The Clout of CapitalFriday, April 19, 2002Donald
LuskinThere'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 FINANCEReuven
BrennerTexere: 2002The 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
usualconception of economics as "the dismal science," defined by
Britisheconomist Lionel Robbins as "the study of the use of scarce
resources which have alternative uses." Instead, Brenner's economics is
ajoyful 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
beingsto 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 asociety 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 theworld'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 acountry'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." Thatmeans 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 quicklythan
democratized capital markets just as nothing threatens acompany
more than competitors with access to cheaper financing."Brenner
shows that the elites use a bewildering variety of "mythologies, economic
ones and financial ones inparticular," 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 asa 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 ayearly 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.
