Chaitanya Patel

Just thought of sharing some interesting facts about gold today.

There is roughly 7000 years (beginning of civilization) of history of gold.

We all seek permanency and gold comes near to that.

Gold does not get corroded or rusted. It is not soluble in any acid. It is very difficult to demolish.

Most of the gold digged from time immemorial is still in circulation.

So we may even be using the some of the gold (recycled) that was used in the times of Rama, Krishna, Buddha and Jesus.

It is very soft that you can beat the gold down so thin that sunrays can shine through it.

The quantity of steel poured in an hour in our planet is more than what has been poured for gold since the civilization. That is how limited the availability of the gold is.

It is estimated that total gold available (in circulation and storage) in the world is 1,65,000 tonnes.

1 tonne is 1000 Kgs. At Rs.3000/- a gram, the cost of 1kg of gold is Rs.30 lakhs. So 1 tonne of gold is worth Rs.300 crore.

Indians privately own anywhere between 15,000 to 20,000 tonnes of gold. Even pegging it at 15,000 tonnes, the value comes above Rs.45 lakhs crore.

Since I cannot not talk about equity, the entire fund management industry in the country only manages Rs.6 lakh crore worth of equity assets.

Indian government owns only around 550 tonnes of gold.

No one knows how much gold the Indian temples have.

Tirupathi is estimated to have gold worth Rs.90,000 crores. Around 4000 kgs of gold is offered annually by his devotees to Lord Balaji. Interestingly as per legend, Balaji borrowed from Kubera 1.14 crore coins of gold for his marriage. Marriages have always been expensive in this country. By any standard, Balaji’s wedding with Padmavathi is the most expensive marriage that has ever happened so far in our world.

Till few years ago, we never knew Lord Padmanabha is so rich. Is that why he is very relaxed (ananda sayanam)? The very conservative estimate suggests that the value of gold in his abode is around Rs.4 lakh crore.

Reading various estimates and guesstimates looks like we (including deities) may have even 30,000+ tonnes of gold in our country. So we own around 20% of the entire gold in the world.

This means at today’s price, we have Rs.90 lakh crore worth of gold. India can be amazingly rich and poor at the same time.

Since gold is so malleable, just one gram of gold can be beaten into a sheet of one square metre.

The entire gold available in the world today can easily fit within a cube measuring 67 feet. Just one good shipping container would do. Golden Voyage!

75% of the gold available today has been extracted only after 1910.

The U.S.government (Fed Reserve + FortKnox) has close to 10,000 tonnes of gold.

During great depression, in 1933, U.S. government banned private holding of gold. People were ordered to handover the gold they have and were provided instead with dollars of equivalent value. Once the process was over, the government devalued the currency by over 40% eroding people’s wealth overnight. This coupled with high inflation was an extremely tough time for its citizens.

This ban was subsequently lifted only in 1975 and Americans were again allowed to own gold.

Since China has lot of dollar or dollar denominated assets; they understand the above risk better than anybody else. Chinese people were not allowed to own gold for more than 40 years and possessing gold was a severely punishable offence. Sometime during last decade this ban was removed and China has been encouraging its citizens to buy gold and silver.

Talking about silver, Buffett who rarely touches commodity, purchased 37% of the entire silver available in the world (yes, you read it right) in late nineties and sold it some time in the middle of the last decade. I think that considering the growing industrial demand and limited supply then, he saw value in purchasing the same and selling it at a very good profit. Silver was selling at abysmally low prices during the time of his purchase.

Every year, the new gold produced / recycled is consumed 50% as jewellery, 40% for investments (including ETFs) and 10% for industry. I was under the impression gold has no industrial use whatsoever till one of our client told me that electronics industry uses gold.

Though South Africa has been one of the world’s largest producers of gold, its citizens were not allowed to own gold till 2009.

For sports fan, do you know that Olympic gold medal is not made of gold! A ‘gold’ medal contains only 6 grams of gold. Only till 1912 Olympics, the gold medals were actually made of gold.

In 1991, our country’s situation was so bad that 65 tonnes of gold was taken out of the country  and mortgaged to tide over external payment crisis.

If you are worried that gold’s supply would get exhausted soon, fear not!

About 10 billion tonnes – 10,000 million tonnes (yes, you read it right) of gold is estimated to be held in the oceans of the world. An economically viable model of extraction is being explored.

Necessity is the mother of invention. If gold prices continue to rise and if the demand would only increase, who knows, a technological innovation can happen in extracting gold from ocean.

May be we can all then plan for building our own golden homes. Midas would be a happy man.

(This appears in some editions of Deccan Chronicle today. It is amazing to see stocks now being bought on EPS, rumours and future house of cards. I think this is a great time to study companies. Of course, if you are a CAT investor (with several crores in the bank) it hardly matters)

“BALANCE” SHEET

In understanding or analyzing any company, the most commonly used document is the annual report. The annual report has, among other things, a ‘profit and loss’ account and a ‘balance sheet’ . The P&L tells us what happened in the period under review (typically a twelve-month period or a Financial Year as is commonly referred to) in terms of sales, the costs incurred in reaching those sales and the resultant profit or loss. A balance sheet gives you a position of what the company owns (machineries, land, vehicles, receivables, inventories, investments, bank balances and other ‘assets’) and what the company owes (share capital and reserves, loans, creditors and other ‘liabilities’).

A strong balance sheet can help a company weather a couple of bad years on the P&L. However, a weak balance sheet is like a fair-weather friend. In good times, it makes things look brighter and in bad times, it can sink you without hopes of a recovery.

In a bull market, most people look just at the bottom line or the profit numbers and some related things like EPS etc. The balance sheet is ignored. When the tide turns, those companies that have weak balance sheets, will tend to implode. Most research reports from brokers will simply talk pages about market shares, profits and not talk much about the cash flow or the debt on the books. Their analysis is heavily dependent on the P&L account.

One important health indicator in a balance sheet is ‘debt’.  Once a company is mature, it should be logical for a company to keep reducing its debt and become debt free. It’s profit generation should be sufficient to wipe out debt and keep growing. It does not mean that it will come to raise equity capital every year. If we look at great companies like Nestle, Colgate, Bajaj Auto, Hero, Asian Paints etc, you will understand what a healthy balance sheet means. These companies are market leaders in their businesses and highly profitable. They will not have debt on their books.

A company with no debt has greater freedom to take risks and explore new options. A company laden with debt does not have this luxury. Take the case of the ‘infrastructure’ companies. In the heady days of 2007-08, they took on loads of debt and were banking on continuous placement of equity at huge premiums, to finance their business. Soon, they lost everything and collapsed under the burden of debt. A couple of them, with no debt to very low debt, survived and are now in capitalizing by being able to execute new orders. Same is the case in the real estate sector. Those builders who borrowed and got stuck with unsold inventory, are in a soup. Commodity companies with wafer thin margins and high debt also became victims of poor balance sheets.

I like to look at the net profit of a company in relation to its total debt. If the total debt of a company is higher than four to five year’s net profits, then I think that the company is very high risk. One turn in the business and they will default. These companies have to raise fresh capital to keep going or keep finding new debt to replace the old. Such companies are high risk opportunities.

Just like debt, there are companies that are stressed for cash. Their current assets (debtors and inventories) grow faster than their sales do. Which means that the business is too competitive and they are likely to face a cash crunch plus debt write offs in the future. A business that is ten years old, ought to manage cash flows in a manner that the total debt actually reduces in absolute numbers and finally gets extinguished.

Yes, there are companies which like to grow furiously by taking on new projects year after year. They are living dangerously and are banking on the friendly banking system to support them in bad times.

