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The Money Game
By Adam Smith
OPEN ROAD INTEGRATED MEDIA Copyright © 1976 Adam Smith
All rights reserved.
WHY DID THE MASTER SAY "GAME"?
The world is not the way they tell you it is.
Unconsciously we know this because we have all been immunized by growing up in the United States. The little girl watching television asks will she really get the part in the spring play if she uses Listerine, and her good mother says no, darling, that is just the commercial. It is not long before the moppets figure out that parents have commercials of their own—commercials to keep one quiet, commercials to get one to eat, and so on. But parents—indeed all of us—are in turn being given a whole variety of commercials that do not seem to be commercials. Silver is in short supply, and the Treasury is running out and begins to fear a run. So the Treasury tells the New York Times that, what with one thing and another, there is enough silver for twenty years. Those who listened to the commercial sat quietly, expecting to get the part in the spring play, and the cynics went and ran all the silver out of the Treasury and the price went through the roof.
This is a book about image and reality and identity and anxiety and money. If that doesn't scare you off, nothing will. It isn't really that serious and there is a message in here from Lord Keynes to that effect. You already know about image and reality, and you probably already know all about identity and anxiety, and everybody knows about money, so all we are doing is stirring them up together. In this introduction, I have two things to tell you. One is who I am not and the other is the single sentence, the illumine, the apple falling on the head, that led me to the attitude expressed in the first sentence, that the world is not the way they tell you it is.
I am not, of course, Adam Smith. Mr. Smith lies in the churchyard at Canongate, his tombstone, written by himself, identifying him as the author of The Wealth of Nations, and he has been there since he died in 1790, rich in respect and honors, having made himself immortal as the first great free-market economist in all the texts of economic history. Mr. Smith did not think of himself as an economist but as a moral philosopher. "To what purpose," he asked in The Theory of Moral Sentiments, "is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power, and preeminence?" I like that, but it wasn't because of it that I picked the name Adam Smith as a pseudonym. That was a happy accident.
Not so long ago I was asked to write something about Wall Street in a new publication, and I had what I thought was a bright idea. There is not very much written about Wall Street that Wall Streeters themselves believe. (The Street runs on oral-aural communication anyway, like McLuhan's global village.) The reason for this is that the writers about the Street are Outside, and Wall Street tells them more or less what it wants. Wall Street is well paid, and the writers aren't, and when the writers learn enough they get offered jobs in Wall Street and off they go, perhaps satisfying their creative urge by working on a black comedy on the weekends. Then they are Inside and rich and don't write about Wall Street any more. Writers who really want to write would rather ride with the President in Air Force One, or sit in the Polo Lounge of the Beverly Hills Hotel with some movie star. Such writers are heroes at the next dinner party. Wall Street writers are never heroes at dinner parties because any broker or fund manager knows as much Street gossip as they do.
There are, of course, Wall Street writers, as opposed to writers on Wall Street, and some of them are essayists as good as Addison, Steele, and writers writing anywhere. Bradbury Thurlow, for example, writes a weekly market letter which has the grace of a Mozart sonata. But these essays are musings on the scene related to particular stocks; the coda of the essay is a therefore, as if the essay were an argument: therefore should we now buy Telephone, Q.E.D., so have I proved.
What is really going on is very difficult to report except for an insider. (B.C. Forbes, the founder of the magazine of that name, knew this. He noted that reporters with notebooks and pencils had to wait by the kitchen of the old Waldorf, so he got himself top hat, striped pants, and circulated with the tycoons.) But for an insider, there are problems, namely, how do you keep your friends from getting irritated if you are putting the Breughel scene to paper?
My bright idea was to use a pseudonym and to change the names and numbers of my friends, the players. A fund manager will tell another fund manager the innermost state of his emotions, the condition of his marriage, and even his purchases and sales, but he will not tell a broker or a magazine or any outsider who is likely not to understand him completely. I figured if we were not too solemn, everybody at Oscar's, off Wall Street hard by Lehman Brothers, would get into the spirit of the game.
