Category Archives: Finance

Why is deflation bad?

This topic is probably well known to people with an understanding of economics, but that isn’t most people so I decided I wanted to write about it. With most of the Western world experiencing sky-high inflation these days, people are wondering when prices will ever come down. A reduction in prices would be an example of deflation, and the Fed has for years been working tirelessly against that, which might make some people wonder “why wouldn’t it be a good thing if prices went down?”

To begin with, technology is supposed to be deflationary and in this case it’s seen as a good thing as it allows the economy to grow faster and people to afford more things. However while deflation is expected in certain sectors, the economy as a whole should not be deflationary as it can pervert the market forces which lead to growth. In a deflationary environment, money gains value as time goes on and this means the rich get richer just by holding money, they don’t even have to invest it. Not only that but loans are very expensive because the value of money keeps going up. Both of these facts discourage investment and encourage sitting on wealth instead, which decreases economic growth and productivity.

This is often cited as to why despite its use throughout human history, a gold standard is not appropriate for a modern economy. A gold standard would ensure that money can only be created through mining more gold, and since the economy is expected to continue growing as more people join the workforce and more technology is rolled out, this would by necessity induce deflation. Deflation would then discourage investment and encourage hording, hindering economic growth and ossifying social mobility as old money becomes unassailable by new money.

For all these reasons most central banks have an inflation target of around 2%, let’s all hope they manage to get inflation in line.

Will inflation become persistent?

Currently most of the western world is experiencing inflation of between 8% and 15% a year (although there are some stark outliers).  The question on everyone’s mind is “will this become persistent,” my question is “how will we know if it has?”  

The Federal Reserve’s view that inflation would be “transitory” didn’t seem so unreasonable when they made it in early 2021.  Inflation was caused in part by the sudden drop in supply due to the COVID19 pandemic.  That drop in supply had also caused a drop in demand, but as the economy opened up demand was rising and it was assumed supply would as well.  This could have meant that within a year or two supply and demand would restablize to somewhere around their 2019 levels, when the factories and supply chains were fully staffed and the consumers were fully consuming. But something went wrong, at some point it seems that demand got well ahead of supply and at that point supply couldn’t catch up as long as low rates and easy money remained a policy of the Fed. And so in 2022 the Fed quietly retired the “transitory” label and started raising rates in earnest.

To digress a little, Argentina experienced an inflation rate of around 300% on average from 1975 to 1990, and the results on consumer habits were amazing.  People generally spent all their money as soon as they had it, no saving in sight, because inflation erodes the value of saved money almost immediately.  People would buy cars as soon as they hit the market, drive the car for a few years, and then sell it used and were able to make a profit because with 300% inflation the price of their car had gone up tremendously even as they drove it.  The lack of any sort of savings, and the sky-high demand as people spent every peso they had, both became entrenched in the buying habits of Argentine consumers and those habits were difficult for the central bank to overcome.  Worse still, these habits created a “tragedy of the commons” among the Argentine consumers, if everyone would be willing to spend less pesos and save more, then demand could cool off and supply could increase to match it, taming the inflation.  But if only some of the consumers stopped spending and started saving, then inflation would persist at sky high levels and all those consumers would accomplish is the swift erosion of whatever money they put towards savings.  If you wanted to keep your wealth during hyperinflation, you had to spend it (or convert it to dollars, which also didn’t help the peso).

The persistence of Argentine inflation was what made it so impossible to cool, not just the constant sticker shock.  That’s part of why the Federal Reserve has been so deliberate and communicative, it wants to maintain the trust of the American consumers and producers.  As long as people trust that the central bank will cool inflation, they will continue to save and not just spend spend spend.  But if people don’t trust the institutions (as they did not in Argentina), then any attempts to maintain trust in the currency are futile.  I haven’t detected the sort of tell-tale signs that inflation is becoming ingrained in American’s buying habits, we’d know if it had when people start buying things today on the assumption the price will rise in the near future, and I haven’t seen a lot of that.  On the other hand I’m a scientist who doesn’t have much money for big purchases, so what do I know about spending habits?