It is true that leverage (debt) helps to boost shareholder return. However, that can happen only when the business earns a rate of return that is significantly higher than the cost of borrowing. If a company can do it successfully, year on year, then the cash thrown up will make it debt free! Just look at the ROE of debt free companies like HUL or Colgate or Nestle and compare them with any company with debt.

For long term investments to pay off, the one sure test is a balance sheet test. Do not forget the balance sheet and the cash flow. These two analytical tools can help keep you away from potential disasters. The P&L is only the dressing on the salad. And quarterly numbers are even more of a dressing than the annual ones.

For the last four weeks, after landing in Britain, we’ve been using the dishwasher fairly regularly. On an average, we run it once a day, and the vessels come out of it nice and shiny – to an extent that is nearly impossible when you wash them by hand. Last year when we were in Spain, too, we used the dishwasher fairly often.

Considering the convenience (all your dishes done in one go, and coming out nice and shiny), I’ve been wondering why the dishwasher hasn’t taken off in India. The requirement for water and electricity doesn’t explain it – the near-ubiquity of the washing machine in upper middle class households suggests that is not that much of a problem. It’s not a function of our using steel plates, either – if that were the only constraint, people would have switched plates to get the benefit of this convenience.

The real answer lies in the archaic concept of the enjil (saliva; known as jooTa in Hindi), and theories on how saliva can get transmitted and contaminate stuff. To be fair, it’s a useful concept in a way that it doesn’t allow anyone’s germ-bearing saliva to contaminate things around them, except for roads and sidewalks that is! Specifically, the enjil concept ensures that food doesn’t get remotely contaminated by someone’s saliva. But it takes things a bit too far.

For example, sharing plates, even when you’re using separate spoons (let’s saw when sharing dessert at a restaurant), is taboo. When you double-dip your spoon into the plate, germs from your saliva get transmitted there, and can potentially contaminate people you are sharing your food with. Or so the theory goes. The exceptions are in childhood, where a child is allowed to share plates with the mother, and after marriage, when couples are allowed to share plates! Go figure how that works.

Similarly, traditional Indians eschew the dining table, and the concept of keeping serving bowls on the same surface as plates. Again, the concept is that saliva can somehow “transmit” from the plates to the serving bowls and contaminate everyone’s food.

Next, there is an elaborate protocol to deal with used plates. They are not supposed to be washed in the same sink as other vessels. Yes, you read that right. When I was growing up, the protocol for used plates was to first rinse them in the bathroom (after throwing leftover food in the dustbin) before dropping them in the sink. It didn’t matter how well you rinsed the plate in the bathroom – that water had fallen on it after your usage would indicate that it was now purified, and fit to sit with all the other unwashed vessels.

Now consider the dishwasher. To achieve economies of scale at the household level, and to ensure vessels don’t pile up, you put all kinds of vessels in it at the same time – plates, spoons, forks, serving bowls and  cooking vessels! In other words, “saliva-bearing” dishes are put into the same contraption at the same time as “saliva-free” cooking dishes, and the “same water” is used to wash all of them together.

And that clearly violates all prudent practices of saliva management and contamination avoidance that we have all grown up with! And trust me, it takes time to get over such instinctive practices one has grown up with. And so I predict that it will at least be another generation (20 years or so) when there are sufficient households with adults who grew up without a strong concept of enjil, and who might be willing to give the dishwasher a try!

I’ve been looking for and reading about investors who made it big through ‘buy & hold’ investing of quality companies.

Reading about them reinforces the required conviction to stay the course.

One such investor is Canadian billionaire Stephen Jarislowsky.

To make it really big, these investors started very early (usually in their twenties) and lived beyond eighties. This gave them the crucial variable of ‘time’ which is essential for compounding.

We neither started in twenties nor do not know how long we would live. If someone has investible surplus of Rs.10 crores at the age of 50, at 15% compounding, he would end up with Rs.160 crores  at the age of 70. Such is the power of compounding. We are not aiming for billions but may be few million dollars. We can achieve this despite starting late and not knowing about our longevity.

Stephen looks for high quality large cap companies which are non cyclical and can keep doubling their earnings every 5 to 7 years. He simply buys these companies and hold them forever.  He is now 91 years and started investing when he was in his twenties. He holds the stocks he bought as early as 1948. In fact his secret his ‘buy stocks you never plan to sell’. He believes the one thing investors need to learn is virtue of patience.  He shuns cyclical stocks and looks for industries like consumer staples, alcohol and healthcare which are stable and growing businesses.

He says that shares produce an average real return of 5% to 6% a year (after inflation). The earlier that you can start, the more miraculous will be the effects of compounding over a working life.

While I was reading about Stephen Jarislowsky, I stumbled upon the story of Ronald Read. Last year Ronald Read passed away at the age of 92. He was working as a janitor (door man) at JC Penney. Before that, for many decades, he worked as an attendant in a gas station. When he died, it was found that he has left $8 million in charities for local library and hospital. Nobody was aware that the door man at the local shop was a multi millionaire. He has also bought and has been holding high quality companies for many decades. He never went to college and was a high school dropout. He regularly used to read Wall Street Journal which should have aroused the curiosity of people around him. They completely missed this aspect of his life.

We may not become a Stephen Jarislowsky. But we all earn more and capable of investing much more than Ronald Read. Whether it is Stephen or Ronald, they held on to equities for decades completely ignoring news and noise. They never aspired for quick money and rated patience as the highest virtue in investing.

Without compromising current consumption and present life style, we all are capable of saving more, which we do. Where we occasionally fail is losing our patience and getting carried away by noise.

As I mentioned about stocks, let me give an example of equity fund as well. I was going through a brochure of HDFC Tax Saver. Rs.1 lakh invested in it twenty years ago has become Rs.1.04 crores now. Money multiplied by 104 times in 20 years. Rs.1 lakh invested systematically in it every year for last 20 years is now worth Rs.4.75 crores. An annualised return of more than 25%. Past has been wonderful and we expect future to be more modest but still provide a decent return of 15%.

Last 20 years there have been many negative news and events both in India and across the world. Those who stayed the course with tremendous patience would have built excellent wealth.

Have patience, give time and stay the course. Wealth is all yours.

“Why India Needs a New Constitution.” is the title of the chapter I contributed to a Festschrift published in November 2016 by the Center for Civil Society in Delhi.

That idea rubs Indians the wrong way because Indians generally believe that the constitution is a fine work. Not that they have examined it for themselves. They think that it must be so because politicians praise the constitution and uncritically accept their verdict.

It is like the fable of the emperors new clothes, except in this case the people have not themselves seen the emperor in his new clothes. They have only heard of reports that the emperor has a new set of clothes, and experts who have seen the new clothes have declared them to be wonderful. The belief has been implanted in the people, and they will vehemently oppose any suggestions to the contrary.

I argue that the emperor’s new clothes are in fact his old clothes, and therefore the “new” clothes do an equally bad job of hiding his unsightly nakedness as his old clothes did.

To persuade you to read the chapter in the book Liberalism in India (link at the end), here are a few excerpts below. 

The factors that affect and determine the prosperity or poverty of nations are many. Some of them are necessary although none of them individually or severally are sufficient.1 The heterogeneity of people in various nations, the diverse geographical and environmental conditions, the different historical routes followed, the diversity of cultural practices, the technology available to them, and the nature of competition for resources, all differ in space and time for individual nations. This partly explains why it is so difficult to arrive at some formula for the economic growth and development of any particular nation.

I argue that rules matter in a nation’s prosperity:

An economy essentially is a collection of interacting human beings. For
any group of two or more people, this collective interaction requires rules. These rules could have evolved naturally, in which case they are part of the culture, or they could have been codified through some formal procedure, which itself could have been arrived at organically or by borrowing from others. In all cases, however, there always are rules.

