One of the surprising themes was that manufacturing concerns in the 1800s did very little accounting and thus had very little insight into their businesses, even whether they were profitable
Accounting also shows up in Rockefeller's story as a key enabler; it very much seems like the 'data science' of the late 1800s.
Yes, I remember that too—can't remember where I read about it, maybe Yergin's The Prize. The analogy that occurred to me was web/app analytics, especially the social media apps that learned to measure their “viral coefficient” around the late '00s
One of the posts which has been sitting in my drafts pile the longest is titled "Economic Agents Who Have No Idea What's Happening". The draft starts like this:
Eight hundred years ago, a bloomery produces some iron. The process is not tightly controlled - the metal may contain a wide range of carbon content or slag impurities, and it’s not easy to measure the iron’s quality. There may be some externally-visible signs, but they’re imperfect proxies for the metal’s true composition. The producer has imperfect information about their own outputs.
That iron is sold to a blacksmith. The smith likewise does not know the quality of the iron, but will do largely the same thing with it regardless. The quality of the worked product depends in part on the quality of the input, and is likewise difficult to observe. The producer has imperfect information about their own inputs, and that uncertainty carries through to their outputs.
I wrote those paragraphs at least a year before reading Jason's review of Andrew Carnegie's autobiography. Now the draft has a TODO to replace the opening with a summary of relevant passages from the autobiography.
This idea of "economic agents who have no idea what's happening" plays a pretty central role in my world-models, because the very large majority of economic agents have basically no idea what's happening the very large majority of the time. They can kinda pattern-match the most surface-level-obvious features of the things they're directly working with, but they have no idea what's going on under the surface, or what's going on in other parts of the economy. This was even more true historically. The passages and discussion in Jason's post are the best currently-published source I know of to convey that frame.
Premodern iron producers had basically no idea what was in their ore, no idea how productive and profitable the parts of their business were, they didn't even know how profitable they were until the end of the year! And the passages in this post show that they constantly wasted resources and missed out on opportunities as a result.
Premodern iron producers had basically no idea what was in their ore, no idea how productive and profitable the parts of their business were, they didn't even know how profitable they were until the end of the year! And the passages in this post show that they constantly wasted resources and missed out on opportunities as a result.
This sure does describe how I currently feel about "trying to cultivate intellectual progress via online tools and community". I don't really know how to get from here-to-there.
It sounds like this is the book that inspired the setting and details of Ayn Rand's Atlas Shrugged. Philosophy aside, it's a dystopian novel about the science of railroads and steel and the capitalism of continent-wide industry, with a few bits of sci-fi tossed in to make her points.
If Adams Express paid $10 a month on $500 of stock, that’s a 24% annual dividend yield, which is far better than any similar investment today, and presumably this easily covered the payments on the loan.
When I read the tales of crypto-markets on LessWrong, there are also people who speak similarly about yield. There's risk but the same might be true with the stocks back in the day.
Given the difference between mortgage rates and average market returns, you probably should mortgage your house to invest in the stock market even today.
That's a bad plan unless you're fine with a decent risk of foreclosure - the market can (and in the past, has) go down and stay down for 10+ years. If that happens, you now have lost much of your equity in your house and have payments to make. If that coincides with losing your job (which is of course correlated with the market) then you're at high risk of being foreclosed on.
If you really want to have higher returns with higher risk, another strategy is to buy stocks on margin. You can't have the extreme multiples of the 1920's, but you can still get much higher returns. The tradeoff is the potential to also lose it all.
Of course, you might think that that risk is worthwhile for the extra returns, but they definitely are not for me.
Easily worth it for me. Margin is probably a better deal and should be taken advantage of first. But the idea of being so attached to a particular house that you'd give up a chance to be significantly wealthier just to avoid the risk of foreclosure sounds nuts to me.
The market may go down for 10 years but you're not gonna stay unemployed for 10 years. If you lose your job in a developed country for reasons that are correlated with the market (i.e. not quitting or misconduct) you get unemployment, which is more than enough to live on.
I’ve been reading Andrew Carnegie’s autobiography, published late in his life, in the early 1900s. Here are some interesting themes and quotes. (Emphasis added in all block quotes below.)
Science and steel
One key to Carnegie‘s success in the iron business is that he was one of the first to seriously apply chemistry:
Part of the problem was that the ores and other inputs to smelting were inconsistent in composition:
This is where chemistry was able to help:
It wasn’t just that some materials were of low quality, but that the right mix of materials was needed, no matter the purity of the inputs:
With better chemical assessment of ores, Carnegie was able to arbitrage his supplies:
He gives another example later of discovering a property with ore that had no phosphorus, “really an ore suitable for making Bessemer steel” (the Bessemer process could not handle phosphoric ores, until later improved by Gilchrist and Thomas). Again, it was the purity of the ore that was a problem:
Here‘s how they assessed the mine:
Chemistry, however, was still foreign to many people:
The Bessemer process
One of Carnegie‘s major achievements was to bring the Bessemer steel-making process to America. This was a new way to achieve high-quality steel at a low price. Previously, the only options were low-strength wrought iron, brittle cast iron, or expensive steel in limited quantities. Bessemer broke this iron triangle.
