Socrates and the Greater Fool Theory

The greater fool is an economic theory akin to riding the wave. 

Survivor investing.

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.  

What the F*@# is Federalism!?

PART I: THE FEDERALIST PARTY

The Federalists as a political party did not really began to take shape until disputes arose. One of the most famous disputes led to a Supreme Court decision, Marbury v. Madison that was based on the reasoning in Federalist No. 78, authored by Hamilton. Both Hamilton and Jefferson had positions in George Washington’s Cabinet, Hamilton as Treasurer and Jefferson as Secretary of State.

But even before the parties began to take place, there was an important dispute between Jefferson and Hamilton in the Cabinet. That dispute was over the First National Bank, and it continued for many years, eventually becoming another famous early Supreme Court decision, McCulloch v. Maryland.

Chief Justice John Marshall authored both the Marbury v. Madison and McCulloch v. Maryland opinions. The Supreme Court was just as political in the early 1800’s as it was today, and Marshall’s governmental philosophy was very much in line with the Federalists. Prior to being appointed the Chief Justice, he was the Secretary of State in the Federalist John Adam’s Administration.

The National Bank controversy started brewing in Washington’s Cabinet. He asked both Jefferson and Hamilton to write opinions on whether it was Constitutional to establish a National Bank. Jefferson, a lifelong debtor, felt that it was not, and that if the Federal Government were to charter a National Bank it would be used to violate the autonomy of the states. Hamilton, from a wealthy family of merchants and bankers, thought it was clearly constitutional under the Commerce Clause combined with the Necessary and Proper Clause. Their dispute dove deep into the semantics of necessary verses necessity, but eventually Washington sided with Hamilton and a National Bank was chartered.

That charter eventually expired, but the War of 1812 brought caused Madison to reconsider Jefferson’s opinion and the Second National Bank was chartered. Maryland was not happy about it and tried to tax the bank for operating within its borders. That led to the case of McCulloch v. Maryland. Of course Marshall, a Federalist, had no problem finding the Second National Bank to be constitutional under Congress’s Commerce power coupled with the Necessary and Proper Clause. Federalist wanted a strong centralized national government.

And part of having a strong centralized national government is having a powerful Supreme Court to make final decisions. That is where Marbury v. Madison comes into play. Right before Adams turned over the presidency to Jefferson, he appointed a whole bunch of Federalist Judges, with the help of the Federalist Congress, of course. These so called “midnight appointments” under the Judiciary Act were signed by then Secretary of State John Marshall. Marshall sent his brother to deliver the appointments, and unfortunately one that did not get delivered was to Marbury.

Jefferson ordered his Secretary of State, Madison, not to deliver the appointment, and Marbury sued. Of course when now Chief Justice Marshall got the case, he had to rely on some tricky sophistry to get his way with those states’ rights Jeffersonian Democrat-Republicans. He ended up ruling that the Judiciary Act was unconstitutional, but in doing so, he used the reasoning in Hamilton’s Federalist No. 78 to increase his Supreme Court’s Constitutional arsenal and create the power of Judicial Review.

But perhaps even more noteworthy, the disputes between the Federalists and the Democrat-Republicans transcended politics and law. The disputes literally became a matter of life and death with Aaron Burr shot and killed Hamilton in a duel.

But the most important take away from all of this is: politics was as bad then, perhaps even worse, than it is today. And the other take away is: Federalists wanted a strong centralized government to help the creditors collect money from the debtors. States, especially southern farming states, were more prone to protect their citizens from the unscrupulous east coast bankers and merchants. The federal government was a tool used by these Federalists to get richer.

Today, it seems to be just the opposite. State governments argue for deregulation to help the rich get richer, while the federal government enacts programs like Social Security and Consumer Protection to help the poor debtors. How did this switch happen and how did Federalism come to mean states rights? To answer this question we must continue to trace the evolution of political parties and special interests.

What the F*@# is Federalism!?

INTRODUCTION

My fiancée, after graduating Law School and doing pretty well in American Legal History, went back to meet with our professor. Her primary question was: What the F*@# is Federalism?

This question has been elusive since the founding, and the truth is that Federalism means is many different things and continues to evolve with time.

The best place to start is with the Founding Fathers. First, it is important to distinguish between the Framers and the Founders. The Framers “framed” our Constitution. The Founders “founded” the United States of America. Thomas Jefferson was a Founder, but not a Framer. He did write the Declaration of Independence, but he had no part in drafting the Constitution.

The idea of a Constitution was not new. The United Kingdom has an Unwritten Constitution. The Greek City States had separate Constitutions written by Xenophon, Aristotle, or his students. But perhaps most important, ten out of thirteen States already had their own State Constitutions by 1776.

Prior to ratification of the United States Constitution, there were the Articles of Confederation. Ironically, under the terms of the Articles of Confederation, the United States Constitution was an illegal document. Nevertheless, it came into being, and the changes it made to the structure of government in the United States are still being felt today. The debate over the advantages and disadvantages of the United States Constitution largely took place in public, and we have a wonderful historical record of this debate encapsulated in the now famous Federalist Papers.

The Federalist Papers were written by John Jay, James Madison, and Alexander Hamilton. While they surely did not agree on everything (especially Hamilton and Madison), they all agreed that the Articles of Confederation were inadequate and that the United States Constitution would better protect the well-being of these thirteen newly formed states. Those who supported the United States Constitution became known as the Federalists.

On the other side of the debate, the Anti-Federalists argued that the United States Constitution was dangerous because of centralized power. They viewed centralized power as returning back to a British mode of government, and considering the causes and consequences of the Revolutionary War in terms of money and people, they had a legitimate concern.

It is clear today that the Federalists won this debate. Nevertheless, Federalism does not mean the same thing today that it meant then. And it is important to trace the evolution of political parties and special interests in order to understand how this change took place and what it means for our country today.

Ross Van Dusen: My get rich slowly plan

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