Appreciation: Morris on The Tycoons

This review is about four years late, but I'll do it anyway, for two intelocking reasons: one, it's a pretty good book, and two, it's easily misunderstood.

The book is Charles R. Morris' The Tycoons, first published, if I read this right, in 2005. Let's start with the misunderstandings which are, I suspect, either self-inflicted or the work of an incompetent publisher. The most important arises from the subtitle: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy. I can't think of a single respect in which this phrase is accurate. Granted, Morris puts a spotlight on the fabulous foursome--rather, threesome, since he never quite makes the case that Gould belongs in their company (in preference to, say, E.H. Harriman, who seems every bit as important as Gould, and in his own lone). But it's almost perfunctory: when the three are relevant to some larger story, he keeps the focus on them; otherwise, he simply moves away. And the profiles themselves are pretty much second-hand stuff, summaries of what you'd get in more complete form from any number of standard biographies.

What Morris does far better--where he is far more helpful--is in his review/analysis of the vast secondary literature on the structure of development in the 19th Century. Thus he has a number of enlightening insights to offer about the place of technology/innovation in economic growth (in this respect, a good companion to Joel Mokyr's Levere of Riches)--close alongside such related matters as the development of replaceable parts. He also offers a fascinating discussion of what you might call the "puzzle of deflation." That is: after 1873, American prices went into a cycle of decline. But wages in many cases seemed to decline more slowly than other expenses--so the lot of ordinary people might seem to have improved. Yet they weren't happy with it. What can have caused this unrest? Morris doesn't have a ready answer, although he offer some general comments about social instability. But he sets forth the evidence nicely, and makes a good case for the proposition that the puzzle did exist.

More generally, Morris offers some useful notes toward a general analytical framework to understand both the successes and the perils of the economy at the end of his story. That is: we have a market heavy on items with high fixed costs and low marginal costs. Railroads are perhaps the obvious example: it takes a ton mof money to build a railroad, but once it is in operation, you re impelled to accept almost any return, hoever trifling, rather than let your stock sit idle. This led to persistent cycles of oversupply and "ruinous competition"--two words that JP Morgan, in particular, tended to utter as if one. A lot of the competition does indeed seem to have been ruinous, but it seems to have accompanied a spectacular cycle of innovation and technological creativity. As an aside, Morris points out that we've gone through something of the same nature in our own recent past in telecoms--think of how many winners and losers we saw in the 90s in telecoms, but think how much the product has changed as part of the same process.

Morris sets himself up here for what I take to be a more general message about the 20th Century, although he doesn't spell it out in detail. In my own rephrasing: the American economy was the victim of its own success. "We" (=they) built up a network of complex and powerful--yet dynamic--entities, capable of producing a huge volume of product at low prices (think Model T Ford, bakelite telephones). Yet we made ourselves so invulnerable that we went soft. We became a woolly mammoth which had no idea what to do when the cave men showed up with clubs and spears. The reader is invited as an exercise to identify his own favorite example. Mine would be steel. Morris pointed out that almost nothing happened by way of innovation in American steel production after the great consolidation at the turn of the (20th) Century. Protected by strong tariffs and the ruination of our competitors, we still enjoyed a pretty strong domestic steel industry at the end of World War II. The generation after that can be read as almost nothing more than a cycle of evasions and lost opportunities as we threw away our received advantage.

Morris is so good at what he puts into this book that it is a shame to consider how much he has left out. But you'd have to concede that you can't call it a universal history, no matter how good it is at the breech-loading rifle and the open hearth furnace, if it leaves out any but the slightest mention of the trans-Atlantic cable or the electric light bulb.

A final word about the personalities. As I say, Morris may not regard them as central to his story. Still, he has some interesting insights. He seems to give the highest marks to Rockefeller who, in Morris' view, had a spectacular ability to be right sooner than just about any of his competitors (and not nearly as evil as his critics charged). He is slightly more guarded on Morgan. Morris grants him his energy and integrity. He finds Morgan guilty of a certain lack of imagination--yet ironically, it may be this very lack of imagination that may have kept him on message, and made him such a rock of stabilityin time of trouble. Carnegie by turns comes across as talented and energetic, yet a hard man to like or admire--often mean and mischievous with his friends to the point of (ironically) obstructing his own best interests. Gould remains for me a fascinating character--was he a creative scoundrel or just a scoundrel? Morris seems to vote for the former, although he doesn't offer enough by way of detail to make his case.

