Austrian Economics – David Veksler

Is Inflation Good For The Poor?

The Intercept story “Inflation is Good For You” argues that “Inflation is bad for the 1 percent but helps out almost everyone else.”

After denying the threat of inflation, then claiming that it is transitory and that it would fade away, the mainstream is finally admitting a wave of unprecedented inflation for the foreseeable future. So now the story is that inflation is good for the poor. President Biden claims that a massive expansion of government spending will actually reverse inflation.

The Intercept story has more holes than swiss cheese, but I want to rebut the central thesis of the article. Is inflation bad? Spoiler: the worst aspect of inflation is not rising prices or eroding savings, but the censorship of price signals required for a thriving economy.

Demand-Pull Theory Doesn’t Explain Inflation

The unstated theory of the author and the mainstream economic model that guides the monetary policy of the world’s central banks is Keynes’ model of Demand-Pull Inflation. The theory goes like this: when aggregate demand exceeds the value of aggregate supply, producers raise prices. In response, governments can raise interest rates to reduce demand, slow economic growth, and end inflation. Problem solved!

If the master planners at the Federal Reserve simply need to pull a few levers to fix the economy, why has the global economy had a series of boom-bust cycles ever since the Fed was founded in 1913? The usual excuse is that the government simply hasn’t imposed enough regulations to stop the pesky capitalists from screwing up their central planning.

The Austrian economic school provides a comprehensive response to Keynes’ economics. Say’s law (Jean-Baptiste Say, 1803) provides a simple refutation of Keyne’s demand-pull theory. In order for someone to buy goods, he must first produce something of value to obtain the money needed to pay for those goods. Production is the source of all economic growth, not consumption. Economic growth is an increase in supply, not an increase in consumers demanding more. To consume the product of others’ labor, you must first produce something they find valuable. Government edict can change what goods are produced, but it cannot magically command new workers, factories, and materials into existence.

What Is Inflation?

Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon.“ Inflation is a broad decrease in the purchasing power of money caused by governments creating new money. And boy have they been creating it.

Just look at the money being printed by the Fed:

Since Covid 19 began, the M2 supply has jumped from $15 trillion to almost 20 trillion dollars. Quick quiz: if the same amount of economic activity is served by 40% more dollar bills, what will happen to prices? It’s not a question of if but when.

The question of why the government had to print so much money is a long and shameful tale, but the ultimate result is inevitable: massive inflation.

Inflation is much worse than the official numbers suggest:

First, in an economy with a hard (fixed) money supply, we should have deflation proportional to the rate of economic growth.

Second, the United States has been able to hide away most inflation, mostly by exporting dollars as a global reserve currency.

Third, the official deficit numbers are misleading because much government spending (like government-backed student loans and mortgages and quantitative easing) doesn’t end up on the books.

What we are seeing now is not the beginning of a period of higher inflation, but an unprecedented expansion of the money supply causing the Fed to lose control of the narrative and have to admit it in official indexes.

So Why Is Inflation Bad?

The problem is not that prices are going up. If prices merely increased by some steady amount each year, we could adapt to them, just as employees expect a 3-4% base salary raise every year to match inflation. Likewise, producers and lenders would have no problem adapting to a universal increase in the price level.

The problem with inflation is that it’s not a universal increase in price. Inflation is what happens when politicians print new money to hand it out to their constituents instead of raising taxes. Raising taxes is hard but running printing presses (physical or digital) is easy.

To understand why inflation is harmful, we need to understand what prices are: prices are signals about which activities are valuable to people. When the price of a good goes up, producers direct more resources into the production of that good. When the wage of a job goes up, more workers are directed to that industry. This “invisible hand” of the market continually optimizes human activity to direct human effort to the most valuable activity.

The main evil of inflation is that it corrupts this information flow. Inflation begins when governments give new money to favored groups. The recipients of new money spend it at the current price, whereas the downstream users of that money spend it at a higher, inflated price. Instead of prices signaling which activities are socially valuable, they signal activities supported by the government’s printing presses. Inflation corrupts the economic harmony that directs resources to their most valuable use.

If you remember one thing, it should be this:

“Fiat” is another word for “decree” or “edict.” It’s called “fiat money” because governments force people to use their money by decree. Through inflation, fiat money forces people to allocate their lives to the causes the government’s money benefits instead of those they would voluntarily choose for themselves.

