“Davidson” submits:
Q3 2019 hedge fund letters, conferences and more
An argument raging certainly since Plato’s time is should government seek to control economic decisions or should individual citizens freely decide what decisions are best for their individual needs and expectations. Plato(~427-347 BC), a student of Socrates, taught that the State should organize society into 3 tiers of citizens:
“Plato’s ideal state was a republic with three categories of citizens: artisans, auxiliaries, and philosopher-kings, each of whom possessed distinct natures and capacities…Philosopher-kings, the leaders of the ideal state, had souls in which reason reigned over spirit and appetite, and as a result possessed the foresight and knowledge to rule wisely.”
https://education.stateuniversity.com/pages/2326/Plato-427-347-B-C-E.html
Western Philosophy of the organized State is based on the teachings of Socrates and Plato which are taught globally. In every instance but for the US, governments have been organized with a class of individuals governed by the belief in an upper class which is expected to be benign and altruistic. Every society which placed a few permanently in charge has failed to meet expectations. Throughout history there have been individuals who believe themselves to be entitled to rule others. Some gained governance power through inheritance by Devine Right as in Kings and Queens while others were members of long established ‘political families’. In a famous quote John Emerich Edward Dalberg-Acton, 1st Baron Acton, 13th, said:
“Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men…”,
https://history.hanover.edu/courses/excerpts/165acton.html , April 5, 1887
This was a philosophy in conflict when the writers of the US Constitution, who for the most part had been business and land owners. They labored to create a self-governing document protecting personal interests against government confiscation which all had recently experienced. That document is the US Constitution. What emerged is the blueprint of the “Free Market”. Even today, we continue to define and argue amongst what it truly means. Today, now that the US represents considerably more wealth than even 100yrs ago, the question remains debated if we should seek equal financial outcomes for all citizens or should we seek equal opportunities no matter how unequal and imperfect the outcome. Stated differently, should we adopt Socialism and its ‘Top Down’ social engineering approach or remain a Free Market with individual outcomes dependent on individually-based innovation and the free choices of our citizens in determining which ideas succeed or fail on the merits?
Before there was sufficient data, various economic/political thinkers argued as did Friedrich Hayek(1899-1992) in “The Road to Serfdom”, 1944, that erosion of the right of individual choice leads to an impoverished State. Hayek, known as a member of the Austrian School of Economics, viewed the wealth of a country emanating from the individual property rights and self-expression of its citizens.
“Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded.”
“A claim for equality of material position can be met only by a government with totalitarian powers.”
“We must face the fact that the preservation of individual freedom is incompatible with a full satisfaction of our views of distributive justice”.
“Law, Legislation and Liberty” ,1973 https://libsa.files.wordpress.com/2015/01/hayek-law-legislation-and-liberty.pdf
Hernando de Soto wrote “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”, 2000, emphasizing that in ‘Top Down’ governments, citizens seek even imperfect means to retain personal control over individually earned assets. Hayek and de Soto did not have the clarity of market evidence to support their observations. The evidence only developed fully after 2008. Markets reveal that sharp return differences exist between US markets and everywhere else.
Since the beginning of the 2000’s, there has been a noted expansion into Emerging Markets as investors sought higher returns. It is commonly advised that the better returns derive from global diversification per Modern Portfolio Theory. Despite expectations, returns have not been as expected as is shown in the chart of the SP500 vs ACWX market prices. After an initial flurry representing early capital commitments to Emerging Markets, the results have been basically flat since 2008. In every instance investors with high expectations experienced capital erosion due to autocratic leadership violating individual property rights. For many, the assumption had been that the investment rules and protections to capital developed over hundreds of years in Western Nations would follow naturally on deployment to Emerging Markets. Capital deployed to Emerging Markets proved unprotected from confiscatory governments. Even European markets, a significant portion of ACWX, have much lower returns due to governance issues and stand in stark contrast to the strong performance of the SP500.
Socialists make the argument that it is a battle of ‘equal outcomes’ vs a few very wealthy ‘Capitalists’ as if it is a few wealthy individuals who benefit to the detriment of the rest of society. They view the world as static. A world in which exchanges between individuals are on an ‘I win-you lose’ basis. Or, as a world in which those who have become wealthy forced others to buy over-priced products foisted on the unsuspecting making themselves wealthy while making the rest of society poorer. They fail to comprehend that when self-governance protects individual property rights and self-choice, products are bought not sold. This distinction means that it is individuals who decide if a product improves their standard of living or not. Individuals decide how they use their earnings. Socialists fail to understand that in freely-made individual decisions, when one is buying a product it is the individual doing the buying who determines whether the benefit received, an intangible value, is worth the cash paid, a tangible value based on one’s earnings value. In fact, most individuals only spend earnings when they believe that they are receiving greater value than what they received as earnings. To do otherwise would not advance one’s standard of living.
Socialists do not recognize that talent is not equally distributed nor is any particular talent always in demand in society. The talent for musicality is not the same talent for being a technologist. Even though the same individual can have multiple talents, time and circumstance typically dictate which talent one pursues is more beneficial. As an example, Steve Jobs had the talent to envision the iPhone in the early-1990’s, but it took advances in technology and the Internet before he could bring the iPhone into existence in 2007. Jobs was a visionary, an artist, but did not have a management talent stack. He was fired in 1985, but returned in 1997 after success with Pixar. He invented an entirely new industry to the criticism of many who did not understand the benefit the iPhone brought to society. They only thought of it as the most expensive ‘cell phone’ at the time. They thought Jobs would bankrupt Apple. The US Constitution and its individual protections are why the iPhone and the Internet occurred first in the US, nowhere else, and made those who innovated successfully wealthy.
In a Free Market, those who bring innovations to society successfully typically become wealthy. Amassing wealth over time is the signal that what they brought to society was not only of great benefit, but that the benefit was sustained long enough for them save more than they could spend or even give away. Wealth in a Free Market is more often a measure of society benefiting from individual entrepreneur’s talents. Being wealthy is not a form of theft. In a Free Market, we want more wealthy individuals not to punish them as Socialists demand.
Contrary to Socialist thinking, no society can or should attempt to force equal outcomes. Society should attempt to ensure equal opportunity and then step out of the way to let talents which are always unequal and time/circumstance which are always unpredictable determine outcomes for the benefit of society. The evidence for positive outcomes in the only Free Market is clearly visible in SP500 performance.
In my opinion, the US is the only market investors should consider.
