“The Ascent of Money” and “Black Swan”–two terrific books, which are (unkown to their authors) partly about alcoholism.
Review: The Ascent of Money: A Financial History of the World by Niall Ferguson and The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb
One of the greatest financial books (Ferguson’s) and one of the best books on philosophy and, indirectly, finance ever written (Taleb’s) would not be expected to be of interest to the addictionologist. However, I have long said that history cannot be understood without comprehending the idea of alcoholic egomania, which due to the resulting need to wield power over others has caused so many addicts to markedly affect history. This includes large chunks of financial history, as detailed in The Ascent of Money.
I’ve written elsewhere (see in particular the August 2007 issue of TAR) that financial manias are made more manic by the euphoric delusions of grandeur of the alcoholic and that much of the late, great real estate and financial mania was fueled by such addicts. I have hypothesized that this would prove true throughout history and, in addition, that it often “takes an addict” to create revolutionary change, for better or worse.
The brilliant historian Niall Ferguson details several such events in the history of money. On a positive note, it took two alcoholic 1700s clergymen, Robert Wallace and Alexander Webster, to turn the theory of life insurance and life annuities into practice. Wallace, a “hard drinker,” and Webster, whose nickname Bonum Magnum (about whom it was said to be “hardly in the power of liquor to affect Dr. Webster’s understanding or his limbs”), created the first fund into which premiums were contributed and out of which widows and orphans were paid on the death of the insured. Actuaries to this day “marvel at the precision with which Webster and Wallace did their calculations,” which required an accurate projection of the number of future beneficiaries and the funds needed for their support. Thus the first annuities were created by two alcoholics.
The first great modern property crash may have been exacerbated by the likes of the 2nd Duke of Buckingham in the 1840s. His ancestors had acquired a 67,000 acre empire over the preceding 125 years, which one would think have seemed adequate for an “extravagant” lifestyle spent on mistresses, illegitimate children and suing his father-in-law’s executors. One would have thought wrongly. His gross annual income of 72,000 pounds did not keep pace with his 109,000 pounds spent yearly and could no longer pay even the interest on the over 1 million pounds of debt. His “final folly” was something likely only an alcoholic would ever do: “In preparation for a much-sought-after visit by Queen Victoria and Prince Albert in January 1845, the Duke refurbished Stowe House [the family home in Buckinghamshire] from top to bottom.” It was so luxurious that Queen Victoria remarked, “I have no such splendour in either of my two palaces.” His greeters, which he hired at his (and his creditors) expense, included four hundred tenants lined up on horseback, “several hundred smartly dressed labourers, three brass bands and a special detachment of police brought in from London for the day.” To avoid complete ruin, his son, the Marquis of Chandos, wrested control of his fathers estates barely after he came of age and, “in August 1848, to the Duke’s horror, the entire contents of Stowe House were auctioned off. Divorced by his long-suffering, much-betrayed Scottish wife…the Duke was forced to move out of Stowe House into rented lodgings. He eked out his days at his London club…and incorrigibly [chased] actresses and other men’s wives.”
There are several other likely alcoholics included in Ferguson’s beautifully written book who helped create financial history, but it took a convicted murderer, womanizer and compulsive gambler, John Law, to not only single-handedly create “the first true boom and bust in asset prices. He may also be said to have caused, indirectly, the French Revolution by comprehensively blowing the best chance” for France to fix its finances. Law talked and charmed his way into the position of controller of the entire French financial system after one of his (as Doug French puts it in Early Speculative Bubbles) “partying” friends, the Duke of Orleans, assumed control of the French government after Louis XIV died. The nub of the story is his use of what is now euphemistically called “quantitative easing,” but more accurately called “printing money,” to reinflate the economy and, especially, the shares of the Mississippi Company of his creation. Unfortunately, the earnings from exploiting the mosquito-infested swamp of the Mississippi delta in which 80% of the early colonists died from starvation or disease couldn’t possibly equal the promised dividends. As The Economist magazine put it, “a vicious circle was created, in which a growing money supply was needed to bolster the share price of the Mississippi company and a rising share price was needed to maintain confidence in the system of paper [fiat] money.” When the scheme faltered, Law, resorted to a number of “rescue” packages echoed by those today in which governments purchase assets at greater than market prices. It was essentially a Ponzi scheme (not at all unlike that of today), which ultimately collapsed as all such schemes must. Before it collapsed, the almost assuredly alcoholic John Law had become the chief of all of France’s tax collections and the controller of the entire French national debt, the twenty-six mints that produced France’s coins, the colony of Louisiana, the Mississippi Company, the French fur trade with Canada and all of France’s trade with Africa, Asia and the East Indies. Among his vast holdings, he owned more than twelve country estates, several Louisiana plantations, a hotel, and a palace. The resulting inflation and imploding of the bubble he created, according to Ferguson, “set back France’s financial development, putting Frenchmen off paper money and stock markets for generations” and led to the royal bankruptcy that finally precipitated the French Revolution.
Nassim Nicholas Taleb’s The Black Swan is important to the addictionologist for a different reason: Taleb provides magnificent support for the idea that we can’t predict events, because models don’t match reality, much of life is driven by luck and we cannot know which of the countless initial conditions is important and relevant to determining future events. Therefore, we can’t predict rare events that have a severe impact, or negative Black Swans, and should instead focus on protecting ourselves from and minimizing the negative effects of such events. This has enormous ramifications when dealing with addicts.
Taleb’s key points are that history (and life) is driven by unpredictable and rare events having huge consequences, and that almost nothing of significance in finance and economics (and life) has been predicted, including wars, stock market collapses and inventions. The bell curve, which most statisticians worship, dramatically understates the likelihood and impact of severe socio-political-economic-human events due to the fact that probability in real life can’t be modeled in this way. If a turkey looks at the past to predict the future, it thinks that being fed by the nice farmer for 1,000 days means that life is good and safe, when in fact a Black Swan event—one that is rare, unpredictable (from the standpoint of the turkey) and carries a big impact—is just about to strike. We can’t protect ourselves from everything, but Taleb gives us an out: we can sometimes predict when risks of a Black Swan are inordinately high and do what we can to protect ourselves from these “Grey” Swans. While Taleb isn’t likely aware of what I have often called the tornado-like effect of practicing alcohol and other-drug addicts, the idea can be easily extrapolated and provides further evidence for the idea that because we can’t predict how destructive a practicing addict may become, or when, we should instead do everything possible to reduce the risks such addicts create. If they are responsible for 80% of criminal and unethical behaviors, we can, by identifying the alcoholics nearby, arguably reduce the odds of a Black Swan blindsiding us by as much as 80%. We will never spot every one, but at least we can do a lot to protect ourselves from becoming yet another victim. His work by inference supports the idea that should take the focus off trying to predict what the addict might do and instead focus on protecting ourselves.
The Black Swan, which meshes together philosophy, finance, statistics, economics, psychology, chaos theory and sociology, is at times a tough read. Taleb is often sarcastic and the reader may often wonder where he’s heading. However, it’s a magnificent book, which will likely change the way you view the world. As one reviewer put it, it’s a positive Black Swan.