Standing Solo in the Crowd

Mob mentality – not the type of thinking that is regarded highly…but then again, apparently two heads are better than one – or are they? Bill Bonner explores…

Ek aur ek guyazah

A Hindi saying, meaning "1 + 1 = 11"

When we picked up James Surowiecki’s new book, The Wisdom of Crowds, we not only expected to be appalled; we counted on it. It is much easier to write a review of a man’s errors than it is to praise his merits. Beyond that, we had reason to expect little. We have come to believe that crowds are full of dumbbells and psychopaths; it would be a nuisance to alter such a strongly held opinion at this stage in life. What’s more, we felt that the book would probably provide encouragement to communists.

No one takes Bolshevism seriously any more. But unseriously, comically, almost accidentally, it has taken over most of the world – including the United States. The cost of paying retirements has been collectivized. health care has been largely collectivized – both by government force and by the insurance industry. Risk of all sorts – including financial risk – have been spread out so much, no one knows exactly how far they reach. If a man defaults on his mortgage in San Diego, who will be the ultimate loser? It is hard to know. Risk is collectivized. And modern corporations are hardly the exploiters and despoilers of Marxist imagination. Au contraire, public companies are now owned by "the people" – through millions of small shareholdings and mutual funds. And they are managed in such a way that almost guarantees that the capitalists will never make money. Dividend yields are below 2% – while the inflation rate is 3.3%. Investors take on the dividend…even though it represents (assuming the share price remains constant) a net annual loss of 1.3%. The capitalists no longer exploit the proletariat, in other words. Instead, the workers exploit the little capitalists.

As evidence for this, we give you the latest report from GM. The giant automaker and finance house needs cash. "Liquidity is oxygen to us," said its CEO. Yet the cost of cash is going up. GM’s bonds are getting marked down to trade at junk levels after the company failed to hit earnings targets, says the news, because its health care costs [for employees] were higher than expected. GM, of course, is a huge collectivity: Owned by American consumers-turned-capitalists. Operated for the benefit of workers-turned-renters. And financed by lenders who are beginning to regret it.

The Wisdom of Crowds: Why We Didn’t Think We’d Like the Book

There is another reason, by the way, we were prepared to dislike Surowiecki’s book. The man had written a foolish column in The New Yorker about gold. Not that that disqualifies him completely from future contributions to mankind’s understanding of the world around him, but it was a bad omen.

"Large groups of people are smarter than an elite few, no matter how brilliant – better at solving problems, fostering innovation, coming to wise decisions, even predicting the future," says the jacket cover. Did a large group of people write Shakespeare’s sonnets, we wondered? Did a large group of people invent the beret…or crispy duck? Will a large group of people help us fix our dishwasher?

It was, of course, a large group of people who wanted Adolf Hitler in the Chancellor’s office in Berlin. Another large group wanted to see Mussolini in high office. And what about the multitude of yahoos who cried out "crucify him!" when asked what to do with the Nazarene?

(We guessed that Surowiecki did not mean "crowds" at all – but aggregated, independent individuals, putting their heads together like Strunk and White.) But now that we have read half the book we breathe a sigh of regret; the book is not bad. In fact, it is delightfully misleading.

The Wisdom of Crowds: Two Heads Are Better Than One

The idea of the book is that crowds are smart. We never doubted it. "Two heads are better than one," is the old expression. Actually, two heads are often better than two. Putting people together with different points of views, different tastes, different brains, and different incentives actually can work a kind of magic – multiplying the talents of the people involved. Surowiecki provides many examples. We have our own: Laurel and Hardy. Rogers and Hammerstein. Gilbert and Sullivan. Bogart and Bacall. Simon and Garfunckel. Antony and Cleopatra. Brad and Jennifer. Lennon and McCarthy. Burns and Allen. Dow and Jones. Ernest and Julio. Jagger and Richards. Scrooge and Marley. Bonnie and Clyde. Jack and Daniels.

Ek aur ek guyazah.

Of course, this does not mean that every time you get a couple of knuckleheads together they’re going to write good music or build an atomic bomb. Get any bunch of people you want. We will bet that we will be better at guessing our PIN code – alone – than all of them put together. Nor can even a hundred of the smartest men on the planet do a better job of telling us what we want for breakfast than we can do for ourselves. Nor do you get any extra benefit from having a group of yes-men sitting around the table. Instead of giving you better outcomes, they merely reinforce the moronic ideas of the group leader. Even in decent groups, people tend to get bullied or bamboozled. Or, they merely follow along with any idea that has the floor. This sets off a "cascade" of ideas and opinions that tumbles toward an outcome – either benign or malevolent.

Still, the Bolsheviks and syndicalists were right about one thing: Collectives work. But the collectivists always make a mess of things when they insist. The only collectives that work are voluntary collectives – families, markets, communities, social groups, religious groups, enterprises – the very things the collectivists wanted to destroy.

None of this is particularly new. Adam Smith, Adam Ferguson…and generations of natural philosophers and economists have worked on these issues for many years. What is refreshing about The Wisdom of Crowds is that Surowiecki describes what Hayek called the "spontaneous order," as if he had just discovered it. He seems astonished – and perhaps disappointed – that people go about their daily lives and get things done, without anyone telling them what to do. It is as if he had never heard of culture, or trust, or fairness, or convention, or tradition…or any of the millions and millions of small acts of cooperation that make civilization possible. It makes the book fun to read – it’s like taking a Baptist teenager to a whorehouse; "So this is what it’s all about?" he asks, his face lit up and his pulse racing.