Ironically, perhaps the best portrait in the book is one of a man not in the title, and whose presence is only tangentially relevant to Morris' plot. That would be Frederick Winslow Taylor, father of "Taylorism," and "efficient management," the dark progenitor of the modern business school. Morris clearly dislikes Taylor whose attitude he finds mean and snobbish, and whose pretensions he finds overblown. I suppose his point here is that Taylor represents all that went wrong with the American economy in the (early decades of) the 20th Century, just as the other four represent what went right with it in the 19th. He's certainly onto something here and I think I'll forgive him for not quite integrating the character sketch into his general point.

Granting its limitations, though, I still can't think of a better introduction to the structure of the American economy than Morris' account. As qualified, highet marks.

Appreciation: Ritholtz on the Late Uproar

So far I've read three overview accounts of the debacle/meltdown/uproar.* Charles Morris' The Two Trillion Dollar Meltdown is the most polished and elegant, with some good detail on the mechanics of particular deals. Mark Zandi's Financial Shock! is perhaps the most thorough, though a bit pedestrian in style. Comes now Barry Ritholtz' Bailout Nation, surely the wise-guy hubba hubba entry in the pack. Short summary: they overlap; they're different; they are all worth the effort.

For all his streetsmart style, Ritholtz has plenty of content, but I'd say his book is a bit misnamed. He does indeed provide a convenient summary of which banks have allowed themselves to be burdened with how many ladles full of taxpayer money--at least so far. But perhaps the most distinctive part of his presentation is his account of the sea change in Federal Reserve policy from its original role as a guarantor of the integrity of money to its modern avatar as protector of asset values (he doesn't have much to say about the intermediate character as facilitator of full employment--somehow, that one seems lost in the shuffle. This is interesting and important, but I'm not persuaded that it quite fits the catchphrase of the title. The "rescue" (sic?) of Long Term Capital Management, for example, was noteworthy in the respect that it did not involve the direct expenditure of taxpayer money, although it certainly did involve a fair amount of Federal bullying arm-twisting, with the intent of getting private parties to act. Even the Fed's frantic, pell-mell rush to restore confidence in markets after the 1987 jolt was not quite the same as a direct stuffing of Federal dollars into private pockets.

Ritholtz begins his account of a "modern bailout era" with the story of Lockheed in the early 70s and Chrysler in the early 80s. This is both too broad and too narrow. Too broad: Ritholtz is right that both Chrysler and Lockheed did involve infusions of taxpayer cash into private entities, although neither one was quite the naked public-to-private wealth transfer that we might envisage. Lockheed, for example, as government contractor, was virtually a ward of the state to begin with. And while a good deal of its problem appears to have arisen from mismanagement of the Tristar project, still a lot of their difficulty could simply be attributed to faulty bidding on government projects.

Chrysler was, of course, not primarily a government contractor. The difficulty with Chrysler is that the company, against almost everybody's expectation, actually paid the money back. We may well say that the government made a colossally risky loan/investment here, of the sort that no sensible private party might have undertaken. Still, it was a kind of success, and recall the answer to the question "who was the best Civil War general"--"Gentlemen, they paid off on Grant."

But Ritholtz is also too narrow, in that forgiveness of the financial failings of private parties is an old American tradition. A natural complememt to Ritholtz' book is David A. Moss, When All Else Fails, about the long history of the government as a guarantor of last resort--including, inter alia, it's role in facilitating the limited liability company and the bankruptcy discharge.

These days Alan Greenspan looks pretty much like a bum for having opened the money sluices duirng the flood of real estate financing. Ritholtz adds his voice to the chorus of critics, but it would have been helpful if he had gone a step further and tried to understand or account for the response of Greenspan and his defenders. For example, Greenspan himself as argued that his manipulation of short-term money can't be held responsible for the real-estate bubble because real estate is long-term and there is no evident coupling between short-term and long-term rates.

