The Story of Money: The Core Concept of Investment

The Story of Money: Meeting Adam Smith

It is said about ‘the classics’, or classical literature that everyone has an opinion on them but nobody’s read them. In this decimilestone episode of the series, we meet the author of one such great classic work relevant to our subject. A Fertile Island No man is an island, it’s also said, and no great cultural and intellectual output emerges from a vacuum. Let’s explore the context and the background before we get to the person. In my parallel series on human achievement (tecc), I’ve traced the evolution of human intellectual progress from the earliest days. By the time we get to the 1700s, there arose in Scotland an effervescence of intellectual output which has been termed the Scottish Enlightenment which developed within the fertile soil of the wider British context of rapid innovation setting the stage for the industrial revolution in Britain shortly thereafter. The Enlightenment within Britain itself was part of a wider movement in Western Europe as a break from the medieval past (all of which I’ve been covering in the said other series with more to come.) It was into this milieu of extraordinary intellectual output that was born Adam Smith. Adam Smith in a sense needs no introduction. He’s widely regarded as the ‘father of economics’ or even the ‘father of capitalism’. (Although check out TecC 48 [https://ashstuart.substack.com/p//tecc48-seeking-symmetry-finding-balance-making-harmony] and TecC 49 [https://ashstuart.substack.com/p//tecc49-foreseeing-new-frontiers-integrating-novel-instruments-creating-unprecedented-value].) Smith is seen as having pioneered the idea of so-called ‘free-market capitalism’, and based on who you ask, unfettered economic activity and industrial expansion with profit-seeking as the sole motive, and with the State moving out of the way with no role to play. And of course such ideas are claimed to have been crystallized by him in his landmark book ‘The Inquiry into the Nature and Causes of the Wealth of Nations’, or simply ‘The Wealth of Nations’. But was he really all that and was that really his tenet, message and goal? Notions and Sentiments Much as some people may love to hate this Gordon-Gekko image of Smith, I have disappointing news for them - he was indeed a very different person than his popular caricature. He was first and foremost a moral philosopher mainly concerned about understanding and improving the human condition, in particular that of the less fortunate sections of society. This manifests in what might in fact be an even greater work of his, ‘The Theory of Moral Sentiments’ published much earlier, and so thought even by the author himself. Even though some of the notions of morality and similar values have changed in the two and a half centuries that have passed since, scholarly research and opinion have pointed out some ‘surprisingly modern’ treatment by Smith on these topics, such as, as per research, around concepts like mutual empathy, egalitarianism, individual sovereignty, and human dignity. An Inquiry in Earnest So his subsequent inquiry into economic questions that form the substance of his more famous work can be traced to stem from this deep concern for improving the human condition as just mentioned. Let’s take a few examples of this as emanating from that work. We saw in the previous episode his description of the notion of division of labor as underpinning (sorry, can’t help the pun) the new economic system that was emerging leading to the Industrial Revolution in Britain, an economic system others later, approvingly or disapprovingly, have called ‘capitalism’. In the episode on specialization I mentioned how the philosopher Karl Marx, perhaps the one person most opposed to the so-called ‘capitalism’, railed against specialization. Now guess what, in fact Adam Smith in his discussion of the division of labor expressed deep concerns on the same matter. Let’s next look at the other popular misnotion: that a ‘free market’ should be allowed to operate unfettered by the interference of the State. Adam Smith’s work evinced no such ideological position. Smith expressly insisted that the State had a very specific role in ensuring the good functioning of markets and the well-being of society thereof. As part of this, he explicitly called for State programmes, such as on-going access to public education, to help alleviate the sense of loss of dignity that can arise by being a small cog in a big industrial wheel. Yes, don’t take my word for it, he said it! And perhaps most strikingly, he looked upon wealthy merchants who then try to game the market system to their incumbent advantage - the fatcats as we may call them, with extreme scorn. (”...the mean rapacity and monopolizing spirit of the merchants and manufacturers...”) He spoke of their oligarchic tendencies to form cartels, to stifle new competition, to bend the State with tax preferences and protective tariffs, to suit their own interests... A more recent economist, or a few of them, have spoken about the need to “save Capitalism from the Capitalists”. While Smith wouldn’t have used such terms in his time, he was probably the first man (he wasn’t named ‘Adam’ for nothing!) to recognize and express the danger of such excessive concentration of wealth and power by people who rose within the system as posing the biggest threat to the system that made them! Ultimately, all these need to be taken in context, not just the ‘contemporary context’ I provided above, but for us looking back into the past and connecting it to the present, a wider evolutionary or historical context. Adam Smith in essence sought to debunk an older economic (and political) system that had existed into his lifetime. We may think our system is bad, and most of us would agree it’s not perfect (what is?) but to understand what we have, we must, as I’ll come back to, recognize how awful the system before it was. And it is in this light that we must look at what Adam Smith did: describe and help elevate an economic system that was, and despite everything remains, a huge improvement over what existed before. Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * TecC 06 - The First Great Acceleration: The Birth of Industry [https://ashstuart.substack.com/p/tech-06-the-first-great-acceleration-the-birth-of-industry-the-revolution-that-changed-everything] - The Revolution othat changed Everything * The Theory of Moral Sentiments, Adam Smith - Gutenberg [https://www.gutenberg.org/ebooks/67363] * An Inquiry into the Nature and Causes of the Wealth of Nations - Gutenberg [https://www.gutenberg.org/ebooks/3300] This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com [https://ashstuart.substack.com?utm_medium=podcast&utm_campaign=CTA_1]