Inflation Is A Hidden Tax

All taxes are signals which force people to produce goods they would not voluntarily produce. But taxes are different from inflation in that both the tax burden and the recipients of tax income are generally auditable by the electorate. Inflation is a hidden tax that subtly changes the incentives throughout an economy to erode its ability to produce wealth.

Because it’s hidden, inflation is highly addictive to the political system. Government programs depend on printing money to a far larger extent than official deficit numbers suggest. Even if there was suddenly a broad awareness of the harms of inflation and a political movement to curtail it, moving to a sound money system absent a complete collapse of the dollar regime would still be outside the realm of possibility.

Inflation Wrecks The Structure Of Production

Why is the economy suffering from shortages of seemingly everything? It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.

One of the main disagreements of the Austrian school with Keynesian economics is the emphasis it places on the structure of capital. Capital is not a monolithic blob of “aggregate supply”, but a hierarchy of lower and higher-order goods. In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

When the government created new money for the stimulus programs, that money first went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. Inflation robbed producers with low time preference and redistributed the loot to consumers with a higher time preference. The shortages were a result of inflation eating the “seed corn” of capital needed to maintain and expand production.

So what should happen when an external shock (such as pandemics and lockdown policies) constrains production and changes demand patterns? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

The inflation-powered stimulus packages attempted to “freeze” the economy in pre-pandemic spending levels and thus crippled the adjustment to the new reality. The rest was inevitable.

The Myth of Idle Capital

President Biden claims that the “Build Back Better” stimulus package will reverse inflation by “reducing bottlenecks” in the economy. This thinking is straight of out Keynes’s General Theory (1936). Keynes believed that government spending is needed to put “idle” resources to work and stimulus the economy.

William H. Hutt refuted this idea in “The Theory of Idle Resources” (1939). Politicians cannot create new capital and labor. They can only force people to do the government’s bidding rather than what individuals believe is in their best interest. If some capital is idle, it’s because it currently provides no economic value to people. “Build Back Better” is just the latest version of the belief that the government’s central planning is more efficient than the price mechanism of the free market. Though Mises, Hutt, and many others refuted these ideas in the 1930s, the backdoor of fiat money allows politicians to try the same failed policies without consequences.

Does Inflation Help The Poor?

The Intercept claims that inflation is good for the poor because it will make debts easier to pay off. Supposedly, rich lenders will suffer while the poor are granted a reprieve.

Do you really believe the elites suffer more under any economic policy? While banks may lose some money, they are also the first recipients of new government money!

There are many reasons why the poor always suffer the most from inflation:

* A far larger percentage of poor households’ income is used for basic needs.

* The wealthy get most of their income from inflation-protected assets like real estate, business interest, and stocks.

* The prices of basic goods increase faster than luxury goods.

* Families with low incomes will be pushed into poverty, while the middle and upper classes can cut down on luxuries.

* Debt is a wealth-maximizing strategy for the wealthy, while it’s a survival strategy for the poor.

* Although existing mortgages and student debt will depreciate, interest rates on new debt will go up dramatically!

Though the very idea that inflation helps the poor is absurd on its face, it’s not the fundamental error of the article. The central problem is the idea that high inflation is just the price we pay for economic growth. If you have understood the above description of inflation, you should understand that this is another way of saying that government central planning of the economy is more efficient than the market. If you believe that, look up the thriving economies of the USSR, North Korea, Venezuela, or Cuba.

How Fiat Money Corrupted Savings & Made Us All Market Speculators

Originally posted at The Bitcoin Consultancy

Before the world switched to a fiat monetary system, people who wanted to build wealth kept their savings in a bank. Interest rates tended to equal the average rate of profit, which was enough for all but a small minority of professional investors and entrepreneurs.

This all changed with the move to a fiat monetary system and the devaluation of money. Today, the majority of households own stocks — not because they wish to be investors, but because it is the simplest means of protecting savings. As a result, the political system has become highly involved in market outcomes. The real return of securities markets has been greatly diluted, created perverse incentives, and global risks for the economy.

Historical context

Before the creation of the Federal Reserve Banking System, the class of investors was small and limited to finance professionals. Everyone else earned income on their savings by keeping their savings in a bank. For example, the interest rate was 8.1% in 1798.

This changed in the 1920s, the Federal Reserve System fueled a huge credit expansion that caused the stock market bubble. Easy credit drove the return of the stock market to dramatically exceed the return on savings. We know what happened next.

By 1952, 4.2% of the U.S. population owned stocks. The 2008-9 financial crisis had a dramatic impact on interest rates when the government injected massive amounts of money into the banking system. Rates have remained low ever since. Today, over 50% of households own stocks, rising to 88% of $100K households.