Technology is supposed to be deflationary

Elon Musk and Cathie Wood are complaining about deflation again.  For the most part they’re just sad that the Fed’s actions have cut off the flow of cheap money, reducing the price of stocks and thus reducing their total wealth.  But they both have a tiny kernel of truth within their whining, technology is deflationary by nature and our monetary policy should be prepared to deal with it.  But what does that even mean for technology to be deflationary?

I’d like to go back to a post I did on dividends for an example here.  Let’s look at the Oil Shock of the 70s for a good example of an inflationary period.  The rise in the price of oil led to inflation as companies and people who still needed it bid up the price in order to compete for what little oil was left to go around.  This in turn pushed inflation into other sectors, as the lack of oil meant there was a lack of goods that relied on oil, thus the price of those was bid up as well.  If we take the example of a company which uses oil to make certain goods, how do they deal with the oil shock?  

Most directly, they can continue to buy oil at a high price and raise the price of their goods to compensate.  As long as every other company in their sector is also forced to raise prices, the company will survive by pushing inflation onto their customers, but if the other companies making their good are not affected by the price of oil, then this strategy won’t work as the company will just bleed market share into bankruptcy.

Alternatively, they can look to find ways to reduce the amount of oil they use per unit product.  In this way they can try to keep their prices low while their competitors’ prices are forced to rise, thereby gaining market share.

In a very real way, reducing the amount of oil used to create products would require some sort of innovation in technology, the creation of things like electric cars and nuclear power plants so that less of some stuff (oil) is being demanded and more goods are being supplied. This decrease in demand and increase in supply will cause deflation as prices drop due to these factors.  Remember that this is why some neoliberals pushed back against price controls and rationing during the oil crisis, those things depress the market forces which would otherwise cause people to invest in innovation and trigger deflation.

So today we don’t have an oil crisis, but in Europe we have a gas crisis, and European countries have also declared their intentions to accelerate the gas crisis by subsidizing demand instead of reigning in supply.  The problem here is that the government will pay the cost of this gas inflation and so there’s no reason for market-actors like companies to change their behavior or invest in alternative technologies.  Perhaps the governments themselves will try to force investment in alternative technologies, but I’m skeptical they’ll do as well as the market would.

So what does all this mean? Well if you believe that we’re on the cusp of a technological revolution, then it’s true that the Fed could accidentally flip us into deflation without even trying. On the other hand one of the biggest drivers of inflation this year, energy, is being subsidized by the government with price caps or tax reductions so companies and individuals aren’t being forced to invest in new technology in order to limit their use. Technology is supposed to be deflationary, but that’s no guarantee.

The Short Cramer ETF and the paradox of the stock picking

Tuttle Capital made waves last week by bringing out an ETF called SJIM that would let you short the stock picks of TV personality Jim Cramer.  Cramer, the longtime host of “Mad Money” on CNBC, has a prolific history of making bad calls from “Bear Sterns is Fine” to “sell Netflix in 2012” and even “Buy Netflix in 2022.” So it’s entirely unsurprising that “just do the opposite of Cramer” would gain traction as a valid investment strategy.  What’s interesting is that this strategy runs counter to the semi-strong version of the Efficient Market Hypothesis (EMF) in a way that some might not expect.  I’ve at times seen people attack Cramer based on the EMF, pointing out that even the best stock pickers rarely perform better than random chance and that therefore Cramer is by definition a waste of time.  Yet many of those same people wouldn’t realize that if Cramer himself is a waste of time, then shorting him is a waste of money.