The Story of Money: Division of Labor

Back in Episode 013 [https://ashstuart.substack.com/p//ecfin013-the-story-of-money-understanding-specialization] we looked at specialization, let’s now look at a very closely related concept. Just as in that episode, the fictional anchor for this episode is going to be the story already narrated in TecC 43 [https://ashstuart.substack.com/p//tecc43-making-work-art-making-art-work-engineering-excellence], where we saw how, after a disastrous start in a joint initiative, with everyone stepping on everyone else’s toes, our four fictional friends eventually manage to allocate each of themselves specific areas of focus and work things out. The Coordinates of Cooperation What they do can be explained either as specialization or division of labor, in fact it’s kinda both - it’s the division of labor that allows for specialization to take place. And in the specialization episode, we correspondingly focused on some of the more human elements of the phenomenon, given that specifically relates to one’s role, identity etc, here let’s look at a few other parameters. We can in fact look at division of labor as related to process more than the people per se. It’s the overall system of coordination, cooperation and indeed specialization. There are thus the questions of how the overall set of activities is broken up into discrete parts each of which can be handled separately from the others but in tandem, whether simultaneously or in sequence. Beyond this, there’s the question of how the coordination/cooperation is ensured or enforced. All this said, there has to be a certain amount of scale to justify division of labor: the requirement of making artisanal jam to be sold over a full week of an annual market event justified our fictional friends in the fictional story to apply these concepts. But if it was just a matter of preparing 3 jars of jams to gift a visiting aunt, it’s probably best done solo. (Hello aunt Margaret, what time are you arriving this weekend? And don’t worry I have a team of 12 people working on a small gift for you!) Pinning it Down The classic example of division of labor in economics literature is the famous one provided by Adam Smith in his landmark work on the subject: the pin factory. He contrasts a solitary worker with a specialized team of 10 workers. Having broken down the overall task of making a pin into 18 subtasks, such as drawing the wire, straightening it, cutting it, making it a pointy on one end, adding a head on the other and so on... The contrast Smith draws is the sole worker’s handful, about 20 pins a day to the ten-worker team’s around 48,000 pins in a day! The Division that Multiplies That’s roughly 4800 per worker, where applying division of labor has yielded an improvement of 2,400 X. We can appreciate some of the factors that make any such improvement possible. Apart from allowing each worker to become more dexterous in their task at focus, and avoiding the costs of code-switching both by way of cognitive load and the time lost in the transitions, this division of labor and the intense focus can facilitate the discovery of better techniques or even newer labor-saving tools, as Smith outlines. This way, as we delegate more and more of these subtasks to technology - new tools built specifically to handle them, we save ourselves of the drudge. So paradoxically division of labor itself might be helping us rid ourselves of the monotony of division of labor? There are other advantages too, it’s more viable to find a substitute worker or quickly train one for one particular task should the original worker not be available for some reason, since there is less of a learning curve. This of course entails lower disruption and downtime and thus increased overall productivity. Division of Labor exists everywhere in our modern world. For example, much of the music we are used to enjoying would be impossible - imagine your favorite rockstar hopping between the drums, the bass and singing mic + guitar all at once! Imagine how much more time and effort it would take to make the movies, fabricate the machines, build the buildings we are all used to seeing around us, if at all! In fact in the modern world, even the simplest device is the result of extensive division of labor. As the author Matt Ridley has said, nobody, no single individual, knows how to make a computer mouse! *** I mentioned Adam Smith given it’s sort of mandatory to do so when discussing this concept, but I haven’t introduced him in the series yet, the father of economics in a series relating to economics! I had originally planned to introduce the topic of division of labor alongside Adam Smith in the same episode, but then, that wouldn’t be division of labor, would it? So yes, we shall next meet the man himself, buckle up! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * Who knows how to make a computer mouse? - Matt Ridley [https://www.youtube.com/watch?v=DTLizne1uNw] This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com [https://ashstuart.substack.com?utm_medium=podcast&utm_campaign=CTA_1]

