Master of the Mint vs. Folly

A major justification for the expansion of the regulatory state, now and historically, is that people need to be protected from their own mistakes.

At its simplest, the argument is that since we can’t figure out the better course for ourselves, the agents of the state will do it for us. This makes a strong case for all manner of intervention in the financial area.

But consider the following history from “Regulators Against Folly” in Ponzi Regulation:

“Isaac Newton had the misfortune of making one of the worst financial mistakes known to posterity. The great physicist had interests that ranged from alchemy to the doctrine of the Trinity to stock speculation. In 1713, he invested in the South Sea Company. In April 1720, he sold at a 100% return.

So far, so good, but from April through June of that year the stock tripled. Watching other people reap profits that made his look puny, Newton was unable to resist the temptation. In July he acquired a big position at an astronomical price. That he lost a fortune when the scheme collapsed in September seems entirely predictable—though the impression of predictability comes from our hindsight.

For the rest of his life Newton did not want to hear the words “South Sea” again. …..

……He is said to have remarked, “I can calculate the motions of the heavenly bodies but not the madness of people.” It is easy to conclude that if the genius could be fooled, anybody can be, and therefore a comprehensive regulatory regime to protect all investors is necessary.

That conclusion is wrong. At the time of the debacle Newton was not just an academic; he stood at the pinnacle of the political and scientific elite and was a top regulator. From 1696 to his death in 1727 he was Britain’s Master of the Royal Mint, a job that among other functions included pursuing fraudsters and counterfeiters. Also, he was president of the Royal Society. He was among the officials who would be expected to stop something like the South Sea scheme.

In fact the South Sea company was a government crony scheme backed by the Lord Treasurer Robert Harley, who whipped up publicity and encouraged share buying. As bribes, allies in the government and their associates received a kind of stock option, paid with money coming from the public. …..

Clever officials are capable of doing things that, when done by private citizens, are thought of as indicating cognitive or moral weakness.”

How can those same officials overcome such weaknesses among the public? They’re just as likely to encourage faulty judgments.

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One Response to “Master of the Mint vs. Folly”

  1. Delusions and the State | HedgeFundSmarts Says:

    […] government agents were caught up in the same misconceptions as the public—a modern version of the Master of the Mint debacle.  Whether or not regulators acted the fool, the fact remains that in the 1990s the regulatory […]

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