Savings in a pre-fiat, gold-backed monetary system

In a market economy, the rate of business profit tends to equal the interest rate. The rate of profit tends to even out across all sectors since money flows to more profitable sectors until the rate equalizes. Capitalists borrow money in proportion to the rate of return on investment. When investments are more lucrative, the interest rate increases until the cost of borrowing money equals the potential return — and vice versa. In this manner, savers in a pre-fiat monetary system needed to keep their money in a bank to reap the rewards of a growing economy.

Savings in a fiat monetary system

In a fiat monetary system, the government artificially lowers the interest rate by expanding the money supply. Savers have to shelter their wealth in inflation-protected assets because the fiat system devalues savings through inflation.

Wealthy families have other channels to protect their wealth – such as real estate and business interest, but for the middle class, their main means of protecting savings are their 401k and their primary home.

The corruption of the joint-stock company by fiat money

Passively managed index funds now account for the majority of U.S. equity funds. While they are great for investors, they only exist because the fiat monetary system has forced savers into the securities market.

The publicly traded company exists to allow investors to pool funds together in a common enterprise, without incurring unlimited liability for its debts. Participation in a public company ought to come with high risks — offset by high rewards.

When a company needs funds, it used to raise them through bonds and other forms of debt — with debtors being paid before investors.

This model is very different from the current system. By the time a publicly traded goes public, most of the risk and therefore return has already been taken by venture capital, which only a small group of private equity investors have access to.

Because so many savers participate in the market, politicians are strongly motivated to intervene in market outcomes. The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and the 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly traded companies.

There are now just 3,530 publicly traded companies in the U.S. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors.

Dividend yield has decreased from 5.49% in 1871 to 1.33%. Because government debt outcompetes private debt, companies issue stocks to raise money instead of bonds.

Likewise, the price to earnings rate over double historical rates, as savers flock to the stock market — not seeking high returns, but trying to preserve wealth.

Furthermore, the political system is highly motivated to avoid downturns in the market. Politicians cannot prevent economic destruction (that mostly comes from the economic miss-allocation they cause), but they do inflate market prices through inflation. Easy credit transfers wealth from dollar users to investors, while at the same time, capital gains taxes transfer much of those gains to welfare recipients. (By “welfare” I mean all recipients of government benefits, individual and corporate.) All this activity accelerates the inflationary death spiral caused by our unstainable welfare system.

Stock ownership in a free market should be high-risk, high-reward

Stock ownership should be a high-risk, high-reward endeavor for professionals. By contrast, savers should earn the rewards for their thrift by keeping their savings in a bank. A savings account is the original “index fund ETF.”

Bitcoin as a return to sanity

Bitcoin has a limited supply and cannot be manipulated by politicians. In a growing economy, Bitcoin is a deflationary currency. This makes it ideal as a means of saving money.

Bitcoin savings accounts (such as currently exist in crypto-lending platforms) offer investors a higher return at a higher risk. Their stablecoin interest rate is around 9%. I would guess that this reflects a 6-7% rate of profit plus a 3% adjustment for inflation.

There is no easy way out of the current mess. The same forces driving more and more of the public to become market speculators also make those markets ever more unstable and unprofitable. Loan-bearing crypto deposit accounts (whether they hold stablecoins or cryptocurrencies) are rapidly growing in popularity and may become the high-yield savings accounts of old for savers everywhere.

The shortages were unevitable

What did you think would happen?

1: Lockdowns and unemployment subsidies constrain production

2: Print trillions of dollars and throw it out of helicopters

3: Consumers start spending stimulus money

4: Manufacturing shifts to the production of consumption goods

5: Producers bid up prices of production goods and labor

6: Price increases, shortages, and unfilled jobs everywhere.

It has nothing to do with a “chip shortage,” or the Suez canal blockage, or just-in-time manufacturing. These are only the symptoms. The root cause of the “everything shortage” is the government’s manipulation of the money supply.

One of the most important concepts I learned from Austrian Economics is capital has structure.

In order to produce consumer goods, capital must be employed. To make your Venti Frappuccino (first-order good), a barista uses an espresso grinder (second-order good). The grinder requires steel and microchips (third-order goods).

The stimulus money went to consumers, who voted with their wallets to shift the structure of capital from the production of higher-order (production) goods to lower-order (consumption) goods. In other words, the government robbed producers with low time preference and redistributed the loot to consumers with high time preference. The rest is inevitable.

