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From The Strange Case of Dr. Hayek and Mr. HayekLudwig von Mises initiated the “socialist-calculation debate” in 1920 by arguing that socialism could never be economically efficient, because if government were to own or control the means of production, then planners could not rationally set prices for capital goods(as distinct from consumer goods) since transactions among such goods would in that case become merely “internal” transfers of goods which would thus not be “objects of exchange.”Since the goods would not be priced, planners would be unable to allocate them efficiently”, and so, “rational economic activity is impossible in a socialist commonwealth” – whereas the free market with its price system shows how to distribute resources rationally since individuals acting in the market distribute goods and services on the basis of other individuals’ willingness to pay for them: free-market prices convey information about the abundance of resources and their desirability to consumers, whereas socialism, lacking in such a price system, cannot allocate resources rationally. Hayek developed these points further by (as we have seen) describing the price system under free-market capitalism as an information-processing scheme for which no adequate substitute could be devised. [Lionel] Robbins and Max Weber favored the anti-socialism side of the debate. Oskar Lange (b.1904), Abba Lerner, H. D.Dickinson and, albeit mostly in private discussions, Otto Neurath (b.1882) were on the socialists’ side. This appendix will describe Neurath’s and Lange’s relatively unfamiliar arguments and put them in proper historical context.Neurath was trained as an economist and became active also as a sociologist, philosopher and graphic designer. His experiences working for the Austrian government during World War I by helping organize the government’s wartime economic planning persuaded him that socialist planning would be feasible and desirable. After the war, the Social Democratic administration in Bavaria invited him to serve on a commission overseeing the socialization of the economy. But then during the 1919 revolution in Germany, the Social Democratic premier of Bavaria was assassinated by right-wing nationalists, and this led to a Communist-led uprising in Munich which resulted in the Social Democratic administration being replaced by a short-lived “Soviet Republic of Bavaria,”which retained Neurath in his post. The German army soon put down the uprising, whereupon he was arrested and charged with treason on account of his having served the soviet republic. He pleaded not guilty on the grounds that his duty as a civil servant had been to serve whoever was in power. Prominent German academics (including Max Weber) spoke out on his behalf, the Austrian government interceded for him, and ultimately his sentence of a year and a half of confinement to a fortress was commuted to expulsion from Germany for seven years. Returning to his native Austria, he devoted himself to the workers’ movement there (by, for instance, teaching classes for work-ers). As part of these activities he developed graphic isotypes for conveying practical information to illiterate or semi-literate people – an invention which had a notable impact on graphic design internationally (see illustrations). He also resumed his interests in philosophy. Before the war he had been part of a circle concerned with Ernst Mach’s philosophy of science; he was one of several Austrian Marxists drawn to Mach’s philosophy (or, in some cases, to neo-Kantianism) despite Lenin’s disapproval of such tendencies; now in the 1920s he began to collaborate with a number of philosophers and scientists(Rudolf Carnap, Moritz Schlick, Philipp Frank etc.) in an effort to update Mach’s ideas in light of the new developments in logic that had been pioneered by people like Gottlob Frege, Bertrand Russell and Ludwig Wittgenstein. This new philosophy became known as logical positivism or logical empiricism. Neurath co-authored with Carnap a manifesto for it, “The Scientific Conception of the World: The Vienna Circle,” and was the driving force behind a unity-of-science movement seeking to join the natural and the social sciences and producing the Vienna Circle’s International Encyclopedia of Unified Science.Much of Neurath’s discussion with Hayek as to the feasibility of socialist calculation hinged on their opposing stances in regard to Neurath’s “physicalism.” Many of the logical positivists envisaged a kind of reconstruction of science on the basis of sense data, but Neurath regarded perceptual experiences as too subjective to provide a valid foundation for science; he thought that a stronger one could be based on mathematically formulated physics and objective spatio-temporal coordinates, and that such an approach would foster the elimination of metaphysical statements from science by enabling its propositions to be reduced to a set of assertions related to physical facts.He held that this physicalism was applicable to the social as well as to the natural sciences.Until fairly recently, his role in the socialist-calculation debate has tended to be downplayed in literature about the debate, most likely because he communicated with Hayek by post rather than publicly. In recent years, however, research on ecological economics and sustainable development has fostered a revival of interest in some of his economic ideas because he advocated “in-kind” (as distinguished from monetary) economic accounting (Naturalrechnung). (In the 1920s he also advocated Vollsozialisierung, i.e “complete” rather than merely partial “socialization.”) His proposed changes to the economic system were therefore more radical than those advocated by the mainstream Social-Democratic parties of Germany and Austria, and he debated these matters in the ’20s with leading Social-Democratic theoreticians (such as Karl Kautsky, who insisted upon the necessity of money in a socialist economy). It was while serving as a government economist during the war that he had observed that“As a result of the war, in-kind calculus was applied more often and more systematically than before.... It was all too apparent that war was fought with ammunition and with the supply of food, not with money”—and had come to believe in the feasibility of an economic system with planning done in terms of quantitative amounts of specified goods and services, and with no use at all for monetary currency. (It was in response to these ideas that Mises wrote his famous essay of 1920.) For Neurath, war economies displayed advantages in regard to speed of decision and execution, optimal distribution of means relative to (military) goals, and no-nonsenseevaluation and utilization of inventiveness. Two disadvantages which he perceived as