Sunday, October 18, 2015

New York Fed: "Who Wants to Be the Richest Economist?"

The author, New York Fed research librarian Amy Farber, links to one of our posts on rich economists but not to my favorite, which, if interested, you'll find after the jump.

From the Federal Reserve Bank of New York's Liberty Street Economics blog:

Historical Echoes: Who Wants to Be the Richest Economist?LSE_2015_hist-richest-economist_farber_460_art
Mark Skousen explains in a 2010 Daily Reckoning post how David Ricardo (1772-1823) became the richest economist in history (the post is excerpted from his 2009 book “The Making of Modern Economics: The Lives and Ideas of Great Thinkers”):
Ricardo has the distinction of writing erudite theoretical works and making a fortune. Few economists can boast doing both . . . Ricardo made his money primarily as a stockjobber, handling his own accounts, rather than as a broker. A stockjobber might be compared to a specialist on the floor of the New York Stock Exchange who handles large sums of stock and constantly makes a market in specific issues . . . A contemporary wrote of Ricardo: “He is said to have possessed an extraordinary quickness in perceiving in the turns of the market any accidental difference which might arise between the relative price of different stocks [government bonds].” His transactions would tend to be short-term and he would “realise a small percentage upon a large sum,” typically £200 to £300 a day. He wrote a friend, “I play for small stakes, and therefore if I’m a loser I have little to regret”.
When he died, his estate was worth more than $100 million, in today’s dollars. So why are there not so many super rich economists walking around? There may be a mistake in the assumption that Ricardo’s being an economist had everything or anything to do with his being a success in the market. (Maybe he would have gotten just as rich as a politician . . . wait a sec, he was a politician toward the end of this life.) The assumption of a cause and effect relationship in Ricardo’s case is further dashed when you consider that he started his career as a broker and speculator. First he got rich, and then he got interested in how it all works. One Investopedia post attempts to explain why economists aren’t rich by arguing that their profession deals with theoretical rather than practical studies and that, even though they can make large amounts of money as quants, that only works if the market does not stray from their model....

In August 2010 we linked to the Skousen piece with "Investing Tips from the World's Richest Economist". That led one of our correspondents to send a link to a biography of Ricardo about which Nobel econ Laureate George Stigler said:
"Ricardo was a fortunate man... And now, 130 years after his death, he is as fortunate as ever: he has been befriended by Sraffa."
Ricardo in Business - David Ricardo, The Works and Correspondence of David Ricardo, Vol. 10 Biographical Miscellany [1795]

Part of: The Works and Correspondence of David Ricardo, 11 vols (Sraffa ed.)

Ricardo in Business
As a Jobber on the Stock Exchange
Of the beginnings of Ricardo’s life in business we know only what the Memoir tells us, namely that ‘at the age of fourteen his father began to employ him in the Stock Exchange, where he placed great confidence in him, and gave him such power as is rarely granted to persons considerably older than himself.’1 It would seem that by the beginning of 1793 (being just under twenty-one) he was doing some Stock Exchange business of his own, since his name appears at this time in the Stock Ledgers2 as a holder of government Funds. The earliest of the accounts opened in his name is that of the Three per cent Consols, where he is entered on 29 January 1793 as purchasing £1150 of stock in two lots, and selling on the same day £1056 to A. Ricardo, his father.3
When he married in December 1793 against the will of his parents, we know that he was thrown ‘upon his own resources, as he quitted his father at the same time.’4 He was not, however, left entirely without support. All the biographers agree in saying that influential friends in the City came to his assistance. Thus Mallet in his Diary writes: ‘His friends who felt warmly for him then, as they have ever done since, gave him their countenance and support, and set him up as a stock-broker, the usual resource of people who have no capital. Mr. Ricardo’s whole property when he married did not exceed £800’.5 But neither Mallet nor any of the later biographers has revealed the identity of these friends. Fortunately, however, the obituary of Ricardo in the Sunday Times,1 which has so curiously been overlooked, makes it possible to identify them: ‘Renounced and disinherited, Ricardo was not without friends. An eminent banking-house in the city (Lubbocks and Forster, we believe) knowing his character, and hearing how he had been used, sent for him, told him that as they had every confidence in him, he need be at no loss for money; for if he continued prudent, “they would honour any check which he pleased to draw upon them”. This support and his own talents were quite enough for Ricardo, he immediately began business and in the course of a very few years was a richer man than his father.’ Some confirmation of this is found in the fact that Lubbock and Forster were Ricardo’s bankers throughout his life.2
When Ricardo started in business with his father, the stock-brokers and stock-jobbers met in the Stock Exchange Coffee House at the corner of Threadneedle Street and Sweeting’s Alley, having moved there from ’Change Alley in 1773. This was a loose kind of organization, anyone being admitted on payment of 6d. per day.
In 1801 it was decided to reorganize the Stock Exchange and to convert it into a ‘subscription room’; admission to be by ballot and the subscription for membership 10 guineas per year.1 There were some five hundred members and, unlike the old Stock Exchange Coffee House, the general public were not admitted. The new building in Capel Court was opened in the following year, and Ricardo, who had been a member of the Committee for General Purposes in 1801, was elected to the new committee at a general meeting held on 8 February 1802; but he resigned shortly after2 and was not a member of the Committee in any subsequent year. He took however an active part in the clearing up of two spectacular frauds on the Stock Exchange, both of them based on the dissemination of false news about the war, that of 5 May 1803 and the Cochrane hoax of 1814; Ricardo being on the latter occasion a member of the Committee for the Protection of Property against Fraud.3
Already at the time when the Stock Exchange was in Sweeting’s Alley stockbrokers were divided into two distinct groups, although the distinction was not nearly as sharp as it has become since: the brokers who acted on behalf of clients, and jobbers who dealt on their own account with brokers or between themselves, and who made a market by being always willing to quote prices at which they would deal. Bargains were made both for cash and for time, the latter being for the settling days, of which there were about eight in the year.4 Transactions for time were by far the most important; one writer says that they were ten times as large in volume as those for cash.5 At the time, business was almost exclusively in government Funds, apart from the stock of the great chartered companies such as the Bank of England and the East India Company....MUCH MORE