Thursday, August 14, 2014

Innovation in Higher Ed, 1680 Edition

Does anybody read Bagehot's Lombard Street any more? You totally should, it's full of good stuff. It's baffling to me, as a sometime teacher of History of Economic Thought, that most of the textbooks and anthologies don't mention him at all. Anyway, here he's quoting Macaulay:
During the interval between the Restoration and the  Revolution the riches of the nation had been rapidly increasing. Thousands of busy men found every Christmas that, after the expenses of  the year's housekeeping had been defrayed out of the year's income, a surplus remained ; and how that surplus was to be employed was a question of some difficulty. In … the seventeenth century, a lawyer, a physician, a retired merchant, who had saved some thousands, and who wished to place them safely and profitably, was often greatly embarrassed. … Many, too, wished to put their money where they could find it at an hour's notice, and looked about for some species of property which could be more readily transferred than a house or a field. A capitalist might lend … on personal security : but, if he did so, he ran a great risk of losing interest and principal. There were a few joint-stock companies, among which the East India Company held the foremost place : but the demand for the stock of such companies was far greater than the supply. … So great was that difficulty that the practice of hoarding was common. We are told that the father  of Pope, the poet, who retired from business in the City about the time of the Revolution, carried to a retreat in the country a strong-box containing near twenty thousand pounds, and took out from time to time what was required for household expenses... 
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 stock-jobber was first heard London. In the short space of four years a crowd of companies, every one of which confidently held out to subscribers the hope of immense gains, sprang into existence… There was a Tapestry Company, which would soon furnish pretty hangings for all the parlors of the middle class and for all the bedchambers of the higher. There was a Copper Company, which proposed to explore the mines of England, and held out a hope that they would prove not less valuable than those of Potosi. There was a Diving Company, which undertook to bring up precious effects from shipwrecked vessels, and which announced that it had laid in a stock of wonderful machines resembling complete suits of armor. In front of the helmet was a huge glass eye like that of Polyphemus ; and out of the crest went a pipe through which the air was to be admitted. … There was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the Royal Academies Company. In a pompous advertisement it was announced that the directors of the Royal Academies Company had engaged the best masters in every branch of knowledge, and were about to issue twenty thousand tickets at twenty shillings each. There was to be a lottery : two thousand prizes were to be drawn; and the fortunate holders of the prizes were to be taught, at the charge of the Company, Latin, Greek, Hebrew, French, Spanish, conic sections, trigonometry, heraldry, japanning, fortification, book-keeping, and the art of playing the theorbo.
Many of Macaulay's examples, which I've left out here, are familiar, thanks to Charles Mackay and more recent historians of financial folly. (Including everyone's favorite, the company that raised funds "for an Undertaking which in due time shall be revealed.") The line about Pope is also familiar, at least to reader of The General Theory: Keynes cites it as an illustration of the position of the wealth-holder in a world where the rentier had been successfully euthanized. But I, at least, had never realized that the diving suit was a product of the South Sea bubble. And I'd never heard of this spiritual ancestor of Chris Whittle and Michelle Rhee.

It would be interesting to learn more about the claims that were made for this company, and what happened to it. Alas, Google is no help. Although, "Royal Academies Company" turns out to be a weirdly popular phrase among the Markov-chain text generators that populate fake spam blogs. (Seriously, guys, this is poetry.) We can only hope that today's enterprises that promise to give gentlemen a liberal education on low terms  (or at least an education in japanning and/or ski area management) will vanish as ignominiously.


  1. Coincidently, I came across these two pieces which argue hedge funds are scams.

    "This paper found that investors in hedge funds received about the same investment return as holding Treasuries between 1980 and 2008, and much less than if they has (sic) just bought stocks."

    "Be careful out there people - whether you're trading stocks or fighting land wars in Asia, the race may be to the swift, the battle to the strong, but long term survival goes to he who identifies stop loss points ahead of time and sticks to them."

    1. The goal of investing in hedge funds is not to make money; those who invest almost definitionally have more money than they can spend.

      The goal of investing in hedge funds is to combine the two mandates of the wealthy: to save and be abstemious (because the morality of wealth is the morality of misers, ineluctably), and to consume in a way that marks you out from the common run of men.

      I maintain that we could break the hold of the wealthy over the country in a generation if only we convinced them to live like the aristocrats in Downton Abbey, because the problem with r>g is not that certain people have more money, it is that the rich save more of it than the poor.

    2. Higher inflation would help erode it.

      Speak of the devil, a Democrat financier and Republican economist worry about the euthanasia of the rentier and the reach for yield:

      "Whatever the reason, the low yields on Treasury bonds have led to reaching for yield in many ways and in very large magnitudes. Again this needn't mean that the asset prices are excessive, but the combination of their dramatic increase in price, the low volatility and the reaching for yield by investors and lenders suggest that the risk of excesses and the consequent instability have increased substantially. And if there are excesses, they represent wide-ranging systemic risks that go beyond the banking system.

      There are many potential examples of heightened risks. For one, if hedge funds hold excessively priced assets that at some point start to adjust, there could be contagion and a snowballing effect, especially given the crowded trades that are common among hedge funds. That could affect broader markets and the economy more generally."

      via Dean Baker:

      "Had these men written a similar column in 2004 warning about the housing bubble (as some of us were desperately trying to do at the time) it undoubtedly would have received enormous attention in both the policy and financial community. Both men were considered the pillars of economic wisdom for their respective parties. Feldstein served as head of the Council of Economic Advisers under President Reagan and had trained most of the other leading lights of conservative economics. Rubin has served as Treasury Secretary under President Clinton and had advanced the careers of figures like Larry Summers and Timothy Geithner."

    3. Daniel Davies' blog is back online? Happy day!

      I don't think he is saying that hedge funds are a scam, though. in fact. It seems to me his point is close to the opposite -- that some popular arguments that hedge funds are scams, would wrongly apply to non-scam funds as well.

    4. You're probably right and I misinterpreted his post. The following may be partly why the archive is available again - he's retiring to travel:

      I interpreted him as saying some talented managers could do well if they were smart about it, while Smith was saying on average hedge funds don't do well.

      I was just interpreting it as another sign of the euthanasia of the rentier. Hedge funds will turn your money into more money some of which you can invest in education entrepeneurs.

      Just as the increased capital share cause returns to shrink for some, hedge funds promise higher returns. During the housing bubble, mortgage backed securities were rated as AAA so people moved money from FDIC-protected banking into shadow banking for higher returns. Bitcoin promises to protect your hard-earned cash from dilution by the government:

      People worry about the end of banking. Like you've said, if credit is cheap why do we need liquidity specialists?

    5. The following may be partly why the archive is available again - he's retiring to travel

      Oh hey! good for him.

  2. It would be interesting to learn more about the claims that were made for this company, and what happened to it.

    Steven Shapin is a goto guy with multiple books on 17th century gentleman's science.

    Bob McManus

  3. Diving bells were in use at the time, and in fact before:

    1. OK. But the passage seems to describe an articulated suit.