The Story of Money: Decoding Efficiency

I’ve discussed the concept of value creation in the past, both in Episode 004 [https://ashstuart.substack.com/p//ecfin004-the-story-of-money-on-the-worth-of-value-and-gain] of this series and elsewhere in my writing on here. Let’s go further. But first a quick, and of course efficient, detour to check on our fictional friends. Steve, Bryan, Brenda and Irene are sat around the garden table discussing the week’s matters. Bruno the dog and Iris the cat are of course... well you know them by now! Recently both Steve and Bryan have taken up a new business - in parallel: shirt-making, thanks to a surplus of cotton in their region. While they don’t say as much, they each want to do a better job than the other. So Brenda and Irene are like, how’s it going lads? Steve is like, well, I keep running out of stock, in this last cycle I made 10 shirts from the stock that came through at the beginning. Bryan is like, hmm, I got the same amount of stock too, I got 15 done. Something must be done. The next day Brenda and Irene walk into Steve’s workshop, followed by Bruno and Iris, and what do they see, tons of pieces of cloth strewn everywhere. He has more equipment than can be seen in Bryan’s workshop. Brenda is like, Steve, where are your manuals? Steve’s like, what manuals? Irene’s turn, and where are your accounts, how are you keeping track of how much stock is getting consumed. Steve’s look doesn’t get any less bewildered. Bruno the dog and Iris the cat walk out in disgust. Yardstick’s Yields So it’s obvious where we are going with this. And on the face of it, we all know what efficiency is: how well we get something out of what we put in -- there is some nuance with related terms such as effectiveness and efficacy but those are for another day. And while discussing value creation previously, I’ve formalized that general concept by way of the production equation: inputs + processing = output. Only, here, with efficiency, we are concerned with more consciously measuring the inputs and outputs with some degree of accuracy. This broader notion has been expressed in slight variants severally before, for example, by Lord Kelvin and much later, Peter Drucker. In my own paraphrasing to capture that essence: if you can’t measure what you’re doing, you do not know what you’re doing. (The variants of these famous figures having ‘manage’ or ‘improve’ in the second part.) Because quite simply, unless we know the baseline for today, how can we tell how we did tomorrow? As I trust I’ve demonstrated in this series so far, economics is about more than numbers and charts. Economics straddles science (including mathematics) and the social world - areas such as psychology and anthropology. It’s an attempt to apply mathematical rigor to such aspects of human behavior, which is why it gets tricky, and one may say, economics therefore ends up disappointing both the scientific types and the humanities types. Still, the concept and application of efficiency, which reflects this desire for mathematical vigor, is vital and fundamental to the pursuit of economics, with its ultimate aim of improving the human condition within our environment. Metrics and Optics But even before such a discipline as ‘economics’ was formally constituted, there had been efforts to understand and apply efficiency, albeit haphazardly or, as the economists might say, unscientifically. But in essence, all technological progress can be seen to be part of an endeavor to achieve better efficiency: writing [https://ashstuart.substack.com/p//tecc-16-outsourcing-the-mind-a-striking-impression-underscoring-an-underrated-invention-that-rewrote-the-rules-of-knowledge], printing [https://ashstuart.substack.com/p//tecc42-going-from-a-handful-rapidly-to-millions], even the wheel [https://ashstuart.substack.com/p//tecc-13-turning-point-the-axis-of-progress-the-paradox-of-finding-constancy-amid-motion-stability-amid-change]! (Yeah, I mean just try tugging any amounts of material on wooden logs like the Stone-Hengers did!) (I’ve demonstrated this in action in my series on innovation linked.) But efficiency isn’t everything. You may be justified to say that economics overemphasizes efficiency. Life is a lot more complex than that. Oftentimes in fact inefficiency is the best way or even the only viable way. Consider this: as you sit down to dinner at a nice restaurant on a first date, you can’t ask your date to fill out a form before you process the answers for compatibility and decide to order starters (Sandra, if you don’t mind paying particular attention to the hobbies, preferred holiday destination and especially the Myers-Briggs section on page 17 through 19, and then we can look at the menu...) So how do we know what areas are better off when we seek efficiency and what other areas need other priorities, or at least, what is the right balance between seeking efficiency or not, seeking to measure or not, seeking to be precise or let go? Economics, at this point, one might say, can by definition offer only part of the answer. Still, given the broader principles I’ve applied in my writing beyond just pure economic theory, I trust we have a better way of getting to such answers as relevant to each of us in our own lives. So stick along! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * TecC - A study of efficiency by way of exploring human progress and achievement [https://ashstuart.substack.com/t/tecc] This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com [https://ashstuart.substack.com?utm_medium=podcast&utm_campaign=CTA_1]