Carnegie, already in the iron business, was paying attention and could see the future:
As an example of the potential market for steel, Carnegie gives the example of iron rails, which wore out quickly under the pounding of heavy trains:
Railroads and iron-makers went to great lengths to solve the problem:
Carnegie formed a company in 1873 to use the Bessemer process to make rails.
Accounting
One of the surprising themes was that manufacturing concerns in the 1800s did very little accounting and thus had very little insight into their businesses, even whether they were profitable:
Just as Carnegie had brought the science of chemistry to his processes, so he brought “scientific management” to his operations:
This level of quantitative insight allowed Carnegie to make good choices about capital investments:
Investing
Carnegie’s attitudes towards investing strike me as very odd. There was something very different about 19th-century investing that I don’t fully understand.
On the one hand, people were willing to take on significant amounts of personal debt in order to buy equity. In 1855, when Carnegie was a young man living with his mother, his boss tipped him off to a rare opportunity to buy railroad stock:
How to pay for it? His mother mortgaged their house:
It’s remarkable to me how random this all is, how reliant on personal relationships and chance connections. But even more so, it strikes me as financially reckless, the sort of thing you’d read about today on r/wallstreetbets. On the other hand, it turned out very well:
If Adams Express paid $10 a month on $500 of stock, that’s a 24% annual dividend yield, which is far better than any similar investment today, and presumably this easily covered the payments on the loan. No wonder Carnegie and his mother were so eager to get in on the deal.
Later, when Carnegie is still working for the railroad, there’s another chance connection, when the inventor of a sleeping car approaches him on the train:
Getting a deal with the railroad, the inventor invites Carnegie to become an investor in the new sleeping-car business:
(In this era, investors would often fund a business in regular installments, rather than all at once up front as is standard today.) Once again Carnegie decides to go into debt for this investment, and once again gets the loan through personal connections:
And once again, it works out anyway! 19th-century businesses seem to have gotten to profitability faster than today’s startups, because Carnegie writes: “The sleeping-cars were a great success and their monthly receipts paid the monthly installments [on the loan].”
Yet despite all of this willingness to invest on margin, Carnegie, like many others of his day, considered investing in the public stock market to be a reckless gamble. Later in his life, when he moves to New York, he remarks:
He complained that owning public stocks was distracting, and he warned people away from it, in a passage that sounds like today’s discussion of the psychological effects of social media:
Later he comments that investing in public markets degrades one’s integrity in business affairs:
A reason to be wary of investments in those days was the lack of limited liability in many instances. Without it, even small investors uninvolved in management could be fully liable for the debts of the company. Carnegie tells this story:
All this was reinforced by Carnegie’s experience in the financial panic of 1873, when he “entered upon the most anxious period of my business life”:
Scottish and American spirit
Carnegie often remarks on the ideals he picked up as a boy in Scotland. This will come as no surprise to those familiar with British history, but it was remarkable to me the streak of independence and anti-authoritarianism:
Later, Carnegie tells a story of visiting an oil boom town in Pennsylvania in 1862. The town had been set up in a hurry, with too many people crowding in and not enough housing. He was impressed with the determination and resourcefulness of the oil wildcatters, who quickly threw up rough accommodations. But more, he was impressed with “the good humor which prevailed everywhere. It was a vast picnic, full of amusing incidents.” Flags with “strange mottoes” flew, such as one drilling crew flying the words “Hell or China.” Carnegie praises the American spirit:
19th-century life
Finally, a number of quotes shed light on the general quality and challenges of life in the 1800s:
The burden of travel
A few stories give a glimpse into the hardship of travel before railroads and steamships. For instance, soon after his family came to America:
On his return from the aforementioned oil fields:
Travel was also less reliable, owing to weaker infrastructure—for instance, wooden bridges. Part of what induced Carnegie to go into the iron business was the superiority of iron for bridge-building:
Cultural experience
In the 1800s, there weren’t many ways for an American to learn about fine art and classical culture. There weren’t many great museums (the Metropolitan Museum in New York, for instance, wasn’t established until the 1870s; much of its collection was donated by the great industrialists of that era, including over seven thousand pieces from J. P. Morgan). There was, of course, no Internet, no multimedia, and not even a lot of high-quality printed books (or libraries to borrow them from—Carnegie himself was later to establish many public libraries as a cornerstone of his philanthropy). There were no recordings of music until the end of the century, and no radio broadcasts.
So the only way to learn was to vacation to Europe. Carnegie was one of the few who could afford such a trip (and the time off in which to take it), and he wrote of its profound effect on him:
Later he took a more ambitious trip, around the world, which was even more transformative for him:
The outcome, as he describes it, was a much more cosmopolitan outlook, and a sense of the commonality of world cultures:
Disease
Like many people of the pre–germ theory era, Carnegie suffered from infectious disease, and lost relatives to it. The fact that this was common, and had been for all of history, didn‘t prevent the tragedy from affecting him emotionally:
Pollution
Air pollution in Pittsburgh was almost inconceivable:
Oil spills, now considered a disaster, were once routine. Again describing his visit to the oil fields:
Incidentally, in the early days of the industry, many people thought that oil would run out quickly. Carnegie, like many others, lost money on a scheme to take advantage of the peak that was believed to be imminent:
Overall I found the autobiography readable and enjoyable, although for my research purposes I lost interest after Carnegie‘s retirement (the last several chapters are all about his philanthropy and about politics). If you want more like the excerpts above, it‘s worth reading.