Friday, April 19, 2002 Donald Luskin There's an important new book that every investor should read. First published as Luskin's Ahead of the Curve column for SmartMoney.com on April 19, 2002. THE FORCE OF FINANCE Reuven Brenner Texere: 2002 The Force of Finance is an important new book that should cause investors to tear themselves away from their usual obsession with recession, earnings season and the accounting scandal du jour. It's one of those books that come along only once or twice in a generation – one with the power to redefine the way we understand the rules of the game of global economic growth. The author of this remarkable book is Reuven Brenner, a professor of business at Montreal's McGill University. Brenner is an economist and an academic, yet he tells me he "despises academia and economists." That's because he has no time for the usual conception of economics as "the dismal science," defined by British economist Lionel Robbins as "the study of the use of scarce resources which have alternative uses." Instead, Brenner's economics is a joyful social science, based on his proposition that "Prosperity is the result of matching brains with capital and holding both sides accountable." The Force of Finance is a celebration of the ultimate un-scarce resource – brains: the unlimited creative power of human beings to build wealth. Brenner believes that the best brains from around the world will try to migrate to those countries and those industries where they can achieve their highest potential. For Brenner, that means they will seek the most highly developed and most open financial markets they can find, trying to match their brains with capital. He should know – born in Rumania in 1947 as the son of concentration camp survivors, Brenner moved his own brain first to Israel, and finally to Canada. For Brenner, America is at the top of the pyramid of global growth and global wealth because "The United States has created a society in which anyone with talent, energy, and the ability to organize has access to financial resources. Banks, venture capitalists, underwriters, and asset-management firms do not much care who your grandfather was or whether you dropped out of college. They only want to know if they can make money by backing you." With our capital markets beckoning and our relatively open immigration policies, America attracts the crème de la crème of the world's brains. The result is more than just material wealth. Brenner believes that as countries move closer to the American model of open capital markets they are able to harvest important social and institutional advantages, as well. The more developed and more active a country's capital market, the larger the percentage of total resource- allocation decisions that are being made not by elitist government planners, but by informed market participants who will risk their own fortunes on making the right decisions. Brenner says, "Mercantile interests are diverse, not dogmatic." That means that everyone has a stake in stable institutions, lots of new ideas get tried out, and bad decisions quickly get diversified away or corrected. What prevents every nation from imitating the American model of free financial markets? Brenner believes that ruling elites – not just monarchs, but too-powerful vested political and commercial interest, as well – know that "nothing disperses power more quickly than democratized capital markets – just as nothing threatens a company more than competitors with access to cheaper financing." Brenner shows that the elites use a bewildering variety of "mythologies, economic ones and financial ones in particular," to justify keeping capital markets unfree. And it is for their complicity in this myth-making that Brenner damns his fellow economists. What Brenner calls "the illusion of macroeconomics as a science" has given birth to a global industry that creates, interprets and debates meaningless statistics about economic activity. "Economists transformed a self-serving political idea (a benevolent big government) into a neutral-sounding scientific debate about numbers and statistical methods. Macroeconomics thus became an obscure theory that could be taught in dictatorial regimes as well as democratic ones." Even in the United States, perched at the very top of the pyramid, the smooth functioning of free financial markets is constantly endangered by governmental abuse of groundless economic myths. One of many examples offered by Brenner is the theory of Princeton economist Paul Krugman that a perpetual rate of inflation to 2% to 4% is beneficial. Brenner despairs, "Do not ask why. Even a yearly inflation rate of 2% doubles the price level in 35 years. Yet that is not the only bewildering idea that Krugman and other economists offer today." But economic myths are not the only culprits. Any dogma that disconnects brains from capital sets back the cause of prosperity. "The three big innovations that brought about the Renaissance in Europe – the printing press, the compass, and gunpowder – all originated in China centuries before. But when rigid Confucianism was imposed during the Ming and Manchu dynasties, Chinese inventiveness ceased." Brenner notes that for many Islamic nations, the decision to allow no separation of church and state has "resulted in accepting interpretations of the Koran as final arbiters on commercial and financial matters." Islamic law cripples open capital markets by prohibiting charging interest on loans, and forbidding any contract involving gharar – any risk, uncertainty or speculation. "Religion may offer a moral compass, but does not offer solutions to practical problems societies are facing, especially when their populations are exploding. Unfortunately stumbling on natural riches only makes matters worse…because those in power can spend more on military." And terrorism, I would add. In some sense the terrorist attacks of September 11 can be seen as a battle in a war between the top of the pyramid and the bottom, between the civilization with the most free financial markets, and the civilization with the least free. Perhaps it is more than a coincidence that the buildings destroyed that day were not only New York's tallest, but were called the World Trade Center. "World trade" is an apt symbol for the open capital markets that fundamentalist regimes have outlawed and vilified. In that light Brenner worries about the war on terrorism. "But what does `victory' mean? The answer I found was that enduring evidence of victory comes with the democratization of capital markets around the world." A very tall order, and one calling in the long run more on diplomatic skills than military force. But as the title of Brenner's book suggests, finance is itself a powerful force. The Force of Finance provides a template for how the architects of a new world order can allow capital markets and commercial institutions to create not only prosperity, but stability and freedom as well.
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