It comes down to what I sometimes call “the paradox of stock picking”: if you believe it’s impossible to predict the winners in the market, you must also agree it’s impossible to predict the losers.  Many people agree that you can’t know with certainty which company in the stock market will do well in the future, past performance is no guarantee of future success and all that.  What is the best electric vehicle company to invest in today?  Tesla is synonymous with EVs, but then Microsoft was synonymous with tech in 2001, and if you put all your money into Microsoft in 2001 you would have missed out on the massive gains made by Apple, Google, and others.  It’s hard to be certain that Telsa will continue to be the EV leader or even that it’s current growth trajectory is sustainable, and in either of those cases there could be some other company that would make a much better EV investment.  So then let’s flip this question on it’s head: what is the worst EV company to invest in?  Rivian is trading at around 600 times revenue for example (revenue 55 million, market cap 33 billion), can you guarantee that it is a bad investment?  What about Nikola?  They faked an electric truck by rolling one down a hill, are beset by scandal, and are still trading at about 80 times revenue, are they a bad investment?  The EMF states that you cannot beat the market with fundamental analysis, so the investment opportunity of scandal-plagued Nikola and profit-less Rivian are already priced in by the market just as the growth opportunities of Tesla are already priced in.  If you thought you could with 100% certainty pick which EV company was the worst investment, or even just a below average investment, then you could make an EFT made up of every EV company except the definitely-bad one. Then your EFT would beat the EV market as a whole because it would include all the market winners while eliminating one of the market losers.  This would run directly counter to the EMF which says you cannot beat the market.

So getting back to Cramer, is shorting him via an ETF a waste of money?  If you believe the semi-strong or strong versions of the EMF then Cramer’s chance of success as a stock picker is perfectly random, no more no less.  In order for shorting him to be a good investment, then you must believe: 

  • The market is not efficient and it is possible to pick winners and losers
  • Cramer’s analysis is not just so bad that his chances of success are random, but rather he is so bad that chances of success are worse than random.  
  • Cramer’s chances of success are so much worse than random that the gains from shorting him outweigh the expense ratio of the ETF

It’s important to note here that shorting Jim Cramer puts you on the hook for his successful calls as well as his failures.  Failed predictions often generate more buzz than successes since the schadenfreude of seeing some idiot on the TV be proven wrong is a powerful emotional tool for getting people talking.  But if SJIM had come about 15 years ago and you had held it, then you shorted Jim Cramer on his “Bear Sterns is Fine” call but also shorted him on “Buy Apple” in 2010.  Adjusting for stock splits Apple’s price has gone from around 5$ to around 150$ in that time period, is that the kind of short position you want to take?  Only time will tell if SJIM is a good investment I guess.

The stock market is not the economy, so what is it?

With the stock market down almost 25% year-to-date, it’s always necessary to remind people that the stock market is not the economy. The market can go way up in a “bad” economy (as we saw during the COVID lockdowns) and likewise can go way down in a “good” economy. But if the market is not the economy, then what is it?

Well in some ways that is a question with multiple answers. As stated in a previous post, for companies the stock market is a source of money, what professionals call “liquidity.” The ability to get more money when you need it just by selling stock, or to purchase assets with stock or borrow against stock, these are all ways that a company can treat stock like it is money and use it to grow their business. So when the stock market is down companies could have a harder time raising the money they need in order to grow and expand their business. In this way it can be argued that the stock market does affect the wider economy significantly by determining how easy it is for companies to grow and expand their business off the money from stock investors. If this source of money/liquidity is hard to come by (because of a bust stock market) then growth will suffer.

From an outside perspective however, the stock market can be seen as the expected near future of all the companies in the market. In a different post I explained that one mechanism that gives a stock value is the expectation of all future dividends (accounting for inflation and uncertainty). Dividends require profits in order to be sustainable, so if in the near future one expects most companies to turn unprofitable, then one would expect many companies to be forced to cut their dividend, and thus one would value stocks less and other investments (like bonds) more. Thus many people have argued that the stock market is a leading indicator for the economy as a whole, if the market is down then that probably says something about the near future of the companies in the market ie that they would be expected to be entering rough straights. In the same way the stock market can be the first thing to rebound out of a recession as investors look to the near future and expect profits and dividends to make a comeback.

