Neal's Workshop

Warren Buffett is an American hero. He's also a hero of mine. Ever since plowing through Roger Lowenstein's Buffett: The Making of an American Capitalist and subsequently picking up The Essays of Warren Buffett: Lessons for Corporate America, only to go on to read Benjamin Graham's The Intelligent Investor, I've recognized the Oracle of Omaha as an avatar for capitalism. Who else has demonstrated more clearly the profitability of reason and property? Buffett was built for it.

Yet something about Buffett was never right.

Throughout the course of the majority of his life, Buffett routinely rejected philanthropic requests. As you can imagine, there were many hands held out asking Buffett to open his coffers and support this or that cause. Buffett kindly rejected most of these requests. His mentality, you see, was that his accumulated wealth was better off under his watch. When you have a knack - a track record - for returning in excess of 20% return for twenty plus years, as Buffett did, you can understand such a mentality. Even if you wanted to give your wealth away, which Buffett made clear that he did, allowing that wealth to compound upon itself at a rate much greater than the market in general is the quintessence of fiscal and social responsibility.

Buffett's legacy can be seen clear enough in the chart below. Take note of the gold line (The one that is essentially flat compared to Berkshire Hathaway from 1978 to 2006) - it's the S&P 500 (NOTE: The DJIA vs BRK.A looks the same. Go see for yourself on bigcharts.com).

Given such success, why is Warren Buffett merely the "99%" capitalist? Where has he failed?

Buffett has always felt that he owes something back to society. When Buffett announced that he would give his wealth to the Gates Foundation, he said the following:

We agreed with Andrew Carnegie, who said that huge fortunes that flow in large part from society should in large part be returned to society. In my case, the ability to allocate capital would have had little utility unless I lived in a rich, populous country in which enormous quantities of marketable securities were traded and were sometimes ridiculously mispriced. And fortunately for me, that describes the U.S. in the second half of the last century.

Buffett, as usual, is right: circumstance placed him in the right time at the right place and equipped him with the right skills to succeed.

Mr. Buffett fails to recognize the social return on his capitalistic actions. He doesn't see how his capitalistic behavior - investing in mispriced equities, but solid companies - resulted in a measureable (Look at the chart above) as well as an unmeasureable amount of good. His investing wisdom has bestowed upon investors worldwide the gift of reason as applicable to the too often irrational "Mr. Market." His sound investments have secured jobs for thousands. His wise allocation of capital has resulted in products being provided at competitive prices.

Warren Buffett has supported the role of the government in society. He's favored taxation, in general, throwing his support to the estate tax and arguing for increased property taxes for Californians. Buffett has stood firmly opposite to his father, the late Howard Buffett, who was a Republican senator for four terms, held a libertarian idealogy and was a friend of Murray Rothbard.

Political ideology aside, Buffett is a proponent of social responsibility. He sees his gift of capitalistic genius as something to enjoy, personally, and then pass back to the world. Nothing is wrong with holding such a view. It's laudable that Buffett wants to make the world a better place with his wealth via donating it to the Gates Foundation - to do so of his own volition is what liberty is all about.

However, Warren Buffett's imperfection as a capitalist is in his implicit hypocrisy: while believing that wealth was better in his hands, rather than another's, he maintains that wealth is rightfully taxed away by an entity necessarily designed to provide a negative return. Mr. Buffett further fails to see that his wealth could potentially do more good in the free market, as it had done good all of his life, than it might do under the stewardship of a charitable organization - even one so meritorious as the Gates Foundation.

It is Buffett's incomplete, inconsistent economic understanding that vexes the capitalists of the world. We are surprised and disappointed that such a free market legend could fail to understand the basic nature of capital: that capital is always more productive in competitive hands rather than charity cases. Bill Bonner elucidates the problem and hints at the inconsistency of Buffett's beliefs:

For it is thus, with real income, honestly earned by sweat and saving, that people are lifted out of poverty. Acts of grand benevolence, on the other hand, whatever good they do in the short term (and we don't deny that they do great good in the short term) usually make things worse in the long term. Instead of [individuals] getting to choose what they want, [they] get what the givers choose to give them, not as customers, but as charity cases.
. . .
Buffett says he wants to avoid passing on the corrupting influence of unearned money. He will give his children "enough so they can do anything, but not enough so they can do nothing."

Buffett's ideological inconsistency is clear. His failure as a capitalist is his shortsightedness: Buffett has failed to take the determining factors of his success to their logical conclusions.

As a consequence of this lack of rigor, the real legacy of Warren Buffett, the capitalistic creation of an incomprehensible amount of wealth, will be forever overshadowed by his philanthropy, confusing his greatest gift to society - his capitalism - with the lesser gift of giving the resultant wealth away.

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