resulting from centralized decision-making were a reduction in productivity and a loss of the benefits of simple economic exchanges; but he thought (as did Lenin) that the reduction in productivity could be mitigated by means of “scientific” techniques based on analysis of work-flows etc. as advocated by Frederick Winslow Taylor (an American mechanical engineer and management consultant). Neurath believed that socio-economic theory and scientific methods could be applied together in contemporary practice.Although he was opposed to “market socialism” (as well as to capitalism), he believed in granting some degree of independence to small producers in the crafts and in agriculture:“The doctrine that there is a trend towards ever more comprehensive organizations has been confirmed fully, less so the doctrine that small businesses will be replaced by large-scale concerns.”He considered it essential, however, that small producers of various sorts be organized in a multitude of regional and branch organizations to ensure that goods and services would be produced according to a central plan, and he held that “total socialization” would require a comprehensive statistical apparatus:“Even before they begin their work, all bodies ... should be required to report to the Central Economic Administration, which, in collaboration with the Center for Statistics ... will fit the individual results into the universal statistics.”When countering the theories of some of the leading Austrian champions of market economics (Carl Menger and Joseph Schumpeter), Neurath found that he had to challenge some of their basic assumptions. From Aristotle and from socialist literature he adopted the radical notion of wealth as based on use-value and welfare, whereby economic theory would be concerned with “wealth” in the sense of people’s physical and social conditions. His concept of welfare was, however, more Epicurean than Aristotelian; he said that “social Epicureanism”“deals with the happiness of human beings as an effect of social actions. What is the effect of different orders of life, of different measures, on the conditions of life of human beings and thereby on their happiness and unhappiness?”He felt that economists should try to find out which conditions promote people’s wealth in that sense of the term,and which institutions increase or decrease it. But he also perceived a theoretical challenge in regard to representing wealth and its allocation in such terms – namely, how to defend the rationality, objectivity and fairness of decision-making in the alternative framework. In considering “the problem of pleasure maximum,” he argued that cardinal measures – that is, quantitative ratings with cardinal numbers (such as, say, 481, 25¾ and 7,333) as distinct from ordinal numbers (1st, 2nd, 3rd...) – for comparative utility or “pleasure values” could not be computed for any one individual, much less for different individuals. He also rejected the assumption that it is possible to sum together the utility functions (the pleasures) of separate individuals. He therefore concluded that it is not possible to calculate maximum social-utility functions, i.e., that interpersonal comparisons of utility are impossible – and likewise for comparisons of utility for the same person at different times.Neurath felt that this general absence of valid unitary measures and algorithms for decision-making weakened the theoretical case for a market economy, because he held that market-economic theory assumes a framework in which “people influence each other’s actions exclusively by means of the higher and lower qualities of life that result from the process of exchange,” with the main conditioning-factors being profit and loss (and with the goals being those of maximizing the one and minimizing the other). On the other hand he thought it would be a virtue of an administrated economy that“[it could,] by rewards and penalties, prompt the individuals to do things which they would not have done in an economy characterized by exchange, because without these rewards and penalties the consequences would have been different.”It was a quarter-century after the original exchanges between Neurath and Mises that the debate resumed – this time between Neurath and Hayek but with Neurath’s part of it being kept private by Hayek’s refusal to debate publicly. Neurath, upon reading in 1945 an essay by Hayek which attacked what Hayek called “scientism” and which singled out Neurath as a prime culprit, challenged Hayek to a public exchange of views. Hayek replied:“I am at the moment entirely engrossed in an attempt to elaborate the psychological implications of the earlier part of my Scientism essays – or rather an attempt to restate certain ideas I had formed on this subject a very long time ago – at the moment at any rate I feel quite unable to give my mind to anything but these questions, but, of course, nothing may come of it.”(In citing this letter of Hayek’s, an admiring disciple of his has pointed out that he “did not tell Neurath that his new work was aimed at least in part at Neurath’s own physicalism.”) However, Neurath persisted with additional correspondence, and the result was a discussion of some of their respective views. Hayek had previously criticized what he saw as Neurath’s rationalism; Neurath responded now that he was just as critical of rationalism as Hayek was and that they actually shared some assumptions as to the limits of reason and predictability. Neurath was rebutting what he saw as some misunderstandings of logical empiricism which were (and still are) widely accepted and which Hayek himself had popularized. Neurath attempted to turn these assumptions back against Hayek in order to defend the possibility of socialist planning. It seemed to Hayek that Neurath’s belief in in-natura calculation was due to an illusion as to the nature of knowledge similar to the illusion of social engineers who think social problems have purely technical “optimum” solutions. Hayek thought that social engineers (including Neurath)were falling for a “Cartesian rationalism” which viewed human reason as omnipotent and that they were thus fail-ing to perceive that knowledge, including practical knowledge in the form of local skills and know-how (Michael Polyani had called it “tacit knowledge”), is dispersed in society and cannot be articulated in propositional form and gathered together by a central planning agency. Hayek, seeing in the market-price system an indispensable way of coordinating information and distributing it among different economic actors, felt that there could never be an in-natura alternative to this reliance on money and prices, there could never be any physical units (such as units of energy) which economic planners could successfully use to devise a uniquely “optimum” solution. How-ever, Neurath