So no, the stock market is not the economy. But this the stock market may tell us about the future of the economy, either directly causing that future (companies grow more slowly because it’s harder to raise money) or being an effect of that future (economic storm clouds cause the stock market to tank before the real economy). Either way, we should be prepared for whatever future it holds for us.

The American Challenge Finale: Eurofederalism for the future?

I know I haven’t written much about the American Challenge for a while, but as I read through the book I realized most all of my critiques would be retreads of what I had already said.  In the end, Jean-Jacque Servan-Schreiber’s thesis was made clear from the outset: Europe was falling behind in technology and economics and his preferred cure was Eurofederalism.  As an aside, some of my American readers might not know what Eurofederalism is, it’s basically the idea that Europe (the EU to be more specific) should continue forming an ever closer union between the states, such that political and economic power rests more and more with the supranational EU rather than the nations themselves.  Exactly what the end goal of Eurofederalism is varies from person to person, some people envision a United States of Europe, some want more federalism, some want less, but most would agree that the current amount of cooperation is not enough.  

With Servan-Schreiber’s thesis laid before us, it’s tempting to look back and try to judge how right he was.  On the one hand, I can see all his arguments from 1968 being made today in 2022: Europe still falls behind in certain sectors to American multinational corporations, and many Europeans still think the cure is Eurofederalism, so it’s tempting to call him a true visionary who noticed these things well before others did.  On the other hand, many of the problems he identified from 1968 were solved by Europe without the kind of Eurofederalism he envisioned.  University graduation steadily climbed in Europe to reach the same highs it did in America, Europe’s growth rate climbed so that America never outpaced it to the extent he though they would, and although Europe does not control many of the tech companies of today, they still have not missed out on the productivity gains that tech has brought because buying a computer is still as good as building in yourself.  Perhaps the Four Freedoms on the EU have helped Europe reach this point, but it’s clear that a common, EU-wide industrial policy was not necessary to maintain Europe’s economic growth in the face of American corporations.In the final tally, I do believe Servan-Schreiber was prescient for his day, identifying key weaknesses in the European economies and key strengths in the American one.  But in other ways he was wide of the mark, many industries he wanted to throw money at are not the ones building the future, and his preferred answer was not necessary for Europe to “catch up” in many ways to America’s standard of living.  Overall though, a very enjoyable read: 8/10.

Weekend thoughts: Technical Analysis seems like Exegesis

The stock market has been moving lately.  Up,  down, side-to-side, every movement can launch a thousand stories, but lately I’ve seen a lot of stories pop up of how someone should invest in this market and where they should put their money.  I’m not going to say I have the answers to this question, or even the knowledge of how to find the answers, but I’ll lay out the facts of where I think you will not find the answers.

As an overview, the market is down somewhere between 20% and 25% since January.  If you think the market is going to keep going down, you’d be advised to sell your stocks and hold them as cash until the market reaches a bottom and starts going back up.  If you think we’ve reached the bottom you’d be advised to buy more stocks and rake in the profits as the market goes back up.  There’s arguments for both, but some arguments that feel unsatisfactory are those based on technical analysis.  I don’t mean to be unkind, I know many people swear by TA, perhaps even some of my readers, but TA reminds me of something else I know too much about: exegesis.

Exegesis of the bible or any other holy book is supposed to mean explaining the passages so that your target audience will better understand and act upon them.  The problem is you can make exegesis say whatever you want, because ultimately your explanation is entirely up to you.  When Jesus said “a rich man cannot enter the Kingdom of Heaven anymore than a camel can pass through the eye of a needle” what did he mean?  An exegete can claim that this is a metaphor, that the eye of a needle is a metaphor for a very narrow gate which a camel overloaded with goods would not be able to pass through, so a rich man needs to give away some of his wealth to charity and then he can enter the Kingdom.  Another exegete would say that this isn’t a metaphor, it’s a plain statement emphasized with sarcasm.  A camel cannot pass through the eye of a needle, that’s just dumb, and so Jesus is saying a rich man cannot enter the Kingdom no matter how much he gives to charity.  We can’t know exactly what Jesus meant by this because we can’t call Him up and ask Him.  And there are hundreds of passages in the bible that an exegete can claim to mean whatever they want them to mean, as long as you define enough things as being metaphors or sarcasm or straight facts in order to defend your argument.  Exegesis is a way of creating whatever meaning you want out of Scripture.

