Roundabout Investing (2)

Here is a continuation from thelast post (parts that I have marked in my copy of the book “The Dao of Capital” by Mark Spitznagel):

Frederic Bastiat

41.“The only real antagonism as Bastiat saw it was among “two principles that can never be reconciled – Liberty and Constraint.”

42.“Bastiat draws the reader’s attention from only the seen what is yet unseen, but which can be foreseen.”

43.“As Bastiat warned, “The sweeter the fruit of habit is, the more bitter are the consequences.”

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Charles Darwin

44.“There were two forms of teleology: one theistic, with nature seen as directed by a master agent, and the other mechanistic, with a “cybernetic” functioning within individual organisms and species. While Charles Darwin, in his 1859On the Origin of Species, did not specifically seek to counter teleology (in fact, in his time he was roundly criticized as a teleologist, which today has a more theistic meaning), his theory of evolution through natural selection had the effect of diminishing its influence. In fact, to Darwin the ideal of natural selection did not falsify the teleology of Aristotle and Kant, but rather supported it. Teleology introduces other forces into the natural world, in addition to the familiar physical laws.”

45.“This has been renamed teleonomy, or intermediate ends of necessity masquerading as rational agent-selected ends – again conflating Ziel and Zweck.”

46.“Menger also augmented Smith’s declared central driver of “universal opulence,” the economic progress of civilization and the extension of prosperity throughout. Smith saw this progressing division of labor as the driver. However, it was clear to Menger that this was “but a single cause of progress in human welfare” – that is, a proximate cause – whereas the higher level, ultimate cause was “the increasing employment of goods of higher order upon the growing quantity of goods available for human consumption (goods of the first order).”

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Carl Menger

47.“The debate between Schmoller’s historicists and Menger’s theorists had far wider consequences than the use of data and application of economic theory.”

48.“The gospel of this book, which should be obvious by now, is the strategic positional advantage gained in the roundabout way.”

Eugen Bohm von Bawerk

49.“The protagonist of the Austrian narrative is the entrepreneur, known in Bohm-Bawerk’s texts as the Unternehmer, or “undertaker” (the literal translation from the French term coined by Say), who assembles the necessary inputs, the factors of production, into a temporal capital structure. As Bohm-Bawerk demonstrated, capital accumulation is a

www.capitalideasonline.com Page - 3 Roundabout Investing (2) sequential production process accomplished through stages to produce final consumer goods more efficiently and timed for when they will be demanded – the constantly stalked strategic advantage toward the ultimate end of satisfying the consumer. To meet that objective, the Unternehmer must raise his sights beyond the current slice of time in the marketplace and look ahead to anticipate not only what goods consumers will want but importantly when they will want them. An intertemporal choice and tradeoff exist between present and future satisfaction, as the Unternehmer foregoes the “current immediate” and instead pursues a “later immediate”.”

50.“However, interest as the cost of time has an entirely different meaning; it is the inherent price one must pay to access capital sooner rather than later, which in turn becomes the threshold for determining one’s return and the prudence of making an investment.”

51.“Bohm-Bawerk pointed out that capital structures are cumulative (indeed, autocatalytic); what comes before leads to and is contained in what comes later.”

52.“Ford warned against “the most common error of confusing money and business”, which he blamed on the stock market for leading people to believe that “business is good if there is lively gambling upward in stocks, and bad if the gamblers happen to be forcing stock prices down.”

53.“Impatience now with the belief that we can and will be patient later is the way of all flesh.”

54.“The roundabout – the pain of positioning and paying now for the advantage and payoff

www.capitalideasonline.com Page - 4 Roundabout Investing (2) later – only works when we remove our temporal blinders that keep us hyper focused in the moment. Then, and only then, can we pursue those proximal aims intended to give us an intermediate advantage from which the distal ends are more easily and effectively achieved. To say this is extremely challenging is an understatement.”

55.“The reason for this difficulty can be found in our wiring, those genetic tracings of our evolutionary journey rooted in survival, when overlooking immediate needs was reckless and life-threatening.”

56.“We must become like the Daoist manipulative sage, who first “humbles himself to be in a better position to rise” later, the archer with crossbow drawn seeking the positioning, or hsing, from which to then overwhelm the enemy.”

57.“There has been one continuous theme to this book: utilizing the present as means for opportunistic exploits in the future; in Bohm-Bawerk’s words, “our economical conduct has exceedingly little reference to the present, but is, almost entirely, taken up with the future”. But how do we accomplish such a feat for ourselves? It starts with the basic metaknowledge of our time preference. We acknowledge that time preference is so subjective and contextual, with variability from one individual to the next (due to factors such as age and environment) and within the same individual from one moment to another due to circumstances or a particular slate of choices. But mostly, we must recognize our consistent temporal bias. Although it may seem irrational, it is not; rather, it is how we got here, part of the calling card of membership in Homo sapiens. And so, we confront our evolutionary fears of scarcity and even of our own mortality.”

