On March 22, 2013 the Wall Street Journal carried an article
under the title: “What would Hayek Do?” The latter being Friedrich Hayek, the
economist of Austrian descent whose life has spanned almost the entire length of
the Twentieth Century. As to the writer of the article asking the question, he
is Eamonn Butler who is the current director of the Adam Smith Institute in
London, England.
Except for a short mention of these two men again at the end
of my presentation, I am not going to write about Hayek who is too complex to
handle in this space, and I am not going to write about the Butler article
because it speaks for itself. What I am going to do is set the background as I
see it for those who may wish to ponder the question: What do I want to see
done?
Well, my friend, think about it for a moment; if the good
fairy came to you one day and asked: What do you want from your investment
portfolio? What would you say? Rest assured that whatever you will say, and
whichever way you will put it, has been said before because people ask
themselves a similar question all the time, and they answer it almost the same
way each and every time. What they want for now is a steady and reliable income
stream; and what they want for the future is for the value of their portfolio
to grow year after year.
This means that an investment to satisfy everyone would be
the common shares of a company that pays dividend quarter after quarter, and
promises to grow year after year, never to falter. Since no company exits that
can give this kind of guaranty, most investors put together a portfolio that is
diversified. It would have a component that is close to risk-free and yielding
a steady income, and it would have a riskier component that offers a high
probability of growth with the passage of time.
That is the best approach to take but even then, there is no
guaranty that things will unfold as planned because external factors will
intervene and upset the calculations we make. Such factors will be rooted in
the economy, a beast that has its own cycle, and a rhythm of its own that is
totally unpredictable. This is why if you get to see the good fairy, ask her
not for a portfolio that will grow year after year but an economy that will run
at a steady and predictable pace. This is because it will be the best guaranty
that your portfolio will do well. And never forget the adage which says that a
rising tide lifts all boats. What we need, however, is a tide that rises on a
solid foundation, not on the skin of a bubble.
Unfortunately, you will never get to meet a fairy because
neither a good fairy nor a bad one has ever existed outside the storybooks of
children. This is why investors look for an alternative that will give them as
much as possible of what they want. Regardless of the political inclination of
the individual investors – be they of the Left or be they of the Right – they
will all think of the government as being an integral part of the economy, and
will act accordingly. Thus, the investors who have an average portfolio or
better, will take the government into consideration when making decisions. What
these people want, they want it from the economy thus want it from the
government.
As mentioned earlier, people want a steady and reliable income
now, and they want the value of their wealth to increase year after year. Since
most people see little or no difference between the economy and the government,
they view government securities as being at least as good as the economy thus
less risky than a single enterprise in it. This is why short term Treasury
bills and long term government bonds make up a good part of the better than
average investment portfolios. The essential idea to take away from this point
is that a portion of the population lives off the government by trading in its
securities.
A number of these people call themselves names ranging from
market maker to arbitrageur, and do nothing but trade in government securities.
For this reason, they fit in a category that the public calls financier. They
spend their time picking not projects that produce goods or services, but spend
it picking the right moment at which to buy or sell a security. Thus, they take
advantage of the swings in the marketplace – swings they help exaggerate by
participating in the activity. Thus, they manage to make a high enough profit
with each trade to pay themselves a fat salary now, and to increase their
wealth. They are, in fact, their own fairy – good or bad depending on your
point of view.
And so, it can be seen that society is made of a group of
people who work to produce the goods and the services that make up the wealth
of the nation. Society is also made of another group of people who accumulate
the money by helping to swing the marketplace all day long. At the end of
each day, they grab the highest paying government securities and keep them to
enjoy receiving a steady income for life. But this is not the whole story
because there is another group that lives off the government for a different
reason.
That group receives money not because there exists a legal
contract between the two which says the government is obligated to pay the
holder of this security a specified amount, but because there exists a social
contract between the two which says that individuals unable to sustain
themselves for any of the listed reasons, are entitled to receive assistance
from the government by right of citizenship. The old, the very young and the
disabled make up this part of the population; and they are sometimes undeservedly
called welfare recipients.
As to the group of people who produce the wealth in the
advanced industrial economies, they are sometimes referred to as the middle
class. These would be the people who own the enterprises that produce the goods
and services that make up the wealth of the nation, and would be the people who
work in these enterprises for a wage or a salary. Some of them have an
investment portfolio, and some do not. Some depend on a payment from the
government from time to time, and some go to the age of retirement having never
taken a payment from the government.
Now, given that the business (or economic) cycle has not
been repealed, and given that the swing between the high point and the low
point in the cycle depends on the amount of money that the financial
institutions inject into the economy, it stands to reason that we should hold
these institutions responsible for the bubbles that burst and cause the sort of
crashes that Butler describes at the start of his article in this manner: Why
did no one see this coming?" asked Queen Elizabeth II at the London School
of Economics shortly after the 2008 crash. The LSE's finest stared at their
shoes.
Butler goes on to discuss the Hayek theory of economics, and
ends the article this way: As for central bankers ... Hayek suggested they
should lose their monopoly over currency ... Farfetched? Maybe. But when you
... realize that private companies today are often trusted rather more than
governments, perhaps not.
Thus, we see that Hayek was a proponent of the free market
system. But he was more than that because he balanced his position by
advocating a role for the government. He put it this way: "In a society
like ours ... security should be guaranteed to all; that is: some minimum of
food, shelter and clothing, sufficient to preserve health ... the state should
[also] help to organize a comprehensive system of social insurance in providing
for those common hazards of life against which few can make adequate
provision."
At the end of the day – whether we are of the Hayek school
or the Keynesian school – we realize that we want the same thing; an economy
that grows steadily and reliably. We talk about it incessantly but do so at
different levels of intensity. Those who produce the wealth talk with pragmatism
and little emotion. Most of the time, they let the other two groups carry on
with the debate.
Of those, the people who cannot provide for themselves and
need assistance, talk with passion about their needs but do not demand that
their rights be fulfilled all at once. On the other hand, the financiers who
live off the government more than do the welfare recipients, talk loudly and
passionately about their requirements.
What they do however that is objectionable, is blur the line
between themselves and the producers of the wealth. In doing so, they ask that
the same considerations be applied to them when in fact, they are nothing more
than glorified welfare recipients.
No, the success of a day trader that hits the jackpot cannot
be given the same respect as the craftsman that produces a gadget as good or
better than any on the market, thus makes life easier for society and collects
a just reward.
Hayek and Keynes would agree with that.