The sound quality is not very good, unfortunately.
19 April 2013
Follow your heart.
Be on the business side of what you love most.
Let the money take care of itself.
The sound quality is not very good, unfortunately.
19 April 2013
Follow your heart.
Be on the business side of what you love most.
Let the money take care of itself.
In response to the growing interest in Bitcoin, Crowdfunding, and related topics, I am developing an online course that focuses on post-Industrial entrepreneurship. This is to be a practical and fairly standard university-style course that I will host in Moodle on this website. (My plan is to devote summer 2013 to getting the first version of the course up, in time for the publication of the JOBS Act rules in the USA.)
This is a request for topics to include in the outline of the modules that focus on Bitcoin, Crowdfunding, Chilean incorporation, and other recent innovations. The idea is to go back to Adam & Eve, and to lead the student through the curriculum, as if he or she were six years old. My target market is the non-techie who is selling services or information goods, or is doing small-scale international trade. The course is to be open to anyone in the world who has access to the Internet.
By way of background, I teach Finance in South Florida, and I am a veteran of the first wave of moneypunk ‘electronic currencies’ back in the 1990s. The mood of the day now feels very much like those heady days two decades ago leading up to the Dot.Com Boom, that saw the birth of Amazon, Google, PayPal, and Yahoo!, and later Facebook, Skype, and YouTube.
Any suggestions and links to resources will be greatly appreciated, and I will be glad to acknowledge publicly anyone who likes that kind of recognition. I already have a large collection of resources, and redundancy of recommendations will be seen as confirmation.
3 November 2012, Clayton Christensen, whose earlier works I have found inspirational and illuminating, published an article in the New York Times—”A Capitalist’s Dilemma, Whoever Wins on Tuesday“—that starts with a reasonable premise, and veers hopelessly off course.
To Wit: “Whatever happens on Election Day, Americans will keep asking the same question: When will this economy get better?”
Fair enough. That is a very reasonable question, and it is a very reasonable expectation that Americans will keep asking it.
So far, so good.
Then, we get this:
“The Fed has been injecting more and more capital into the economy…”
The Fed has been pumping more and more money into the economy. The value of money is measured by the ratio of units in circulation to the value of stuff. If the number of units in circulation increases faster than the quantity, value, or both of stuff, then prices rise.
Capital is the long-term means of production: drill presses, trucks, robots, etc.. The Fed doesn’t have any of that, and Fed governors are not in a position to command others to make such things available.
The Fed lends money to the US Treasury, buys toxic assets from commercial banks, and regulates banks. It isn’t a hardware store.
Now, if one is sitting on a lot of money that one can convert into capital assets, then one might adopt the financier’s habit of referring to that money as capital, but one should avoid conflating fiat inflation with the means of production.
“And yet cash hoards in the billions are sitting unused on the pristine balance sheets of Fortune 500 corporations.”
Firms are supposed to keep pools of cash as a kind of self-insurance policy against slow economic times. We call this ‘working capital’. When the future is even scarier than normal, the prudent thing to do is to hold more cash. The ‘Fiscal Cliff’, Pres. Obama’s political rhetoric expressing open disdain for those who are wealthier than he, the unknowable effects of Obamacare, the ongoing transition away from a capital/labor economy toward a service/knowledge economy, and the specter of another decade of ‘Bush’s war’ are enough to render all expectations of the future little more than random bets and wild guesses.
And, no one gets fired for playing it safe. So, until things settle down, executives play it safe.
“Billions in capital is also sitting inert and uninvested at private equity funds.”
Does Prof. Christensen believe that fund managers have piles of big, canvas sacks with dollar signs on them, filled with cash… like Scrooge McDuck or the dapper little fellow from the Monopoly™ game?!?
The money is invested somewhere, most likely US Treasury debt, because the US Treasury has a reputation of always paying its debts… even if it has to print more money to do so. In these highly uncertain times, the safest bet is the safest bet.
