Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

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7/8/04
Linden Doerr: Optimism Times 40

When it gets depressing here, the right Rx is frequently to sit on the floor and page through Triumph of the Optimists again. The rap against it is that it worked for the 20th Century but can't carry on. It's a victim of round numbers in that sense, but if Dimson & Co had picked any shorter or shifted period, they'd be accused of curve fitting. The study is a prisoner of time because notional value, accurate trading records and, most importantly, wide-spread financial trading itself are recent developments. All these depended on the creation of wealth that wasn't plundered, one way or another, from subjects, but rather was actually created by economic activity and then saved and reinvested.

Two things recently caught my untutored eye that give hope for extending backwards (albeit without the same precision) the essence of the study in TotO.

The first was a statistical study, "A Measure of Media Bias", written by Tim Groseclose of UCLA and Stanford and Jeff Mylio of U Chicago. Of interest to me were not the results nor the hostility the study has engendered, but the neat way the researchers were able to separate the music from the static...and then count. Could it be that notional value and widespread trading with accurate record keeping aren't essential to statistically measuring ever increasing wealth, thus extending beyond these boundaries?

It's been discussed frequently that, among the remarkable features of TotO, are the fact that there is great variation by decade among the returns for each country in the study and the differences in returns among the countries studied over the entire period and even shorter ones comprised of single or multiple decades. Beyond the emotional fuel of the study itself, it's these variations that most interest me because, I think, that is where the underlying factors that drive the sustained creation of wealth can be identified. So, for me, it is the contrasts that matter.

Let's say, for the sake of argument, that what Groseclose and Mylio did could be extended to a TotO kind of study. What might be candidate for the music? A second newspaper report in the 7/6/4 Personal Journal titled, "New York's Jewish Museum Turns 100" by Matthew Gurewitsch leads with the following sentences: "It's one thing to see infinity in a grain of sand and eternity in an hour. Stuffing 4,000 years of memories into a shoebox is another, even if the figurative shoebox is as big as a Fifth Ave. mansion."

Hah! Four thousand years of a continuous culture that has celebrated human action and that, for reasons of survival or otherwise, endeavored to be self-sufficient, self-supporting traders of value. What if, as a start, the period from the 17th Century operation of the Dutch futures markets to the end of the 19th Century, when TotO takes over, were studied using the techniques of Groseclose/Mylio. That the 1.5 million percent ("15Kx") returns of the 20th Century might show up in earlier centuries, among these traders in particular, as 10Kx or some other multiple isn't the issue and would no further eliminate the willful blindness of naysayers unable to imagine or appalled by the inevitable results of ever-compounding wealth creation.

Such a study might be even more controversial than A Measure of Media Bias, not only because it would single out a culture that remains a focal point for immense hatred but also because it would provide ample evidence of the strong correlation between wealth creation and individual rights that is only hinted at in TotO.

7/8/04
Comment by Elroy Dimson

As you know, there are no reliable index data for the US and UK (or for other markets such as Belgium or Germany) before the 1860s. Markets were not the same before that. For the UK there is an unsatisfactory series that goes all the way back to the 1700s, but with huge survival bias. It also omits dividends. The survivor bias obstructs interpreting the data.

7/8/04
Comment by Ken Smith

Third, there is the over-time population growth. The more individuals there are to feed on in the population which a predator has selected, the fatter the predator will become.

7/8/04
Comment by Steven Ellison

Actually, I had the opposite reaction. Dr. Doerr's thesis is intuitively correct, i.e., Western standards of living in 1900 were far higher than 1800, which in turn were far higher than 1700, so whatever investments in businesses existed at those times, as a group, no doubt performed splendidly. The biggest reason I can think of that the trend might not continue is that the last several centuries have had fast population growth. However, world population is expected to peak around 2030 and begin declining thereafter. What happens to economic growth when population declines?

7/12/04
Linden Doerr's Response to Comment

Hi Steve:

The only doctor in the house is my wife, who graduated from law school too late to earn an LL.B.

More to the point, I think that wealth creation is independent of population growth or decline. In fact, I think wealth creation will become easier rather than harder for several reasons. The reasons arise from the fact that it is becoming easier for a majority of people to earn well in excess of their needs for living. It is the savings that result that create new wealth. I think, in fact, that the distortions that Ken Smith cites are evidence of this. We know that distortions always disappear in free markets. In fact, most of the people on this list depend on it every day.

But more importantly, what will assure that conditions exist for wealth creation to continue is an increasingly widespread understanding by this majority that their right to the wealth they create is dependent on recognition and enforcement of individual rights.

7/8/04
Comment by Jared Albert

I just ordered Triumph of the Optimists from Amazon.

One question which I've wondered about and I hope (though regret wasting their time) deeper thinkers here might comment on is: if money represents units of work. And the sum total of human effort thus far has increased complexity, then from an entropy point of view all the energy used to increase the complexity of our world should be reflected in the increasing monetary value of all human investment. So baring a species ending event, the value of our markets should continue to increase provided we as a species continue to create.