Darwinism And Other Nonsense

Looking out my office window at Mount Vernon Square in Baltimore, I again pose the question — why do I choose to live in France rather than the United States?

And since there is no one else in the office at 5 o’clock in the morning, I will have to answer the question myself, as well as pose it.

The answer, as I hinted yesterday, has to do — in a very roundabout way, of course — with Darwinism.

But first, let me introduce a distinction to which I refer often in these letters. There are two forms of knowledge, said Nietzsche before he went mad. There is the knowledge you get from personal experience…which he called “erfahrung”…and there is “wissen” — which is the knowledge you get from the newspapers and from the abstract ideas you learn in school.

Darwinism is an example of “wissen,” confirmed, or at least not contradicted, by much of what we can observe personally. People who understand Darwin’s theory believe they know something.

Darwin noticed that there were similarities between living things. He wondered if all might not have developed, or evolved, from the same source. This led to a theory about the way nature works.

The popular expression of the theory has two main elements: that random mutations are the source of change…and that these mutations either confer an advantage or a disadvantage in the competitive environment, and are thus selected in or out as the case may be.

In answer to the question, why does a giraffe have a long neck, the reply — “in order to eat the leaves of trees” — is incorrect. That response would suggest a hidden order or even design to the natural world. Darwinists don’t believe in design…they believe life is, in the poet and insurance agent Wallace Stevens’ words, “an old chaos of the sun.” The giraffe, according to Darwinists, has a long neck because the short-necked giraffes did not survive.

My argument with Elizabeth concerned the meaning of “random.”

“Either things are random or they are not,” I told her, following up with the logical flourish worthy of William Jennings Bryan:

“And if man evolved from monkey by random mutation, favored by natural selection, then God had no role in man’s creation. And if God had no role in man’s creation, then Nietzsche is right…he may as well not exist.”

“But how could Darwin or anyone possibly know whether the mutation is random or not?” asked Elizabeth. “Maybe it just looks random.”

There is something about the concept of randomness that always seems to provoke an argument in our household. Longtime Daily Reckoning sufferers may recall another argument that we had — concerning the Random Walk Theory of stock price movement.

There, too, Elizabeth resisted the idea that stock price movements could be entirely random.

As it turned out, she was right.

By way of further introduction, we practice a division of labor in our household. Elizabeth decides where we live, what we eat, where our (six!) children go to school, how we spend our money and so forth.

I take on the big, important issues — such as the family’s position on the Efficient Market Hypothesis (EMH)…or what we think of the Strategic Air Power (SAP)…or whether we favor the Designated Hitter Rule (DHR). If it cannot be reduced to three capital letters, in other words, it is out of my sphere of influence.

But the randomness of stock price movements, the Random Walk Theory, or RWT, is clearly something I should know something about.

Still, Elizabeth’s instincts were right. As Smithers and Wright put it in their book, “Valuing Wall Street,” “It is now widely agreed among economists that the random walk version of the Efficient Market Hypothesis is very nearly, but crucially not quite, supported by the data.”

People took the Random Walk Theory very seriously, just as they took Darwin’s Theory of Evolution (TOE) very seriously. Both appear to describe the way things work. But neither gives the reader any clue as to why they work the way they do…how things got to be the way they are…or what they will be like in the future.

Smithers and Wright do explain that the failure of the Random Walk Theory does suggest a useful insight — one that could save you a lot of money…but I will get to that later. Let me first return to Darwinism…and why I like living in France.

France is a country with many things that I deeply dislike.

It has a strong, well-padded central bureaucracy. Everything requires paperwork and approvals. Since I do not like anyone telling me what to do…the bureaucracy is annoying.

It has high taxes — with a maximum income tax rate nearly 50% higher than in the United States and a “wealth tax” which eats away not merely at what you earn in the current year, but what you earned, and managed to save, from previous years.

It is also a culture that delights in “solidarite” — where group-thinking and mass action are cultivated. Strikes are common…with the trains and highways often blocked. Still, the French not only tolerate these disruptions — they invariably seem to sympathize with the disruptors.