I go on to note that all political entities are defined and distinguished by the rules they create, implement and follow. Rules determine national trajectories.

 If the rules don’t change, the trajectory does not change. This fact simply explains the persistence of prosperity or poverty of nations. Generally, the rules persist and therefore the trajectory persists.

People make the rules. But in a bit of circular causation, rules make the people. Of course, it is only the “leaders” of the group make the rules. But the rules themselves determine who the leaders are. Rules provide the constraints within which the rules are made and by whom. Rules choose leaders and leaders choose rules (although this is not simultaneous.)

The constitution of a country lays out the basic rules of the great game that the people — meaning citizens, bureaucrats and politicians — play. These rules have to be consistent and in some limited sense, complete.

The constitution of a modern constitutional republic is sovereign.

In a monarchy, the king is supreme and therefore they have ‘God Save the King’. In a constitutional republic, the constitution is the king. We need to note that a monarch is omnipotent and sovereign. The constitution is sovereign but not omnipotent. The people have rights that even the constitution cannot take away.

The constitution is a set of fundamental rules. It defines the structure of the government or the state, the duties of those representing the state, and powers they shall have to discharge those responsibilities.

The most important function of a constitution is to limit the powers of the state so that the state cannot rule tyrannically over the citizens. That is, the constitution defines the relationship between the state and the people.

That can be a master-servant (or a principal-agent) relationship. It is evident that the US constitution places the people as the principals and the state as their agent. The Indian constitution has the reverse: the government is the master and people are the servants of the state. (Being in “government service” is highly prized because it puts elevates one from the servant class to the master class.)

I argue that Indians are generally ignorant of this sad fact because they have not read the Indian constitution. It’s too big, too complicated, and written in a language that ordinary people find confusing. It’s incomprehensible.

James Madison, who drafted the US constitution in 1787 (that’s 230 years ago) had this to say about why constitutions have to be brief and to the point:

:It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is today, can guess what it will be tomorrow. Law is defined to be a rule of action; but how can that be a rule, which is little known and less fixed?

The Constitution of the United States was just four handwritten pages. The full text of the US constitution is around 4,300 words. The Indian constitution has over 80,000 words. I haven’t read it cover to cover, and neither have you.

In its essence, the Indian constitution is a rule book for the rulers to subjugate the citizens. It’s an offspring of British colonial rule.

The Indian Constitution is a collection of rules and regulations that the British had crafted as the colonial rulers of India. The Government of India Act of 1935, crafted by the British, is largely incorporated in the Indian Constitution. There were some changes but essentially the same set of rules continued to be in effect after 1947 as before.The rules that the British had created naturally placed the government over the people, and the same relationship continued after 1947. The same old set of rules, and the same old direction, the same old dismal outcome.

I have consistently argued that India is ruled by dead Britishers and that for all the hoopla about India’s independence, Indians are still not free. India became independent of the British Crown but India did not become free.

For India to become free, Indians have to become free. For that to happen, India needs a new constitution. I have drafted a Constitution for a free India. (PDF–click to read, right click to download.)

Here’s the full text of the chapter “Why India Needs a New Constitution” (pdf) The LiveMint column where I summarize the book chapter in 800 words.

Some of the hugs look too flimsy for a 10-year reunion
– Pinky

As anyone here who has tried to construct an index will know, any index, however well constructed, will end up being way too simplistic, and abstract away way too much information. This is especially true of indices that are constructed as weighted averages of different quantities, but even indices with more “fundamental” formulae are not immune to this effect.

Some eight years ago, I constructed an index called the “Mata Amrita Index“, which my good friend Sangeet describes as the “best ever probabilistic measure” he’s come across. It’s exactly that – a probabilistic measure.

Quoting from the blog post where I introduced the concept:

The Mata Amrita Index for a person is defined as the likelihood of him or her hugging the next random person he/she meets.

Actually over time I’ve come to prefer what I’d called the “bilateral MAI”, which is the probability that a given pair of people will hug each other the next time they meet. The metric has proved more useful than I had initially imagined, and has in a way helped me track how some friendships are going. So far so good.

But it has a major shortcoming – it utterly fails to capture quality. There are some people, for example, who I don’t hug every time I meet them, but on the random occasions when we do hug, it turns out to be incredibly affectionate and warm. And there are some other people, with whom my bilateral MAI tends to 1, but where the hug is more of a ritual than a genuine expression of affection. We hug every time, but the impact of the hug on how I feel is negligible.

In fact, I’d written about this a couple years back, that when the MAI becomes too high, the quality and the impact of the hug inevitably suffers. Apart from the ritualness of the hug robbing it of the warmth, a high MAI also results in lack of information flow – you know you hug as a rule, so the hug conveys no information.

So, now I want to extend the MAI (all good index builders do this – try to extend it when they realise its inadequacies) to incorporate quality as well. And like any index extension, the problem is to be able to achieve this without making the index too unwieldy. Right now, the index is a probabilistic measure, but not that hard to understand. It’s also easy to adjust your bilateral MAI with someone every time you meet.

How do you think I can suitably modify the MAI to bring in the quality aspect? One measure I can think of is “what proportion of the time when you meet do you hug, and it makes you feel real good?”. As you can see it’s already complicated, but this brings in the quality component. The ritual hug with the high MAI counterparty makes no impact on you, so your modified MAI with that person will be low.

The problem with this Modified MAI (MMAI) is that it is automatically capped by the MAI, given the “AND” condition in its definition. So a person you hug infrequently, but feel incredibly good after each such hug, will have a low MMAI with you – it’s more to do with the low frequency of hugging than the quality.

If you can think of a more elegant measure, do let me know! Whoever said building an index is a simple process!

Algorithms are all the rage these days. AI researchers are taking more and more ground from humans in areas like rules-based games, visual recognition, and medical diagnosis. However, the idea that algorithms make better predictive decisions than humans in many fields is a very old one.

In 1954, the psychologist Paul Meehl published a controversial book with a boring sounding name: Clinical vs. Statistical Prediction: A Theoretical Analysis and a Review of the Evidence.

The controversy? After reviewing the data, Meehl claimed that mechanical, data-driven algorithms could better predict human behavior than trained clinical psychologists — and with much simpler criteria. He was right.

The passing of time has not been friendly to humans in this game: Studies continue to show that the algorithms do a better job than experts in a range of fields. In Daniel Kahneman's Thinking Fast and Slow, he details a selection of fields which have demonstrated inferior human judgment compared to algorithms:

The range of predicted outcomes has expanded to cover medical variables such as the longevity of cancer patients, the length of hospital stays, the diagnosis of cardiac disease, and the susceptibility of babies to sudden infant death syndrome; economic measures such as the prospects of success for new businesses, the evaluation of credit risks by banks, and the future career satisfaction of workers; questions of interest to government agencies, including assessments of the suitability of foster parents, the odds of recidivism among juvenile offenders, and the likelihood of other forms of violent behavior; and miscellaneous outcomes such as the evaluation of scientific presentations, the winners of football games, and the future prices of Bordeaux wine.

The connection between them? Says Kahneman: “Each of these domains entails a significant degree of uncertainty and unpredictability.” He called them “low-validity environments”, and in those environments, simple algorithms matched or outplayed humans and their “complex” decision making criteria, essentially every time.

***

A typical case is described in Michael Lewis' book on the relationship between Daniel Kahneman and Amos Tversky, The Undoing Project. He writes of work done at the Oregon Research Institute on radiologists and their x-ray diagnoses:

The Oregon researchers began by creating, as a starting point, a very simple algorithm, in which the likelihood that an ulcer was malignant depended on the seven factors doctors had mentioned, equally weighted. The researchers then asked the doctors to judge the probability of cancer in ninety-six different individual stomach ulcers, on a seven-point scale from “definitely malignant” to “definitely benign.” Without telling the doctors what they were up to, they showed them each ulcer twice, mixing up the duplicates randomly in the pile so the doctors wouldn't notice they were being asked to diagnose the exact same ulcer they had already diagnosed. […] The researchers' goal was to see if they could create an algorithm that would mimic the decision making of doctors.