Pseudonyms are not much used in this country. Mr. George Kennan, upon leaving the State Department, did sign his famous article on containment in Foreign Affairs as "Mr. X." But then he went right back to being George Kennan again. In England, where on some levels literacy seems to arrive at birth, the business of pseudonyms has gone on quite a long time. In the early nineteenth century, if something in the marketplace was bugging a merchant banker, he did not hire a P.R. man but wrote his own polemic, signed it "Cato" or "Justinian" and dispatched it. If a governor of the Bank of England wanted to loose a salvo at his opponents, he could sign it "Plautus" or "Seneca" and be as acid as he wanted. He knew he would get rapt attention, because his expertise was so obvious. Some of this still survives in England, but often it is just so that "Justinian" can be several people. (I am not saying he is, and for all you know, six of us are Adam Smith.)
So I had "Procrustes" all picked out. Procrustes, as you remember, was a highwayman of Attica who placed his victims on a bed of iron. If they were too short, he stretched them, and if they were too long, he chopped off their feet. It seemed appropriate for Wall Street.
The new publication did not come to pass, and the editor of New York magazine, in the Sunday World Journal, scooped up my sample and ran it. (The World Journal was a newspaper in New York which has since joined its ancestors.) "I had to change your name," said this editor on the phone. "They wouldn't believe here that anyone was named Procrustes; just plain Procrustes sounds too much like a pseudonym, and we don't use pseudonyms. So I put down the first name I could remember that would fit. I think it was Adam Smith."
So then there was Adam Smith, my Sunday recreation, and it all became too much fun to stop.
First of all, when the situations I described were successful, Wall Street filled in all the details of my sketches. Take Poor Grenville, a fund manager I described who bet the wrong way. He had just gotten himself a nice $25 million cushion of cash in his fund when the market turned around and ran away without him. Everybody knew Poor Grenville, only—it was pointed out to me—Poor Grenville wasn't caught with $25 million but with $19 million or with $33 million and his hair wasn't blond, it was red or it was brown. Otherwise it was Poor Grenville all right. I have since met six Poor Grenvilles and there are more coming into town all the time.
Then there were the Lamont Cranston aspects of it all. (If you don't remember Lamont Cranston, the Shadow, and the secrets he learned in the Orient which enabled him to pass invisibly among men, we must not be in the same generation.) I was at a cocktail party once and I joined a respectful circle listening to a New York Times reporter I had never met. The reporter said he knew Adam Smith well and had for years, and he told us all about him. I listened raptly. In another instance, my seat-mate on a cross-country jet introduced himself, and we got to talking, and he told me about Adam Smith. When I seemed to be impressed, he said he knew Adam Smith but he couldn't tell me who he was, because Smith had sworn him to secrecy.
It's great. It's like being the Fugitive with nobody chasing you.
You will notice all through this treatise a leitmotif of observations by John Maynard Keynes. This use of Keynes has very little to do with Keynes the economist; it has rather to do with Keynes the writer and speculator. Keynes the economist is simply there, like Darwin and Freud and Adam Smith of Kircaldy, County Fife, a part of history. I bring this up because Keynes the economist still elicits an emotional reaction from many readers. Having, in publications, quoted Keynes a few times, I began to receive mail from gentlemen whose phrasing is generally found in more right-wing publications, the gentlemen implying that if I had any truck with Keynes, I was a dupe of the internationalist bankers and the British, and that I was probably rejoicing in the disintegration of the dollar and the, therefore, inevitable disintegration of American moral character. I wrote a long paper on Keynes in graduate school which I found recently while cleaning out a file. It is amazing how stupid one can be in graduate school, because while I was puzzling through L1(Y)=y/v=M2, the income velocity of money, I missed all the fun.
Here is an economist with a sparkling style, something rare enough in itself. But more than that, here is a man with a great sense of life and of living. Keynes was a great speculator, and made a fortune not only for himself but for his college, Kings College, Cambridge, and he did it in half an hour a morning from his bed. I believe that Keynes' participation in markets as an investor led him to some of the observations in the "Long-Term Expectation" parts of his General Theory. They are throw-away aperçus, secondary to the main points, but they are the sharpest things around. I wish he had written more. No one has ever been more perceptive on markets than Keynes, and I don't think he would have had this "feel" without himself being a participant; academic economists just haven't.
