Machan's Musings - Paternalism at Yale and The Times
by Tibor R. Machan
This, folks, really takes the cake for me: David F. Swensen, chief investment officer at Yale University, has penned an op-ed for The New York Times, in defense of rank financial paternalism. As he puts it, “what began as a reasonable opportunity for sophisticated investors has become a killing ground for naïve trend-followers, with scandals and frauds prompting predictable calls for increased regulation of hedge funds. But if Congress and the Securities and Exchange Commission really want to protect individual investors, they should prohibit unsophisticated players from participating in hedge funds.”
It doesn’t surprise me a bit that this op-ed appeared in The New York Times, that venerable member of the fourth estate, which has become an unrestrained cheerleader for paternalism on nearly every front of human social life. It is rather typical: an organ promoting a political agenda of egalitarianism—let’s treat everyone with equal respect—then turns right around and asserts shameless elitism. I, the amateur, should be barred from the hedge fund markets. You the expert, get a pass.
Let’s just assume that what Swensen says about this issue is true. Here are some more of his thoughts: “Less informed investors rely on an intermediary (often a fund that invests in a variety of hedge funds) to make fund choices. Again, the principle of adverse selection applies. The best fund managers avoid these ‘funds of funds,’ which operate with shorter time horizons, in favor of a direct relationship with big long-term investors. Of course, the funds of funds add more fees to the already overburdened hedge fund investor, further reducing chances for success.”
And, of course, there is more of this. But none of it addresses one of the vital issues: how some governmental body is going to differentiate between sophisticated and unsophisticated investors, what tests will be given and, most importantly, how they dare to meddle in all this in the first place. Nor does it address an even more vital topic: How dare anyone propose banning anyone else from doing something entirely peaceful? Perhaps, however, it’s no wonder that this sophisticated arrogance comes from one of the Ivy League universities. Those are places that foster one of the most outrageous inequalities in the country, as they refuse to voluntarily share their enormous endowments with less fortunate colleges and universities (even as their professors and other spokespeople preach egalitarianism and paternalism left and right).
If I were a joshing sort of guy, say a P.J. O’Rourke or a Dave Barry, I might propose that “if Congress and the Securities and Exchange Commission really want to protect [us,] they should prohibit unsophisticated players from” writing op-ed pieces of the sort that Mr. Swensen penned for The New York Times. How might one be able to tell the difference between a sophisticated and an unsophisticated pundit? The first thing I would consider is whether he or she is championing paternalistic government measures.
Since America has flatly rejected the monarchical system of government—wherein the king or queen is “the keeper of the realm” and supposedly has the God-given power to make sure all the subjects carry on properly in their lives—Mr. Swensen’s advice about how to deal with unsophisticated investors clearly lacks sophistication, that is, sufficient learnedness. His ideas are obsolete; they belong in the pre-Revolutionary era, not in a society that is supposed to treat us as sovereign citizens instead of subservient subjects. Alas, my type of humor is different. I don’t do well at being ironic and I am afraid to offer a reductio ad absurdum so as to make my point, lest some of these unsophisticated blokes take me seriously and abolish the First Amendment to the U.S. Constitution.
If, however, the First Amendment’s philosophy is sound and anyone (no matter how unsophisticated) may say anything at all, anywhere he or she can find a forum, then so is the free market philosophy which proposes that no one—not Congress, not the SEC, not anyone—ought to have the legal power to ban people from investing as they choose. Just as the philosophy of the First Amendment presupposes that free men and women are capable of obtaining good advice on matters they read in The New York Times, should they be so unsophisticated as to need such advice, a free market presupposes that free men and women will be able to find good advice about how to invest their resources prudently.
There is really no difference between the two philosophies—that of the First Amendment and that of the free market. They both rest on the idea that adult men and women are normally capable of protecting themselves from bad ideas about any subject whatsoever.
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