This simple first attempt, [Lewis] Goldberg assumed, was just a starting point. The algorithm would need to become more complex; it would require more advanced mathematics. It would need to account for the subtleties of the doctors' thinking about the cues. For instance, if an ulcer was particularly big, it might lead them to reconsider the meaning of the other six cues.

But then UCLA sent back the analyzed data, and the story became unsettling. (Goldberg described the results as “generally terrifying”.) In the first place, the simple model that the researchers had created as their starting point for understanding how doctors rendered their diagnoses proved to be extremely good at predicting the doctors' diagnoses. The doctors might want to believe that their thought processes were subtle and complicated, but a simple model captured these perfectly well. That did not mean that their thinking was necessarily simple, only that it could be captured by a simple model.

More surprisingly, the doctors' diagnoses were all over the map: The experts didn't agree with each other. Even more surprisingly, when presented with duplicates of the same ulcer, every doctor had contradicted himself and rendered more than one diagnosis: These doctors apparently could not even agree with themselves.

[…]

If you wanted to know whether you had cancer or not, you were better off using the algorithm that the researchers had created than you were asking the radiologist to study the X-ray. The simple algorithm had outperformed not merely the group of doctors; it had outperformed even the single best doctor.

The fact that doctors (and psychiatrists, and wine experts, and so forth) cannot even agree with themselves is a problem called decision making “noise”: Given the same set of data twice, we make two different decisions. Noise. Internal contradiction.

Algorithms win, at least partly, because they don't do this: The same inputs generate the same outputs every single time. They don't get distracted, they don't get bored, they don't get mad, they don't get annoyed. Basically, they don't have off days. And they don't fall prey to the litany of biases that humans do, like the representativeness heuristic.

The algorithm doesn't even have to be a complex one. As demonstrated above with radiology, simple rules work just as well as complex ones. Kahneman himself addresses this in Thinking, Fast and Slow when discussing Robyn Dawes's research on the superiority of simple algorithms using a few equally-weighted predictive variables:

The surprising success of equal-weighting schemes has an important practical implication: it is possible to develop useful algorithms without prior statistical research. Simple equally weight formulas based on existing statistics or on common sense are often very good predictors of significant outcomes. In a memorable example, Dawes showed that marital stability is well predicted by a formula: Frequency of lovemaking minus frequency of quarrels.

You don't want your result to be a negative number.

The important conclusion from this research is that an algorithm that is constructed on the back of an envelope is often good enough to compete with an optimally weighted formula, and certainly good enough to outdo expert judgment. This logic can be applied in many domains, ranging from the selection of stocks by portfolio managers to the choices of medical treatments by doctors or patients.

Stock selection, certainly a “low validity environment”, is an excellent example of the phenomenon.

As John Bogle pointed out to the world in the 1970's, a point which has only strengthened with time, the vast majority of human stock-pickers cannot outperform a simple S&P 500 index fund, an investment fund that operates on strict algorithmic rules about which companies to buy and sell and in what quantities. The rules of the index aren't complex, and many people have tried to improve on them with less success than might be imagined.

***

Another interesting area where this holds is interviewing and hiring, a notoriously difficult “low-validity” environment. Even elite firms often don't do it that well, as has been well documented.

Fortunately, if we take heed of the advice of the psychologists, operating in a low-validity environment has rules that can work very well. In Thinking Fast and Slow, Kahneman recommends fixing your hiring process by doing the following (or some close variant), in order to replicate the success of the algorithms:

Suppose you need to hire a sales representative for your firm. If you are serious about hiring the best possible person for the job, this is what you should do. First, select a few traits that are prerequisites for success in this position (technical proficiency, engaging personality, reliability, and so on). Don't overdo it — six dimensions is a good number. The traits you choose should be as independent as possible from each other, and you should feel that you can assess them reliably by asking a few factual questions. Next, make a list of questions for each trait and think about how you will score it, say on a 1-5 scale. You should have an idea of what you will call “very weak” or “very strong.”

These preparations should take you half an hour or so, a small investment that can make a significant difference in the quality of the people you hire. To avoid halo effects, you must collect the information one at a time, scoring each before you move on to the next one. Do not skip around. To evaluate each candidate, add up the six scores. […] Firmly resolve that you will hire the candidate whose final score is the highest, even if there is another one whom you like better–try to resit your wish to invent broken legs to change the ranking. A vast amount of research offers a promise: you are much more likely to find the best candidate if you use this procedure than if you do what people normally do in such situations, which is to go into the interview unprepared and to make choices by an overall intuitive judgment such as “I looked into his eyes and liked what I saw.”

In the battle of man vs algorithm, unfortunately, man often loses. The promise of Artificial Intelligence is just that. So if we're going to be smart humans, we must learn to be humble in situations where our intuitive judgment simply is not as good as a set of simple rules.

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Sponsored by: Royce & Associates – Small Cap Specialists with Unparalleled Knowledge and Experience..

I haven’t read these books that Amazon recommended to me via email today. But I hope that within the pages of these books the authors somewhere explain the economics of textbook publishing and why these books on the principles of economics cost an arm and a leg.
Thankfully in modern times, the principles of economics is accessible to many who can’t afford those prices. It’s all there on the web. And economics, I would argue, is the easiest subject to understand. Besides, it is more important for the general public to understand than many other subjects that are taught in schools. There is a much greater cost to being economically illiterate than to physics illiteracy. This is so because the general public’s economic illiteracy leads to flawed public policies. There are no practical negative consequences to thinking that the world is flat or that the sun goes around the earth. But there are enormous costs to believing that the government can fix economic problems.

I have begun to wonder whether Indian banks have stopped competing aggressively with each other and have started forming an implicit cartel. Rising non performing assets have reduced the appetite for bank lending to a level even lower than the severely depressed demand for bank credit. Obviously, banks do not need to raise much deposits if they are not lending much. It is easier (at least in the short run) to try and charge higher fees from a smaller depositor base than to spend time and money acquiring and retaining customers. And that is what we are seeing. More ominously, some of the attempts to raise fees and user charges seem to a casual observer to be coordinated across banks. If that is the case, then of course these are serious issues for the Competition Commission.

I think demonetization has played some role in this for multiple reasons. First, it boosted the liquidity of the banks virtually overnight and accelerated trends that had been building up slowly over several months. Second, demonetization turned banks into an extended arm of the state: bank officers became quasi government officials with substantial powers. Long after that stage passed, many banks have not gone back to being service organizations again. Anecdotal evidence suggests that this transformation from customer service to bureaucratic conduct has happened in the private sector banks to the same if not a greater extent.

In the long run, this change in the behaviour of the management and employees of the banks would be disastrous for the banking system. On the deposit side, payment banks and mutual funds might find a once in a lifetime opportunity to disrupt banking. On the advances side, non bank finance companies have gained valuable customers turned away by the banks. In the long run, the bond markets could also take business away from the banks.

The first 25 years of economic reforms saw the banking system grow to dominate the financial system previously dominated by the development financial institutions. Shortsighted management and staff could erode this dominance very quickly.

Richard Dawkins has one of the best-selling books of all time for a serious piece of scientific writing.

Often labeled “pop science”, The Selfish Gene pulls together the “gene-centered” view of evolution: It is not really individuals being selected for in the competition for life, but their genes. The individual bodies (phenotypes) are simply carrying out the instructions of the genes. This leads most people to a very “competition focused” view of life. But is that all?