Technical Analysis seems to do the same thing with stock market trendlines.  The line is going down, are we “testing support” and will soon break through to go even lower?  Or are we “finding support” and will bounce off to go higher?  You can draw the future trendline however you want, and I’ve honestly never heard of a cogent argument proving that some form of TA is true more often than any other form, or is true more often than a random coin flip.  I’ve seen both bulls and bears quote their TA studies to support their points, and yet I’ve never seen the kind of scientific analysis that can prove the methods to be useful.  The counterargument is that many people, some of them very wealthy and successful stock traders, use TA to build their portfolios and so TA must be useful otherwise those people wouldn’t keep doing it.  My response would be that TA is no more accurate than random chance, and since the market is not zero-sum and rises on average ~7% per year, many people can become supremely wealthy based on this random chance while believing they are beating the market.  I don’t know, it all just seems like wishful thinking, and I’d love to be directed towards some studies discussing the efficacy of TA as a strategy.

Can you beat the stock market?

Since my stock posts tend to get the most traction, let’s try this one.  I wanted to post because I was recently made aware of the Efficient Market Hypothesis which essentially states (in its weak, semi-strong and strong forms) that you cannot beat the stock market.  The weak form states you can’t beat the market using prior performance, the semi-strong states you can’t beat the market using prior and current performance, and the strong form states you can’t beat the market using insider knowledge.  Essentially weak = Technical Analysis is useless, semi-strong = fundamental analysis is useless, strong = insider trading is useless.  Taken together, these hypotheses seem unappealing to a day trader or stock picker, as they suggest the only winning move is the boring play of buying whole-market ETFs.  And yet that also creates a weird contradiction because if everyone believed the Efficient Market Hypothesis, everyone (including banks, hedge funds, and investment groups) would just buy and hold whole-market ETFs and never trade stocks individually.  There would essentially be no stock market in that case!

But getting back to the hypothesis itself, why would it be true that you can’t beat the market?  Let’s start with the weak and semi-strong forms, which only make statements about publicly available information.  The hypotheses in this case are yet another statement about the wisdom of the crowd: all of us are smarter than any one of us.  If you try to use available information to guess the next moves of a stock, you will find that the next moves are already “priced in” because the market beat you to it, and so there is no way to buy low + sell high.  Before you want to buy the price will go up, and before you want to sell the price will go down because the market is always faster and more accurate that the individual.  On the face of it this seems like the joke about the two economist walking down the street: one says to the other “look, a 20$ bill on the sidewalk!” and the other says “ridiculous, there are no 20$ bills on the sidewalk, someone would have already picked them up!”  The fact is that there always has to be someone who was first to use some particular information, and does that let them beat the market?  On the other hand this hypothesis isn’t talking about individual events but averaging across all possible events.  Yes you may have bought early this time, but you can’t consistently buy early and so you’ll buy late and lose as often as you buy early and win.

As to the strong form of the hypothesis, it’s the least defensible because remember it basically states “you can’t make money via insider trading.”  The conceit is that in this case any insider information isn’t purely such, and the wisdom of the market can “price in” insider information thanks to the constant stream of rumors and leaks that even the tightest-run ship is subject to.  Still strong-form hypothesis proponents were quick to point out that this doesn’t necessarily mean insider trading shouldn’t be illegal, it can still be true that the actions someone will take in order to perform insider trading are harmful and so insider trading should be banned.  Hiding bad or good information, making very short term decision to boost the stock at the expense of long-term corporate health, these are all bad things, even if the people making them can’t actually make money off of them, the fact that they think they’ll make money is reason enough to ban insider trading as a practice.