himself rejected the notion that there are technocratically based optimum solutions to social problems; he was just as hostile towards technocracy as Hayek; he said that when it comes to social choices, no proposal can be valid unless it takes into account multiple criteria (not just monetary price) for evaluation. He shared with Hayek certain epistemic assumptions, and his critique of what he called “pseudorationalism”resembled Hayek’s rejection of rational science. So he thought that he could in a public debate turn the tables on Hayek. But then he died within five months (at the age of 63), and since Hayek had rejected his proposal of a proper debate in public, quite a few issues in their truncated private discussion were left hanging in the air. According to a recent student of Neurath’s philosophy,“The most striking area in which there is congruence between Hayek and Neurath is in their common rejection of Cartesian rationalism and the technocratic conception of planning that they both take to stem from it. Hayek’s account of Neurath as an advocate of such rationalism in his scientism essay is simply in error. Moreover, there are important overlaps in their arguments against the possibility of complete predictability in the social sciences.For example, both appeal to the argument that complete prediction of the future direction of society is impossible,since social change is dependent on developments in the content of knowledge and those developments are in principle unpredictable.”The extant traces of this private debate do not show whether Neurath in the 1940s was still calling for centrally planned Vollsozialisierung (although they do show that Hayek took this for granted). Neurath clearly still doubted, however, free markets could be relied upon to deal decently with issues involving nonrenewable resources. It is possible to agree with Neurath on that score – and indeed this point has been taken up by modern ecological economists – without accepting his belief (at least in the 1920s) in the feasibility of an economic system so thoroughly permeated with in-natura calculations that money could be dispensed with altogether.The most notable other representative of the Socialist side in the social-calculation debate was Oskar Lange,an explicit opponent of Vollsozialisierungin the foreseeable future. (Karl Marx himself had held that only in a distant future could society “inscribe on its banners: ‘From each according to his ability, to each according to his needs!’”) Lange was a Polish economist who migrated to England in 1934 (subsidized by a Rockefeller fellowship) and then served as an economics professor at the University of Chicago from 1938 to 1945, when he gave up his American citizenship and returned home to Poland. During the war he had worked initially for the Polish government in exile but then had broken with them to work for the Soviet-backed Lublin Committee instead.He was a Marxist and a neoclassical economist, however. He thought Marxism provided the key to understanding the historical evolution of capitalism (including its supposed ultimate displacement by socialism), but he regarded traditional Marxist economics as inadequate in several ways. He considered the “labor theory of value” (as shared to a great extent by Adam Smith and David Ricardo as well as Marx) unscientific, and held that a Marxian concept of exploitation could be restated without it. He made statements like“If people want to anticipate the development of Capitalism over a long period, a knowledge of Marx is a muchmore effective starting point than a knowledge of [Friedrich von] Wieser, [Eugen von] Bohm-Bawerk, Vilfredo Pareto or even [Alfred] Marshall (although the last-named is in this respect much superior). But Marxian economics would be a poor basis for running a central bank or anticipating the effects of a change in the rate of discount.”and“[I]n providing a scientific basis for the current administration of the capitalist economy ‘bourgeois’ economics has developed a theory of equilibrium which can also serve as a basis for the current administration of a socialist economy. It is obvious that Marshallian economics offers more for the current administration of the economic system of Soviet Russia than Marxian economics does, though the latter is surely the more effective basis for anticipating the future of capitalism.”(He appreciated Marshall for taking seriously the fact that the theoretical concept of “perfect competition” is un-realistic. Keynes was also among the non-Marxian economists whom he regarded as very informative about the dynamics of capitalism.)Lange held that Mises’s original argument floundered on a confusion over the nature of prices. The concept of price-ratio could, according to Lange, mean not only the exchange-ratio between two commodities in the market, but also, more generally, the “terms on which alternatives are offered”; and he contended that only price ratios in this more generalized sense are indispensable for achieving a rational allocation of resources. In a centrally planned socialist economy, there would be no price ratios in the narrower sense among capital goods, but this would not, he said, preclude the existence of such ratios in the more general sense, because central planners and administrators would have access to the same knowledge of production-functions that is available to capitalist entrepreneurs, and could thus manage to make rational economic decisions.Lange regarded Hayek and Robbins as offering a more sophisticated and stronger version (than Mises) of the argument against the feasibility of socialist economic calculation. He interpreted them as conceding the theoretical possibility of a rational allocation of resources in a socialist economy but as arguing that such an allocation was not realizable in practice under socialism. (Hayek thought that any central planning board would have to solve many thousands of equations in order to allocate resources; Robbins said it would entail millions of equations; the general idea dates back to Pareto quite early in the 20th century.) Lange acknowledged that capitalist economies are able to solve the problem of allocating resources rationally via trial-and-error processes (Leon Walras had called them tâtonnements) in which capitalists adjust prices up or down until markets clear, and that price changes will then act as signals to tell other capitalists whether to increase or decrease the production of given goods or services. He said that in a centrally planned socialist economy, the functions which are performed by the price system would have to be duplicated somehow by the central planners. He believed that they could do it b using a trial-and-error procedure “to determine accounting-prices of capital goods and of productive resources