***

More than 100 years before The Selfish Gene, Charles Darwin had famously outlined his Theory of Natural Selection in The Origin of Species.

We’re all hopefully familiar with this concept: Species evolve over long periods time through a process of heredity, variation, competition, and differential survival.

The mechanism of heredity was invisible to Darwin, but a series of scientists, not without a little argument, had figured it out by the 1970’s: Strands of the protein DNA (“genes”) encoded instructions for the building of physical structures. These genes were passed on to offspring in a particular way – the process of heredity. Advantageous genes were propagated in greater numbers. Disadvantageous genes, vice versa.

The Selfish Gene makes a particular kind of case: Specific gene variants grow in proportion to a gene pool by, on average, creating advantaged physical bodies and brains. The genes do their work through “phenotypes” – the physical representation of their information. As Helena Cronin would put in her book The Ant and the Peacock, “It is the net selective value of a gene's phenotypic effect that determines the fate of the gene.”

This take of the evolutionary process became influential because of the range of hard-to-explain behavior that it illuminated.

Why do we see altruistic behavior? Because copies of genes are present throughout a population, not just in single individuals, and altruism can cause great advantages in those gene variants surviving and thriving. (In other words, genes that cause individuals to sacrifice themselves for other copies of those same genes will tend to thrive.)

Why do we see more altruistic behavior among family members? Because they are closely related, and share more genes!

Many problems seemed to be solved here, and the Selfish Gene model became one for all-time, worth having in your head.

However, buried in the logic of the gene-centered view of evolution is a statistical argument. Gene variants rapidly grow in proportion to the rest of the gene pool because they provide survival advantages in the average environment that the gene will experience over its existence. Thus, advantageous genes “selfishly” dominate their environment before long. It's all about gene competition.

This has led many people, some biologists especially, to view evolution solely through the lens of competition. Unsurprisingly, this also led to some false paradigms about a strictly “dog eat dog” world where unrestricted and ruthless individual competition is deemed “natural”.

But what about cooperation?

***

The complex systems researcher Yaneer Bar-Yam argues that not only is the Selfish Gene a limiting concept biologically and possibly wrong mathematically (too complex to address here, but if you want to read about it, check out these pieces), but that there are more nuanced ways to understand the way competition and cooperation comfortably coexist. Not only that, but Bar-Yam argues that this has implications for optimal team formation.

In his book Making Things Work, Bar-Yam lays out a basic message: Even in the biological world, competition is a limited lens through which to see evolution. There’s always a counterbalance of cooperation.

Counter to the traditional perspective, the basic message of this and the following chapter is that competition and cooperation always coexist. People see them as opposing and incompatible forces. I think that this is a result of an outdated and one-sided understanding of evolution…This is extremely useful in describing nature and society; the basic insight that “what works, works” still holds. It turns out, however, that what works is a combination of competition and cooperation.

Bar-Yam uses the analogy of a sports team which exists in context of a sports league – let’s say the NBA. Through this lens we can see why players, teams, and leagues compete and cooperate. (The obvious analogy is that genes, individuals, and groups compete and cooperate in the biological world.)

In general, when we think about the conflict between cooperation and completion in team sports, we tend to think about the relationships between the players on a team. We care deeply about their willingness to cooperate and we distinguish cooperative “team players” from selfish non-team players, complaining about the latter even when their individual skill is formidable.

The reason we want players to cooperate is so that they can compete better as a team. Cooperation at the level of the individual enables effective competition at the level of the group, and conversely, the competition between teams motivates cooperation between players. There is a constructive relationship between cooperation and competition when they operate at different levels of organization.

The interplay between levels is a kind of evolutionary process where competition at the team level improves the cooperation between players. Just as in biological evolution, in organized team sports there is a process of selection of winners through competition of teams. Over time, the teams will change how they behave; the less successful teams will emulate strategies of teams that are doing well.

At every level then, there is an interplay between cooperation and competition. Players compete for playing time, and yet must be intensively cooperative on the court to compete with other teams. At the next level up, teams compete with each other for victories, and yet must cooperate intensively to sustain a league at all.

They create agreed upon rules, schedule times to play, negotiate television contracts, and so on. This allows the league itself to compete with other leagues for scarce attention from sports fans. And so on, up and down the ladder.

Competition among players, teams, and leagues is certainly a crucial dynamic. But it isn’t all that’s going on: They’re cooperating intensely at every level, because a group of selfish individuals loses to a group of cooperative ones.

And it is the same among biological species. Genes are competing with each other, as are individuals, tribes, and species. Yet at every level, they are also cooperating. The success of the human species is clearly due to its ability to cooperate in large numbers; and yet any student of war can attest to its deadly competitive nature. Similar dynamics are at play with ants, rats, and chimpanzees, among other species of insect and animal. It’s a yin and yang world.

Bar-Yam thinks this has great implications for how to build successful teams.

Teams will improve naturally – in any organization – when they are involved in a competition that is structured to select those teams that are better at cooperation. Winners of a competition become successful models of behavior for less successful teams, who emulate their success by learning their strategies and by selecting and trading team members.

For a business, a society, or any other complex system made up of many individuals, this means that improvement will come when the system’s structure involves a completion that rewards successful groups. The idea here is not a cutthroat competition of teams (or individuals) but a competition with rules that incorporate some cooperative activity with a mutual goal.

The dictum that “politics is the art of marshaling hatreds” would seem to reflect this notion: A non-violent way for competition of cooperative groups for dominance. As would the incentive systems of majorly successful corporations like Nucor and the best hospital systems, like the Mayo Clinic. Even modern business books are picking up on it.

Individual competition is important and drives excellence. Yet, as Bar-Yam points out, it’s ultimately not a complete formula. Having teams compete is more effective: You need to harness competition and cooperation at every level. You want groups pulling together, creating emerging effects where the whole is greater than the sum of the parts (a recurrent theme throughout nature).

You should read his book for more details on both this idea and the concept of complex systems in general. Bar-Yam also elaborated on his sports analogy in a white-paper here. If you're interested in complex systems, check out this post on frozen accidents. Also, for more on creating better groups, check out how Steve Jobs did it.

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Something that happened at home earlier today reminded me of my very first full-time job, which I had ended up literally running away from barely two months after I’d started. I like to call this the “slavedriver sandwich”.

The basic problem is this – you need to get someone you normally have no influence over to do something for you, and this something is contrary to what this person needs to do. You somehow need to convince this person to do this – effectively, you need to “slave-drive” her so that what you want done is done.

The problem is that you aren’t even sure that you want this thing to be done. The only reason you are slavedriving the person you’re slavedriving is because someone else (let’s call this person “the boss”) is slavedriving you, and trying to make you get this person to do this.

The boss is very clear on what she wants done, and how she wants it done, but for reasons of her own choosing, doesn’t want to get it done directly. She wants you to do it. And you aren’t convinced that what she needs to be done is the right thing to be done – you agree with the basic principles but think there’s a better way to do it than slavedriving the person you normally have no control over.

Like I remember this time from 2006 when the then boss wanted some data, and I had to convince this client to give us the data. It seemed tractable that the data would be available in a day, and in CSV format. But the boss wanted it the same day, and in Excel format (yeah, I worked for people who considered conversion from CSV to Excel nontrivial). And so I was slavedriven, so that I could slave drive this client, and get the data to the boss in time (never mind that it was I who would ultimately use the data, and I actually preferred CSV!).

In other words, then and now, I was stuck in a “slavedriver sandwich”. Someone slavedriving you to slavedrive someone, and you are wondering what role you have to do in the whole business in the first place. And then you decide that you have nothing to do there, and you should just eliminate the middleman, which is yourself.

