Three vastly differing histories, the best volume of Buffett essays yet, and a new classic from George Gilder comprise a disparate collection of top book choices this year. I report them to you in the order they appeared.
1. We begin with a factoid that I’ll bet neither you nor I previously knew: Although four of the first five American presidents, who served 32 of the first 36 years under the Constitution, were Virginia planters, four of the first five treasury secretaries—who served for 21 of the Constitution’s first 27 years—were immigrants.
The greatest of these, Alexander Hamilton, was born on the Caribbean island of Nevis; the longest-serving of all time, Albert Gallatin, came from Geneva. Indeed to a tremendous extent the saviors and shapers of American finance during and long after the Revolution were men (Robert Morris, Haym Solomon, John Jacob Astor, Stephen Girard) whose commercial and cosmopolitan backgrounds and outlooks were accumulated in foreign lands, and particularly in foreign cities.
This startling realization—with its decisive implications for the finances of our nascent capitalist democracy—is at the heart of a book by Harvard’s Thomas K. McCraw titled The Founders and Finance: How Hamilton, Gallatin and Other Immigrants Forged a New Economy. No matter how well read one is in the literature of the early years of the republic, one finds in this important book an entirely new idea, developed in positively crackling prose.
2. Next: Would you ever think that a book about industrial production could render you not merely excited but at times even ecstatic as you read it? Well, neither would I until I came upon Arthur Herman’s Freedom’s Forge: How American Business Produced Victory in World War II.
On the day the war started in Europe in 1939, America had the 17th largest military in the world (just behind Romania) and its people were avidly isolationist. By the end of 1942, only a year after we ourselves had been drawn into the war, America was producing more war materiel than Germany, Japan and Italy combined. At war’s end we had produced two thirds of all the military equipment used by all the Allies.
As Mr. Herman demonstrates in a book you can’t put down, this happened because the state wasn’t permitted to take over and try to run the war machine. Here and only here, production triumphed by employing what one reviewer called “the traditional skills and strengths of free enterprise.” Though high-profile New Dealers would never cease to agitate for government direction of war production, it was private enterprise that had gotten FDR’s call, and that responded not just efficiently but heroically. It’s a story Mr. Herman has researched thoroughly and told brilliantly.
3. It is a truism that no one explains the financial thinking of Warren Buffett even remotely as clearly as does the man himself. The serious advisor wishing to study the architecture of Buffett’s genius as the greatest capital allocator who ever lived must go to the source: his annual shareholder letters.
To that end, the great contribution of George Washington University’s Lawrence Cunningham is not merely in compiling these essays but—with Buffett’s active collaboration—editing them thematically into the treasure that is the third edition of The Essays of Warren Buffett: Lessons for Corporate America. Savor it, for there is enrichment on every page, and epiphany on very many.
In addition to everything else, one is struck in this new edition by what an extraordinary writer Buffett is. At his best he’s an essayist of the highest order, on a plane—in his perfectly unaffected and pithy Midwestern voice—with a Montaigne and even an Emerson.
He is blessedly merciless and at the same time marvelously funny in laying bare his own occasionally howling mistakes (USAir, Salomon, selling Cap Cities much too soon). This demonstrates a kind of humility (indeed a kind of sanity) too few “great men” have. You’ll love this book, and find yourself—as I have—going back to it again and again.
4. Thirty-odd years ago, in his book Wealth and Poverty, George Gilder established the intellectual underpinnings of what came to be known as supply-side economics, and became thereby Ronald Reagan’s most oft-quoted living writer.
He’s back this year with a new magnum opus, Knowledge and Power: the Information Theory of Capitalism and How it is Revolutionizing Our World. At the great risk of oversimplifying—which it’s almost impossible not to do in a capsule review of so rich an idea—Gilder’s theory is that capitalism is the defining humanitarian and even ecological force in human life. And that economics, far from being a science of systems, is and ought to be inherently unstable—primarily to the upside, as entrepreneurs command cascading information technology for the greater good as well as for their own gain.
Thus the information theory of capitalism runs directly counter to the “progressive” idea that the greater good flows down out of regulation and income redistribution, which must impede and ultimately stifle innovation. A dollar taxed away to be spent on yet more food stamps is a dollar that can’t be invested in venture capital, or anything else that might advance innovation. And the 2,323 pages of ill-defined bromides and byzantine regulations of a Dodd-Frank will in the end be most effective at preventing not fraud but the risk-taking that is at the heart of entrepreneurialism.
Bottom-up, chaotic innovation versus top-down, stultifying regulation is thus the essential (and even existential) struggle in Gilder’s view of the future. In the long run, I suspect that Knowledge and Power will prove to be even more important than Wealth and Poverty as the information economy continues its humanist march against the darkness of collectivism.
5. Finally: if not the most important book of the year, certainly my sentimental favorite. I was a neophyte advisor, struggling to understand the business and my place in it, when we were all engulfed by the Somber Seventies.
I think it’s impossible, unless you lived through it, to appreciate the apocalyptic nature of the ecological catastrophism that seized the popular imagination as that decade began. It was the era of the Club of Rome’s wildly popular book The Limits to Growth, the Santa Barbara oil spill, the first Earth Day—and above all, Paul Ehrlich’s jeremiad, The Population Bomb. Ehrlich—who appeared on the Tonight Show with Johnny Carson no fewer than 22 times—predicted the imminent collapse of human civilization due to massive overpopulation.
Toiling away in obscurity at the University of Illinois, an economist named Julian Simon came to the conclusion that Ehrlich’s theory of overpopulation—indeed, the whole menu of resource exhaustion theories—was nuts, because it ignored the single most powerful force on earth: man’s inexhaustible capacity for innovation.
Simon believed that a free market would, if and as resource prices rose, promote their conservation while calling forth vast and hitherto uneconomic supplies. In time he became by default the anti-Ehrlich.
In 1980, just as the declinism of Jimmy Carter was giving way to the rational optimism of Ronald Reagan, Simon offered Ehrlich a bet. If the theory of resource exhaustion was right, he said, then over the next decade commodity prices must increase. Simon, of course, held that because markets create innovation while enforcing efficiencies, commodity prices must fall. He let Ehrlich pick five commodities, and bet him $1,000 they’d be lower in 10 years. Ehrlich and two cronies chose chromium, copper, nickel, tin and tungsten, and settled in to await their inevitable win.
In October 1990, Ehrlich—churlish to the end—sent Simon a check; there was no accompanying note. Although the world’s population had increased some 800 million in the interim, and despite consumer price inflation around 50%, the nominal prices of the five commodities had fallen by more than half—and for exactly the reasons Simon had forecast: conservation and innovation.
The development of ecological alarmism and of the optimistic, humanist, free-market response is brilliantly reported in my pick hit of 2013, The Bet: Paul Ehrlich, Julian Simon and Our Gamble over Earth’s Future by Yale history professor (and environmentalist) Paul Sabin. It’s a balanced, nuanced treatment of the larger subject, but at the same time a riveting story of the clash between two outsized and highly idiosyncratic personalities. You’ll find in it a renewed faith in the potential of innovation and the free market to solve—as they always have—mankind’s seemingly most intractable problems. The Bet is a lucid, readable gem.
© 2013 Nick Murray. All rights reserved. Reproduced by permission. Nick highlights new books, articles, research findings and academic papers in the “Resources” feature of his monthly newsletter, Nick Murray Interactive. To download a sample issue, visit www.nickmurray.com, and click on “Newsletter.”