Welcome to Our American Stories. Today, we’re joined by economist and best-selling author Tim Harford, who shares fascinating insights from his book, Fifty Things That Shape the Modern Economy. Tim kicks off our journey with a look at the Limited Liability Company, or LLC. This ingenious invention might sound technical, but it’s a powerhouse for growth, fundamentally changing how businesses raise money and allowing big ideas to become reality, from sprawling railway networks to vast electricity grids that power our homes and cities, driving significant economic development across the nation.
But Tim doesn’t stop there. He also unearths the surprising history of reinforced concrete, the silent giant beneath our skyscrapers and bridges, an engineering marvel that literally builds our world and shapes our infrastructure. Then, we dive into the smart financial innovation of the index fund, a simple idea that democratized investing and helps millions manage their money smarter. Join us as we explore these powerful inventions – the Limited Liability Company, reinforced concrete, and the index fund – and discover how these fundamental concepts continue to build our communities, shape our economy, and empower our futures, often in ways we never even notice.
📖 Read the Episode Transcript
Speaker 1: And we continue with our American stories. Our next storyteller is Tim Harford, an economist and best-selling author of Fifty Things That Shape the Modern Economy. Here he used to tell the story about three of those things, starting with the LLC.
00:00:28
Speaker 2: The limited liability company was very important in allowing companies to raise money. What is essentially true about a limited liability company is that if you and I, say, decide we’re going to invest in a company, and we decide we’re going to put ten thousand dollars into a company and try and get it all started, we may lose our ten thousand dollars, but we can’t then be pursued for any more money. Like, I’ve put my ten thousand dollars in. You can’t get twenty thousand dollars out of me, or fifty thousand dollars, or a million dollars, if the company does something wrong. My liability is limited to the amount of money I originally put in. And so, having this protection for investors made it more attractive for investors to put money into companies. It made it easier for companies to raise money because their investors knew there was a limit to their downside, and that in turn was important because it meant that suddenly you could raise money from people who didn’t know you. Previously, you would only be able to raise money from very close friends, from family. So, limited liability enables companies to go out and raise money from a large number of strangers. You think about companies such as General Electric trying to set up an entire electricity grid. Where you think about the railway companies. How is a railway company supposed to make money? You’ve got to build an entire railway, and you’ve got to put the trains on it before you can collect a single dime from any railway passenger. Clearly, you’ve got to raise a huge amount of money. So, limited liability structure allowed that to be possible, and so you could have these huge infrastructure projects: water, railways, electricity. There have been a lot of downsides, of course. A lot of people have been ripped off by limited liability companies. Companies have taken too much risk. But overall, I think you would say that this was a very important step in the creation of major multinational companies. They really couldn’t exist without limited liability. There’s a lot of concrete in the world. It’s probably the substance that we humans use more of than anything else, with the exception of water. It’s a very, very flexible, very versatile building material from the point of view of an engineer or an architect. Actually, the trouble with concrete is once it’s built, there’s nothing you can do with it. You can’t change it. It’s not like bricks. Bricks, you can take down a brick wall or a brick house and reuse the bricks. But for a structural engineer, for an architect, it’s a very, very robust, flexible, and inexpensive material, and so we pour a lot of it. Concrete bridges, concrete skyscrapers—it’s everywhere. There is an amazing fact that I checked three times, and then some colleagues of mine at the BBC said they didn’t believe, and so they fact-checked me, and they came back and said that you were right all along, Tim. And that fact is that in three recent years China poured more concrete than the United States did in the entire twentieth century. It gives you a sense of the building boom going on in China and how incredibly important this material is. Where did it come from? We’ve had concrete for a very long time. That’s been discovered in settlements in Turkey eight, ten, maybe twelve thousand years ago. The Romans used a lot of it, the Parthenon. If you ever have the chance to go to Rome, there’s this ancient church. It’s nearly two thousand years old, the Parthenon. It’s made of concrete, and if you go in and you look up, it is recognizably concrete. It reminds me a little bit of the