So to finish this ramble, I don’t know if I believe the efficient market hypothesis.  The weak and semi-strong forms obviously seem the most defensible, but it’s important to remember that many well-regarded stock traders with long histories of success don’t believe it.  And what’s true in mathematical economics isn’t always true in reality

The Chapwood Index is a very silly model of inflation

With inflation nearing double digits this year, so called “experts” have been crawling out of the woodwork to proclaim the Death of the Dollar and how they always said inflation would kill us all.  Most of these people make claims with no regard to reality, inflation is bad today and they say it will kill us all.  But 10 years ago when inflation was miniscule they also said inflation was bad and would kill us all.  The facts don’t matter, only the hatred of inflation.  Inflation is high?  We’re all gonna die.  Inflation is low?  It’s actually high.

I can understand the feeling of course, it doesn’t feel good knowing that year after year your money loses value.  But that feeling doesn’t translate much into reality, most Americans gained wealth in real terms from 2010 to 2020 (a trend only reversed around 2021).  So when your feelings of inflation conflict with the reality of inflation, what do you do?  If you’re Ed Butowsky (inventor of the Chapwood Index), you declare reality to be wrong.  You instead make up your own basket of goods (the Chapwood basket) and send open ended surveys asking people to track the changes in those prices.  And if your basket is unusually weighted towards such things as golf club memberships and financial planner’s fees, then yes you could show some strangely high inflation between 2010 and 2020 as the price of those things went up.  But the much larger and more representative basket from the Federal Reserve showed enough price drops in other things that it evened out into low inflation.

In the last decade you might have repeatedly heard calls about how the Fed and the Government are lying about the true rate of inflation, how everything is getting more expensive by double digits and how it’s destroying American wealth.  In the same breath these people probably tried to sell you gold, but that’s neither here nor there.  The point is that many people have tried to argue that the Federal Reserve is lying about the economy and that everything is going to hell in a handbasket, only “secretly” so that none of us plebs realize it.  This year as the economy has actually been rocked by inflation, those voices have been completely overwhelmed, because it’s very clear that genuinely high inflation feels nothing like the low-inflation period that characterized the last 10 years.

Basically the Chapwood Index (and indices like it) was designed to “prove” the point that America had super high inflation, to the tune to 10%, yet the index was completely ridiculous on the face of it.  If America experienced double digit inflation from 2010 to 2020, and if the nominal GDP numbers were accurate, then we would have experienced a real GDP decrease of around 50%.  That means 50% less total everything produced by the economy, 50% less cars, vegetables, and doctor’s appointments.  Yet this flies in the face of actual evidence showing a moderate increase in American production over that time frame.  Simple put, the evidence isn’t consistent with a prolonged decrease in real output.  Again, compare this to 2022 when America is experiencing actual inflation: nominal GDP is up by near double digits, but since inflation is also up by nearly that amount, the total American economy may have contracted slightly by the end of the year.  Super high inflation has been coupled to super high nominal GDP, and it’s still an open question as to whether inflation or GDP will win the year, but it’s clear that this year feels different than all the years from the last decade when people screamed about hidden inflation and buying gold.

Basically what I’m saying is inflation isn’t really missable, if it’s there it’s there and people know it.  Everyone knew the price of goods was increasing in 2021, but the Fed and the government acted slowly because they predicted the increase would be small and “transitory.”  But when inflation jumped to 4% and now nears 8%, it was obvious and didn’t require creating a whole new index just to see it.