What should happen when an external shock (such as pandemics and lockdown policies) constrains production? The economy needs to re-structure to rebuild the structure of production to reflect the new reality. Uncertainty causes consumers to save more, which frees up higher-order capital to shift to new demand trends. Capital can focus on producing PPE, webcams, home exercise equipment, and consumer groceries rather than restaurant supplies, office buildings, airliners, etc.

By attempting to “freeze” the economy in pre-pandemic spending levels, the government crippled the adjustment to the new reality. The rest will be inevitable.

Stimulus checks are a dangerous game

What happens when the government sends out a stimulus payment? Politicians can print money, but they cannot wish all the goods and services that money buys into existence. They would like you to think that their money causes factories to hire workers and put idle production lines to work. But that’s not what happens.

Tens of millions of employees and warehouses full of raw materials are not waiting around for stimulus money to put them to use. What were those people, factories, and raw materials doing before the stimulus?

Absent government intervention, they were putting their time and capital into the most profitable ventures they knew.

Stimulus money can boost consumer spending in the short-term, but it cannot command the resources needed to produce goods and services into existence. The short-term boost in consumer spending comes at the expense of long-term economic destruction.

Here is what most people (and economists) don’t understand: When the government creates new money, it can only create a short-term boost in consumer production at the expense of eroding the capital needed to produce those goods. “Capital” is all the things that make consumer goods and services possible: factories, farms, bridges, trucks, trains, and cargo ships, sewers, mines, warehouses, and so on. By printing money or lowering interest rates, the government steals from savers to pay spenders. Those savings are what pays for capital maintenance and expansion. Without savings, factories can’t maintain or expand production.

Worse yet: the new money is not distributed evenly but goes mostly to those with political connections rather than successful or innovative businesses. Taxpayers get a shiny check, while trillions more go to cronies.

The result of long term monetary manipulation is infrastructure rot: factories, bridges, buildings that crumble, and an inability to invest in research and capital expansion. The government makes money available to consumers and investors, but it cannot dictate new people and machines into existence. The stimulus causes new big-screen televisions to show up in department stores, but the VR headsets that the stolen capital would have produced never come to exist.

Printing money is addictive: once one politician sends a stimulus payment, they raise the bar for everyone else. Unless voters revolt at having their savings stolen, the game keeps escalating: print just enough money to win votes without collapsing the economy.

For nearly 100 years, the U.S. government has been running all sorts of welfare programs for the rich and poor alike. It has been able to sustain those programs because technological progress and capital accumulation expanded productivity just enough to keep up with the increased burden of the welfare state. It’s a dangerous game of brinkmanship: steal just enough from producers to win the next election, without causing an economic recession that causes voters to change sides. The game keeps escalating as politicians find more and more ways to steal savings and redistribute the loot.

For example, using the COVID-19 pandemic as an excuse, the government started buying corporate bonds, running huge permanent deficits, reducing the bank’s reserve requirement to 0%, and now, sending increasing large checks directly to the public.

How does this game end? All monetary manipulation creates economic destruction, but as long as the world’s major central banks move roughly in tandem (as they have been), the destruction goes unnoticed. However, the heavier the government burden, and the more reckless and inflationary policy, the more fragile the economy becomes. 9/11, the 2008 financial crisis, and the 2020 pandemic were all used to justify massive expansions in government programs. Now that voters have gotten a taste of direct cash payments, we’re entering a dangerous new phase. The coming escalation of fiscal irresponsibility is predictable and inevitable.

So is the economic correction that will follow when capital is looted to such an extent that economic production collapses, and the government can no longer pay for welfare programs or maintain its debt. Whether it’s a terrorist attack, another pandemic, or something else entirely, the next “emergency” could push the economy beyond recovery.

The only question is what happens then: a return to sanity or the end of the U.S. as a superpower?

Six principles of successful investors

Most amateur investors who pick stocks significantly underperform the market. 90% of people who pick “winning” stocks do worse than if they picked them at random. There are many reasons for this: (1) your emotions will work against you — you will be tempted to buy high and sell low, (2) even if you correctly identify a good stock, it is much harder to evaluate if it is already priced too high and (3) unless your have exceptional talent, the collective wisdom of the market will be superior to your predictions.