“Empowering innovations create jobs, because they require more and more people who can build, distribute, sell[,] and service these products.”
Sadly… no, no, no, and no.
Build: Factories are increasingly automated, and when meat-that-talks is needed, one hires labor where it is cheap; i.e. Latin America, Southeast Asia, and increasingly Sub-Saharan Africa.
Distribute: DHL, FedEx, UPS, already have that pretty well covered.
Service: What is that? Throw it away and buy a new one.
“[T]he Toyota Prius hybrid is a marvelous product.”
“‘[E]fficiency’ innovations… almost always reduce the net number of jobs…”
This one is spot-on. It is unfortunate that Christensen did not make it the centerpiece of his analysis.
“The economic machine is out of balance and losing its horsepower. But why?”
Peter Drucker answered this question in Post-Capitalist Society, which was written nearly twenty years ago, and reads today like a play-by-play account of what happened in the 1990s and 2000s.
[Reread the sentence above, click on the link, and buy the book. You can thank me later.]
The scorpion’s sting is in the tail. Toward the end of the article, Christensen states, “We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs.”
No one knows where the ‘jobs’ of the future will be. Social engineering always fails. In the 1960s, it was plastics; in the 1980s, software development; in the 1990s, Dot.Com… No one knows what it will be next decade.
“[T]he [capital gains tax] rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.”
It might have made sense a century ago, when technology changed slowly, to make it costly to change plans quickly in response to new information, but Christensen’s advice in a highly dynamic—even chaotic—integrated global economy would create an incentive to keep sub-optimal plans running beyond their use-by dates.
“Federal tax receipts from capital gains comprise only a tiny percentage of all United States tax revenue.”
This suffers from two fatal flaws. 1) The universe does not end at the US border. 2) If capital gains represent a trivial portion of the federal budget, then eliminate the cost of collecting and enforcing them and call for their repeal. Leave the money in the owners’ hands, rather than seize it at gunpoint, if it is hardly worth collecting.
“It’s true that some of the richest Americans have been making money with money — investing in efficiency innovations rather than investing to create jobs. They are doing what their professors taught them to do, but times have changed.”
Indeed, times have changed, but that does not mean that this time is different, as Christensen seems to assume. We are in the latter stages of a transition as profound as the 18th Century Industrial Revolution, from a capital/labor division—in which semi-literate proletarians drive industrial machines—to a knowledge/service division, in which skilled workers are the ‘capital’ and are not interchangeable.
However, the wealthy will invest where they expect the greatest opportunities are, as has been the case since the Renaissance a half millennium ago. When princes, presidents, and parliamentarians create uncertainty, the wealthy will hunker down and wait until circumstances stabilize.
Christensen started with the premise that the president and the Fed do not have the power to fix things, and then concluded that the IRS does have such power.
This conclusion is counterintuitive. An alternative would be for presidents, princes, and parliamentarians to enforce transparency, and otherwise to mind their knitting, rather than concern themselves with affairs that are beyond their abilities.
An interesting pattern emerges, when we line up market structure from economics and finance with theories of developmental psychology and pedagogy, as in the table below. For more details than I describe here, click on the links at the head of each column to see the Wikipedia articles on these topics.
Admittedly, the alignment undoubtedly is not as precise as implied below, but the exercise is fruitful, at least in broad brushstrokes. The point here is to seek insights that might lead to testable hypotheses, rather than to present established conclusions concerning a detailed theory of society.
