The greater fool is an economic theory akin to riding the wave.
Survivor vs. Value vs. Contrarian.
Survivor = Speculative Bubbles.
Value = Long Term Stability and Growth. Finding outstanding company at sensible price.
Contrarian = Scavenger.
Value and Contrarian require discounting.
In my opinion the greater fool theory can be much deeper. The greater fool theory in an epistemological sense goes way beyond economics. Let me try and explain.
Behavioral psychology and epistemology. What I think vs. what I know. What people think vs. what people know. People as a whole or as a group that is part of the whole cannot know anything without the forms (Plato's) and agreement and conversation. What individuals think can and must change for a group of individuals "know."
Knowledge is elusive and has its limits.
The ship captain that thinks he/she knows when he/she really does not know is eventually going to wreck the ship carrying the whole.
To bring this into the current political sense, we cannot help but to think free market capitalism vs. socialistic government controls that restrict free trade.
One can't help but think, when looking at the fat man standing next to the thin man, that the fat one has taken advantage of the thin.
So is it liberal/socialist policies that make one thin, or is it free-market capitalism that does so? And depending on your political perspective, you would come to opposite conclusions.
So ultimately we are asking what sort of government is best? And does that answer depend on what group we are categorizing together as a whole or as a part of a whole? Political philosophers have been debating this, in my opinion, since around 500 BCE, the time of Socrates.
And before we can make decisions concerning the whole ship, we must first make decisions about who we are as individuals.
Blank slate environmentalism (not green hippies, but in the sense that we are shaped by our environments and societies and upbringing) vs. some pre-determined universal, so imagined genetic advantage of some over others. And if the latter, we must consider advantage for what? Well I think the answer is advantage to get fatter than the thin man (what is fat, what is value, it seems that it must be subjective).
The government does and always has had a say in things. Not just what part of the free market to help, but what part of the free market to restrict or shut down. Moreover, the government, particularly through use of the law defines what property rights are in the first place, and perhaps more important, what rights are in the first place.
But we have a government of men (and women)... So that brings us to the question of whether the law shapes society or society shapes the law.
The answer is: a little bit of both, just the same easy cop out answer as the blank slate question.
But we cannot help going back to epistemology and the Socratic image of the ship captain and the different types of individuals. Epistemology is of Greek origins and essentially refers to the study of knowledge with an emphasis on its limits. The ship captain image, already alluded to, is this:
One kind of person is a person who does not know. You may be a person who does not know how to be a ship captain. Then there is one that does know. What I said about you may be wrong. I do know some individuals that do know how how to sail and some that possibly know how to be a ship captain. But of those that know, for any specific category of knowledge, are usually less than those that do not. And then still we need Plato's forms to define the categories. So there are 2 categories I want to make clear so far: (1) those that do not know and (2) those that do.
Now we pull thinking in. (3) those that think they know when they do not. And perhaps even (4) those that think they do not know when they in fact do know. 3 seems by far more harmful than 4. And 2 seems more helpful than 1. That only leaves the question of where 1 falls compared to 4...
The greater fool theory posits that category 2 thinks that there will always be a category 3 in the future and thus wants to take advantage of category 3.
Contrarian investing posits that category 2 thinks that there has always been a category 4 and they want to take advantage of category 4.
Value investing posits that everyone eventually learns the truth and becomes category 2 thus it is safest to not take advantage of other categories else you might discover you have been taken advantage of. Nevertheless, unless everyone is actually a category 2, this perspective still leaves one vulnerable to be taken advantage of.
In my opinion, the best perspective is to know that you do not know and you must try hard not to think you know things you do not. That is what Socrates would have demanded, and recognition of the limits of knowledge is a core component of epistemology. If great is also good, then the greater fool is also a good fool. And a good fool does not tell others what to think or believe, instead he lets each figure it out for themselves.
America was built by the greater fool in many ways. First, our constitutional freedoms let us believe what we want and say what we want.
Next, our government has always been involved in propping up some activities while putting down others. From land grants to state sponsored monopolies to unfettered access to incorporate and tax breaks and outright prohibitions.
This is no completely free market and there never has been one. And even if we could have one, I do not know if it would be good for the whole, even if some groups think it would.
The greater fool is one the believes in possibilities. The notion of an American Dream would never have been created without the fact the individuals love to believe in possibilities. The American Dream will crash and burn if people cease to believe in possibilities.
From this perspective, it becomes very difficult to differentiate value investing from the greater fool theory. Even the value investors believe somethings are possible.
If you argue the difference boils down to discounting, well then I would say you are discounting social psychology and the role that public opinion, or what the greater fool theorist thinks is public opinion, controls or discounts the ultimate decision of what bubbles are rising and how fast.
Know value. But how? That is the problem. The captain is valuable to the ship.
What is valuable to you, money, gold, silver? If you want to make yourself fat, or rich in material possessions, you cannot help but speculate. But could there be something else beyond that. Something more spiritual perhaps. Something more true. Does it matter what the many think, or should it only matter what category 2 thinks?
I think we should work hard to make everyone learn to be category 2 and not know anything but realize and believe in the possibility that we can all one day agree on what is truly worth valuing. Only at that time, and once we all agree on the forms, or the boundaries to that category, whatever we may decide to call it, will it be possible to stop some individuals from taking advantage of others. And we cannot forget we need different skill sets, different parts doing different things to make the whole more full, so that when the whole realizes there is an infinitely expanding universe or whole some other part of that bigger whole does not reduce us to nothingness and these conversations continue to be something to value.