1: How you invest is far more important than what you invest in

Most investors believe that the job of a investment advisor (or a personal investment strategy) is to look at the thousands of securities (stocks and bonds) and pick “winners” rather than “losers.” The better an investor’s talent at picking “winners,” the faster his portfolio grows. Other investors think the market or economy has predictable cycles, which one can take advantage of to earn superior returns.

The reality is that the vast majority of both amateur and professional investors cannot pick stocks or time the market any better than random chance. In fact, randomly picking stocks will usually provide a higher return than professional management.

2: Amateur intuition is a terrible guide to investing

It is possible to outperform the market, but it’s not a simple or quick process:

Sort through thousands of companies to find securities that trade for less than their intrinsic value using fundamental analysis.
Buy and hold those stocks for years (or decades) until you achieve a return in your investment
Monitor those companies and sell stocks if their fundamentals change.
Repeat the process with several dozen stocks so that you’re not overly exposed to any one company

This “buy and hold” strategy is more profitable than frequent “active” trading, but it requires hundreds of hours of study, more risk, and a lot of practice. Even if you do everything right, you will only earn slightly more than picking stocks at random. A “set it and forget it” strategy of investing in broad indexes is far easier.

Furthermore, even if you think that you have a superior understanding of market fundamentals because of your economic theory or insider knowledge of your market, that’s no guarantee of superior returns:

For example, if you follow Austrian economics, you might think that your understanding of why business cycles happen would lead to superior returns. However, you may have noticed that most Austrian economists are not millionaires. That’s because the results of most macroeconomic policies play out over decades, and simply staying out of the market because you think it may crash in the next 5, 10 or 20 years is worse than keeping your money in the market. The timing and severity of crashes is impossible to predict, and most are followed by a sharp recovery. The best strategy is usually holding on for the long run.

Likewise, even if you understand an industry well enough to pick winning technologies, there’s no guarantee that the first mover will execute them best. It’s possible to be a great futurist at predicting future trends and yet completely fail at predicting the companies which will profit at exploiting them.

3: Expert stock-pickers won’t do better than you

There are at least four reasons why the average small-time amateur investor can get a better return than by delegating the job to a professional manager:

1: The more effort is spent on an actively managed portfolio, the more that manager has to be paid: whether it is a mutual fund or a personal broker, the more work the manager has to do, the more he’s going to charge you for it. Since he’s unlikely to do much better than the market, he’s just as likely to hurt your total returns as to help.

2: The more popular a fund becomes, the more difficult it is to outperform:

The more popular a fund, the larger its value. For example, Fidelity Contrafund (FCNTX) has a net worth of $80 billion. A manager of an $80B portfolio cannot bet on a few promising startups because investing billions into a small company will drive up the stock too much. He’s forced to invest in large S&P 500 corporations and dilute his strategy investing in many companies. The larger a fund becomes, the more its performance tracks the overall market.

3: A consequence of getting too popular is pressure to match the index: high returns require taking bigger risks. A small fund can afford to do that, but an $100B fund is too big to fail — there will be too many angry investors when $20 billion of shareholder value is wiped out. This forces fund managers to insure against underperforming their indexes and discourages risk taking.

4: Unlike hedge funds, mutual funds are required to disclose their holdings, so anyone can copy the strategy of a successful fund. While some funds might be unusually successful because of innovative strategies, investors can’t be sure of that until they have a proven track record, by which time the market has copied and diluted their advantage.

Thus, a common pattern is:

A managed fund outperforms the market
More and more people buy into the fund and copy its strategy
The fund becomes too big and stale to profit from its original values

Studies show that the overall effect after taking costs into account is that managed funds slightly underperform indexes. By investing on your own in cheap index funds, you can keep your costs low and match your target asset class.

4: High-performing investment categories are not legal unless you are already rich

So far, I’ve presented a pretty pessimistic view on the notion “beating the market.” If you can’t do better than the experts or actively trading on our own, is there any way to get superior returns?

There are investment vehicles which may outperform the market, but they are only available to accredited investors – those with over $1 million in assets or $200K in yearly income. You must be an accredited investor to invest in venture capital, hedge funds, angel investments, and other alternative investments such as financial instruments based on loans, legal settlements, and crowdfunded real estate.

Alternative investments might return above market returns and they can offset risks from investing in the market through because they are allowed to short the market, etc. Unfortunately, most western countries have decided that non-accredited investors lack sufficient financial sophistication to understand and take on the risks.

Small-time investors seeking superior returns do have a way to seek superior returns: you can become an entrepreneur by starting your own business or buying property. If that does not appeal to you, it’s best to resign yourself to buying in for the long run and getting rich slowly.

