The Moneyball Method - Excerpt 3A

The Essence of Markets

Free markets are grounded in the principle of objectivity, meaning ideas and actions that are consistent with the facts of reality. Specifically, people must produce to survive, excess supply can be traded and sold —and that creates demand of other products. Known as Say’s Law or the Law of Markets, it validates producers as the first consumers, it was published by French economist Jean-Baptiste Say in 1803 and is the foundational principle of all sound economic theory.

In essence, producers immediately become consumers with their ownership of tradable goods and their desire for cash to buy things. Say was also the first to define entrepreneurs and recognize them as the indispensable managers of all complex, productive processes. Accordingly, the supply side is the side that matters most — and to elaborate, economist George Reisman delivers the positive "externalities,"

“It is in the nature of a division-of-labor capitalist society to bestow enormous benefits for which people do not have to pay. Indeed, in such as society perhaps 99.9 percent or more of everyone’s standard of living comes as an external benefit provided by the thinking of others.”

About the demand side, Say’s Law says, “It is the aim of good government to stimulate production, of bad government to encourage consumption.” Really? Yes, because man must produce to survive, there are no consumers without producers and supply creates demand. Say is telling us that objective law — including property rights defended by an impartial justice system, are primary to a civilized division of labor society. Regrettably, Say’s Law is ignored in today’s culture that promotes consumerism over productive virtues. Markets may be the glue of civilized cultures, but to the critics, markets are immoral because they are indifferent to their equality of wealth ideals.

In any event, producers create their own demand and inspire demand that did not previously exist. Hedy Lamarr came up with spread spectrum technology in 1941, Douglas Engelbart auditioned the computer mouse in 1968 and Steve Jobs hatched the iPod 2001.

Think about that when you read that 70% of US economy activity is driven by consumer spending (GDP expenditure method), that “stimulus” spending (GDP fiscal policy) is a tool for economic health, or that “excess” aggregate demand (GDP monetary policy) must face “demand destruction” to fight the price inflation caused by monetary policy and stimulus spending.

In contrast, rational investors understand that spending and consumption mean nothing without production and supply. Good theory is good practice and for free markets, the political principles are the protection of rights and a ban on the initiation of force – especially government-initiated force. That is the nature of capitalism!

The lesson here is that decentralized authority by the consent of the governed will trigger the elegance of voluntary production and trade. In that environment, innovation is triggered, specialization is rewarded, productivity improves, wealth is created, prices fall, businesses expand, choices skyrocket, society prospers, medical breakthroughs are discovered, lifespans increase, leisure time is enjoyed and the arts flourish.

As Tuskegee Institute founder Booker T. Washington proved as well as anyone: “Political activity alone cannot make a man free. Back of the ballot, he must have property, industry, skill, economy, intelligence and character.” Economic power is potent and when combined with liberty, is the key to upward mobility. That was late 19th and early 20th century America in the Jim Crow south, a time and place in which laws requiring segregation by race were enforced to prevent the economic power of free minds to supplant the bigotry of the entrenched bureaucracy.

Preceding that, women gained their own economic power after the Civil War when they entered the workforce en masse. Enabling their liberation was technology, particularly an 18th century Scottish innovation — the first efficient steam engine from Thomas Watt. And enabling the industrial revolution was capitalism — an innovation by Scottish philosopher Adam Smith.

Within a few generations of the Enlightenment’s great upheaval, capitalism had set men and women free from the desperate conditions of feudal serfdom. “The machine, the frozen form of human intelligence,” as simplified by Ayn Rand, “is the power that expands the potential of your life by raising the productivity of your time.” Thanks to the capitalists who unleashed their creative energy, the very existence of America benefits the entire world.

This is because markets, a man-made phenomenon, share two important aspects with reality — they are complex, dynamic systems and they don’t care about your prosperity, health, or happiness.

With both nature and markets, Renaissance giant Francis Bacon got it right, “Nature, to be commanded, must be obeyed.” Capital and enterprise, like energy and matter, are codependent variables in a complex and elegant system. And as with money and prices, markets might say, leave me alone and get out of my way!

The Moneyball Method: A Middle-Class Manifesto for Objective Investing: Shupe, Mark: 9781696009119: Amazon.com: Books