We are taught—at least those of us who grew up without a great deal of it—that money is A Very Serious Business, that the stewardship of capital is holy, and that the handler of money must conduct himself as a Prudent Man. It is all part of the Protestant ethic and the spirit of Capitalism and I suppose it all helped to make this country what it is. Penny saved, penny earned, waste not, want not, Summer Sale Save 10 Percent, and so on. Then I came across this sentence in "Long-Term Expectation" of Keynes' General Theory:
The game of professional investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.
Game? Game? Why did the Master say Game? He could have said business or profession or occupation or what have you. What is a Game? It is "sport, play, frolic, or fun"; "a scheme or art employed in the pursuit of an object or purpose"; "a contest, conducted according to set rules, for amusement or recreation or winning a stake." Does that sound like Owning a Share of American Industry? Participating in the Long-Term Growth of the American Economy? No, but it sounds like the stock market.
Let us go one step beyond. Drs. John von Neumann and Oskar Morgenstern developed, some years ago, a Theory of Games and Economic Behavior. This game theory has had a tremendous impact on our national life; it influences how our defense decisions are made and how the marketing strategies of great corporations are worked out. What is game theory? You could say it is an attempt to quantify and work through the actions of players in a game, to measure their options continuously. Or, to be more formal, game theory is a branch of mathematics that aims to analyze problems of conflict by abstracting common strategic features for study in theoretical models. (You can tell by the phrasing of that last sentence that I have the book before me, so let me go on.) By stressing strategic aspects, i.e., those controlled by the participants, it goes beyond the classic theory of probability, in which the treatment of games is limited to aspects of pure chance. Drs. von Neumann and Morgenstern worked through systems that incorporated conflicting interests, incomplete information, and the interplay of free rational decision and choice. They started with dual games, zero sum two-person games, i.e., those in which one player wins what the other loses. At the other end you have something like the stock market, an infinite, n-person game. (N is one of the letters economists use when they don't know something.) The stock market is probably temporarily too complex even for the Game Theoreticians, but I suppose some day even it will become a serious candidate for quantification and equations.
I bring this up only because I think the market is both a game and a Game, i.e., both sport, frolic, fun, and play, and a subject for continuously measurable options. If it is a game, then we can relieve ourselves of some of the heavy and possibly crippling emotions that individuals carry into investing, because in a game the winning of the stake is clearly defined. Anything else becomes irrelevant. Is this so startling? "Eighty percent of investors are not really out to make money," says one leading Wall Streeter. Investors not out to make money? It seems almost like a contradiction in terms. What are they doing then? That can be a subject for a whole discussion, and will be, a bit later.
Let us go back to the illumine, that the investment game is intolerably boring save to those with a gambling instinct, while those with the instinct must pay to it "the appropriate toll." This really does say it all. We have more than twenty-six million direct investors in this country, i.e., people who have actually bought stocks. (I say direct investors because indirectly, through insurance companies and pension plans, we have more than a hundred million investors, which is just about everybody except children and the truly poor.) Not all of the twenty-four million are fiercely active, but the number grows all the time, making the stock market a great national pastime. Active investors do not pursue bonds (except convertibles) and preferreds (except convertibles). It isn't that one can't make money with these instruments, it's that they lack romance enough to be part of the game; they are boring. It is very hard to get excited over a bond basis book, where your index finger traces along a column until it gets to the proper degree of safety and yield.
Sometimes illusions are more comfortable than reality, but there is no reason to be discomfited by facing the gambling instinct that saves the stock market from being a bore. Once it is acknowledged, rather than buried, we can "pay to this propensity the appropriate toll" and proceed with reality.
I mean here no more than recognizing an instinct. Dr. Thomas Schelling, a Harvard economist and the author of a number of works on military strategy, goes a lot further. Writing on "Economics and Criminal Enterprise," Dr. Schelling says:
The greatest gambling enterprise in the United States has not been significantly touched by organized crime. That is the stock market.... The reason is that the market works too well. Federal control over the stock market, designed mainly to keep it honest and informative ... makes it a hard market to tamper with.
Excerpted from The Money Game by Adam Smith. Copyright © 1976 Adam Smith. Excerpted by permission of OPEN ROAD INTEGRATED MEDIA.
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