in public ownership”: the planners would adjust prices up or down depending on whether shortages or surpluses had appeared. (They would, for instance, reduce the prices of overstocked elements.)In an essay published in 1936, Lange discussed various models which a socialist economy might conceivably follow, including some with full freedom for consumer-choices and occupational choices, as well as some where those kinds of freedom would be restricted or even eliminated. He tried to demonstrate that in all those cases, central planners could solve the problem of achieving (a) consistency of decisions and (b) efficiency in carrying them out, and could thus allocate resources rationally. He went on to make it clear that he did not advocate a socialist model in which bureaucrats suspend freedom of choice for consumers and workers in order to impose their own preference-scales on people. He said: “Mr. [Abba] Lerner has sufficiently shown the undemocratic character of such a system and its incompatibility with the ideals of the socialist movement.” A year later he pointed out that“As [Cambridge] Professor [A.C.] Pigou has shown, there is frequently a divergence between the private cost borne by an entrepreneur and the social cost of production. In the cost account of the private entrepreneur, onlythose items enter for which he has to pay a [monetary] price [to someone else], while such items as the maintenance of the unemployed created when he discharges workers, the provision for the victims of occupational diseases and industrial accidents, etc., do not enter.... [Under capitalism, certain important matters, such as the]life, security, and health of the workers, are sacrificed without being accounted for as a cost of production. A socialist economy would be able to put all the alternatives into its [in-kind]economic accounting…. By doing soit would avoid much of the social waste connected with private enterprise. As Professor Pigou has shown, much of this waste can be removed by proper legislation, taxation, and bounties within the framework of the present economic system; but a socialist economy can do it with greater thoroughness.”Hayek’s rejoinder (1940) began with the argument (which he said Pareto had hinted at) that socialist economic planning would be unfeasible because the planners would have to solve too many simultaneous equations; then he turned to Lange and his allies (mentioning Dickinson) and, after berating them for allegedly not admitting that their proposals for socialist economic planning differed from previous ones which socialists and critics of socialism had been discussing, expressed doubt as to the efficiency of having a central authority adjust prices by trial and error. He was convinced that no central authority could reset prices in a timely manner; at best it would be, he said,much slower than market forces at adjusting them in relation to supply and demand. He added that people like Lange and Dickinson, overly concerned with the issue of whether or not a socialist economy could duplicate the results achieved by a market economy under conditions of perfect competition, ignored the fact that capital goods in heavy industry (buildings, ships, machinery etc.) are usually produced to meet special contracts rather than for open markets; vendors might compete to win the contracts, but seldom under conditions resembling perfect com- petition as envisioned by neoclassical economists. No central planning authority could, he said, be relied upon to set prices properly in such peculiar situations.Lange acknowledged promptly in a letter to Hayek that this article made some important points. He saw Hayek as having shifted considerations of the socialist-calculation problem from a “static” to a “dynamic” stand- point. Lange said that even though sensible prices could in theory be determined by trial and error in the absence of a market, in practice he favored the determination of prices by markets wherever this was feasible – which for him meant wherever there were sufficiently large numbers of both purchasers and sellers – but that prices should be set by public agencies in those sectors of the economy where the numbers of sellers or purchasers are low. He held that something analogous happens under capitalism, except that there it is monopolies which do the price-fixing rather than agencies acting in behalf of public interest.Hayek responded in 1945 in a paper, “The Use of Knowledge in Society,” which is nowadays remembered less for its repeated arguments against Lange than for the one about diffused knowledge which we have cited int he main part of this essay. Hayek held that the trial-and-error method of planning proposed by Lange could never produce a rational allocation of resources because there could never be any way for national planners to gather together enough valid information. In The Road to Serfdom he argued that one reason why, if the Labour Party were to win the election of 1945, life in Great Britain would amount to serfdom, was that“[it is] impossible to assume control over all the productive resources without also deciding for whom and by whom they are to be used. Although under this so-called ‘competitive socialism’ the planning by the central authority would take somewhat more roundabout forms, its effects would not be fundamentally different, and the element of competition would be little more than a sham.”In the 1960s, Lange argued, in an essay entitled “The Computer and the Market,” that recent technological developments made it possible to solve in relatively short periods of time the large sets of equations theoretically involved in certain aspects of rational central planning. This did not change his basic view that planners would always have to correct their plans by the trial and error. He said that some economic processes are so complicated that it would still be impossible to construct good computerized models of them, and he observed that markets were already being used in socialist economies for the distribution of consumer goods; yet he argued that computers give faster answers than markets do, and that market-price changes cause different social groups to experience either increases or decreases in their incomes (with results that would be problematic in a socialist economy where there is supposed to be a policy of evening out the incomes) and indeed that markets sometimes fail to provide iterative solutions to the equations – that is, they do not always converge to equilibrium, there may instead be “cobweb-cycles” (inventory- or other reinvestment-cycles) as well as more general business-cycles. He felt that while computers could be used for making prognostications, (a) it would be unwise to try to replace markets altogether in regard to short-term decisions; economic planners could instead use sophisticated computer models to make fore-casts which would then be verified against market data; whereas (b) markets are not very useful for long-term economic planning since they work by treating the accounting problem as a static issue. He was alert to the fact that prices reflect recent conditions but do not provide systematic information as to the possible effects of investment changes, of changes in technical conditions for production, and of the creation of new wants. Such shortcomings in the informative value of market prices were, in his opinion, present under capitalism as well as under socialism.Hayek never replied to these arguments.