The Story of Money: The Dance of Supply and Demand

I’ve sort of touched upon this topic before, or at least skirted around it while discussing price [https://ashstuart.substack.com/p//ecfin003-the-story-of-money-the-enigma-of-price] and scarcity [https://ashstuart.substack.com/p//ecfin011-the-story-of-money-understanding-scarcity]. But today let’s look at supply and demand in their own right. Back in the first of those two episodes, we posed a question. At the townsquare market when Brenda and Irene each inquired on the price of a sack of grain, Steve and Bryan quoted different prices for the same quantity, 8 and 10 copper coins. But why the difference? Furthermore, the question can be broadened to beyond just the same item or quantity. Without fully answering the question back in that story, we considered a few factors at play, and as we intuitively know, supply and demand are a couple of them. The Ups and Downs While we don’t need a literal textbook definition of these two words, let’s poke them around a bit. Firstly, much of this question arises because of the aforementioned reality of scarcity - things are limited in supply. And then, different people want different amounts of different things. So obviously if more people want something than there is supply of it, the effort needed to satisfy that need gets greater - and that, is signaled by the figure we call price. And of course, in a functional market, if there is less demand for something, the price will correspondingly go down. It generally works in the other direction too. If a seller jacks up the price of some item of utility, it may dissuade people from buying it. And conversely: we are all familiar with those empty shelves in the supermarket for those heavily discounted items - usually perishable goods, like your favorite yogurt brand? The Balancing Game So in a sense this is about equilibrium, every good in the economy is in this game with every other and with people seeking the goods, and in aggregate add up to then confer upon each good a certain price - hence my insistence in that episode that price is essentially a filtered-down signal of the underlying economy. Thus in other words, it’s a reflection of human behavior in aggregate as well. How well the prices reflect the economy depends on how functional (some use the word ‘free’) the market is - how freely such signals can move without the distortion of forces such as subsidies and price controls - topics for another day. And there is a feedback mechanism built in to such a system, each purchase changes the supply, and the prices and purchases act as a feedback loop which further changes the picture, ad infinitum, again, all subject to how freely these dynamics are allowed to play out. Let’s take a simple example - without even money necessarily in the picture. Imagine in your town there is a park that’s getting popular with the townsfolk as a picnic spot. As more and more people decide to go to that park for their picnic, the experience for each group will start to degrade - it’s noisier, more crowded, less fun over all - that’s the price they’re paying, the feedback loop also consisting of the ‘gossip’ or general talk about how crowded the place is getting. And then someone finds another park not really used for picnics, some folk start to go there instead, it’s pristine, initially, and then... you know where this is going. A Delicate Dance As participants in the economy, we are used to the effects of supply and demand. We know, for example, that in the unlikely event of war in the Middle East, prices go up because everything needs energy to function. We know that housing prices are highest where there’s more demand. Even human capital is entwined with the supply-demand dynamic - wages depend on the availability of certain jobs, our skills etc. Ultimately, however, the point I’m making there is supply and demand are in fact everywhere in all aspects of our lives. Consider this fun story: the dance form of the tango developed at a time when there was huge immigration of male population into Argentina (from Italy) which meant very little supply of female contact for most of these young men, the only outlet being a faint chance to find a dance at the overcrowded-with-men weekend ball. So yes, men, it is said, practiced this intimate dance with other men all through the week just so they each could dance the tango well enough to impress and attract the attention of one of the women to dance with them! (So in fact it takes three to tango, right?) But yes, we can’t escape supply and demand - they are more than a graph with 2 lines crossing. But perhaps we can train ourselves to be aware of the dynamic, to spot the trends - that pristine, rarely picnicked-at park, make the best of it, dance the tango well enough! To take one last but more pertinent example, research has found that in recent decades, with the prevalence of social media and its myriad distractions, people’s attention span is starting to shrink quite severely, what with living in a trigger-happy, push-of-a-button, instantly-tweet-my-grievances world! In an era of augmented intelligence where we can offload many cognitive tasks to machines, there is one skill that will still remain key: the ability to pay attention without distraction, the ability to focus deeply, the ability to do deep work. Those who can retain or strengthen this one thing will be in high demand in an era of low supply of it, and these few will have a high price tag on themselves! Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * A Passion for Tango, David Turner * Tango - Album by Julio Iglesias * Carlos Gardel This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com [https://ashstuart.substack.com?utm_medium=podcast&utm_campaign=CTA_1]

