“For a while he trampled with impunity on laws human and divine;
but, as he was obsessed with the delusion that two and two make five,
he fell, at last, a victim to the relentless rules of humble arithmetic.”
Louis Brandeis, Associate Justice of the U.S. Supreme Court (In office 1916 – 1939)
In our previous blog post we wrote of John Bogle, the founder of Vanguard, and his success in disrupting the investment industry with his Vanguard mutual fund.
By way of backstory, while an economics student Bogle researched and wrote a paper on the fledging mutual funds industry. His observation was that mutual funds do not generate returns higher than market averages, and that the fees and expenses of mutual funds were too high. He concluded that future growth in the mutual fund space required a reduction of sales loads and management fees. By 1976 he had the opportunity to test and prove his theory when he launched Vanguard, the first index fund.
In 1979, the median cost to purchase a fund was 8.5%. In 1999, the median cost to purchase a fund was 4.75%. In 2021, mutual fund fees at Vanguard vary from 0.25% to 1.00%. If you’ve ever paid less than 8.5% to invest in a fund (and who among us hasn’t) or otherwise paid less in fees than were typically paid in 1979 (and who among us hasn’t), you and your investment portfolio have John Bogle to thank.
Bogle and his efforts were not insulated from plantation system mentality rancor. He and his Vanguard fund were quickly attacked as foolish and un-American, particularly from those in the investment industry forced to lower their predatory fees in order to compete with Bogle’s better model. We suspect Bogle was sustained and encouraged by the wisdom of his contemporary Buckminster Fuller who urged, “You never change things by fighting the existing reality. To change something, build a new model that makes the old model obsolete.”
Bogle’s conviction that his vision and new model to give the citizen-investor a fair share was right – mathematically right, philosophically right, and ethically right – was eventually understood and accepted by others. Revered economist Paul Samuelson put it this way in 2005, “I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese: a mutual fund that never made Bogle rich but elevated the long-term returns of the mutual-fund owners. Something new under the sun.” (For clarity, Samuelson’s reference to “never made Bogle rich” must be taken as relative to other financial industry titans. In Bogle’s own words his wealth was “just this side of astonishing.”)
Part of Bogle’s genius was the ability to boil down the essence of his entire approach to Brandeis-inspired “relentless rules of humble arithmetic”— short and sweet, factual statements about the fundamental realities of investment math. This is a formulation that is substantive enough to create conviction that lasts through hard times (and has been proven quite right over and over) while also being brief. Relentless rules can be conveyed quickly and convincingly. They put ideals into a form with immense practical value for both communication and implementation.
Relentless rules cut through ideology; they are not opinions but rules that simply “are.” Even those who may not share certain ideals have to reckon with the logic of “the relentless rules of humble [investment] arithmetic.” Relentless rules cut through large and potentially complex matters as well as long-held misconceptions to make sense of it all in a way that is broadly understandable and actionably helpful. With brevity, they create shared understanding of ideas and the opportunity, at least, for shared actions based on those understandings.
Bogle’s death, as Aaron and I were writing Better Capitalism came as a deep loss. Although we never met him personally, through his writings and example we felt he was a presence and guide as we thought and wrote. We honor him and even expand upon his impact by bringing his “common sense” and mutual approach more into being. A fitting place to start is with our observation of the relentless rules of economics.
1. All economic exchanges involve frictional costs.
2. Exchanges that merely transfer/extract existing value from one party to another result in a net loss once frictional costs are considered
3. Exchanges that create value beyond frictional costs for all parties involved result in a net gain.
4. As a whole, we receive the average net result of all exchanges.
5. We gain from net-positive economic exchanges and lose from net-negative economic exchanges.
Our recognition of these relentless rules underlies our approach to economics and economic ethics. These rules simply are what they are; none of us can choose to change them. Our choice is to recognize, think, and act in beneficial ways in light of them or continue to be caught and plowed over by their relentlessness. Partnership Economics is the structure by which to recognize, think, and act beneficially in light of these relentless rules of economics—the way to create more net-positive economic exchanges and therefore increase the average benefit for all economic participants, as Bogle did for us citizen-investors.
We invite you to read further about these relentless rules of economics in Chapter 1 of Better Capitalism. There we do a deeper dive, although nothing that will drown you, together with a recap and restatement that equips you to better navigate your piece of our economic world.
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