Wriston's Law of Capital
Wristons law of capital is named after Walter Wriston (1919-2005). He was a banker, and former chairman of Citicorp. He was widely regarded as the most influential commercial banker of his time(at least according to Wikipedia).
The law states that:
“Capital will always go where its welcome and stay where its well treated…Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated”
The key here is that capital is not just money, but its people and ideas too. For most of the short history of the US, it has attracted capital ruthlessly. People who work hard, people who study hard, ideas, patents, talents, especially people who were unwelcome elsewhere with their ideas. The world would have been a very different place if events in Germany hadn’t unfolded as they did.
The ‘welcome’ and ‘well treated’ parts are very important as well. Essentially,being nice to foreigners was critical(well, at least from an economic standpoint). Germany and Japan weren’t particularly nice or ‘tolerant’ to their neighbors in the first halve of the 20th century, so the smart ones, just left. Or as Amy Chua, Yale law professor said:
“Nazi intolerance caused the loss of incalculable scientific talent. The list of brilliant physicists and mathematicians who fled Hitler is astounding, including Edward Tellar, known as the “father of the hydrogen bomb”; the aeronautical genius Karman, John von Neumann, Lise Meitner, after whom element 109 is named; Eugene Wigner; Niels Bohn; Albert Einstein…”
The key word here was tolerance. But tolerance comes and goes. It is essential in the beginning of attracting capital but eventually wanes. The rise and fall of Europe’s history is based on tolerance but actually, relative tolerance. Jewish and Asian immigrants in the 1930’s, might or might not have been welcome in the US, but they were more welcome than elsewhere.
But in the current scenario, Wristons Law allows us in making educated guesses about the movement of capital and about future prosperity. Certain patters are recognizable, or as Einstein put it, “Insanity is doing the same things over and over again, expecting different results”.
What happened in the Dutch republic as Spain fell is a perfect example from history. The Dutch inherited all the Spanish capital(human and physical) and this eventually led to the establishment of the Amsterdam Stock Exchange.
But eventually, in 1688, when the Dutch William of Orange became a king of England, he brought over from Holland the financing and the people for the English Army. And so, it was soon enough that immigration followed and England became the new capital magnet.
Currently, the US is exporting its business too. However, Chua argues that China is unlikely to became a hyperpower like the US. China is not a human capital magnet since it is, to some extent, still a closed society. Chinese PhD’s(poor, hungry, and devoted) want to move to the US, rather than the other way around. But does that mean the US will not lose capital to some other country eventually, I’ll leave that for you to decide.
Read more here:
Walter Wriston
Amy Chua
Ineihen-rm
well written
Nice post. This underlines a big part of the reason for America's decline. The country was founded on the principles of freedom and justice, which means, like you said, "For most of the short history of the US, it has attracted capital ruthlessly. People who work hard, people who study hard, ideas, patents, talents, especially people who were unwelcome elsewhere with their ideas." This one simple fact interrupted the usual cycle of history: 1) Competitive advantage leads to rise in economic power, then military and social power 2) abundance of economic, military, and international social power leads to the moral decline of a nation, resulting in the loss of the original competitive advantage and the deterioration of all power. America has avoided the last step so far because every time the moral decline part came (consisting largely of laziness brought by wealth), there were immigrants with the work ethic, ingenuity, and vision to keep the idea of America going. With all the immigration restrictions put in place, America threatens its predominance and very existence because it loses these people.
Agreed. Research points to the fact that immigration actually helps the locals, since the bulk of the immigrants take up jobs that pay minimum wage and free up the more 'intellectually capital intensive' jobs for locals. Its sad to see the US restricting growth by having things like the 'H1B' cap.
Often what seems to be the case is the first generation immigrants are the ones you are referring to - and I agree that the benefits you point out are evident. On top of that, the second generation will be brought up with a work ethic that most Americans don't have, because their parents often spend their lives working hard just to give a better life to their children. This second generation is the one I was talking about - the ones who make it to college and have that combination of education and industriousness .
Very thought provoking. In all of the examples you provide, there were radical social, economic, and political change that expedited the transfer of power. Unless a similarly abrupt change were to happen now (which it very may well...) I don't know that capital will shift wholly to China.
in short, brain drain
Wriston's Law of Capital(part 2) (Originally Posted: 09/29/2012)
This post is a continuation of Wristons Law of Capital: Wriston's Law of Capital
Currently the movement of capital has already started. What was labeled as a rough patch has already turned into much bigger phase. The welfare state is about to come to an end. Whether we call it the age of deleveraging or something else, we don’t know how long it’s going to last.