Roboadvisors are good investment vehicles.I write today in sadness and frustration.I hesitate to link to Blake Ross' recent article on the tyranny of Wealthfront because it strikes a blow that sets my friend’s and generation’s investment goals back immeasurably. While I fear that his colorful writing and celebrity status will likely confuse people into inaction, I hope that this article will inspire you back into action and shed light on some the inaccuracies and misrepresentations in Ross’ article.Before I begin my response I implore readers: If you’ve been evaluating Wealthfront, Betterment, Vanguard Retirement Funds, or Schwab Intelligent portfolios over the last few months (or years) and can’t decide which to use — for the love of whatever you believe in, stop reading this post, roll a 1d4 and just pick one. They’re all better (by a large margin) than you leaving it in your checking account, spending it on something stupid, or giving it to an active advisor. Go. Do it. Now. Which one did you choose? As the Rock would say, “it doesn’t matter [what you chose, as long as you chose].”Time for business.There is a lot of powerful and glossy rhetoric in Ross’ post and while I appreciate the passion and renegade approach, I am upset by the misinformation. I’ll try to distill it down to the key arguments that I think he makes and address those. Let me know if I missed any, and I’ll try to add it in when I have time.Argument A: You’ll make more money with Vanguard Retirement Fund than a Roboadvisor — This is a strong claim that in Ross’ words, “There is simply no evidence, nor any theoretical reason, to believe”. It’s the hardest claim to prove but is also most important of the arguments. Simply put, the Wealthfront portfolio costs 0.18% more annually but probably makes up for this difference (and then some) due to tax loss harvesting (enough to close the gap alone), a likely superior asset allocation, a likely superior rebalancing strategy, and a faster rate of innovation.Argument B: Roboadvisor fees increase over time — This isn’t a particularly unique thing, and I’m not sure what the ultimate impact is of this argument, especially since Ross’ alternative suffers the same “flaw”. A number of business models include fee structures like this, especially when the benefit of the product increases over time as well.Argument C: Tax-loss harvesting is too good to be true and the benefit is overstated — Ross agrees that there is an aftertax benefit to tax loss harvesting. His argument is that the magnitude of the impact is too small to matter. Unfortunately, even if we cut Wealthfront’s estimates by 10x and then refer to Ross’ citation about Tax Loss Harvesting, both sources claim an annualized benefit of at least 0.20%, which is already enough to push Wealthfront above Vanguard Retirement Funds. Finally, the author of Ross’ only substantive claim against the benefits of Tax Loss Harvesting actually supports Roboadvisors, and even Wealthfront specifically.Argument D: Roboadvisor fee structures are unprecedented — No they’re not.Note that while Ross decides to aim his critique primarily at Wealthfront, his arguments apply to Roboadvisors at large and so I’ll genericize my response where I can. When I use specific fee figures, I’ll use Wealthfront’s. Also note that Ross’ alternative is by no means bad, it’s just not better, and certainly not better to the degree that justifies the tone of his critique. I love Vanguard. They’re great.Onward…A. You’ll make more money with Vanguard Retirement Fund than a Roboadvisor1. The true fee difference is about 0.19% in Vanguard’s favor — Wealthfront’s portfolio costs about 0.37% annually (closer to 0.35% for accounts with Direct Indexing). This fee is composed of a 0.25% fee paid to Wealthfront and a 0.12% fee paid to the administrators of the ETF that Wealthfront invests you in (mainly Vanguard, by the way). Ross’ “dirty secret” alternative (Vanguard Retirement Fund) charges 0.18%. Now, that means we need to see if Wealthfront can overcome ~0.19% in annual fees. Let’s get to work.2. Tax Loss Harvesting by itself makes up for the 0.19% (and then some) — Wealthfront claims Tax Loss Harvesting can save you up to ~2.5% annually. While I agree with Ross that this figure is huge and likely overstated, just ignoring it is hardly sensible. So let’s decimate this claim. That’s 0.25%. So this means that 1/10th of Wealthfront’s claimed Tax Loss harvesting makes up the 0.19% difference by itself, and then some. I contend that Ross’ arguments show a misunderstanding of what TLH is and the mechanics of how it works. I’ll dive into this in depth in the TLH section.3. Ross likely misrepresents Buffett’s viewpoint — Furthermore, he mis-characterizes a Buffett quote as evidence to assail robo-advisors:“… Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”First, if you asked Mr. Buffett whether 0.37% is a high-fee manager, I’d wager he wouldn’t think it was too bad given the management fees being in the 1–2% for most of his lifetime and given Ross’ own argument that WF has significantly lower fees than other advisors and given that Ross’ alternative has fees that are less than 0.20% lower. Second, I’d also place a wager that Buffett is referring to active managers (most Roboadvisors are passive asset allocators). Third, Buffet’s allocation is obviously an oversimplification that can and should be improved upon. Or is it? Let’s see what the experts have to say about the importance of a diversified asset allocation.4. Asset Allocation matters a lot — In a seminal 1985 paper it is argued that asset allocations explained almost 94% of a portfolio’s return versus other factors contributing 6%. The administrators of Mr Ross’ alternative also believes this too as evidenced by aVanguard-published paper stating that almost 77% of portfolio performance comes from asset allocation decisions (they removed some factors from being classified as asset allocation that the Brinson paper includes). If academics don’t convince you, fine.5. Good investors also think asset allocation matters a lot — Some not-so-bad investors say stuff too.