Most people who make investment decisions for themselves or for
business probably have technical investment skills like the ability to
read balance sheets or calculate net present values. But developing an
investment strategy requires a broader perspective, such as the ability
to distinguish between fundamental and incremental change. Using that
example, I would like to show how the history of ancient business can
usefully contribute to such challenges.
My interest in ancient business did not begin as a quest for
investment strategies. As manager of a small manufacturing and
distribution company, I was stomping around my office late one night,
frustrated with our antiquated business practices. I heard myself
mutter, “this place is run like a Roman blacksmith shop!” I stopped.
Did they even have any blacksmith shops in ancient Rome, I wondered?
How did they run, and what did they do? In fact, how did business, to
which billions of us now devote our working lives, even begin, and what
are the important differences between ancient businesses like Roman
blacksmith shops and the computerized, outsourced, internet-linked,
machine-based businesses of today? Such questions led to The Origins of Business, Money, and Markets.
Satisfying curiosity is fun, but knowledge of history has practical
functions as well. Often, the easiest way to understand complex
phenomena like business is to watch their development unfurl over time.
The earliest phases of development often display its driving forces
most clearly, thus constituting a relatively simple model of what may
now be something of bewildering complexity.
In the back of my mind, then, I hoped that by learning about ancient
business and what affected its standing and profitability, I might gain
insight into investment strategies applicable today. As a wise old man
once said, if you want to know where the train is going, look at the
tracks.
In modern life we face an endless succession of changes, many of
which appear dramatic, or are claimed to be so. Important investment
and policy decisions turn on the question of just how fundamental a
change may be. For business, a fundamental change is one that disrupts
existing practices in major ways, often hard to foresee. A leading
modern example would be the Industrial Revolution. Incremental changes
have consequences too, but that’s just life; they do not change the
nature, role, or operations of business, and they have a more limited,
more predictable impact. Distinguishing between one type and the other
is not easy, but has major investment implications.
While change came much more slowly to the ancient world than it does
today, there are some interesting examples of the difference between
fundamental and incremental change. For instance, the coming of the
Iron Age around 1000 BC, a development of immense political importance,
would seem to have fundamentally changed business as well. After all,
the Iron Age led to gigantic empires in the Middle East—the Assyrian,
Babylonian, and Persian—as it dramatically undercut the previous Bronze
Age cost of tools, armor and weaponry. A Bronze Age cooking tripod was
worth three women or twelve oxen to Achilles, but iron tripods
performing the same function cost a small fraction of that.
On closer observation, however, iron technology changed business very
little. Yes, blacksmiths came into their own, and yes, iron tools made
farming more productive. But the Iron Age did not noticeably improve
the marginal role of business in the economies of the Middle East,
change business practices, or lead to disruptive new industries.
Business played no different or larger role in the economies of the
Assyrian, Babylonian, and Persian Empires than it had in the Sumerian
and Egyptian societies that were the first civilizations 2000 years
earlier.
By contrast, the second great change—the invention of
coinage—dramatically altered the role and practice of business in the
Greek world. Coins were invented late in the 7th century BC,
when in order to pay Greek mercenaries the Anatolian kingdom of Lydia
began minting pure gold coins in a size equal to a year’s pay. As the
Greeks learned of this innovation, they began issuing their own coins.
Over the course of the 6th century BC, these became smaller
and more useful as a medium of exchange in their markets. Coins vastly
increased Greek purchasing power.
This revolutionized the nature and role of business. As trade in
coin replaced barter, economic exchanges became much more frequent,
stimulating consumer demand. With more trades in terms of money, prices
became visible indicators of value, and provided instant information
about supply and demand. So useful were these money-based markets that
they, and the traders and manufacturers who worked them, became central
to many city-state economies and were considered defining features of
Greek life. The conquests of Alexander the Great and the Romans later
made this nexus of business, money, and markets the dominant form of
urban economy throughout the western world.
The difference between the impact on business of the Iron Age and of
coinage cautions us to ignore the “shock and awe” of change as a general
proposition, and focus on the practical details of exactly how the
change might work in reality.
Consider now two of the most famous changes taking place currently:
globalization and the computer revolution. With the rapid growth of
nations like China, India, and Brazil, plus the wonderfully written
books of Thomas Friedman, globalization has attracted enormous
attention. It has certainly wreaked havoc with US and European labor
markets, as many formerly well paid jobs have been shipped to low wage
nations, and it has led both to a great new wave of business
consolidation as firms have bulked up for international competition, and
also to new competition as formerly protected national markets have
opened up to firms and products from outside their borders. It has also
permitted a vast expansion of international investment, and with new
players gaining advantage, provided many new investment opportunities.
Based on the example of the Iron Age, however, I would argue that
despite its dramatic political and personal consequences, globalization
does not represent a fundamental change for business. The expansion of
supply chains, the addition or subtraction of competitors, the creation
of new investment opportunities, even the internationalization of
labor—these are all normal conditions of business life. Globalization
has not produced radically new industries, altered the role of business
in modern economies, or fundamentally changed the nature of business
activity. Its investment implications are by no means trivial, but they
hardly point to dramatic innovations, a proliferation of new
businesses, or changed perspectives on the business landscape.
By contrast, the computer revolution (really, the microprocessor
revolution) that started in the 1960’s does indeed seem fundamental,
comparable in scope and impact to the Industrial Revolution. Only with
computers could many scientific calculations even be made, leading to
vital new industries like genomics and virtually the entire modern field
of microbiology. Computer-aided design and manufacturing permit
products and tolerances never before possible. Computers power
virtually instantaneous communication and information capabilities that
are transforming the modes of buying, selling, innovation, marketing,
and business organization.
In finance, computers have greatly increased the trustworthiness of
promises to repay, resulting in a vast expansion of purchasing power by
way of credit. Computers have reduced the risk creditors must bear by
supporting an explosion in options and other hedging instruments. Risk
has also fallen because computers facilitate the creation of credit
instrument portfolios whose risk is lower than that of the components.
By allowing “quants” to create complex structured finance vehicles that
allocate credit risk to parties with different risk preferences,
computers have greatly increased the supply of credit. Computers also
crunch vast quantities of data to provide rapid and massive evaluations
of consumer creditworthiness, making predictions of future repayment far
more accurate. In these and other ways, computers make it far more
rational to provide credit to many more people and businesses than ever
before: that is, to increase the purchasing power that fuels business
activity.
In short, the computer revolution resembles the invention of coinage
far more than it does the advent of the Iron Age. As such, it offers
vast and fertile possibilities for investment, and requires a much
greater focus of attention than do the comparatively simple implications
of globalization. That conclusion, I submit, is important for framing
investment and even public policy strategies. I am sure that it could be
reached without historical knowledge, but for me history has greatly
clarified where the train tracks lead.