Keynes idea was to pursue counter-cyclical stimulus, but the western world adapted the spending part and forget about reduction part and is now stuck in a borrowing mess. Amongst the many ways to reduce debt, inflation is probably the most common one, but that’s not what we’ll talk about today.
There are two variables which can be used to study welfare state, the incentive of authorities to expropriate its citizens and the likelihood of them doing so. Government expenditure can be used to model the former, and the perceived corruption index can be used to model the latter. The point behind such an analysis is that the higher the incentive to steal and the more corrupt the authorities, the higher the risk of the wealth holder.
The Scandinavian countries are the safest and the least corrupt and they get their money via taxation. Greece and Italy are different, they are a lot more corrupt, their welfare spending is high and they do not use taxation to finance such welfare activities. France falls somewhere in the middle.
But it is not that welfare state itself is a problem, but the fact that it’s a bubble that's a concern. It’s an excellent idea and helps create excellent economies; but the financing of such a welfare state is not working very well. According to some estimates, over 50% of US citizens and 75% of German citizens receive some sort of welfare transfer payment. And this system represents a ‘ponzi scheme’ in itself.
Lenin once said –“The best way to destroy the capitalism of a country is to devalue its currency. By this continuing process of inflation, the government can confiscate, secretly and unobserved an important part of the wealth of their citizens. While the process impoverishes many, it actually enriches some. The real value of currency fluctuates wildly and the wealth-getting process turns into a gamble and a lottery”. The current risk on-off environment resembles such a lottery; and the negative real interest rate environment has been the key factor in destroying wealth.
Alexander Fraser once said –“A democracy cannot exist as a permanent government. It only exists until the voters can vote themselves welfare and benefits from the public treasury. From that moment on, the public lies within the hands of the candidate promising the most benefits. And eventually, such an economy collapses and is followed by dictatorship”.
The relevance of the above is as following. In a true capitalistic country, rule of law is the most important thing. A temporary short selling ban is just a minor detail, but it is potentially a portal things much uglier. Repression can go on for a long time, until it eventually fails. If temporary short selling bans turn into permanent short selling ban, which further turn into a ban on all derivatives, CDS’s, futures, etc. then things wouldn’t necessarily get better. Cash is already being punished via negative interest rates.
Capital today is already on the move again as stated by Wriston’s Law, and London and Switzerland are already benefiting from capital that it has poached from the Middle East, Greece and Spain.
In conclusion, it’s not the sudden shocks and the ‘tail events’ that should be our biggest concerns, but this gradual loss of capital that should worry us more.
Interesting read, thanks.
I agree that the rule of law is one of the foundations of capitalism.
I think that deregulated capitalism can provide incentives for people to challenge the rule of law, however.
I also think that mercantilism is a threat to capitalist democracies. We need to do a better job of responding to mercantilism from East Asia. I still strongly believe in a grain cartel between the US, Canada, the UK, and Australia where we try to make it difficult for countries that engage in mercantilism (IE: currency manipulation, subsidies, etc.) to get cheap grain.
There is a balancing act. But I believe that too much deregulation is a threat to the rule of law.
Capital goes where it is welcome and stays where it is well treated. But food goes where the US decides to export it, and capital doesn't go where there isn't food. Thank God the US owns the grain export market.
Hello Mr. Cato Institute guy,
I don't understand how you can discuss deficits solely in the context of the welfare state and not reference US militarism* in the context of the amount the federal government spends on "defense". Especially considering that the recent wars were financed by debt/deficits rather than an increase in taxation. Furthermore, the growth in the US of "standing armies/forces" since the end of the draft has meant that that part of the federal government in effect is a self contained welfare state.
Another important issue in the context of welfare that you don't refer to is that of unemployment, which in many ways is what drives the government to spend more on welfare as unemployed people are not able to provide for themselves and their families. In this context one needs to discuss NAFTA (in the form that it was passed) and the de-industrialisation of the USA.
Finally (related to your earlier post), we should consider the financial system. The US attracts capital from the rest of the world. That is the nature of its relationships with creditor countries. Capital isn't moving away from the US. Now if capital formation is your concern as opposed to financial speculation, you need to look at how deregulation of capital markets and the rise of "state sponsored corporate welfare" in the finance/banking industry have contributed to this phenomena.
Far from being on the march away form the US, it seems like Capital is strengthening its control over the Law and thus feels quit happy there.
Cheers,
R
* Note: With this particular comment my intention isn't to pass judgement on the nature, necessity, rationale or morality of these wars, that's a separate argument, but rather to point out that they matter in terms of your deficits and potentially your democracy (two points that the OP highlights).
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