Two thousand ten was, for many advisors, an enervating and exhausting year, what with serial terrors of yet another eurozone member on the brink of default, the ten-week "flash crash" correction of April-July, spiraling federal debt and deficits, intractable unemployment, and the most important off-year election in 15 years.
Yet out of this tumultuous year came four of the most important books you'll ever read-books which will sustain you for the rest of your career, and even the rest of your economic life. Indeed, I don't think it's too much to say that they form four pillars upon which an advisor can found a rock-solid economic philosophy-as distinctly opposed to an outlook at any given moment.
The first is Greg Easterbrook's Sonic Boom. Easterbrook's essential thesis is that globalization has barely begun, and that as it reorganizes and even revolutionizes the world over the next decade and beyond, globalization will produce wealth-and spread that wealth farther and wider-than most of us can yet imagine.
He tells the story of globalization through the lens of a number of different world cities, beginning with Shenzhen, China-a city that did not exist 30 years ago, and now has more inhabitants than does New York, much less London or Paris-cities that took centuries to develop. He also refers us to such old and previously-declared-dead cities as Waltham, Mass. (now a high-tech and venture capital hotbed) and Erie, Pa., where GE is now producing fuel-efficient and environmentally friendly locomotives, which the world buys as fast as the company can turn them out.
Innovation drives wealth creation, Easterbrook reminds us, citing the fact that 85% of economic growth now comes from new ideas: In 2007 alone, companies that were seeded by venture capitalists provided nearly ten and a half million jobs, and generated $2.3 trillion in revenues-about equal to the GDP of France. Despite the occasional very odd idea about things like CEO compensation, this book is a powerful antidote to catastrophism.
The second book is Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity by Brian Domitrovic. This is the first complete treatment of the supply-side revolution-of everything that went wrong in the Seventies and then spectacularly right in the Eighties-by a rigorous professional historian. But don't think for a minute that this means the book is dry or "scholarly" in an offputting way (as is, for instance, Reinhart and Rogoff's inexpressibly rich but totally unreadable This Time Is Different). It is in fact wonderfully written and highly entertaining.
I've long recommended the late, lamented Robert Bartley's The Seven Fat Years to advisors seeking to understand stagflation and the low-tax-rate, stable-money revolution that vanquished it. Domitrovic's is, finally, the definitive history we've all been waiting for and didn't know it. As much as I admire some of the recent histories of the Reagan era-especially Craig Shirley's Rendezvous with Destiny-none has been sufficiently strong or even clear on the economics, nor on the key economic actors. Domitrovic sets all to rights, and his book is a gem to be treasured.
The third of the four 2010 classics to appear was Matt Ridley's The Rational Optimist. "On what principle is it," asked Macaulay, "that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?" Matt Ridley wishes us to know that long-term optimism is no more or less than rationality, just as pessimism is irrational (and, as Macaulay suggested, counterintuitive in the bargain).
Why did "a rare predatory ape"-whose characteristics including tool making, big brains, culture, mastery of fire and even capacity for language had been in place for tens if not hundreds of thousands of years-suddenly burst out of Africa 45,000 years ago to dominate the planet with rapidly evolving technologies? To Ridley, it is exchange and specialization-in his wonderful phrase, "ideas having sex"-which provide the answer. This has virtually nothing to do with how man is built, but with how he interacts.
Innovation, in this view, is "a collective enterprise that requires exchange," inasmuch as virtually all technologies are combinations of other technologies. Ridley quotes the molecular biologist Francois Jacob to the effect that "to create is to recombine," and cites his favorite example, the camera pill, invented after a conversation between a gastroenterologist and a designer of guided missiles. With the march of globalization and especially the search function of the Internet, Ridley says (with Easterbrook) that the phenomenal increase in the world's standard of living may just be getting started.