period, low-income households are indeed the most adversely affected when prices increase, simply because they have the least maneuvering room in their budgets," Minarik wrote. "But over longer periods their incomes tend to catch up with prices." The poor were still poor, of course, but inflation did not make them worse off compared to others.

The elderly were partially protected too. Social Security benefits were indexed to the inflation rate, automatically increasing the monthly checks periodically to catch up with prices. Among the elderly, Minarik found, the ones hurt most "are those who rely most heavily on private pensions or their own savings. The notion of the Social Security recipient as the chief loser in inflation is largely incorrect...."

The central explanation for this reversal of fortunes—the many gaining at the expense of the few—was homeownership. Most American families, two-thirds of them, owned only one real asset of any

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(Touchstone Books, January 1989. Paperback, 798 pages. ISBN: 0671675567; EAN: 9780671675561.)

Greed and Glory on Wall Street

Greed and Glory on Wall Street: The Fall of the House of Lehman” was published in 1987. Obviously the author would have a lot of new material in the past 24-hours (and in the coming weeks and months) for an updated revision! But looking back two decades we find that on the forty-second page author Ken Auletta wrote (some emphasis added):

strategy"; (2) "a fragmented and undisciplined approach to running its business"; (3) "a portion of the partnership whose ability, training, and/or work habits are inconsistent with the competitive demands of the marketplace and with Lehman's present business"; (4) "too small a professional staff relative to the number of clients to be serviced and transactions to be processed"; (5) "a bond distribution system which is in chaos and an equity distribution system which is experiencing declining market share"; (6) "recent management changes throughout the organization"; (7) "high overhead relative to current revenue levels"; (8) "comparatively limited capital." The authors warned that "in our judgment the long-term future of this firm is uncertain."

"The firm must face up to the fact that the ability, training, and/or work habits of a substantial number of partners (totaling perhaps 10 to 15 throughout the Firm) are inconsistent with the competitive demands of the marketplace and with that expected of Lehman partners," the authors concluded. "These individuals should be phased out according to some specific plan. The single most important conclusion of this study is that the quality of the partnership is the key to our present problems and to our ability to be successful in the future [their italics]."

Peterson was determined to phase out some partners and to reinvigorate the forty-four man partnership with new blood. But he was sensitive to how fragile the partnership was, and he moved slowly. It wasn't until September 1976 that he replaced seven senior members of the board, reducing the average age of the board from fifty-six to forty-seven years. After his friend Warren Hellman left in 1977 to start his own venture capital firm, Peterson left the presidency vacant.

To address the composition of the partnership required Peterson to confront a strategic question: What kind of investment bank did Lehman wish to be? With remarkable prescience, the internal report had sketched how investment banking had changed, and was likely to change further: "As the nation industrialized, financing was the most important element of corporate life, since shortages of goods created demand which eliminated marketing as the key feature. Few of the inventory-entrepreneur class understood how to raise capital; they had limited contacts with financial institutions and knew of only the handful of investment banking firms whom they could solicit to assist them in the critical function of raising capital... Personal contacts, imaginations, salesmanship and an entreprenurial orienta[tion]

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(Warner Books, March 1987. Paperback, 292 pages. ISBN: 0446384062; EAN: 9780446384063.)

The Myth of the Rational Voter

On the forty-second page of “The Myth of the Rational Voter: Why Democracies Choose Bad Policies” author Bryan Caplan wrote (most emphasis added):

As Scott saw the future, the inexorable increase in productivity, far outstripping opportunities for employment or investment, must mean permanent and growing unemployment and permanent and growing debt, until capitalism collapsed under the double load.⁷⁴

Economists' love of qualification is notorious, but most doubt that the protechnology position needs to be qualified. Technology often creates new jobs; without the computer, there would be no jobs in computer programming or software development. But the fundamental defense of labor-saving technology is that employing more workers than you need wastes valuable labor. If you pay a worker to twiddle his thumbs, you could have paid him to do something socially useful instead.

Economists add that market forces readily convert this potential social benefit into an actual one. After technology throws people out of work, they have an incentive to find a new use for their talents. Cox and Alm aptly describe this process as "churn": "Through relentless turmoil, the economy re-creates itself, shifting labor resources to where they're needed, replacing old jobs with new ones."⁷⁵ They illustrate this process with history's most striking example: The drastic decline in argicultural employment:

In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3. ... The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services. ... What we have in place of long hours in the fields is the wealth of good and services that come from allowing the churn to work, wherever and whenever it might occur.⁷⁶

These arguments sound harsh. That is part of the reason why they are so unpopular: people would rather feel compassionately than think logically. Many economists advocate government assistance to cushion displaced workers' transition, and retain public support for a dynamic economy. Alan Blinder recommends extending unemployment insurance, retraining, and relocation subsidies.⁷⁷ Other economists disagree. But almost all economists grant that stopping transitions has a grave cost.