“Asset allocation is critically important; but cost is critically important, too — All other factors pale into insignificance.” -John Bogle, founder of Vanguard“The most important decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money market securities, etc.) at different stages of your life.” -Professor Burton Malkiel, author of A Random Walk Down Wall Street, way before he became Wealthfront’s CIO“Choose your asset allocation model carefully. Asset allocation is the biggest factor in determining your overall return.” -Charles Schwab6. Figuring out asset allocation difference is hard, we have to evaluate it systemically — Now, the question is whether Wealthfront’s asset allocation is better or worse than the Vanguard retirement fund’s. This is a very, very tricky question to answer because there’s really no concrete way to know aside from just seeing how they perform. The issue with that approach is you don’t know systematically which (if either), will outperform. You only know what actually happened, which is significantly influenced by chance. What we can do, however, is understand the process each manager employs to see if there are systematic biases to outperform the other or not.7. Vanguard portfolios are more constrained than Wealthfront’s — Vanguard’s Retirement portfolios use their own funds. Wealthfront has no such requirement. That means that in cases where an asset allocation would be better served by having a non-Vanguard fund that provides a certain set of exposures, Vanguard must find a close proxy, create a new fund, or risk underperformance. Wealthfront has the opportunity to find the best alternative (which happen to be Vanguard MOST of the time). It’s tough to quantify, but the argument is simply that a constrained portfolio is likely worse than a less constrained one.8. Wealthfront’s rebalance strategy is likely more sophisticated than Vanguard’s -Furthermore, Wealthfront’s rebalance strategy is optimized to minimize drift while keeping costs at bay, a strategy advocated by Vanguard. While Wealthfront has developed software to assess the trade-off between these two sides in real time (it operates continuously), Vanguard does it daily (because they receive fund inflows and outflows daily) incurring small costs on the fund each time and requiring discrete decision-making which is not real-time. Additionally, there is evidence to believe that Vanguard uses time-based and threshold based triggers, which they admit in their own white paper have issues. While the impact here is likely small, it is yet another systematic benefit to an automated strategy like Wealthfront’s.9. Wealthfront’s rate of innovation is fast — Finally, Wealthfront has been at the Vanguard (see what I did there?) of change in the industry for a long time. I will say that Vanguard’s innovations are great, but Wealthfront has been the Roboadvisor that has consistently pushed the envelope, developed new strategies, reduced cost via cheaper ETF’s, and made more features available to smaller investors faster. Others follow suit of the star-studded investment team from Wealthfront. Purely on a trust basis, I would trust the investment analysis (I’ve verified enough myself) of Wealthfront. Even beyond that, there’s a tangible benefit being the leader of innovation because your investors realize the benefits of the features while investors in other funds must wait for the innovations.10. Ross’ critique minimizes the impact of human psychology (and lack of logic) on financial decisions — Ross says,“If you open a retirement account, and you invest some of your paycheck each month into a Vanguard Target Retirement Fund, and you just…leave it… until retirement… you don’t do anything when the folks on CNBC announce that the sky is falling; you don’t do anything when Cousin Eddy calls from a secure underground bunker in the badlands and says that the fed is printing money and it’s time to liquidate and ammo up; you don’t think it’s a sign that your parrot said “fuhgeddaboutit” but you thought she said “get a nugget” and surely that must mean a gold nugget? and you looked online and noticed that the price of shiny yellow metal was crashing and wait your parrot is also yellow and I’ll be damned if that isn’t a sign to buy… no, if you just leave it there to compound over decades… then you will probably make more money than … if you used Wealthfront.”That’d be nice, but it rarely happens. The story of Peter Lynch and the Magellan Fund is a cautionary tale. He ran the Fidelity Magellan fund for 13 years and achieved a ~30% annualized return. The average investor in the fund, however, actually lost money. This happened because investors would fear on the dips and sell and chase returns after a big run up. They essentially broke the cardinal rule of investing by selling low and buying high, over and over again. An automated advisor protects you from yourself marginally more than a portfolio you need to manage more (or even a Vanguard Retirement Fund which is psychologically easier to view as a single investment rather than money with an advisor).11. Vanguard Retirement Funds are either less tax efficient (in taxable accounts) or they are less optimized (in non-taxable accounts) than the Wealthfront portfolio — Wealthfront offers a separate asset allocation for taxable and non-taxable accounts in order to optimize tax treatment. The Vanguard Retirement Fund is a single entity that holds a single asset allocation which is not specifically optimized for one type of account or the other. The impact of this is non-negligible.B. Roboadvisor fees increase over time1. Yes, they do — There doesn’t seem to be a differential implication presented.2. It’s pretty common — In fact, many businesses (even those not on Wall Street) have a business model that charges increased fees based on usage. Many SaaS companies charge by seat. Many data businesses charge by volume of data processed/stored. There seems to be no distinction drawn between Roboadvisors and these other businesses.3. Vanguard’s got the same “issue” — In fact, the suggested alternative (Vanguard Retirement Fund) charges exactly the same way.4. What do you believe? There’s a philosophical / value-based question on whether you think the fee should be proportional. If the value being provided is proportional (it is for many SaaS companies, and it is for Wealthfront too), then I personally find it fair to charge a fee in this way. You’ll have to figure out for yourself what you believe on this one.5. The structure aligns incentives — Furthermore, Wealthfront is better than a number of the alternative subscription-based models in that the fee only increases if your outcomes improve (portfolio value increases). SaaS models that charge by seat cost you more as your # of seats grow, but don’t cost you less if the seats do dumb things with the product or if the seats use the product