Washington D.C. Metro system. It’s quite striking. And the big leap forward was in the eighteen hundreds, a French gardener called Joseph Monier was trying to make concrete flowerpots, and they didn’t really work until he realized he could reinforce them with the steel mesh. The steel and the concrete, as it happens, expand and contract when they get hotter and colder at almost exactly the same rate. This is very unusual for two materials, but it means you can put steel reinforcement inside concrete, and it won’t instantly crack when the concrete heats up. It makes the concrete vastly stronger under certain kinds of stress, and it means you can make concrete skyscrapers, concrete bridges, which would have been impossible. We are maybe storing up trouble for ourselves because some of those reinforcements are starting to get exposed to the elements. They’re starting to rust. That makes the concrete way, way weaker, and so you see these dreadful bridge collapses that happen from time to time. That’s catching up with us, and it’s probably going to catch up with China too. Paul Samuelson, who won the Nobel Prize for Economics. So, a few decades ago, Paul Samuelson said that the index fund ranks alongside wine, cheese, and the wheel as an invention of human history. I mean, that’s maybe slightly exaggerating things, but the index funders saved a lot of people a lot of money. The basic idea of an index fund is you want to invest in the stock market. Rather than pay some experts to pick stocks for you, for which they will charge you handsomely, why not just invest in the market as a whole? Just say, ‘Well, if the market as a whole goes up, I make money. If the market as a whole goes down, I make the money.’ But I’m not going to worry too much about picking stocks, and perhaps surprisingly, that turns out to be really just as good as paying an expert and cheaper. There’s lots of, lots of evidence that suggests that it’s very hard for expert stock pickers to do much better than just whatever the market is doing. So, this was observed by Paul Samuelson, this Nobel Prize-winning economist, and he wrote an essay saying, ‘Somebody should invent a kind of fund that just invests in the index.’ This is probably the first time in human history this has ever happened. Somebody paid attention to something that an academic economist said and said, ‘You know what, this is a good idea.’ His name was John Bogle, and Bogle had just set up his own investment company, and he was looking for low-cost investment strategies, and he came across Samuelson’s challenge, and he said, ‘Well, I’m going to develop an index fund.’ And at first, he was a laughingstock. Other Wall Street funds criticized him, scorned him, accused him of being a communist, accused him of being unpatriotic because, you know, Americans, Americans aren’t willing to settle for the average. They want to do better. And initially, nobody invested. Nobody showed up. That slowly, slowly, slowly, his fund got more and more investors, and the company is called Vanguard. It is one of the largest fund managers on the planet. And this strategy now of just passively investing in the market is hugely popular. It’s all down to Bogle and Samuelson. And I saw an estimate that something like a trillion dollars, if I remember rightly, something like a trillion dollars of investors’ money has been saved that would otherwise have been paid in fees to Wall Street over the last forty years. And it’s how I do it. I mean, I write for the Financial Times. I’m an economist. I have quite a keen interest in markets, but I know enough to know I don’t think I can beat the market. So I use, as it happens—I’m not paid to endorse them, as it happens—I use Vanguard index funds. They seem as good as any, and it’s the same performance but for lower fees. So if a Financial Times columnist and professional economist is saying I can’t do better than a passive index fund, I think the same is true of most of the people listening to this program.
00:08:23
Speaker 1: And a terrific job on the production, editing, and storytelling by our own Greg Engler. And a special thanks to Tim Harford. And he’s the author of Fifty Things That Shaped the Modern Economy. By the way, you can hear more of these from Tim. Go to Our American Stories in the search bar and just type his name: Tim Harford, H-A-R-F-O-R-D. And my goodness, what we learned about the LLC, the limited liability company, and this limits the liability of investors, which then allows more money to be raised. And, yeah, there’s some downsides; there can be some fraud, and there can be some other problems. But the upside, there’s just so much more consequential. My goodness, the amount of concrete that was poured in China, in America, and around the world. It’s unimaginable: the world without concrete. And then, of course, the index fund, John Bogle, being laughed at and ridiculed in the early days as he started the Vanguard Funds. And now, of course, well, I don’t know many Americans who aren’t a part of index funds. The story of index funds, the LLC, and concrete. Here on Our American Stories.
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