France is more of a socialist country than the United States. Perhaps it is a genetic flaw…or a weakness of my character…but I find myself completely unable to get in the spirit of “isms.” Crowd behavior and group-thinking always seem imbecilic…and even dangerous. I do not even like watching sporting events.

Darwinism is an amusing, stimulating idea…but it is also easily vulgarized into a mob-slogan. Thus, the Theory of Evolution devolved into “the survival of the fitness” and the “law of the jungle”…which further devolved into the socialist apologia: “you can’t make an omelet without breaking some eggs.” And by the mid-20th century, the socialists were using this vulgarized abstraction to run not merely their own lives, but those of millions of others.

All things being equal, I would prefer not to be one of the ingredients in the socialists’ omelet.

But just as no sensible man would take Darwinism seriously, neither should he take socialism seriously…or any ‘ism’ for that matter. In fact, big, abstract ideas are often entertaining…but they are certainly no basis for organizing your life. I distrust them all — even, or perhaps especially, my own.

But when I look out my office window in Paris, I do not see socialism. I see a very romantic street scene – with the Paradis Cafe on the corner…cobblestone streets…and attractive people wandering around. Every quarter hour the bells of St. Merry’s toll…and in almost any direction I choose to set out at lunchtime, I will find dozens of appealing restaurants within a 10 minutes’ walk.

Also, I like the way the French windows open…so you can look out without the double-hung bars interrupting your view. And I like the way French drivers stay in the right hand lanes…and the way you can drive 100 mph down the highway without getting thrown in jail.

Taxes are higher in France, but where else can you buy a decent bottle of wine for $5? And where else can you see practically pornographic pictures — such as the current ad campaign for Yves St. Laurent perfume — without paying for them?

What I really care about is not the “isms” — but the everyday experiences of my life. Are my children safe? Are they being well-educated? Is the food good? Is what I have to look at appealing to my eye?

What I actually care about is the erfahrung, not the wissen. And the erfahrung isn’t my concern, in any case. I only deal with the big issues.

So, if you really want to know why I live in France, you’ll have to ask Elizabeth.

Your correspondent, back in Baltimore…

Bill Bonner Baltimore, Maryland December 13, 2000

*** Well, it was nice as long as it lasted, but it looks as though America finally has a president-elect. Bush should demand a recount.

*** The news boosted futures in after-hours trading, but not spectacularly. After all this time, it is hard to believe that yesterday’s Supreme Court decision would have much affect on the markets this morning.

*** Yet that is what commentators are predicting. And overnight, the dollar rose along with Asian stock prices.

*** And Mr. Bear is probably ready for a little holiday anyway. The Dow rose 42 points yesterday.

*** But the news was generally bad. Retailers are worried…and reporting weak results. The latest was Best Buy yesterday, after Wal-Mart, Home Depot and Lowes last week. Consumers just aren’t spending like they used to.

*** Holiday shopping has gotten off to a slow start. Still, there is that one big weekend before Christmas — maybe the customers are planning to show up then.

*** Meanwhile, in the tech sector, Compaq became the latest company to admit it was having trouble selling PCs. The Nasdaq fell 83 points.

*** The Anderson School at UCLA has been making economic forecasts since the Eisenhower administration. Its latest forecast sees an end to the 38 quarters of economic growth in the United States. By the middle of next year, say the forecasters, the United States will be in recession.

*** As if to get a head start, the Financial Times reports that “private hedge funds and investment banks are setting up funds to buy distressed debt, and law firms specialising in bankruptcy and creditors’ rights are staffing up.”

*** “The number of business bankruptcy filings has hovered between 9,000 and 10,000 a quarter since the beginning of 1999,” continues the FT article, “But bankruptcy and creditors’ rights lawyers point out that some recent filings have been large — ICG Communications, the once high-flying telecoms group — and that their own internal evidence suggests a wave of business failures to come…and worldwide defaults on speculative-grade, or junk, bonds will rise from 6 per cent to 9 per cent 12 months from now, with the majority concentrated in North America.

