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The Chairman
Victor Niederhoffer

3/25/2005
Review: Creating Modern Capitalism

The question of what improves material well-being occupies reformers everywhere. "Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions," edited by Thomas McCraw (Harvard University Press, 1995) offers a great perspective by tracing how managers, incentives and the political system led to progress in Germany, Japan, England and the United States in three different stages of their industrialization.

The book emphasizes the importance of mechanisms for fostering the reproducibility of the capital employed to the benefit of consumers. Some of his insights:

In the old days, "buying anything on credit, even for purposes of investment, was often regarded as questionable. The transition from the old mindset to the new was a long gradual process. We ourselves feel vestiges of the old virtues in our guilt about the unrestrained use of consumer credit."
"Capitalists are people who make bets on the future. The essence of capitalism is a psychological orientation toward the pursuit of future wealth and property. It is about aspiration and striving. It rests on the believe that economic growth, even substantial growth, is possible and desirable, for an individual , a family, a business firm, and even a country."

How we wish that the Sage of Omaha and his followers would understand the latter point, instead of writing about how Orville Wright should have been assassinated.

One of the most interesting chapters concerns Henry Ford and Alfred Sloan. The chapter opens with a discussion of the three phases of marketing products: fragmentation (1890-1908), unification (1908-1920) and segmentation (1920-present), which correspond respectively to the growth of the auto industry and the general evolution of consumer products, with soft drinks another prime example.

The typology should be considered in the context of the authors' classification of the three stages of industrial revolution:

Are there general types of businessmen typified by the dichotomy between the engineering and organizational background of Sloan and the entrepreneurial background of Ford typified perhaps by the dichotomies in our field  between the trading and organizational styles of Griffin of Citadel and Tudor and the other fund-of-fundists, versus Soros and Cramer and other "eagles"?

But I pass over this questions to note the amazing correspondence between many stages and milestones in the careers of Henry Ford and the Palindrome. The latter would undoubtedly refer to the former as a robber baron, although like the former he has never read the history of what men like Carnegie, Rockefeller, Edison, Westinghouse, DuPont, Eastman, Durant or Schwab actually contributed to the incredible profusion of well-being that came about because of their entrepreneurial activities.

Consider that Henry Ford, at age 80, "challenged scores of people, particularly reporters, to foot faces. Only the most fleet-footed could stay with him over 100 yards." That's what set me on the track, because the similarly aged Palindrome loves to challenge tennis pros to matches and is not averse to a certain tilting of the scales. Ford, at the beginning of his career, was lionized for introducing things like the 8-hour day and the $5 daily wage, which gave tremendous mobility and freedom to workers in the same way that the Palindrome provided the means and the intellectual foundation for the Berlin Wall to fall.

Like Henry, who became a hero of the Bolsheviks ("Lenin was one of his greatest admirers. What Marx had dreamed, Ford achieved"), the Palindrome became a hero of the agrarian reformers by calling for a world state and demonizing businessmen who wished to avoid triple payments on income, capital and their estates.

As the years passed, Ford's "abundant eccentricities became more and more conspicuous ... he proposed that horses, cows and pigs be eliminated." Without intellectual training, Ford "does not reason to conclusions, he jumps at them." This whole stage of Henry's career, including his foray with the peace ship, reminds me of the Palindrome's speaking tour and corresponding vow to go to a monastery if his archenemy, the present occupant of the White House, were to win.

Both Ford and the Palindrome went through manager after manager, vowing they were not interested in profits at all, and eventually were left with an empty shell of an organization run by their sons. Both were proud that their fortunes were earned cleanly. Both hated financiers: Ford referred to stockholders as "parasites," and the Palindrome would refer to speculators like me with equal contempt.

Eventually, Ford and the Palindrome both took their companies private, and perhaps the rapid turnover in the Palindrome's firm could be compared to that at Ford, where the founder "alienated every one of his prominent young executives; many were snapped up by Sloan at General Motors."

At 79, Henry grew ever more querulous and inflexible. "Had his product not been of such high quality and his brand name of such extraordinary value, his company might well have perished." While both the heroes share an interest in folk dance, unlike the Palindrome Ford never got divorced, and one must refer our readers to the Betsy and the biographies of the Palindrome for further correspondences.

P.S. In writing this, I am aware that I am somewhat like Brutus talking about my former mentor, and I am deserving of the same skepticism that history has given this other traitor

In discussing the history of companies and countries, the author summarizes the value in a timeless quote worth I think sharing with all kids:

"History has nothing to do with memorizing dates. Instead it means charting changes and sequences over time, and making judgments about them. It means discerning the boundaries between volition and inevitability. Ultimately, it means being able to distinguish what's really important from what's not. History offers a vast storehouse of vicarious experience. Perspective becomes vital. It is essential to see events and trends in hindsight, and to imagine how they unfolded for contemporaries. As Maitland urged, 'Never forget that what's now in the past was once in the future.' As Dickinson said 'Forever is composed of nows.'"

Nigel Davies comments:

On reading about Ford and Soros what came to my mind was the distinction between players who love the game more than themselves and those who believe they ARE the game. The saving grace of bad guys like Alekhine and Fischer was always their love of chess, and there's something of great integrity about Fischer making it his priority to build a better chess clock amidst the general insanity of his life. On the other hand the ever-popular Capablanca jumped to the conclusion that the rules should be changed after the shock of losing his title. And now it is evident that Kasparov considers himself bigger than the game through his attempt to bottle up his greatness for posterity, 2005 vintage.

There is a difference here, subtle but fundamental. I know where my sympathies lie.

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