"Yep," you feel like replying. "What did you think?"

We have only read the first half of the book, however. More to come…

Regards,

Bill Bonner
The Daily Reckoning

January 21, 2005

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

Oh dear, dear reader…we’ve begun to worry…and part of our brain may be overheating.

Another day has begun…and before we’d finished our coffee we had before us one…no, two new things that are impossible to believe.

On page one of the International Herald Tribune we see George W. Bush, at his second Inauguration, whose mouth seems to have come such lofty guff he might have been mistaken for a hospital chimney. America’s number one goal, according to its number one citizen, is "the expansion of freedom in all the world." Vive Quebec libre, he might have added, if he had thought of it.

"The survival of liberty in our land increasingly depends on the success of liberty in other lands," said George W.

We don’t know whether that is true or not. But it’s the kind of thinking that becomes popular from time to time. "If we’re going to be free, then you’ve got to be free too." During Europe’s religious wars people were convinced that they could only be Catholic, for example, if they forced everyone around them to be Catholic. Napoleon figured his empire depended on forcing Russia to take its place within it. Later, many thought the survival of the Thousand Year Reich depended on subduing the Slavs. Now, George W. Bush proposes that if America wants to continue holding elections, it will have to force others to hold them as well.

Over on page seven, Thomas Friedman tells us that in Iran, many young people "apparently hunger for Bush to remove their despotic leaders, the way he did in Iraq." We can well believe that many Britney Spears’ fans people would like to see Bush remove their leaders – Tony Blair, Gerhard Shroder and Jacques Chirac, to name a few; probably a majority of them would like to see Bush take himself out.

But it has been a long-established convention in statesmanship to let nations decide for themselves how whom they will put in office…and how. Some people call that "freedom."

Bush’s foreign policy doctrine is preposterous. But his focus on overseas adventures tells us that The White House is less serious about cutting the deficit than it seemed a few months ago. Which probably means that federal spending is going to keep rising at its present pace…and deficits will get larger.

Meanwhile, the people in whose name these world-improving efforts are made…and upon whose backs the costs fall like sacks of cement…are getting poorer. Not only are they ruining themselves by spending money they don’t have on things they don’t need, their incomes are also falling. News reports this morning confirm what we were saying all year: Real incomes went down in 2004. Subtract the CPI from nominal wage growth and you get a negative number – 0.8% below zero.

Yet, in the financial press economists explain that this is not such a cause for worry – because house prices are rising! And here we find the second impossible thing we were asked to believe before breakfast. As you know, we beat this drum so hard already; people next door are probably calling the cops. Today, we will say no more…

Well…one little note. Who would be even a penny richer if every house in America doubled in price? Net…? Nobody. The housing stock would have exactly the same value – just twice the price. Houses could be sold for money. But it would cost exactly the same amount of money, ceteris paribus, to buy another place to live. Of course, some individuals would come out ahead. If you were about to die, for example, you wouldn’t have to buy a new place.

More news, from our team at The Rude Awakening:

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Eric Fry, reporting from Manhattan…

"Your New York editor suspects the bond market’s seeming strength owes more the stock market’s weakness than to any fundamental influence from the economy. Does the bond market "smell" a coming deflation, for example? We doubt it. Rather, the bond market, like a well trained Russian bear, dances on the command of foreign central banks and American institutional investors."

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Bill Bonner, back in Paris:

*** We just received this from Rick Barnard in Paris:

"Another day, another lunch in a fine restaurant… this one right on the Cannes beach. It was truly something out of a movie – the blue water of the Mediterranean lapping nearby…a glass of fine wine in my hand…and a plate of frog legs in front of me.

"Yet my complete attention was focused on Dr. Richebächer.

"The topic today – if any of my talks with Dr. Richebächer have had a central topic – was Europe and its economy. More specifically, the differences between Europe and America.

"For example, Europe has a completely different outlook of property prices.

"’Americans always talks about their rising house prices,’ he told me. ‘But prices are rising here in France as well. Do you hear of it? Of course not, because we know it is nothing to brag about.’

"In his opinion, Europeans are just too modest to brag. And that’s why people perceive the European economy as weak.

"’The only problem in Europe is that its savings are too low,’ he said.

"’Why is that?’ I asked, prying another glob of frog meat from the tiny bone.

"’It is just in our blood,’ he said. ‘Overall, Europeans have always been great savers.’

"The conversation went on for quite awhile. I ate my small dish of frog legs rather quickly, much to our waiter’s surprise.

"When I returned to Dr. Richebächer’s apartment, and we immediately got back to work. For two and-a-half hours straight he answered my questions. Even when I had run out of tapes, he kept talking. My pen raced along to keep up.

"Among the most important information Dr. Richebächer gave me some was what to expect in the next few months. More importantly, he told me what to do about it."

*** We are making a list of mankind’s greatest achievements. So far, only two things have made this list: the French beret and Chinese crispy aromatic duck. The beret is the perfect hat. It can be worn with any outfit…and always gives an air of romance and sophistication (except in France, where it has been hopelessly out of style for years…) And crispy duck? We don’t know why…but we have never found a dish more satisfying.