“‘The last time there was such an increase in defaults, in the late 1980s, the result was recession,’ says David Hamilton, an analyst in Moody’s risk management department. ‘When you have a boom that has been going on for as long as it has in the United States, the longer the boom continues, the weaker the credit quality for the marginal borrower becomes. When you get into the late phase, you get a lot of what turns out to be questionable lending.'”

*** Remember how the Information Age was supposed to eliminate wasted time and resources? Well…again, the FT: “Slowing growth is also putting to the test the theory that improved technology would allow companies to manage their inventory better, almost eliminating the build-up of stocks when demand levels off.

“‘That’s turning out not to be the case: inventories are turning up in a number of industries,’ says Jeanne Terrile, director of strategic research at Merrill Lynch… ‘[Inventory] is still behaving in a sort of old-fashioned way,’ she says.”

*** “For companies that only a year ago were running production lines at full capacity, boasting about Internet- enabled inventory management and struggling to meet demand,” adds the FT reporter, “the challenges of overcapacity, overgearing and overstocking have arrived with frightening suddenness.”

*** And more on the Greenspan Put: “History shows,” writes Charles Peabody, “that, when the authorities try to arrest the deflation of an asset class (such as that which has been occurring in the TMT sector) through the infusion of liquidity, that liquidity usually does not flow into the deflating asset (although it does help, temporarily, to arrest the de-leveraging process). Instead, that liquidity tends to seek out an asset class that has already been inflating and where confidence remains high.”

*** Peabody thinks he sees another bubble in the making — guessing that the next shot of juice from the Fed will find its way into real estate, and real estate lenders, rather than TMT stocks: “And as reflected in [yesterday’s] Wall Street Journal article (see page C1) entitled ‘Small Banking Stocks Vault Over Their Bigger Brethren,’ analysts can’t shout loud enough about the attractiveness of the thrifts and community banks — which are essentially residential mortgage lenders. When the Fed tries to arrest a de-leveraging process by injecting liquidity into the system, that liquidity tends to seek out the asset class that is already inflating and creates an even bigger asset bubble. As can be seen in the chart in this WSJ article, stocks in the Keefe Thrift Index have experienced triple digit percentage increases this year, far outperforming (by almost 60 percentage points) most other financial stocks. And yet, some analysts are predicting another ‘40% climb in thrift shares’ from here.”

*** Power failures cost the U.S. economy $50 billion last year. And new technology is particularly vulnerable. Peter Huber estimates that Internet-related equipment uses 13% of the nation’s electrical energy. And some high-tech equipment is so sensitive that it can only tolerate 31 seconds of outages a year.

*** The L.A. Times blames information technology for California’s electrical shortages: “Consider the college dormitory,” suggests an article in yesterday’s paper. “Thirty years ago, a typical student room might contain a couple of desk lamps, an overhead light, a stereo system and maybe a hot plate. Now check out Claire Steggall’s room at the University of Rhode Island. The freshman engineering student and her roommate have two computers with printers and monitors, two mini-refrigerators, a microwave oven, a television-VCR with cable service, desk lamps, a stereo with a big subwoofer for boosting bass tones, a telephone, hair dryers, a Lava Lamp–you get the idea.”

Asked if she ever switches her computer off, Steggall thought for a moment and said, “I do if I leave for the weekend.”

*** I flew into Washington’s Dulles airport yesterday afternoon. The corridor leading from the airport to Washington is home to many tech and dot-com companies. As we passed PSInet and Careerbuilder.com I half expected to see flags at half-mast…and lights off. Instead, they were lit up for the holidays. And the whole area seemed to be booming. All went well until my taxi arrived at the Washington Beltway. What a mess! It took more than two hours to get around to the other side of the city.

*** It’s very cold this morning. Skies are clear…but snow is predicted in Baltimore for this afternoon.

The Daily Reckoning