5: Sound investing is fundamentally about managing risks, not picking “hot stocks”

There is no particular stock, bond or industry which can predictably be counted on to return above-average returns. In other words, you’re likely to make just as much money investing in high-tech startups as plain old boring utility companies. However, if one looks at broad asset classes, one can see a certain pattern. (Asset classes are categories such as domestic vs international stocks, large vs. small companies, or value, growth, or income stocks.) Research shows that over the long run, all stock-based asset classes earn similar rates of returns.

There is no free lunch in investing. Higher returns come with with higher risks (year by year variability). Some asset classes (such as stocks) historically have higher returns than others (such as bonds), but usually with higher risk. An investment strategy should match your values and financial goals – not guarantee a particular rate of return. Given a particular tolerance for risk, your portfolio should maximize returns while minimizing variability.

A diversified portfolio (one which invests in securities of different kinds to minimize their correlation with each other) will give annual returns mostly consistent with the overall market, but with less variability. As a rule of thumb, no single security should be worth more than 5% of your portfolio.

In short: don’t stress too much about what you invest in – just don’t put your eggs in any one basket: spread your investments over many securities in different asset classes.

Below: my portfolio is diversified by market sector, asset class, and capitalization (not shown).

6: It doesn’t matter if you are up or down

Even experienced investors can get caught up in the emotional rollercoaster of markets: markets move up and down in unpredictable swings, and individual portfolios reflect that trend. On average, the entire stock-market gains 5-7% per year – that’s what you would earn if you picked stocks at random. When evaluating how your stock asset-class is performing, it is important to compare it to the stock-index rather than the absolute number. If the market is up 15% in a year, a 10% return is not actually that great. Vice versa, if you lost 10%, but the market crashed 15%, your portfolio might be OK. Similarly, other compare each of your other asset-classes to a relevant index.

Judge your performance by comparing it to the indexes of the asset classes that you are targeting: for example, a portfolio split between the S&P 500 and international equities should take the average of both when evaluating how well it performed. If you are keeping up with your benchmark index, consider yourself lucky — most investments underperform. If you are losing money when markets make a positive return, it may be time to change your strategy. Only if you consistently out-perform your target index can you conclude that you’ve picked a superior strategy.

Conclusions

Don’t try to pick “hot” stocks or time the market
Build a diversified portfolio by investing in individual stocks in diverse asset classes, or index funds which track the market
Minimize costs by avoiding managed funds, investing in low-cost ETFs, and trading infrequently
Buy for the long term: don’t sell your investments until you need the money
Live a frugal, minimalistic lifestyle so you have some money to invest!

mass luxury and capitalism: Vertu vs. Apple

Vertu is a luxury phone maker. They sell jewel-encrusted phones for $10,000 to $100,000.

Vertu is a successful company, but in both style and substance, the iPhone is probably the best phone you can buy. The vast majority of people who can afford a Vertu still choose to purchase an iPhone, presumably because they believe it is a better product.

The reason why reveals a deep truth about how a capitalist economy works.

In order for the iPhone to exist, consumers must spend hundreds of billions on the smartphone ecosystem, which then pays for the research and development of devices, applications, and accessories. Therefore, the iPhone can only exist if it is priced at a level that hundreds of millions of people can afford.

Vertu probably has sales of about $100 million – compared to $220 billion for Apple. It not possible for them to produce a substantially better or even comparable product given such a difference in R&D budgets.

Furthermore, Vertu only exists because Apple and Samsung created a supplier ecosystem which rapidly democratizes technological innovation. A Vertu’s hardware is almost as good as the latest iPhone or Samsung phone because the hardware ecosystem that the market leaders create is available to all participants. The same applies to the low-end of the market: you can get a substantially similar experience on a Vertu as you would on an iPhone or a $150 basic China-produced smartphone with last year’s hardware.

In a capitalist economy, entrepreneurs compete to direct capital to the creation of products which satisfy as many human values as possible. Given sufficient time for capital accumulation and technological innovation, capitalists create products that try to satisfy all values that can be satisfied by material means, and create substitute products to satisfy non-material values as well – think explosive action movies and pornography.

The larger the potential consumer base of a product, the more resources can be invested in creating and improving it. Therefore, a capitalist consumer economy tends to create affordable, mass-produced goods which cannot be substantially improved by higher-prices alternatives. Andy Warhol observed the result of this in his 1975 book “The Philosophy of Andy Warhol”:

What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.