less. It’s incentive alignment, not predatory pricing.6. Ross misrepresents rarity of the model — He argues,“It’s not just that Wealthfront charges users for its software, which is rare.”This one made me angry so I had to take a break to watch Netflix and listen to Spotify on my Windows OS PC which is connected to my Comcast service provider, before coming back to blog on my personal domain. He also argues,“It’s also that, on average, Wealthfront increases its subscription fee every day.”Yes, I agree. But the question is whether you are OK watching your investment balance grow by $100 while watching the fee grow by $0.25. If you’re not, then I ask about the alternative. His alternative is structured similarly.7. Roboadvisors are not merely providing advice — Finally he says,“Stop charging proportional fees for advice,”to which I say Roboadvisors provide more than merely advice. They provide services like trading for you, keeping up with changes in ETF fees and landscape, rebalancing intelligently instead of periodically, tax loss harvesting and performance tracking. As mentioned in #4, a number of the services above have benefits that in fact do scale with the size of the account. The implication of the statement above is that one should pay fixed fees but gain bigger benefit over time from those fees.8. Wealthfront has never been profitable — In response to the“Wealthfront helps itself to such margins”argument, it is important to note that the company is not profitable and won’t be profitable any time in the next few years. You can write that in pen. On the 2bn they manage, their revenue is less than $5mm. They’ve lost money for every year they have been in existence. Vanguard runs at cost, according to Ross’. I’d prefer to let the VC’s subsidize me.C. Tax-loss harvesting is too good to be true and benefit is overstated1. We need to save in taxable accounts too — Ross argues that“If your nest egg exists entirely in a retirement account, as it does for many Americans, then tax loss harvesting won’t help you at all.”While this is true, I’d argue that it is a big deal that Wealthfront is providing incentive (TLH) to invest outside retirement accounts, given the dire state of savings rates in our generation.2. ETFs have capital gains too — With Ross’ argument that“If you practice the kind of investing that Wealthfront itself evangelizes — buy-and-hold, passive, rational, long-term indexing that is rebalanced with new money or in retirement accounts — then you should not be realizing capital gains regularly anyway.”he fails to mention that his alternative also recognizes capital gains regularly. Most ETF’s distribute capital gains at the end of the year and do not harvest losses, so you’re basically paying capital gains taxes in either scenario. Furthermore this cuts against Ross’ argument that tax loss harvesting gains are capped while Wealthfront’s fees are uncapped.3. Even rudimentary TLH is enough for Wealthfront to come out on top — Furthermore, Ross’ argument against Tax Loss Harvesting as made by the Kitces article above actually says that 0.20% improvements are based upon lumpy and dumb harvesting (once/year, at the end of the year) versus a much more sophisticated, real-time algorithm employed by Wealthfront.4. Ross’ own citation makes a pretty strong case for Roboadvisors — The same author who Ross cites also writes a pretty good article about How Declining Transaction Costs And Robo-Indexing Could Disintermediate Index Mutual Funds And ETFs.D. Roboadvisor fee structures are unprecedented.No they’re not.ConclusionInvest your money in low cost ETF’s. If you have a taxable account and don’t want to spend time on it, I recommend Wealthfront. If you don’t have a taxable account and have time, you can mimic Wealthfront’s allocation and rebalance yourself. You can pick Betterment. You can pick Wise Banyan. You can pick Schwab Intelligent Portfolios. You can pick Vanguard Retirement funds. Do something with your money. But please don’t be paralyzed into inaction by rhetoric.This was originally posted on my blog.

Before I was a Marxist-Leninist, I considered the USSR to be state capitalist, not because I understood how the Soviet economy worked, but because it was convenient for my political agenda. I still believed many of the anti-Communist myths about the USSR (and any other Socialist country) and I wanted to distance myself from them, and that’s generally why people call it state capitalist.NEPState capitalism was the main policy of Lenins NEP from 1921 until his death in 1924. The NEP allowed Russia to go back to private initiative in most of the societal aspects in order to ensure economic activity, including production of food and services. Lenin characterized the NEP in 1922 as an economic system that would include capitalism, subject to state control, while socialized state enterprises would operate on "a profit basis". It was merely a temporary expedient used to fix a war-torn country.The NEP only existed for roughly 4 years, yet some left-Communists use it as an argument that the USSR in it’s entirety was in fact state capitalism.After LeninUnder Stalin, the USSR turned into a centrally planned economy. The entire economy was either directly owned by the state or were owned by collective farms. There was no private property or markets.The argument that the USSR wasn’t Socialist is that capitalists were just replaced with state officials who acted like capitalists and the capitalist class, that they had the same motives and roles, and that wage-labour existed and that there commodity production.I will be talking about the USSR under Stalin.The state and people’s relations to the means of production:In Wage Labour and Capital, Marx defines wage-labour:“The labourer receives means of subsistence in exchange for his labour-power; the capitalist receives, in exchange for his means of subsistence, labour, the productive activity of the labourer, the creative force by which the worker not only replaces what he consumes, but also gives to the accumulated labour a greater value than it previously possessed. The labourer gets from the capitalist a portion of the existing means of subsistence. For what purpose do these means of subsistence serve him? For immediate consumption.”