In that sense, the problem of 2006 was easy – eliminating the middleman simply meant resigning my job. The current circumstances (which I can’t particularly describe here) doesn’t allow for so elegant a solution! So it goes.

Productivity is all the rage. People want to get more done in less time. Productivity systems abound: Getting Things Done, Pomodoro, the Seinfeld thing, etc. There’s certainly something to be said for each of them.

But have you thought about something a little simpler and more basic: How to focus? Like, really how to focus your mind on one hard, long project until it’s done?

Productivity systems are great in that they keep you accountable for getting lots of task-oriented work completed. But they don’t answer the larger question, which is: What do you do that creates value in your career? And more than that, what are you doing that’s going to have a cumulative effect, that’s really going to matter years down the road?

I see these two concepts as intertwined and incredibly important, and ignored by overly task-oriented productivity methods.

The first is figuring out where you’re going to create a massive amount of value in your career, The second is figuring out how you’re going to carve out the time and energy to focus deeply on the first.

The thing is, that type of work — whether it’s building a new product, writing a book, learning a hard subject, building a keynote speech, writing a complicated piece of software, whatever — doesn’t happen by saying “I’ll get to it”, and then allocating 15 minutes here or there in between checking your email and going to meetings.

It happens by stringing together sessions of deep, focused effort. Hours at a time, over and over. The intense kind where you sort of lose yourself and wake up later with a lot of awesome work done.

Learning how to do that kind of work, I think, is something of an art.

I say “art” for a reason. I see a lot of people out there promoting their “science-based” system for getting a lot done. Let me tell you something: The word science is being used to fool you and trick you. To make you salivate, Pavlov-style. “Science” is not some monolith that tells you how to create really meaningful work. There’s no “science” of success. There’s no “science” of productivity. That’s pure charlatanism.

Doing great work is an art. A group of researchers can’t answer the complex question of how to live and work correctly; the real world is too varied. We don’t live in a controlled experiment and we’re not lab rats, or worse, college students in psych labs.

Some scientific research papers can certainly give you hints on how the mind works, sure. They might even tell you a few things about information retention and task-based memory. I can see how that might be useful.

But that’s a long way away from creating a career you care about, where you regularly do focused, meaningful work that feels satisfying. Your life is not the one measured in the labs: You’re not trying to memorize flashcards or strings of numbers; what I’m talking about cannot be boiled down to rigorous science. (And anyone who reads Farnam Street knows the deep respect I have for real science.)

No — it’s art! Or more properly, artisanship. And the essence of being an artisan is that it’s deeply personal: It has to speak to you. You must be willing to put your soul into the game. This means everyone will go about the Art of Focus in their own way. It takes experimentation, dedication, and an understanding that no one can do it for you.

I even called a course I put together The Art of Focus, for this very reason. I don’t claim to have all the answers, or to “scientifically” solve your problems or fix your brain, like you’re a mouse in a lab. I just wanted to give people all of the tips and tricks I knew about doing focused, meaningful work, so they could build a system themselves.

Because the truth of the matter is that, however you go about it, you do need to build your capacity for hard, focused work. That is vital in an age of complexity, where we need to carve out a niche. Most of us aren’t making widgets anymore, and much of that work is being replaced by machines anyways.

And if you’ll let me be controversial for a second, I think that’s a good thing for humanity. Humans aren’t meant to live on a factory assembly line (or the white-collar equivalent – spreadsheets and Powerpoint). We’re meant to lose ourselves in valuable and satisfying work that smacks of originality and humanity.

I know a lot of finance people who want to switch into some related craftsmanship, or writing, or software-building, but not the other way around. Do you know any woodworkers who want to switch into finance? Do you know any writers who want to switch into corporate accounting? Me neither.

But in order to build an awesome career doing hard but satisfying long-term work, you need to build your ability to focus for hours at a time. You need to learn hard skills. You need to let go of multitasking, distraction, and the temptation to be “busy.”

I built the Art of Focus to get people started on that path, but I recommend doing it any way you feel comfortable. With apologies to Phil Knight, just do it.

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Right under where I currently live, there’s a Waitrose. Next door, there’s a Tesco Express. And a little down the road, there’s a Sainsbury Local. The day I got here, a week ago, I drove myself nuts trying to figure out which of these stores is the cheapest.

And after one week of random primary research, I think I have the classic economist’s answer – it depends. On what I’m looking to buy that is.

Each of these chains has built a reputation of sourcing excellent products and selling them to customers at a cheap price. The only thing is that each of them does it on a different kind of products. So there is a set of products that Tesco is easily the cheapest at, but the chain compensates for this by selling other products for a higher rate. It is similar with the other chains.

Some research I read a year or two back showed that while Amazon was easily the cheapest retailer in the US for big-ticket purchases, their prices for other less price-sensitive items was not as competitive. In other words, Amazon let go of the margin on high-publicity goods, and made up for it on goods where customers didn’t notice as much.

It’s the same with British retailers – each of their claims of being the cheapest is true, but that applies only to a section of the products. And by sacrificing the margin on these products, they manage to attract a sufficient number of customers to their stores, who also buy other stuff that is not as competitively priced!

Now, it is possible for an intelligent customer to conduct deep research and figure out the cheapest shop for each stock keeping unit. The lack of quick patterns of who is cheap for what, however, means that the cost of such research and visiting multiple shops usually far exceeds the benefits of buying everything from the cheapest source.

I must mention that this approach may not apply in online retail where at the point of browsing a customer is not “stuck” to any particular shop (unlike in offline where a customer is at a physical store location while browsing).

Variable pricing need not be boring at all!

Most people would readily identify a heap of gold ingots as wealth. But a moment’s reflection is enough to conclude that what can be considered wealth depends on the context.

Imagine Robinson Crusoe alone on his otherwise uninhabited island coming across a pile of gold nuggets in a stream. What’s more valuable to him: the gold or the fresh water in the stream? Gold is pretty useless to him because he cannot use it for anything. Gold is a heavy, soft metal. A piece of iron would be more valuable for making a knife or a pickax. Gold is of little value to him.

The important word is value. The value of materials is not intrinsic to them. Without an evaluating human mind, the concept of value is empty of any content. Humans impart value through their knowledge and preferences. Wealth is anything that is of value. I could have written that last sentence as “Wealth is anything that is of value to humans” but it would be redundant since value necessarily implies an evaluating human mind.

Stuff naturally occurs in nature but it does not become wealth until humans value the stuff. Both knowledge and preference is involved in this. Iron ore is naturally occurring stuff but it is worthless until one knows how to extract iron from it. That’s called technology. It is a handy word that means “knowing how to do something.”

Knowing how to transform naturally occurring stuff into stuff that has any value is how humans create more wealth than what they begin with. A pile of radioactive uranium ore before people knew how to enrich uranium and build fission reactors was just a pile of rocks that was useless, and unknown to them also quite lethal.

Now people know better. They have the technology to use uranium ore. They have ideas — good or bad — about what to use uranium for.

Knowledge, ideas, technology, know how — all these are interchangeable concepts in the context of how humans create wealth. Without ideas, stuff is just stuff. With the proper ideas, humans transform stuff to create wealth.

Preference also comes into the matter of value. For example, a vegetarian would be willing to pay not to have to eat non-vegetarian food that a non-vegetarian would pay good money to eat. I know someone who is massively into clothes and has closets full of them. I consider anything more than a few clothes to be useless clutter. Value is subjective.

Subjective. That’s another very important word. It is the subjective evaluation of something that ultimately determines it value. We value goods and services that we consume. We signal our valuation by how much we are willing to pay for them. Our valuation depends, as mentioned before, on our preferences. (Preferences can be manipulated but that should not detain us here.)