The American Challenge Part 7: Building an economy by predicting the future

I’m still going through The American Challenge by Jean Jacque Servan-Schreiber, the 1968 book which opines on what Europe needs to do in order to not be economically dominated by America.  A consistent theme for Servan-Schreiber is that European governments should direct investment towards key industries which he thinks are important for the economy of the future.  In some cases he was incredibly prescient, he urges Europe to invest in semiconductors and computers years before they hit the mainstream.  In other cases he seems woefully misinformed, claiming that all future air travel will be supersonic and the Concorde will be surpassed by American supersonic planes.  And in some places he’s oddly silent, saying little to nothing about the future need for renewable energy and global reductions in carbon.

Now of course, he shouldn’t be dismissed for not correctly predicting the future, should he?  Who knew that supersonic flight would never take off?  And how accepted was the idea of global warming in 1968?  Yet this is exactly my problem with his economic model, he can’t predict the future, and no one can.  So his claim that the cure for Europe is to decide which industries are “the future” and invest heavily in those industries above all others doesn’t strike me as very sensible.  Instead of the government choosing which industries to invest in, why not create an economic system which allows good industries to start up and flourish?  A government is by its nature a centralized organization, and that centralization comes with both costs and benefits.  Notably, the people directing the government’s economic investments can’t always be experts in every industry they want to invest in, it’s just not possible for a few hundred government workers to include an expert in everything.  So what if you panel on government investment doesn’t include anyone familiar with computers?  Do you pass the idea up?  And what if your panel does include “experts” in cold fusion, do you redirect all efforts towards a futile project?

This to me isn’t an idle criticism, I don’t think a centralized entity can replace a decentralized market with the same kind of efficiency.  I’m not some harebrained anarcho-capitalism mind you, I’ll try to write later about where the government should get involved, but the maxim of “the government shouldn’t try to choose winners and losers in the market” is one I think has merit, the government just can’t be expected to have enough people and enough breadth to be an expert on all the decisions a market can make.

I think there’s more to this “can’t predict the future” argument too.  Servan-Schreiber has what I have called before a “Sid Meier’s Civilization” view of technological progress.  In essence, this viewpoint is that technology costs a certain amount of “something,” be in money or man-hours, and once you discover a technology it’s yours to use while your opponents don’t have it.  Technology thus progresses as a race where countries need to either catch up to the techs their opponents have (by spending money and man-hours) or find new techs their opponents don’t have (so they can have a decisive advantage).  The problem with this view is that there are many technological paths that prove to be a dead-end where you’d have been better off not spending your resources, and we don’t know which are dead-ends beforehand.  I said last week that the Concorde jet was one such dead-end, it costed billions of dollars with not a lot to show for it, and that was money that could have been invested in the NHS or other government services.  The idea was that if we just keep pouring money into Concorde, eventually we’ll create supersonic flight and it will be just as profitable and useful as we’ve always dreamed it would be. Or at worst we’ll learn a lot of lessons about what we need to do in order to create profitable supersonic flight and our next project will be the one that works.  That wasn’t the case, it turned out supersonic flight just couldn’t compete with moving a massive amount of people slightly more slowly.  Another dead end would be fusion power, an area where we still don’t know if we can do it with modern tech let alone tech from the 20th century.  Many many people predicted that fusion was The Future, and urged governments to invest in it.  But fusion wasn’t the future and it’s probably a good thing that a lot of money wasn’t spent on it.

You can’t predict the future, so a government can’t reasonably be expected to know which opportunities to invest in and which to avoid.  A market uses the wisdom of crowds to decide, and so can be relied on to provide at least some of the efficiencies a government board lacks.  It’s easy to look back 50 years and say “if only Europe had invested more in computers!  We could have had European versions of Apple, Google, Microsoft and Amazon!”  But it’s hard to sit where you are today and decide which of the many investment opportunities are “the one” to invest in.  For example, if Europe should have invested in computers in the 60s, what should it invest in right now?  What is the game-changing area, with returns equal to or greater than the computer industry of the 60s, that Europe should throw all its money in?  3D printing?  Genetic modification?  Robotics?  What is the “investment of the future?”  I’d hazard a guess that no one can agree, and so it’s probably better to rely on the wisdom of the crowds than the political decisions of a government.