The Story of Money: The Core Concept of Investment

Thank you for holding on for a whole week from the end of reading the last episode on delayed gratification, so you have my undiluted gratitude! In line with my promise to you when I ended that piece, let’s take that concept to its logical next step. The word investment conjures up some rather advanced images - of complex mathematics, overbearing financial advisers and glassy-facade banking institutions. The core of it is much simpler and more relatable than all that fancy stuff. Let’s also clear out the notion that investment = saving, it’s certainly not as passive as that. Investment is essentially the process of marshalling the other elements of economics we discussed in previous episodes - capital, the time value of money, opportunity cost, and especially risk and putting them to use, implementing, or as I previously said, crystallizing delayed gratification. Let’s see how all this adds up. The Vestment of Progress Let’s start with capital, Episode 005 [https://ashstuart.substack.com/p//ecfin005-the-story-of-money-is-capital-just-money] where I insisted that capital is not the same as money, and indeed in the episode on money, Episode 001 [https://ashstuart.substack.com/p//ecfin001-the-story-of-money-what-is-money-anyways] that money itself has no intrinsic value. Capital is anything, any resource, including human skills, that we put to productive use. In other words, investment is capital put to work! And the time value of money, Episode 007 [https://ashstuart.substack.com/p//ecfin007-the-story-of-money-time-and-its-relationship-with-money] comes into the picture because well, any investment takes time to bear fruit and we have to be confident that it’s worth that time we waited for it. Which then brings us to opportunity cost, Episode 009 [https://ashstuart.substack.com/p//ecfin009-the-story-of-money-what-is-opportunity-cost], for every investment involves decisions made, and for the investment to be viable, we have to assess each decision against the alternatives. And despite all that, the investment may not pay off. If you join the financial advice industry, for the first three months of your financial advisor internship, you’re supposed to chant every single day all day “Past performance is not indicative of future result”. Well, ok ok, it’s not quite so, but that’s the one they are trained to mention in every single communication with you without fail. (I suspect still that financial advice professionals won’t say that about themselves in an interview or a first date!) To get back on track, my point is of course about risk. Risk is perhaps the most important concept and component surrounding the whole story of investment. In fact it goes both ways, the entire industry of ‘investment banking’ can be said to be built on the core need to manage risk. But more on that angle another time. Divested Interests So let’s see where we would be without the idea of investment, without the activity of investing, and the connection to the previous episode. Let’s start perhaps with the more obvious ones, ones that are perhaps more conspicuous in our life, ones we more easily recognize as investments. Those roads, bridges, skyscrapers would never get built. (Manhattan would just be a very expensive swamp, an improvement, some would argue.) No skilled professionals, for without the investment of one’s childhood in education and training, no skilled work would be possible. (Your surgeon would essentially be a very confident guesser with a sharp stick!) No better tools or techniques. By extension, we wouldn’t have dedicated disciplines such as science and technology. (We’d have to carve our angry tweets on stone!) So yes, no cars, no homes to be owned after 30 years... (silver lining? No worries about mortgage payments either!) Going back to the very basics, last time I touched upon the idea of planting seeds in the ground and tending to them in the expectation of harvesting a crop a few months down the line. Investment thus is at the very heart of human endeavor indeed, it’s the sacrifice, it’s the effort, it’s the risk, it’s the decisions, such that one day in the future they may all bear fruit. Article written by Ash Stuart Images, video, voice narration and some footnotes generated by AI Nothing in this presentation constitutes as advice - financial, investment or other Further Reading & Reference * TecC 49 - Foreseeing New Frontiers, Integrating Novel Instruments, Creating Unprecedented Value [https://ashstuart.substack.com/p/tecc49-foreseeing-new-frontiers-integrating-novel-instruments-creating-unprecedented-value] This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com [https://ashstuart.substack.com?utm_medium=podcast&utm_campaign=CTA_1]