Brief Introduction of Each Column
Starting at the bottom, Maslow argued that the primary motive of all individuals is survival; where this is not assured, nothing else will occupy an individual’s mind. Once survival is assured, the individual will focus on safety. Only after survival and safety are fulfilled, can individuals focus on social needs. When survival, safety, and social needs are fulfilled, the individual can focus on self-esteem, which is a fundamental topic in itself, especially among those who grow up in dangerous or abusive environments. Finally, once all of these needs have been fulfilled, the individual can focus on self-actualization — ‘realizing one’s full potential’ or ‘going beyond oneself’ — which might manifest itself in the creation of works of art, volunteering, or any other activity that one feels compelled to do for its own sake
Kohlberg‘s focus was on morality. He argued that how an individual decides ‘right’ from ‘wrong’ starts at a primitive level and becomes more sophisticated as one matures. At the lowest level, the test is pain vs pleasure; if it hurts, it is wrong, and if it feels good, it is good. In time, this develops into egoism, in which the orientation is toward oneself to the exclusion of all others, often associated with young toddlers and their tantrums. As one develops — and corresponding to Maslow’s Social stage — one’s moral orientation becomes outward; first as ‘be nice’, and later as a law & order adherence to the rules. For a minority of the population, contradictions and other failings of the status quo lead to an moral orientation based on questioning authority and reconciling inconsistencies. Finally, some very few adopt a universal ethic, which manifests itself as a single principle that guides the individual’s sense of right and wrong. For some, this ethic might be non-aggression; for others, the superiority of one’s tribe; etc.
An individual can move up or down either hierarchy, but will tend to be grounded in a specific one at any particular time. Individuals generally can imagine the next developmental level up, but not beyond. Those operating at a very primitive level, for example, will be unable to distinguish a universal ethic from egoism. This, also, is not to say that a universal ethic will be viewed by others as ‘good’, as when one who has embraced non-aggression evaluates the morality of a tribalist who believes in the collective ‘superiority’ of his or her people.
Bloom‘s Taxonomy deals with pedagogy and the appropriate method of education. With very young children and those who are new to a subject, the first step is identification, which essentially is being able to point a thing when named. The next step is definition, which is when the learner is able to explain what something is without naming it. Next is application, which is using a tool, concept, or anything else in a prescribed fashion. Higher-order learning begins with analysis, which is breaking complex puzzles, concepts, or objects into simpler constituent units. There is some debate concerning the order of the last two steps: evaluation, which is judging a thing based on some standard, and synthesis, which is constructing something new from existing components, whether it is a structure, a work of art, story, etc.
Market structure is the relationship between the number of buyers and the number of sellers in a market. Here, we focus on the number of sellers and assume that the number of potential buyers is very large. The most restrictive market structure is the command economy, in which a central authority rations goods and services, and secondary trading is generally difficult if not forbidden outright. Next is monopoly, in which only one supplier exists. One of the hallmarks of monopoly markets is price discrimination which occurs when two buyers pay different prices for the same good or service; in any other market structure, buyers can shop among sellers and buy from the one with the lowest price. A market with a small number of sellers, each of whom represents a significant portion of the overall market is called an oligopoly. Oligopolies are distinguished by ‘interdependence’, in which a sale made by one oligopolist is a sale lost by each of the others; oligopolists often have very large advertising budgets. A market with imperfect competition has a large number of sellers — each of whom might have some amount of monopoly power based, most commonly, on geography — none of whom represents a significant fraction of the total market. Most of the sellers that each of us deals with in the real world are imperfect competitors, who might be able to price discriminate through coupons, early bird specials, happy hours, etc., but who do not have the market power of an electric, sewage, or water utility. A commodity market is one in which the good or service sold by one seller is economically identical to the others’. This includes things like wheat, gold, and financial assets that are sold on formal exchanges. At the furthest extreme are public goods*, which exist in such abundance that one’s consumption does not diminish anyone else’s ability to consume them, and one is unable to meter their consumption or stop others from consuming them. Common examples are breathable air at sea level, seawater, and anything else that one can consume in unlimited quantities for free.
|Market Structure and Developmental Psychology|
The Table Row-by-Row.
In general — and bearing in mind that the real world is much subtler than implied here — life in a command economy is brutish and mean. Individuals in such a society likely have little time for reflection on higher ideals, and instead focus their attention on survival and avoiding punishment.
In a society dominated by monopoly, the focus is on personal benefit to the exclusion of virtually all else. Corruption is a common feature in a society that has one provider for each category of goods and services, and innovation and entrepreneurship are essentially unknown — except, perhaps in the oligopolistic or imperfectly competitive underground economy — and daily life is highly bureaucratized.