-Karl Marx: Wage Labour and Capital. Chapter 6For wage-labour to exist, one class (workers) must sell it’s labour to another class (capitalists) to recieve means of subsitence. The capitalist class recieves value which he uses to re-invest and accumulate for himself.In the USSR, there was no class or wage-labour. Workers were not selling their labour to an exploiting class of owners who accumulated value for themselves. Everyone had the same relations to the means of production.Not only that, but workers had a significant say in how production and distribution was carried out. There was no obscure far-off room of elites determining everything, as everyone on the most basic levels of society had a say in the planning process.State officials did not accumulate wealth like capitalists. In the USSR, people who worked for the state on all levels were paid as much as the average worker. Stalin's salary was 1000 roubles a month as General Secretary of the Communist Party (-300 for party dues so pretty much only 700), while a professor of medicine made roughly 3000 roubles a month.Being a Party memeber did not involve immense wealth. John Gunter learned from first-hand experience in the USSR:“The Communists accept nominal managerial salaries for their labour. These salaries are miniscule. Communists, as a rule, get much less than non-Communist technicians whom they hire. The theory is that the fruits of production are pooled for redistribution to the common good.”-John Gunter: Inside EuropeGerome Davis also confirms this, as he also got to see how the Soviet government operated:“There are million in Russia who sympathize with the Party, but do not join. Membership brings few if any privileges and impose heavy duties.Each member must pay the party treasury an income tax on his salary. Every member must devote at least several evenings a week to volunteer party work. A Communist is expected to set an example to others in daily life and work.If he works in a factory, he must turn out more goods and be absent fewer times than the non-Party worker.If he is at the front, he must display more bravery than others.If he fails to preform a duty or breaks a law, the punishment is more severe because of the higher obligation resting upon a member of the party.”-Jerome Davis: Behind Soviet PowerThe USSR had no class. It was classless. There was no wage-labour as there was no case of one class selling their labour to another. No one had the right to hire and fire people and workers received according to their ability and contribution.The surplus value that the workers created was not accumulated by state officials acting like capitalists, rather, the surplus value was given to the “common fund”.“What he has given to it is his individual quantum of labor. For example, the social working day consists of the sum of the individual hours of work; the individual labor time of the individual producer is the part of the social working day contributed by him, his share in it.He receives a certificate from society that he has furnished such-and-such an amount of labor (after deducting his labor for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labor cost. The same amount of labor which he has given to society in one form, he receives back in another.”-Karl Marx: Critique of the Gotha ProgrammeWhat was accumulated to this common fund was given back to the workers in the form of free healthcare, free education, free housing, subsidized vacations, low-cost childcare, subsidized public transportation, etc…In other words, the surplus value created by the workers went back to the workers.Commodity ProductionCommodity production is a trans-historical process not exclusive to capitalism.Marx explains the nature of a commodity under capitalism:“The commodity is immediate unity of use-value and exchange-value, thus of two opposite entities. Thus it is an immediate contradiction contradiction. This contradiction must enter upon a development just as soon as it is no longer considered as hitherto in an analytic manner (at one time from the viewpoint of use-value and from another at the viewpoint of -exchange-value) but is really related to other forms of commodities as a totality. The real relating of commodities however, is their process of exchange.”-Karl Marx: The CommodityUnder capitalism, there is a contradiction between use-value and exchange value. Exchange value presupposes use value, but a commodity can't be both at the same time.The USSR did not suffer from this contradiction found in capitalist commodities.For instance, under capitalism, there are homeless people, not because there are no houses, but because the houses are owned by people who sell them not on the basis of their use, but by their exchange. In the USSR, everyone had a house. Why? Because production was for use, not exchange. Socialist production is free from the contradictions of capitalist commodity production, and production and distribution is in conformity with Socialist production.Soviet economists often discussed whether or not they had Socialism, but since the commodity production in the USSR was so different from the commodity production in capitalist countries, they called it ‘Socialist Commodity Production.’Since commodity production still exists under Socialism, so do the laws of value that come with it:“What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges.(…)Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values.Content and form are changed, because under the altered circumstances no one can give anything except his labor, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption.But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labor in one form is exchanged for an equal amount of labor in another form.”-Karl Marx: Critique of the Gotha ProgrammeSocialist commodity production is special in that there are no markets, private property or capitalists. Goods could not be sold for profits and the allocation of all resources are either directly controlled or heavily monitored by the state. All transactions between the state enterprises and collective farms were not market relations, as everything was planned.“It is said that commodity production must lead, is bound to lead, to capitalism all the same, under all conditions. That is not true. Not always and not under all conditions! Commodity production must not be identified with capitalist production. They are two different things.Capitalist production is the highest form of commodity production. Commodity production leads to capitalism only if there is private owner-ship of the means of production, if labour power appears in the market as a commodity which can be bought by the capitalist and exploited in the process of production, and if, consequently, the system of exploitation of wageworkers by capitalists exists in the country.Capitalist production begins when the means of production are concentrated in private hands, and when the workers are bereft of means of production and are compelled to sell their labour power as a commodity. Without this there is no such thing as capitalist production.”-J.V Stalin: Economic Problems of the USSRStalin did not and would not deign to admit that the USSR was capitalist, because it simply was not.Many people disagree on the definition of Socialism, and that’s fine, but it certainly does not encompass the abolition of commodity production.