Here’s a question. How much is something that is found in nature worth? How is its worth determined? Let’s take iron ore as an example of stuff that occurs in nature. How does iron ore get to be worth what it is worth?

The answer to that is that iron ore derives its worth from the value that humans assign to the things that ultimately gets made out of the ore through a series of transformations. It’s the end product’s valuation that determines the value of the naturally occurring substance. The fact that the end product is valued is the only thing that matters in the valuation of the starting substance.

Note that the production process starts from the naturally occurring stuff — iron ore in our example — to the final consumer product with iron in it but the valuation starts at the consumer product end of the chain and proceeds backward to the iron ore. No one consumes iron ore. People use products made out of iron and that is where iron ore derives its value from.

The valuation of iron ore depends on the subjective valuation of the products that include iron in them. If people did not care for those products that have iron in them, it would be pointless to mine iron ore.

The important thing to appreciate is that natural resources — such as minerals found in and on the surface of the earth — are not wealth in and of themselves although they constitute an important factor that goes in the production of wealth. The transformation of natural resources into final products that have value involves “round about” production processes that require one very valuable thing: time.

Let’s go into the round-about-ness of production and the time factor in a bit.

{This is part of a work in progress called “The Wealth of Nations.”}

Some Indian banks charge for services that are cheap to execute, and offer for free expensive services 

Last week I enddd up spending some time waiting at a teller counter at a bank. This was due to some mess up with a cheque I had received. During my time at the teller counter I had the opportunity to observe other people at the same counter. 

There were a few people depositing cash into their business accounts. A few others were depositing cheques. What caught my attention, however, was this guy from a nearby business who came to deposit a large number of cheques. 

He had an entire book of challan leaves (banks regularly issue those to business customers), to each of which was stapled a cheque. As I watched, the teller would put a seal on a cheque, its corresponding challan and another seal on the counter foil. This process was repeated for each challan in the book. 

And this process was only to accept the cheques. Later on there would’ve been further effort on behalf of the bank to cash the cheque and actually execute the fund transfer. And then add in the effort of writing out all those cheques, writing out all those challans (they’re hard to print) and then take them to the bank. 

It was a rather laborious process all round, on behalf of all parties involved. Yet, banks mostly execute this function for free for most customers. 

On the other hand, they charge for account to account transfers, and the amount isn’t particularly small. Like this morning I was moving money from one account  to another, a process that took me a minute and that wouldn’t have cost the bank any human minutes. And icici bank decided to charge me for it. 

It seems like banks have their pricing and the valuation of their own effort all wrong. For electronic payments the cost is direct – what the banks have to pay the payments systems and any per use software costs. And this makes it easier to value and charge for such services. 

The effort in transacting through cheques, on the other hand, is not directly measurable (though by no means an impossible exercise). There are back offices that do the job whose cost is easy to measure, but several employees who also do other things spend time processing cheques. And this difficulty in measurement means that most banks just don’t charge for cheques. 

Around 2000 when foreign banks expanded their branch networks in india there was an attempt to charge customers for walking into the branch – customers were encouraged to do their business at ATMs or over the phone, instead. This was in recognition of the costs of customer walkins into branches.  

Banks would do well now to do something similar for cheques as well – despite the cheque truncation system (CTS), the effort involved in organising payments through cheques is massive for the bank. 

There is only one upside to cheques – and this is a downside for customers. Cheques result in money going into limbo. The payer doesn’t know when the funds will leave his account and can’t use the funds. The recipient can’t use it either until he has got it. So for the duration that the amount is “in transit” (and this duration can vary significantly) banks can happily use these funds without them being called. 

It’s possible that the benefit to the banks from this float more than compensates for the pain of processing cheques. If not, cheques have no business existing any more! 

Diogenes of Sinope lived in a tub in the marketplace. Since it was a long time ago, around the 4th century BCE, the details are few. He is also known as Diogenes the Cynic.

I feel a certain intellectual kinship to Diogenes because I too am a cynic. He must have been a remarkable man, going by the stories told about him.

It is said that he sometimes walked around with a lamp even in broad daylight. When asked why, he replied, “I am looking for an honest man.” A cynic to the core. 

He lived an austere life, and claimed (correctly, I believe) that man’s needs are basically simple. He had few possessions and lived in a tub, and I suppose lived on handouts and charity. He must have been like the bhikshus that hung around the Buddha who, one must remember, lived a century before Diogenes.

During a sea voyage in his old age, he was captured by pirates and brought to a market in Crete to be sold. When asked for what he was capable of, he answered, “I can govern men; so sell me to someone who wants a master.”

Xeniades, a rich man of Corinth, heard this and bought Diogenes and gave him his freedom. Diogenes was in Corinth when Alexander the Great sent word through a messenger asking Diogenes to come see him in Macedonia.

What would you do if one of the most powerful men in the world sent word that he would like to meet you since he has heard so much about you?

Not Diogenes, though.

Diogenes told the Alexander’s messenger, “Go tell your emperor that Corinth is as far from Macedonia as Macedonia is from Corinth. So if your emperor wants to see me, he can come and find me here.”

Irrefutable logic and infinite self-assurance. The last bit can only come from someone who really does not need anything from anyone however high and mighty.

Alexander surely was not used to being turned down. But I suppose being a warrior, he admired courage. So he went to Corinth to meet Diogenes. Diogenes was sitting in his tub and enjoying the morning sun when Alexander showed up on his high horse with a whole bunch of soldiers.

After a brief introduction, Alexander proudly offered to give Diogenes anything that he needed. “Is there anything I can do for you, Sir?” asked Alexander. Diogenes replied, “Yes, you could. You are blocking the sun. Please stand aside.”

Alexander was a megalomaniac — you had to be if you wanted to (and indeed did) conquer a massive part of the world. So impressed he was with Diogenes that he later remarked, “If I had not been Alexander, I would have liked to be Diogenes.”

One more favorite story about Diogenes.

One afternoon, one of the emperor’s ministers was passing through the town square and saw Diogenes in his bathtub, eating gruel. The minister said helpfully, “Diogenes, you would not have to eat gruel, if only you did one thing. If you were friendly to the emperor, you’d be able to feast.”

Diogenes replied, “If you learned how to eat gruel, you would not have to grovel before the emperor.”

[This is an updated repost. It was originally posted in October 2004. That’s over 12 years ago. Check out the comments there.]

If you ask me what are the necessary causes of the wealth of nations, I will answer — having spent decades learning about and pondering that question — in just one word: Freedom!

Freedom is the sweetest word I know in English.

The advancement of civilization is essentially the expansion of individual freedom — the release from constraints imposed by nature, by other humans or by one’s mental and physical limitations. The notion of the freedom of a group has content only when individuals of that group are free. If the individuals are not free, the group cannot be considered to be free in any sense.

Freedom means you have the right to do whatever you please, provided you respect the corresponding right of others to do as they please. In short, mind your own business. A free society is one in which everyone minds only his own business. Free societies are prosperous societies.

The greater the collectivization of society, the greater the size of the government, the greater the constraints on individual liberty, the less free the society, and consequently the less prosperous the society. Unconstrained democracy is inconsistent with individual freedom, and therefore group freedom, and consequently leads to impoverishment.

Below I outline briefly why the universal application of the notion of minding one’s own business leads to the possibility of universal prosperity through individual freedom. And conversely, when people poke their noses into other people’s businesses, it leads to needless misery.

Freedom, Mukti, Moksha

Freedom’s emotional appeal to me preceded its intellectual appeal by many decades. But now that I understand intellectually why freedom is the most important necessary precondition for not just material but also spiritual advancement, it only intensifies that viscerally felt emotional response to the concept of freedom.

