Last week we discussed Fundamental Law of Private Capital #1 – that private capital is the secret weapon that allows some economies to out-compete others. This week we’ll turn to Fundamental Laws #2 and #3.
Fundamental Law #2: Private capital is the progenitor of all other kinds of capital.
From the beginning of human civilization virtually all capital has been hogged by kings and princes and their modern-day counterparts: commissars and dictators. In socialist economies, an advance over centrally-controlled dictatorships, the most important capital is still hogged by the government, but some private capital is permitted.
But in free market economies private capital always begins in the hands of private individuals and families, i.e., private capital is the progenitor of all other kinds of capital.
Of course, lots of other entities end up owning capital. Corporations, for example, own huge amounts of capital, sometimes in the form of cash (currently being repatriated to the US at a rapid rate), sometimes in the form of plant and equipment. But they get that capital, initially, from individual investors and, later, from investors and from selling their products and services to individuals (sometimes via other businesses, as in B2B enterprises).
Governments also have capital, which they get from taxing individuals. It’s true that governments can (and do) create a kind of ersatz capital by printing money, something our friends at the Federal Reserve have been busily doing for the past decade. But that sort of money is better understood to be “anti-capital,” the consequence of which is to cheapen the value of real capital. As I’ve long argued in these pages, quantitative easing was the equivalent of tossing sand in the gears of the US economy.
Charitable foundations and nonprofit organizations (including universities) control vast amounts of capital, but they get it from donations by individuals and families. It is a source of endless amusement to observe that university campuses are the most hostile places on earth to private capital (not excluding North Korea). This is not in spite of, but is precisely because, the professors’ salaries are paid almost exclusively by owners of private capital – via endowment draws and full-pay students. (As the saying goes, “No good deed goes unpunished.”)
Which brings us to:
Fundamental Law #3: Private capital is by far the most flexible, and therefore the most useful, form of capital available to any society.
Once capital is in the hands of someone other than an individual or family, its uses are limited to carrying out the mission of the new holder of the capital. Harvard University, for example, doesn’t spend its endowment to improve the quality of, say, Yale University, and Google doesn’t spend its capital for the betterment of Apple.
But in the hands of a family the uses to which the capital can be put are limited only by the imagination of the family (and, of course, by law). Let’s consider just a few of the uses to which private capital can be and is put and which powerfully improve America’s competitive position in the world:
Supporting entrepreneurship. Every wealthy family got rich because it, or some ancestor, started a successful company, and as a result families naturally feel a kinship with entrepreneurs. America, far more than any other nation, nurtures the entrepreneurial instinct, resulting in an astonishing and ongoing explosion of new companies that create jobs, produce tax revenues, and enrich lives.
But companies can’t be started or grown without startup capital: no startup capital, no entrepreneurs. Private family capital, in the form of angel investing, early stage investing, and growth capital, provides the rich soil within which entrepreneurs can flourish. This happens almost nowhere else on the planet.
Endowing higher education. Although America has less than 5% of the world’s population, eight of the ten best universities in the world are located here (add Oxford and Cambridge and you have the top ten). And it gets better: America is home to 90% of the top 100 institutions of higher education, giving America a huge competitive advantage over other countries.
But how can this be? If we list in one column the one hundred best colleges and universities, and in the next column the 100 best-endowed institutions, we will find that the correlation is almost perfect. But endowment capital comes from only one source: private family capital. Elsewhere in the world higher education depends on government funding, a very weak reed that results in average (or worse) educational quality.
Establishing charitable foundations. While there are charitable foundations in other countries, no nation has anything remotely like the rich ecosystem of foundations that dot the American landscape. Modern institutional philanthropy was invented here by Andrew Carnegie, and wealthy families have embraced his vision of “giving back.”
Foundation giving is best thought of as entrepreneurial capital for nonprofit organizations, especially in human services and the arts. As a result, tens of thousands of new and interesting ideas receive funding every year in the US, ideas that never see the light of day in foundation-starved societies.
The crucial bottom line across all uses of private capital is this: ideas are not self-executing. Indeed, ideas won’t even arise except in an environment that is welcoming to them. Any society that excelled in any of the areas listed above would have a large competitive advantage over its neighbors. But to excel in all of them, often with little competition from other countries, is what has propelled America into the most dominant society in human history.
Wealth can be abused, of course – but so can apple pie. The rise of free market economies transformed the striving of men and women from a lust for power to a lust for wealth, the latter being vastly more useful and less dangerous to human societies.
People like Thomas Piketty, without seeming to realize it, wish to transport mankind back into a more primitive world in which the strong dominate the weak, men dominate women, and war is the normal state of human affairs. Fortunately, r is in fact > g.
Next up: On Hillbilly Elegy
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.