An Investment Strategy Based on Ancient History

By Keith Roberts

Knowledge of history can be of real practical use, even in business. Ancient history has helped me better understand the difference between fundamental and incremental change in our own age, and that has led me to better focus my company’s investment decisions.

My interest in ancient business began when in frustration at the antiquated business practices of my small manufacturing business, I uttered what seemed like an original curse: “This place is run like a Roman blacksmith shop!”

I stopped. How did Roman blacksmith shops operate, anyway? Did Rome even have them? In fact, when did businesses begin, and what are the significant differences between ancient businesses and modern ones?

In modern life, with its constant parade of changes large and small, major investment and policy decisions can turn on the question of just how fundamental a change is. Change came much more slowly in antiquity than it does today, but antiquity provides some interesting examples of the difference between fundamental and incremental change. For a business, a fundamental change is one that disrupts existing practices in major ways, often hard to foresee. Incremental changes have a more limited, predictable impact. Distinguishing between one and the other is not easy.

The coming of the Iron Age, a development of immense political importance around 1000 B.C., looks at first glance to have been fundamental for business. After all, the Iron Age led to gigantic empires in the Middle East—the Assyrian, Babylonian, and Persian—as it dramatically undercut the previous Bronze Age cost of tools, armor, and weaponry. A Bronze Age cooking tripod was worth three women or twelve oxen to Achilles, but iron tripods performing the same function cost a small fraction of that.

Yet the Iron Age actually changed very little about business. Blacksmiths did come into their own then, and iron tools increased productivity and wealth, and the submersion of states within great empires reduced barriers to trade. But there was no change in business’s role or practices, or in the nature of business activity. Business played no different or larger a part in the economies of the Assyrian, Babylonian, and Persian empires than it had in the Sumerian and Egyptian societies that were the first civilizations 2,000 years earlier.

By contrast, the invention of coinage dramatically altered the role and practices of business, and greatly increased business's economic importance in may Greek city-states. Late in the seventh century B.C., the kings of Lydia minted the first coins, to use to pay their Greek mercenaries. The neighboring Greeks soon issued coins of their own, adapting them for use in their markets.

As sales for money replaced barter, economic exchange became faster and more frequent. Monetary prices improved information about values and supply and demand, reducing risks for traders and vendors. Their wares then became more available, stimulating consumer demand. An entrepreneurial market economy became a defining feature of Greek urban life. Later, the conquests of Alexander the Great and the Romans brought market economies to towns and cities throughout the western world.

The difference between the impact on business of the Iron Age and of coinage cautions us to ignore the “shock and awe” of change as a general proposition and focus on the practical details of exactly how a change works in reality.

Compare, now, two notable modern changes. With the rapid growth of international trade and communication, played up by enthusiasts like Thomas Friedman, globalization has attracted enormous attention. It has certainly wreaked havoc on U.S. and European workforces, and the larger scale of competition has led to a great reshuffling of business organizations and relationships. Globalization has vastly expanded international investment opportunities.

Based on the example of the Iron Age, however, I doubt that these effects represent a fundamental business change. Larger business organizations, disrupted supply chains, new competition, additional investment opportunities, and even the internationalization of labor have long been familiar business issues. Globalization has not produced radically new industries or greatly altered the role of business.

By contrast the computer revolution (really, the microprocessor revolution) that started in the 1960s does indeed seem fundamental, perhaps comparable in scope and impact to the creation of coins. Computers have engendered entirely new sciences like genomics, underlying whole new fields of knowledge, new types of work, and new businesses. Computer-aided design and manufacturing have given us products never before possible. Computers power the virtually instantaneous communication and information capabilities that are transforming purchasing, sales, innovation, marketing, and organizational structures.

Consider the impact of computers on finance. They have made functional such techniques as portfolio diversification, hedging, structured finance, and credit scoring, all of which greatly reduce the riskiness of promises to repay. A vast increase in credit and purchasing power has resulted, fueling economic and business prosperity since the 1960s. To be sure, such financial innovation has outrun regulation, allowing the widespread fraud that ultimately crashed real estate values and the economy. But a lag in regulation is common when there is radical change, and it no more devalues financial innovations than Wild West lawlessness devalued the settlement of the frontier.

In sum, I see the computer revolution as a fundamental change, and I direct my investment strategies accordingly. Many reach a similar conclusion without historical knowledge, but for me history has greatly clarified where the train tracks lead.

0524_keith-roberts_170Keith Roberts graduated from Harvard College and Harvard Law School and has served as attorney or chief executive at investment advisory, real estate development, distribution and manufacturing businesses. He is an arbitrator for the Financial Industries Regulatory Authority and a mediator in the New York court system, and is the author of The Origins of Business, Money and Markets, just published by Columbia Business School Publishing.