Bill Gates Embarrasses Himself, But Offers an Investment Lesson Nonetheless

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Bill Gates of Microsoft fame and fortune gave an interview recently, and though he embarrassed himself, the exchange offers investors an important lesson:

No one has secret knowledge. Someone may perhaps have special knowledge, but nothing that amounts to magic. The Gates interview teaches this important point in two different ways:

He spoke on the inadequacies of economists and the economics profession in general.  “Too bad,” he told the interviewer, that “economists don’t actually understand macroeconomics.” By macroeconomics he meant those aspects of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.

On this point he is correct.  They do not.   Economists and economic thought cannot grasp all the intricacies of the macro economy, much as historians cannot grasp all the intricacies and motivations involved in past events, and much as medical doctors admit to the ongoing mysteries of human health.

Everyone knows – or should know – that, unlike mechanical engineering for instance, economics deals with people, their perceptions and their irrationalities. What seemed to work one way yesterday can lurch in a different direction tomorrow. Why?  Because, for example, the public mood is now different from what it was yesterday, or because popular ideas have changed, or because businesses, having observed yesterday’s results, have now repositioned themselves.  No one pretends, or should pretend, that economics can predict accurately in the way that physics can be sure of the speed of Newton’s famous apple falling from that tree.

Most economists know this and readily admit it. Economists make the effort to predict, not because they are arrogant (though some are), or because they have deluded themselves (though some have), but rather because their subject matter is so immediately important to so many people. If economics were astronomy, this state of affairs would hardly merit comment or criticism. No one faults astronomers because they cannot fully explain the existence of black holes, or even characterize them adequately. People do not readily accept the limitations of economic thought because its subject matter is jobs and income, prosperity and wealth, things that matter deeply to individuals and businesses, as well as to governments. When Washington and businesses try to improve the fortunes of citizens or workers or shareholders, they want a roadmap to tell them where the turns are and where the pitfalls lie. When told that economic thought and its practitioners cannot provide such guidance, these decision-makers ask for a best guess, rough guidance on at least what is not likely to happen. Because a guess that is made within disciplined thought — no matter how inadequate to the task — is better than simply a guess, these decision-makers accept what they can get from the economists.

My posts have repeatedly focused on this lesson – that no one can know, because no one can see the future.  Every forecast, whether about the market or an individual security, is a guess, an educated guess perhaps, but a guess nonetheless.  There is no magic, which is why my posts advise against trying to time markets but emphasize instead diversification so as to avoid having too much riding on one or two insights.

Gates’s interview teaches this lesson again, from a different vantage point, though no doubt he did so inadvertently.  In his criticism, he implied that his insight about the inadequacies of economics was somehow new or shared by only a select group.  As I have said, most economists admit their knowledge is limited, that the subject matter is too complex and too variable for any straightforward treatment.

If Gates had wanted to convey what most everyone knows, he might have explained why economics cannot do what politicians and others sometimes expect of it. As if to buttress my point about his claim to special knowledge, he called in this interview on the wisdom of another billionaire, Warren Buffett.  Mr. Buffett, it seems, has pointed out the existence of negative interest rates and faulted the discipline of economics because no textbook mentions the phenomenon. Somehow, this is supposed to explain how the field does not understand its own subject matter. It would be strange to fill textbooks with anomalies, but that aside, negative interest rates are neither hard to understand nor are they a particularly economic development. They occur less because of economic forces (though those forces have some role), than because institutional arrangements in day-to-day financial business –– the need for collateral, for instance –– force people and institutions to buy and hold instruments that pay a negative rate of interest. They do not buy to invest in a financial instrument that lose them money. It was hardly magical knowledge that informed the more thorough discussion of negative rates I offered in a previous post.  But such explanations matter little when billionaires opine smugly on the inadequacies of others.

Whether the speaker or writer is a billionaire, a spokesperson for a respected investment house, or someone you just met at the bar, they may have experience and insight worth listening to and considering, but nobody knows.  The advice offered in my posts will never lose sight of that fact.