Books That Aren't About Investing That Every Investor Should Read, Part III

By P.J. O'Rourke

Wouldn't it have been great if we had an econ class in college that was really interesting and informative?

Maybe I did. I don't know. I slept through econ. But wouldn't it have been great if we had an econ class that was interesting, informative, and so entertaining that we had no trouble staying awake?

The book New Ideas From Dead Economists is that class. Author 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. He 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 funny writing.

Buchholz is an accomplished fellow. He has a law degree from Harvard and an economics degree from Cambridge. He's a former managing director of Julian Robertson's Tiger Management hedge fund, one of the best-known on Wall Street. He's also a successful entrepreneur who holds a number of engineering and design patents. And he was a founding producer of the Broadway show Jersey Boys.

He was also director of economic policy under President George H. W. Bush. Well, nobody's perfect... There was a little economic mess-up at the end of the Bush 41 administration.

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 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 political 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.

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 the amount of land to farm is fixed. 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, water, and air itself.

But if Malthus were alive today, he would 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. 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 Stansberry Digest subscribers 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 says 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-engine power mower was invented by Ransom E. Olds (later 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 all 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 (If it weren't for free trade, we would 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 fiancé 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 altar.

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 drown."

God says, "Schmuck! Why do you think I sent the rowboat, the yacht, and the helicopter?"

Regards,

P.J. O'Rourke