Thales of Miletus, Aristotle, the Oil Harvest, and Monopoly
I just heard that I’m cited in Cooter and Ulen’s law and econ text for finding the story of how the philosopher Thales made money off his forecasting skill, and even leveraged it using a form of option and a cornering of a market. It’s great for teaching economics. Here’s the story from Aristotle’s Politics, for future reference. I’ve included the next story too, which is about how even the Greeks realized that monopoly was bad for the public welfare.
Now of all the works of art, those are the most excellent wherein chance has the least to do, and those are the meanest which deprave the body, those the most servile in which bodily strength alone is chiefly wanted, those most illiberal which require least skill; but as there are books written on these subjects by some persons, as by Chares the Panian, and Apollodorus the Lemnian, upon husbandry and planting; and by others on other matters, [1259b] let those who have occasion consult them thereon; besides, every person should collect together whatsoever he hears occasionally mentioned, by means of which many of those who aimed at making a fortune have succeeded in their intentions; for all these are useful to those who make a point of getting money,
as in the contrivance of Thales the Milesian (which was certainly a gainful one, but as it was his it was attributed to his wisdom, though the method he used was a general one, and would universally succeed), when they reviled him for his poverty, as if the study of philosophy was useless: for they say that he, perceiving by his skill in astrology that there would be great plenty of olives that year, while it was yet winter, having got a little money, he gave earnest for all the oil works that were in Miletus and Chios, which he hired at a low price, there being no one to bid against him; but when the season came for making oil, many persons wanting them, he all at once let them upon what terms he pleased; and raising a large sum of money by that means, convinced them that it was easy for philosophers to be rich if they chose it, but that that was not what they aimed at; in this manner is Thales said to have shown his wisdom.
So what Thales did was (1) to use private information that the market did not yet have to buy up underpriced assets; (2) buy not the main asset (the olives) but something cheaper (the olive presses– “works” in this translation) whose value would go up and down with that of olives, and (3) corner the market, so besides the gain from his forecasting, he had a separate source of gain from being able to restrict the supply of olive presses.
And of course professors in business schools can use this story for the same purpose as Aristotle: to refute people who say that scholars are people who study useless things and couldn’t succeed in the real world.
Here’s the next passage:
It indeed is, as we have said, generally gainful for a person to contrive to make a monopoly of anything; for which reason some cities also take this method when they want money, and monopolise their commodities. There was a certain person in Sicily who laid out a sum of money which was deposited in his hand in buying up all the iron from the iron merchants; so that when the dealers came from the markets to purchase, there was no one had any to sell but himself; and though he put no great advance upon it, yet by laying out fifty talents he made an hundred. When Dionysius heard this he permitted him to take his money with him, but forbid him to continue any longer in Sicily, as being one who contrived means for getting money inconsistent with his affairs.
This man’s view and Thales’s was exactly the same; both of them contrived to procure a monopoly for themselves: it is useful also for politicians to understand these things, for many states want to raise money and by such means, as well as private families, nay more so; for which reason some persons who are employed in the management of public affairs confine themselves to this province only.
The tyrant Dionysius understood that the monopolization was not good for the public welfare, though he did not make an ex post facto law about it. Aristotle is wrong in saying the iron-monopolizer and Thales did the same thing, though, because Thales would have made profit from his private information about the harvest level even if he had bought just some of the presses instead of monopolizing them.