Aside from Greenspan, Ritholtz is enthusiastic in general to assign praise and blame. Blame is easy because there is so much to go around; I guess you would say that Ritholtz's prime targets are former Senator Phil Gramm, who worked so hard to exempt derivatives from commodity trading regulation, and the "weasels"--Ritholtz' word--who advise corporate boards to pay their managers such obscene salaries. On the other hand, he does a careful and (I think) thorough job of showing that the meltdown was not the result of the Jimmy Carter Community Reinvestment Act or its progeny. He's also got a soft spot--and so do I--for the Federal Deposit Insurance Corporation, the outfit that really does know how to bankrupt a bank, quickly, cleanly, and with minimal damage to the system. I (and, I think, Ritholtz) can only wish they had a chance to do more of it.

All this is good stuff and it may be niggling to want more. Still, there is one underlying issue so pervasive and so central to his argument that I'd really like to know what he thinks about it. That is: did we need to "save the banking system" and if so, was any "bailout" necessary--and if so, how much (I guess that is three issues but you know what I mean). Is Ritholtz a let-em-all-hang libertarian noninterventionist? If so, I'd be happy to have him say so up front, and to address the (possible) consequences. If not, he's put to the question of deciding what parts of the intervention that he excoriates so much--what parts were actually essential to saving the system.

Obviously no book is going to finish the story of this great calamity--certainly not one written in the calamity itself. Still, all three of these books deserve a place on the shelf. If I had to take just one, it might be Morris', but you can learn a lot from any of them, and you can learn stuff from each that you don't learn from either of the others.
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Paul Krugman's Return of Depression Economics might count as a fourth, although as I've said before, it bears the scars of a somewhat improvisational effort to rework an earlier book.

Appreciation: Morris on Soros, Buffett and Volcker

Charles R. Morris' The Sages: Warren Buffett, George Soros and Paul Volcker (2009) really should not be a good book at all. To all appearances a quick-and-dirty threefer bio of a trio of finance celebreties, you might expect something more or less on the level of Us Magazine. What saves it are two things: one, Morris' remarkable feel for the treacherous landscape of some important financial issues, particularly macro policy The other is his extraordinary skill at exposition. Here, for example, Morris summarizes what Soros called "the Imperial Circle"--the unstable state of the macro-world in the mid-80s:

After runaway inflation was crushed in 1982, the economy veered into a peculiar growth stage that most economists regarded as highly unstable. ... an unusual blend of strong growth and a strong dollar, but with big trade and budget deficits. According to conventional wisdom, it was unsustainable--strong currencies don't coexist with big deficits. But the circle was squared by high American interest rates. High rates sucked in capital from abroad, so financed the U.S. trade deficits. At the same time, the depressive effect of high interest rates at home was offset by ... big bueget deficits. So, while high dollar interest rates imposed crushing burdens on developing countries like Brazil and Mexico, they hepled America live comfortably beyond his means.

-- Charles R. Morris The Sages:
Warren Buffett, George Soros and Paul Volcker (2009)

If you think this is ho hum, let me tell you--as one who, as a penny-ante investor, lived through the time while trying to figure out this maelstrom from himself, I think Morris has captured in a paragraph more than any other commentator could capture in no less. He is able to do that for just about every critical macro juncture in the book.

Aside from sheer celebrity, it may be difficult to understand why one would bother to put these three in the same book. Soros and Buffett are both investors but Volcker is primarily the creator of an investment climate. As an investor, Buffett has made his billions by ignoring (as far as he can) the transitory swirls and eddies of the market, while Soros has succeeded in bringing off what so much investment advice tells us we should not do: trying to identify trends and to ride them for all the are worth.

Even the likeability factor may require some justification. Buffett and Volcker probably pass the test--they are two of a tiny number whose reputations remain largely undiminished by the late uproar. Soros is a somewhat different matter. At least in part because of his involving himself in American domestic politics, he has had to bear a certain amount of demonization as a foreigner and a "speculator" (= a Jew?). This line of critique clearly does not impress Morris, who gives it scarcely a glance. He is much more impressed by a Soros who broke as government monopoly on information surveillance in Hungary by flooding the place with copy machines.

But I shouldn't make this review longer than the book. It is a decent evening's read, and a pleasure on every page. Highly recommended.

Current Reading: Finance

Getting ready to teach a finance class to law students, again after an eight months' break, I figured I ought to do some mainstream reading to see what kind of notions were in the showcase. On the eve of the new semester, I squeezed in four (well, three plus--I'm still not quite finished with the last one). All worth my time, in instructively different ways.