Exasperating as the Luddite mentality is, countries rarely move beyond rhetoric and turn back the clock of technology. But you cannot say the same about another controvery infused with make-work bias: hostility to downsizing. What could possibly be good about downsiz[ing].

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(Princeton University Press, April 2007. Hardcover, 276 pages. ISBN: 0691129428; EAN: 9780691129426.)

Tulipomania

On the forty-second page of “Tulipomania: The Story of the World's Most Coveted Flower & the Extraordinary Passions It Aroused” author Mike Dash wrote (most emphasis added):

of his own. Instead, he took pleasure in stocking the gardens of his friends, and they in turn provided him with a host of experimental seedbeds with which to investigate the properties of the plants he had discovered.

Clusius made full use of his friends' gardens in preparing some of the masterful botanical studies to which he devoted much of the latter part of his life. These books, which included detailed studies of the flora of Spain, Austria, and Provence, were among the first to assume that plants are more than simply potential ingredients in the dubious medical preparations of the day and are worthy of study in their own right. Because of this Clusius has always been considered one of the fathers of botany, not least because he developed a system for classifying plants in groups according to their characteristics—an idea that would later be taken up by Carl Linnaeus and turned into one of the foundation stones of modern science.

In May 1573, while Clusius was still living in Mechelen and busy distributing tulip bulbs and other plants throughout Europe, he was asked by the Holy Roman emperor, Maximilian II, to go to Vienna and establish an imperial hortus—or botanic garden—there. This was a tempting offer. Clusius's father, whom he had been supporting had just died at the age of eighty-one freeing his son from the burden of caring for him. The proposed salary of five hundred Rhine guilders a year would let Clusius—who had been embarrassingly dependent on the charity of friends for years—live comfortably at last. And Maximilian wanted a garden to outshine those his princes and nobles had been cultivating. Clusius, whose poverty and scanty claim to the ranks of nobility had left him with something of an inferiority complex, was flattered by the attention and grateful that the emperor offered formal acknowledgment of his status as a noble. In addition, he already knew a little about his prospective patron, who was one of the few emperors ever to show sympathy toward the Protestant faith; his friend and regular correspondent Johannes Crato

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(Three Rivers Press, January 2001. Paperback, 288 pages. ISBN: 060980765X; EAN: 9780609807651.)

Fooled by Randomness

On the forty-second page of “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” author Nassim Nicholas Taleb wrote (some emphasis added):

California earthquake to be more likely than a fatal flood (causing thousands of deaths) occuring somewhere in North America (which happens to include California). As a derivatives trader I noticed that people do not like to insure against something abstract; the risk that merits their attention is always something vivid.

This brings us to a more dangerous dimension of journalism. We just saw how the scientifically-hideous George Will and his colleagues can twist arguments to sound right without being right. But there is a more general impact by information providers in biasing the representation of the world one gets from the delivered information. It is a fact that our brain tends to go for superficial clues when it comes to risk and probability, these clues being largely determined by what emotions they elicit or the ease they come to mind. In addition to such problem with the perception of risk, it is also a scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the "thinking" part of the brain but largely in the emotional one (the "risk as feelings" theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one's actions by fitting some logic to them.

In that sense the description coming from journalism is certainly not an unrealistic representation of the world but rather the one that can fool you the most by grabbing your attention via your emotional apparatus—the cheapest to deliver sensation. Take the mad cow "threat" for example: Over a decade of hype it only killed people (in the high estimates) in the hundreds as compared to car accidents (several hundred thousands!)—except that the journalistic description of the latter would not be commercially fruitful. (Note that the risk of dying from food poisoning or in a car accident on the way to a restaurant is greater than dying from mad cow disease.) This sensationalism can divert empathy towards the wrong causes: Cancer and malnutrition being the ones that suffer the most from the lack of such attention. Malnutrition in Africa and South-East Asia no longer causes the emotional impact—so it literally dropped out of the picture. In that sense the mental probabilistic map in one's mind is so geared towards the sensational that one would realize informational gains by dispensing with the news. Another example concerns the volatility of

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(Texere, 20040416. Hardback, 312 pages. ISBN: 158799190X; EAN: 9781587991905.)