They Shoot Horses, Don't They?
“Who are the fittest: those [species] who are continually at war with each other, or those who support one another? We at once see that those animals which acquire habits of mutual aid are undoubtedly the fittest.”
redefining the ‘tooth and claw’
image of Darwinism
“You want to do what?”
The conversation was beginning badly. Elizabeth had just introduced me to a young woman in riding pants and boots. Was her name Celine? Or Sandrine?
It didn’t matter. But I soon learned the purpose of the introduction.
“I’ve asked her to ride the horses when I’m in Paris,” my wife announced.
“That’s nice,” I replied.
“And, of course, we have to pay her.”
“Wait, don’t you think this is taking the division of labor a little far? I mean…paying people to ride your horses. What kind of hobby is that?”
“Maybe I should take up golf,” I added sarcastically. “I hate golf. But this will give me a way to do it without actually having to chase the little white ball myself.”
“Or maybe I should pay Doug Casey to play polo for me,” I said, warming to the idea. “I always wanted to be a polo player.”
“Hmmm… if I’m going to take up a sport, I might as well try to be good at it. Maybe I could pay Cal Ripkin to play baseball for me. He could play baseball and I could do the milk ads.”
There are limits to the division of labor. I know no one who’s made a successful career out of offering to sleep with other men’s wives. That is something men usually want to do themselves. People will pay others to take care of their houses while they are away on vacation… but few will pay to have someone take the vacation.
There are limits to everything.
You may have forgotten, as I almost did, where this line of thinking began. I realized that there was some truth to the idea that “progress!” reduces the need for gold. That encouraged me to look at out how progress actually works.
I have been taking apart the drive train of progress – examining each piece, from the piston of self-interest, to the gears of specialization to the universal joint of the market to the turning wheels of productivity. And all of it is slathered with the grease of collaboration – the parts working together to drive the machine forward with the least amount of wasteful friction.
The mechanical metaphor is not the right one – the actual process is more organic, biological, and evolutionary – but it will do for now.
For decades a debate has raged in academic circles about the grease. Is it really based on some instinct to cooperate and be nice? Or does it have a corrosive character – a cold calculation of rational self-interest, leaving people to exploit each other, taking advantage whenever they can get away with it…and defecting from the social contract whenever it suits them?
We’ve seen that this is not what people do. At least, not most of the time. They don’t do it because it doesn’t pay for the group. Defecting invites retaliation.
In Northern Ireland, if an IRA gunman wants to stir up trouble, he will kill a Prostestant. He can be pretty sure that this will touch off reprisals. They actually call it ‘tit for tat’ killing.
A refinement of the Tit for Tat computer program, called Generous Tit for Tat, proved even more successful at winning the ‘game theory’ exercises. It often forgave rather than retaliate. Taking the system as a whole, and looking at it over a long period, more generous strategies seem to work. Both in games… and in life.
Primitive hunters share out meat – even to those who don’t participate in hunts. People give gifts – often with no thought of direct or immediate pay back. Generous actions appear to build trust and social standing – which allow further refinements to the division of labor, and the well-being of the group.
Trust is essential in a large, diverse society… as well as human’s oldest division of labor and most sublime partnership – marriage. Pairing off by twos is an enduring feature of all cultures – from the most advanced to the most primitive. There have been some exceptions – such as a West Africa tribe that allowed the chief to do all the mating for the group… and perhaps some hippie communes… but they have been evolutionary dead ends.
Trust in marriage allows a man to hunt and a woman to gather… with the confidence that their fruits will be shared out. It allows a man to have a reasonable degree of confidence that the children he is supporting share his genetic material… and it allows a woman a similarly reasonable confidence that the man upon whom she relies will not defect when he is needed to help raise the children.
Even in today’s world, a breakdown in trust in a marriage destroys the basis for collaboration. A defecting partner is soon on his own – doing his own laundry and gathering his own cereal at the local supermarket.
But trust, like the division of labor, and the faith people put in paper money – sometimes breaks down. Marriages fail. Partnerships break down. Deals go bad. Kids play Grand Theft Auto… and then steal cars. That, too, is a fact of life. People defect. Things go wrong. And when they do, the market sorts out the wreckage.
Thus, we have made little progress in our thinking about gold. We return to where we began. Gold now has many competitors – innovations that have niched out ways to protect wealth from inflation. There are derivatives and exotic investments nearly as numerous and varied as butterflies. Lepidopterist investors can search for them to their hearts’ content. But none of them have quite the track record nor the balance sheet of gold itself. “Gold is,” as Doug Casey has written, “the only asset that is not simultaneously someone else’s liability.” In the great meltdown of financial assets that could lay ahead – Deutschebank or Goldman or the Bank of England could default. But an ounce of gold will not.
The market, in its wisdom, prices gold largely in accordance with the trust that people have in its competitors. That trust is now running so high that people feel they can rely on electronic impulses – not just for their next meal, for which they will pay with a credit card, but for a stream of income in their retirements which could stretch 30 years into the future.
Thus, a modest prediction: gold is likely to experience another cyclical rise before ‘progress!’ puts it out of business.