A society dominated by imperfect competition — “a nation of shopkeepers” as Karl Marx sneeringly described 19th Century England — is organized along the principles of ‘getting along’, ‘not rocking the boat’, and ‘observing established customs’. Perhaps, regulations exist to ensure that the peace is kept. At a personal level, social needs are the primary focus, along with ‘knowing one’s place’. Marginal improvements in techniques are tolerated, so long as they are not disruptive.
A society dominated by commodification — ‘McCulture’, if you will — will be one in which individuals’ social needs are fulfilled in general, and the quest for self-esteem is the primary focus. Rules are broken, norms are evaluated, old ways are cast aside by each new generation. Seen from the outside, such a culture might look superficial, made of plastic, and chaotic, but it operates by its own internal logic of creative destruction and disruptive innovation.
Finally, a society dominated by public goods is a society in which individuals seek self-actualization through the synthesis of what has never existed before, based on some universal ethic. For those locked into the habits of thought of lower stages of development, a public goods society is indistinguishable from a command or monopoly society (i.e., ‘communism’). But, whereas command and monopoly societies suffer from chronic shortage, public goods societies have so must stuff that they just give it away.
The Way Ahead
The wealthy parts of the world today are dominated by commodification, self-esteem, and social change. However, a small but growing subculture of open source, free culture, and ubiquitous charity already has had an impact on modern life. The move is away from command and monopoly in the form of patent and copyright. Granted, those with a vested interest in the status quo will not go quietly, but go they will.
This is not a ‘good’ thing or a ‘bad’ thing, as all value is subjective. It simply is. Some will love the change, others will hate the change, and the great majority will just roll with the tide.
We are in the latter stages of an epochal transition from the capital/labor dichotomy to the knowledge/service dichotomy in an increasingly integrated global community, where borders are largely meaningless, anything that can be encoded as information — whether software, music, texts, videos, title, or even money — flows freely, and emerging institutions are supplanting traditional forms of social coordination.
*Note: The term ‘public good’ should not be confused with ‘government-provided good’. If the ability of an individual to consume a good or service is reduced by others’ consumption, or if it is possible to restrict access, then it is a private good, regardless of whether it is provided by government or no direct fee is charged for it. Thus, ‘public schools’, ‘public beaches’, ‘public roads’, etc. are government-provided private goods.
In business, economies of scale means that it is less expensive, per unit of output, to produce goods, if one produces a lot rather than a few. For example, one would not build a factory, buy raw materials, and hire workers to make only one car. Similarly, one would not set up a restaurant to make only one meal.
Once the oven is hot, the freezer cold, and the employees on-site, the additional cost (what economists call the ‘marginal cost’) of producing a second meal is substantially less than the cost of going from zero to one meal. Likewise, the cost of producing the third, fourth, and subsequent meals can fall even further, as the employees get into the rhythm of the job, several items bake in the oven at a time, and the freezer is cooling more than air and empty shelves.
The larger the operation, the greater the output relative to the cost… to a point.
However, as with plants, animals, and essentially everything else, there is a limit to how much a firm can grow, before costs begin to rise faster than income.
Sticking with the restaurant example, let us assume that a good day’s gross income is $10,000, and that the pre-tax profit is about 15% of that, after paying for groceries, utilities, maintenance, payroll, insurance, etc. [Feel free to substitute an appropriate amount of your local currency, if you reuse this text.]
Now, imagine that the owners have hired a new general manager — we’ll call him Skippy [Feel free to substitute a culturally appropriate derogatory name here.] — who wants to double the gross revenue to $20,000 per day, even on historically slow days.
Skippy holds ‘motivational’ meetings and exhorts the employees to “work smarter” and to be “dedicated” to the “mission” and “vision” of the organization. He wants to run three eight-hour shifts per day, seven days per week including holidays, and to minimize costs.