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58.“Where Bohm-Bawerk became truly radical, however was in the emotional factors, particularly by introducing the concept of willpower (clearly an emotional force) and the effort required to delay gratification.”

59.“As Bohm-Bawerk cautioned, “How often does a man, ‘from weakness,’ let himself be hurried into taking some step, or making some promise, which he knows at the moment he will rue before twenty-four hours are over!” The cause of such hasty actions, he added, is not a lack of knowledge, but rather a “defect of will”.”

60.“It takes more than flipping a temporal switch to adopt a more time-consistent orientation, just as any positive or therapeutic behavior change – dieting, smoking cessation, or overcoming an addiction – takes effort and commitment.”

61.“We weight the future and the past subjectively and disproportionately, such that, like the warnings on the rear view mirror, they seem fuzzier and further away in proximity to the present.”

62.“The more developed the species, the deeper its depth of field, taking a teleological series of intermediate, interconnected steps as a necessary expedient for later competitive advantage.”

63.“Self-control and willpower combine as the necessary ingredients that allow for delayed gratification – in effect, the emotional and psychological underpinnings of becoming roundabout.”

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64.“Like the Austrian economists who followed him, Bohm-Bawerk deduced praxeological phenomena – of time inconsistency and hyperbolic discounting – through a general understanding of the human condition, rather than though clinical data.”

65.“The problem is not in a particular value judgment, but rather in a person who apparently fails to realize that his future self will not be able to carry out the choice that his present self announces.”

Paul Samuelson

66.“Herein was the problem: Despite its formal elegance and convenience in “solving” for equilibria, Samuelson’s model of a uniform discount on future utility didn’t accurately describe the behavior of people in the real world. As discussed, we are decidedly inconsistent in our time preferences – that is, our preference or delay reverses as the delay period changes; and we are certainly not well-described by a single (or perhaps by any) static parameter.”

67.“Or consider a staple of bedtime fairy tales, that of the “Three Little Pigs”: one who quickly builds a house of straw in order to maximize his time for pleasure and relaxation now;

www.capitalideasonline.com Page - 7 Roundabout Investing (2) another who spends just a bit more time to make a house of sticks, but quickly joins the straw-builder in play; and the third who foregoes all recreation now and constructs a sturdy house of bricks. When the big, bad wolf huffs and puffs, straw and sticks cannot stand; fortunately for these two high-time preference pigs, their industrious (and no doubt Austrian- read) friend safely ensconced in brick does not bar the door.”

68.“When our forward perception sharpens, we can, in effect, invert the hyperbolic curve – thus becoming more patient in the present so that we allow ourselves the advantage to act opportunistically impatient in a coming slice of time.”

69.“Without a depth of field perspective, we become victimized by time.”

70.“It’s new direction was toward a distinct alignment with other sciences – the “physics envy”, as it has been called, of quantitative and empirical techniques.”

71.“A verse from Virgil became Mises’s mantra: “Tu ne cede sed contra audentior ito. Do not give in to evil, but proceed ever more boldly against it.”

72.“But when credit is force-fed beyond that (I’ll call it “credit gavage”), grotesque things start to happen.”

73.“In mid-1929, amid his warnings of the collapse to come from credit expansion, Mises was offered a lucrative job at the Viennese bank, Kreditanstalt. Mises gave a straightforward and prophetic rationale for turning it down. As he told his future wife, Margit, “a great crash” was

www.capitalideasonline.com Page - 8 Roundabout Investing (2) coming and he did not want his name “in any way connected with it.”

Ludwig von Mises

74.“In his apriorism, Mises took a very Kantian approach, while others were more Aristotelian, which serves to illustrate some of the diversity of opinion among the Austrians.”

75.“At the heart of the Austrian methodology is healthy skepticism of data and, in particular, how economics (and, equivalently, investing) uses data to back-fit a story around spurious relationships found in the data (we call this data mining).”

76.“As Mises explained, “Mechanical equations can be used to solve practical problems through the introduction of empirically acquired constants and data; but equations of mathematical catallactics cannot in the same way be of service to practical problems in the area of human action where constant relations do not exist.”

77.“In Mises’s view, the economist didn’t rely on empirical tests to choose among various candidates for an economic law; such laws were determined through logical deduction. However, the economist needed to rely on observation (and his own sense of judgment) to know when to apply a particular economic law or principle.”

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78.“The Mises-Hayek studies warned of the dangers of credit expansion and predicted the coming currency crisis.”

79.“It is to Mises that the Austrian Tradition owes an inestimable debt, not only for hard work with little recognition (and scant remuneration), but also for his resolve to be the lone voice against huge and insidious evils that confronted the world in waves, from hyperinflation and irresponsible monetary and fiscal policies to Bolshevism and national socialism.”

80.“The Austrians are known for grounding all of their analysis – even when looking at “macro” issues such as recession and inflation – within a microeconomic approach, based on the actions of individual consumers and entrepreneurs.”

81.“The essential fact is that it is for the competition of profit-seeking entrepreneurs that does not tolerate the preservation of false prices of the factors of production.”

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