Paris, France August 10, 2000
P.S. Reciprocity is the single most important rule of human relationships. When Jesus said to treat your neighbor as you would want to be treated, he was not merely providing moral guidance, but describing the way things tend to work best.
One of the interesting discoveries of the zoologists and economists studying cooperation is that the longer the relationship, the more cooperative people are likely to be. Short-term relationships tend to be exploitative, like a dinner in a tourist restaurant. But a long-term relationship is more like dinner in a restaurant catering to locals. The food and service are better – because there is more at stake. People tend to give up short-term benefits for themselves – in favor of the long-term benefits of the relationship.
“Wouldn’t it be cheaper and simpler to sell the horses,” I asked Elizabeth rhetorically, “and let someone else pay you to ride THEIR horses.”
“It doesn’t work that way,” she said. With a logic that would choke a computer, she explained that while it is reasonable for her to pay someone to exercise her horses, no one would pay her to exercise theirs. “But don’t worry,” she added generously, “I don’t expect you to pay for it. I’ll pay for it myself.”
“Oh no,” I replied quickly, feeling a little miserly, “you shouldn’t have to do that.”
“Yes…I’ll pay for it,” she said firmly.
“Okay,” I gave in graciously, “Or I’ll shoot the darned horses.”
*** Blah, blah, blah – nothing but blabbering gibberish coming from the financial press today. Investors are “concerned about a slowing economy,” said one report. Others were worried about a still-tight labor market.
*** That labor market is worth mentioning. The Fed’s Beige Book report came out yesterday – with all the usual blah, blah. The Beige Book painted with shades of gray – gave mixed signals on the labor market.
*** On the one hand, we have the BLS figures – and the New Era illusion – that higher productivity reduces the cost of labor per unit of output. On the other hand, we have the reality of the labor market.
*** One DR reader reported that the people he knew complained of being forced to work 10 to 15 hours a day to keep up with the workload. Employers polled by the Fed said that “employees don’t show up for work.” And that they needed to offer free food and sign-up bonuses to find people.
*** So, it was a blah day on Wall Street. The Dow, which had reached above its May trading range on Tuesday, retreated back into the range on Wednesday – falling 71 points. The nation’s top retailer, Walmart, met analysts’ expectations. But meeting expectations is not good enough in this market. And WMT lost more than $4. Retailers – which represent 2/3rds of the economy – fell 3.37%, according to the S&P Retail Index.
*** The Nasdaq managed a little progress – but not much. It rose nearly 5 points. Much of the gain came from Cisco. “Cisco’s earnings defy gravity,” said Red Herring. “And the end of this phenomenal success story,” the journal continued, “does not appear in sight.” CSCO beat analysts expectations – by, guess what – a penny. And it expects to increase sales by 50% over the next year. Even so, the stock, trading at 140 times earnings, defies logic as well as gravity. It is more than 300% of what it ought to be, which makes the downside a lot more menacing than the upside is appealing.
*** The Dow is up for the year – but only a trifling 1.8%. That’s about half of the inflation rate. Adding in dividends, a typical Dow investor is still losing money.
*** Oil rose a big $1.23 yesterday – bringing the price back above $30.
*** Richard Russell reports that CSCO has $55 billion worth of options outstanding. MSFT has $61 billion. Intel has $40 billion. These represent, of course, a latent ‘short interest’ in the stocks. And since the companies have demonstrated a willingness to re-price the options lower in order to keep key personnel, it seems likely that they will be exercised. Even at lower values, these will mean a huge dilution of shareholder interests. Ultimately, only the employees may profit from these companies.
*** The dollar rose again. The euro fell to 89.88 cents at one point – but closed above 90. This is the market I am watching most closely. The dollar could hit a new high and signal another major bull phase. Right now, I wouldn’t bet on it. But who knows? Advancing stocks beat declining ones yesterday…and the number of new highs was 3 times the number of new lows. Money is still pouring into mutual funds. And the rising dollar means that foreign money is pouring into U.S. markets too.
*** One place it must be coming from is Japan – where the Nikkei once again fell below 16,000. Japan has fallen. And it can’t get up.
*** And Amazon.com lost $2 1/16 yesterday, to close just above the $30 mark.
*** “By living transnationally, you can flat-out enjoy a higher standard of life at a lower cost,” writes my friend Jim Davidson. If you’re interested in pursuing higher standards for yourself, I’m told there’s few spaces remain on the Sovereign Society European Advantage Tour, Sept. 16- 23 them… contact Amberlee Huggins by e-mail: email@example.com
*** Meanwhile, here in the Paris office, the summer blahs are as far away as Wall Street. “It sure is a jolie matin this morning,” said my assistant Addison, redundantly. We’re here next to St. Merry’s – where the bells ring every quarter hour. Maybe we’ll put an audio feed on the Daily Reckoning so you can hear them. The sun is out, and across the street a pretty young woman in her pyjamas is watering the flowers on her balcony. In the next apartment over, a portly, shirtless man is playing classical works on the piano. His playing equals anything I’ve heard in any concert hall or on CD.
*** I’m going to ask Addison to take some photos and put them up on the website. Watch this space.