I am certain that my Indian upbringing has something to do with why the concept of freedom is so emotionally charged for me. The highest spiritual goal in our Hindu-Jain-Buddhist tradition is the attainment of liberation, freedom, or emancipation from all bondage. The word for that in Sanskrit is mukti or moksha. The Indian concept of moksha compasses and transcends the ordinary meaning of freedom. The ultimate goal of our human existence is to attain freedom in every conceivable way.

You have to materially exist first before you can hope to achieve moksha. Therefore, living in this material world demands freedom from material wants as a necessary precondition of attaining spiritual freedom. Economic freedom is therefore not just consistent with spiritual freedom but is indeed an unavoidable precursor to it.

I don’t want to get all metaphysical in this piece but those are important considerations worth a ponder on our way to the mundane matter of economic freedom.

Individualism

I am convinced that the views I hold, both material and spiritual, are informed by my childhood exposure to the Indian traditions. For instance, I have a deep suspicion of all collectives, and my world view is highly individualistic. That comes from the fact that in our tradition, only individuals — not collectives — attain moksha, and that too only through individual actions. One does need the help of others but only peripherally as guides. The guru may point the way but the individual has to walk the path to liberation.

Nobody else, not some anointed redeemer, and nothing, not even  a cosmic human sacrifice as is required by Christianity, can liberate you. There is no vicarious redemption, no vicarious liberation. Only you, the individual, can attain freedom. The law of karma — that actions have consequences — demands that liberation depends only on the actions of the individual. It is the individual’s responsibility and it cannot be avoided.

Thus have I heard that the last words of Gautam the Buddha included the instruction to “work diligently towards your own liberation.” He didn’t say pray to some divine dictator. or believe in some doctrine, or love everyone or some such nonsense. No siree. He said work diligently for your own release from bondage.

Compassion, not Love

One thing that signals to me that the Buddha was enlightened is that he did not go into the puerile nonsense about love, like the Christ is reported to have stressed. The Buddha stressed compassion, not love.

The admonition to be compassionate towards all sentient beings is practical and universally beneficial. The Christian admonition to love thy neighbor is clearly impractical because it is contrary to human nature, and it also leads to mountains of avoidable misery. (This I will explore in a different piece.)

Mind Your Business

As Alice timidly told the Duchess in part 1 of this series, it isn’t love that makes the world go round but rather everybody minding their own business. That, I submit, is the operationalization of the concept of freedom.

I am convinced that the guiding principle of a truly civilized people should be to respect the individual’s autonomy. Indeed, that respect for the individual lies at the core of what  known as “methodological individualism.” [See footnote 1.]

There can be no justification for harming others, or initiating force against others, or even trying to do “good” to them. The moment one feels the urge to do good to others, one should sit on one’s hands and take a deep breath.

Leave People Alone

The only obligation we have to our fellow beings it that we leave them alone. It is a negative obligation, not a positive on. You have a right to be left alone by others, not a right to anything from others.

But what if someone needs help. Then he is free to request help from others. And the others may have a moral obligation to assist but cannot be forced to help. If someone asks you for help, sure, go ahead and do what you can to help. But the help you extend to others should not be unsolicited.

Here’s a challenge. Think of any human-created problem that the world faces. You’d see that invariably, one of the primary causes is that someone is not minding his own business; someone is meddling in some other persons’ business, most often to harm and often enough to help.

Think of all the conflicts, large and small, around the world. There’s one group that wants others to be socialist. Or the other group that wants others to be democratic or capitalistic. Or the third group that wants others to follow their brand of religious delusions. Or that group that wants others to have live according to some particular set of rules.

Governments

The big problem with governments is that invariably there are people in government whose only business appears to be to interfere in other people’s business. Someone wants to smoke some stuff in the privacy of his own home. Nope. Some government busybody wants to prohibit that — and that too for the smoker’s own good. Someone wants to marry someone but no! There’s another government busybody telling who should marry whom.

That’s insanity even though most people think that it is somehow justified because the government was democratically elected and therefore represents the “will of the people.” The notion that the people have a will is patently absurd. Individuals have wills, not groups or collectives.

Collectives

This does not mean that collectives are not a good idea. It all depends on you, the individual. As long as the individual freely chooses to belong to some collective and to adhere to some set of rules that the collective determines, that is totally fine.

If you want to become a Trappist monk and join a monastery, do that by all means available to you. If you want to become a Buddhist bhikkhu and join a sangha, more power to you. If you want lead a communal life in a kibbutz that would have you as a member, that’s nobody else’s business but yours.

What is not OK is forcing others to do whatever against their will, desires, tastes, preferences, etc. One can attempt to persuade others to one’s point of view but again not against their will. Teach or share your viewpoint with others provided you are requested to do so.

The Indian Ethos

Here again, I value the traditional Indian ethos of not forcing one’s beliefs on others. Never teach someone who has not requested to be taught. In the old tradition, you have to request earnestly — not once but thrice — that the teacher teach you. Only then it is permissible for the teaching to be transmitted. That is why Hinduism, Buddhism and Jainism are not proselytizing faiths.

Judaism is the only monotheistic religion that does not proselytize. Christianity and Islam do, and that characteristic has poisoned human well-being for centuries. Christianity wants to save you, regardless of whether you need saving or wish to be saved. It will force you — even kill you — to follow their creed so that your soul is saved from the eternal damnation that their Divine Being has in store for you.

Islam wants you to submit to the will of their Divine Dictator. There’s an extreme version of not letting others get on with their own business. No wonder that much of the world’s conflicts have involved Islam’s faithful imposing their views on others through force and violence.

Democracy as a Religion

Then there’s the modern religion of Majoritarian Democracy. Notice that the people in the West used to thrust (and still do) their religion on the rest of the world. That practice became somewhat politically incorrect in recent times. That’s been replaced by forcing down unwilling throats the religion of majoritarian democracy.

Middle East Islamic regimes have to be bombed into submission till they all hail the Democratic God — even if it costs millions of lives and trillions of dollars. Never mind that the people of the Islamic countries don’t want to worship the God of Democracy. It’s for their own good that they have to be killed. It’s an old habit derived from Christian and Islamic doctrine.

But you may say, what’s the alternative to alternative to Majoritarian Democracy? Dictatorship? Totalitarianism? Monarch? Anarchy?

Yes, there is. A constitutional republic with the constitution only empowering the government to enforce the only rule worthy of a civilized society: that people mind their own business.

In the next part, I will go into what a constitution consistent with a collective of free individuals would look like.

Footnotes:

1. Methodological Individualism

The concept of methodological individualism, as detailed by James M. Buchanan Jr, resonates elegantly with my overall philosophical makeup. It’s a method of economic analysis that considers the individual as the proper unit of interest, not some collective. It is the individual who evaluates, chooses and acts. What the collective “does” arises out of, or emerges through, some processes that are determined by the institutional structures within which individuals act.

For example in the marketplace, individuals maximize their utility functions (which is just a specification of their preferences) and what emerges from this process of individuals separately maximizing their own utility is the market outcome. This aggregate outcome — the market outcome — is not chosen by any individual or the collective in any meaningful sense. No supra-individual entity chooses the outcome that emerges. The outcome cannot be planned or consciously directed toward some goal. It is non-teleological. What emerges is indeed “the result of human action, but not the execution of any human design” as the Scottish enlightenment philosopher Adam Ferguson (1723 – 1816) noted.

It is like in a game of tennis, each player is playing to maximize his points but the outcome of the game is not some function that is being jointly maximized by the players.

I should also note that Buchanan is brilliant in his exposition but the content of his writing is certainly not for the uninitiated. I read him very slowly and several times before I get the point. To get a flavor of what I mean, take a peek at the text of his 1996 acceptance speech of the (so-called) Nobel prize in economics. [Back.]

{This is part of a work in progress called “The Wealth of Nations.”}