A couple weeks ago, Tadas Viskanta of Abnormal Returns ran a series of links to posts he described as “criminally overlooked.” It was a great idea as it gave new life to older posts that may have been overlooked at the time they were written, but that still have much to offer to a new audience or second-time readers.
It occurred to me that there are also many books on economics and finance that, for some reason or another, have been overlooked by contemporary readers. With that in mind, I thought it would be worthwhile to offer a few of my favorite books that I feel deserve more attention:
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
Written in 1873 by British financier and writer, Walter Bagehot, Lombard Street offers timeless insights into the role of banking and finance in modern commerce. It is unfortunate that the book was not more often revisited during and after the financial crisis in 2008 because the lessons the book teaches would have been very useful.
Here’s Bagehot on credit:
“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone: but what we have requires no proof.”
“The natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in devising new schemes for the employment of redundant capital. It was about the year 1688 that the word stockjobber was first heard in London.”
And, finally, on the futility of bailouts:
“If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them. The cardinal maxim is, that any aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank.”
Originally published in 1908, Fifty Years in Wall Street is a collection of the wisdom and experiences of Henry Clews who, in the mid-19th century, emigrated from England to the United States to work in finance. Over his career, Clews was instrumental in many landmark events, among them helping to sell government bonds to finance the Civil War, and also as an adviser to President Grant. Clews also had front-row seats to many of the booms and busts that seem to have characterized the post-war United States.
Here’s Clews on the economic necessity of recessions:
“These periods of the breaking-down of unsound enterprises and of the weeding out of insolvent debtors and of liquidation of bad debts can be never be wholly averted, nor is it desirable that they should, for they are essential to the maintenance of a sound and wholesome condition of business.”
On the importance of bank lending during a financial crisis:
“In every panic very much depends upon the the prudence and self-control of the money lenders. If they lose their heads and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue; if they accommodate to their fullest ability the larger and reasonably safe class of borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within legitimate bounds. Everything depends upon rashness behind held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks.”
Written in 1992 by former Wall Street Journal editor, the late Robert Bartley, The Seven Fat Years is dated in its specific examples, but not in its wisdom. Similar to Wanniski (the two were close friends), Bartley ascribes the economic success of the economy and the stock market during the 1980s to a return to classical economic policy such as a reduced tax burden, a focus on taming inflation, and reducing the regulatory burden on the economy. The topics on which Mr. Bartley touched were many, but they still have application today.
Here’s Bartley on the role of floating exchange rates on stock market and economic volatility, which seems relevant today:
“Just as Irving Fisher conceived an inflation premium as part of the interest rate, in today’s world I suspect there is an exchange-rate premium as well, incorporating the risks of a floating dollar in an integrated world economy…The biggest cost, though, is the rise of protectionism around the world. When exchange-rate swings can open and close factories, companies and their workers naturally look for ways to insulate themselves from these seemingly arbitrary shocks. Import protection, as well as ‘beggar-thy-neighbor’ devaluations, were hallmarks of the Great Depression, also singularly an international event. World trade imploded, and prosperity with it.”
And on the cost-of-capital effect of debt subsidization:
“The leverage preoccupation has not, however, led to any serious attempts to level the playing field between how equity is taxed and how debt is taxed. Bonds, whether junk or investment grade, have an important advantage over stocks. Under the U.S. tax code, corporations can deduct interest paid to bondholders before calculating the corporate tax, but dividends paid to shareholders are not deductible…It does mean that debt is a cheaper source of capital than equity, a point to be pondered every time you hear talk about ‘excessive debt.'”
Written in 1978 by former Wall Street Journal writer, Jude Wanniski, The Way the World Worksis considered by many to be the gospel of supply-side economics which became prevalent during the Reagan Administration and is credited with bringing about a return to economic growth after the stagflation of the 1970s. The ideas presented in the book are not revolutionary; in many ways, The Way the World Works is simply a recasting of classical economic ideas such as Say’s Law, the gold standard, the importance of capital formation, and the primacy of the entrepreneur in economic growth.
Here’s Wanniski on the various forms of capital:
“Capital is the wealth available to the global electorate for the production of goods and services. Capital exists in two forms, physical and intellectual. Physical capital includes all of the planet’s natural resources, animal, vegetable and mineral, including the bone and sinew of mankind. This form of capital is fixed, broadly speaking, in the sense that matter cannot be created or destroyed…[I]ntellectual capital is…for all practical purposes of limitless potential. Intellectual capital arranges the fixed capital stock in a way that produces net benefits to the global electorate.”
On the stock market as the collective wisdom of countless individuals:
“The market is the most accurately programmed computer on the planet, the closest expression of the mind of the electorate itself. It places a value on each company within it, based on its calculation of that company’s future income streams.”
And, finally, on why economic models are worthless:
“Why is it that economics can build elegant, mathematical edifices atop a foundation of illusion? The simple answer is that they examine the world a piece at a time in trying to fathom how it works when put together.”
Here is a collection of essays on economic development and foreign aid by developmental economist, Peter Bauer. Bauer contributed much to the field of economics during his long career, but I suspect his views against population control and his critical assessment of foreign aid denied him the spotlight his work deserved.
Here’s Bauer on the myth that rapid population growth has been a negative force economically:
“There is ample evidence that rapid population growth has certainly not inhibited economic progress in either the West or the contemporary Third World. The population of the Western world has more than quadrupled since the middle of the eighteenth century. Real income per head is estimated to have increased five-fold at least. Much of the increase in incomes took place when population increased as fast as in most contemporary less developed world, or even faster.”
And here’s Bauer on the economic implications of the experiment that was the “free port” of Hong Kong, a tiny island with scarcely any natural resources:
“The decisive role in economic life of personal aptitudes and motivations, social mores, and of appropriate political arrangements is the outstanding lesson of Hong Kong. Other countries also have had access to outside markets and supplies, without producing such an economic success story. Physical or financial resources are much less important, or even insignificant, compared to personal and social factors and appropriate political arrangements, especially firm but limited government.”
If you have any suggestions for this list, please email me or send me a link to your own list.
Now here’s what I’ve been reading lately:
Deconstructing the investment career of Peter Lynch. – Daniel Sotiroff
My investing mentors. – Michael Batnick
Misconceptions about diversification. – Ben Carlson
An introduction to factor investing, part 2. – Isaac Presley
A vague sense of returns. – Tadas Viskanta