The best of the lot is surely Charles Barnard, The Two Trillion Dollar Meltdown. It's hard to imagine a more helpful account of what has gone haywire in the financial system over the past few years, including an accessible under-the-hood account of some of the more momentous banking innovations. I look forward to stealing from this guy a lot, or at any rate paraphrasing a lot of what he has to say, and perhaps the worse for the paraphrase.

I'd say almost as much for Paul Krugman, The Return of Depression Economics. Krugman is kind of a cult villain in moonbat land, but even those who don't like his politics or his combatative style will have to admit he is (a) state-of-the art technician in macro theory; and (b) a top-notch explainer of abstruse concepts. You can see why Princeton students would want to pay 30 (40? 50?) thou a year to sit at his feet and listen (to what the rest of us can get for 20 bucks, or free). The book is hampered by the fact that it was first written ad an account of the Asian meltdown of the late 90s, then reengineered, rather hastily I must say, for the current uproar. There is a connection, of course, and history is part of the point here. But if he'd written from scratch, he wouldn't be quite so top-heavy with the collapse of the bhat. Also, I can't imagine how the publisher let him get away with that title. While it does, in a sense, accurately represent the contents, I suspect that the kind of reader he's looking for will simply not recognize that this book is for him (her).

Niall Ferguson's The Ascent of Money, I wrote about earlier. I got snide with him for getting confused about bankruptcy but then I conceded that the book was, overall, quite an excellent general over view of a long and complicated history. Still true, although after reading Morris and Krugman, you're reminded of just how broad-brush his presentation is--and must be, considering how broad the task he has set for himself. I oonfess that after having read the book, I couldn't bear to watch the PBS special: the sonorous anecdotes and the jump-cut video was new when I first saw Alistair Cooke's America nearly 40 years ago, but by now the formula is getting kind of stale.

Raghuram G. Rajan and Luigi Zingales Saving Capitalism from Capitalists, is a somewhat more complicated matter. As I say, I'm not quite finished with it, but I think I get the drift: if this were a Victorian political tract, it would be entitled Incumbency: An Account of the Evil Thereof, with Proposals for a Remedy. Their point is intelligible enough: crony capitalism is not capitalism; incumbents dig in and protect themselves against (further) competition. Freeing us from the dead hand of incumbency can make life better for all, and in particular, can give opportunities to the otherwise dispossessed. This is an important, if often overlooked, home truth. I'd say it is fairly generally accepted among economists* --perhaps particularly by economists writing about development, like Dani Rodrik or William Baumol. Indeed, it probably helps to explain the disconnect between self-conceived "liberal" economists (Krugman is a sufficient example) and the voting public on issues like free trade.

RZ hew consistently to their theme and they offer a collation of helpful instances of the evils of incumbency. They make passing reference to their recipe for reform: secure property rights; transparency (which would include mandated disclosure and quality accounting standards). They are also insistent on a point that is a hobbyhorse of mine: a market is a cultural artifact--markets don't just fall from the sky they can be tweaked and formed for good or evil, and we can't expect good results just by leaving them alone.

So far, so good. But unless they are planning a boffo final chapter, they don't seem as systematic as I would like. They cover a lot of ground at a brisk pace. I complained earlier that they really stewed the pooch on the details of bankruptcy and I while I haven't spotted that kind of slipup elsewhere, I must say it does make me wonder about how good they really are at other issues I know less about. So, well worth the effort, and I do expect to finish it, perhaps this afternoon. But to be used with caution.

Oh, and one other that I almost forgot: Kenneth Pomeranz and Steven Topik, The World that Trade Made. Perhaps the reason I forgot it is that it is not a book so much as a collection of anecdotes--a kind of readers' digest of snippets from the economic history of the (post-Medieval) modern era. Apparently these were written piecemeal for some sort of trade journal. There are no footnotes (although they do add a helpful bibliography). But the stories, one by one, are well told and mostly instructive. Amazon reviewers say that this would be a great prep book for the AP history exam. All I can say is that history must be a lot more interesting than it was when I went to high school.

Takeaway point: there really is an awful lot of good, intelligent, nontechnical writing out there. I'd love to kick back and just read a dozen more (isn't that what being a professor is supposed to be about?). But as the philosopher says, stuff happens. I know that 14 weeks from now, I will look back on a semester of either success or failure and wonder--what the heck happened to all my time?
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*Maybe it is the definition of an economist. Cf. Adam Smith:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is im-possible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and jus-tice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.