One young man at a meeting asked, “Um… If we wanted to minimize costs, shouldn’t we just shut down? That way, costs would be reduced to zero.”
Skippy replied, “You have a bad attitude. Ask not what this firm can do for you; ask, rather, what you can do for this firm.”
One problem with selling more meals than is optimal is that one has to provide incentives for potential customers to become actual customers. One option is to offer larger servings, but customers typically eat only so much at each meal. Another option is to reduce prices, either across the board, during times that the restaurant is usually closed or business is slow, for individuals who are members of a favored category — females, a particular ethnicity, a profession, etc. — or some other form of discrimination against those who are not members of the favored category.
By doing so, the restaurant operator reduces the income from each meal sold, even though the costs of producing those meals do not fall. Quite the contrary, by running the equipment without break, one is unable to clean, maintain, or repair it, and by working one’s employees harder, they get tired, make mistakes, and become resentful; beyond the optimal scale, costs per unit of output rise.
It does not matter if it is a restaurant, factory, bank, or whatever, each firm has its optimal size, and anything larger or smaller than that optimal size is less efficient than it would be if it were operating at the optimal scale.
If Goldilocks were a management consultant, one might hear her say, “This firm is tooo small. This firm is tooo big. And, this firm…? This firm is juuust right.”
In general, two things systematically prevent firms from operating at their optimal scales: hubris and regulation. Things that unsystematically prevent firms from operating at their optimal scales stem from the unknowability of the future: uncertainty, surprise changes in market conditions, natural disaster, and other things that one cannot foresee.
Hubris is the kind of overconfidence that leads one to believe that one knows more than one knows, and thus can do more than one can do. It is one of the qualities of the kind of narcissist that is expert at climbing to the top of an organization, in spite of a lack of actual knowledge, talent, or skill. Such individuals often conflate speculative hypotheses with proven conclusions, confuse ‘could’ with ‘must’, and are loath to admit when they are in error. They speak with great bombast, demean those who ask for clarification, and typically refer to their track records when pressed for details.
In positions of power, hubris can lead to doublethink, especially a desire to minimize costs and to maximize gross sales simultaneously, in spite of the fact that there is a cost for every benefit.
Granted, one can try to minimize fraud, abuse, and waste, but any more than this implies fewer raw materials, fewer fixed assets, and less available labor, and thus reduced output; decrease costs, decrease revenue. Similarly, if one wants to increase output, this implies more raw materials, fixed assets, and available labor, and thus increased cost; increase revenue, increase costs.
Hubris tends to result in firms that operate above their optimal scales, based on the notion that bigger is better.
Regulation leads to inefficiency most commonly through the misapplication of the observation that price tends to approximate the marginal cost of production in a competitive market. Only in a monopolistic market can one charge a price higher than the marginal cost of production, because in a competitive market – i.e., a market that has a very large number of relatively small suppliers – if one tried to charge a higher price, a competitor would undercut the price. This process would continue, until no one were willing to charge a lower price.
In monopoly markets with only one supplier or in oligopoly markets with a small number of relatively large suppliers, sellers can charge prices that are substantially above marginal cost, because buyers have nowhere else to go. The choice is between paying the high price or going without.
This reasoning underlies antitrust statutes. The idea is that, since perfectly competitive markets have the lowest profit margins, and thus the lowest prices to consumers, a small number of large suppliers is de facto bad.
This ignores economies of scale.
Some productive processes have very high barriers to entry, typically in the form of expensive equipment, as is the case with airlines, cruise ships, railroads, electrical utilities, etc. If it makes economic sense for suppliers in these industries to be large and highly concentrated, then the tendency will be for the successful to acquire the unsuccessful.
Some suppliers operate in a ‘winner-take-all’ environment, as is the case with search engines, social network websites, operating systems, etc. If consumers tend to favor a particular supplier to the exclusion of essentially all other competitors, then the optimal supplier will tend to be a monopoly.
Regulations that hinder concentration where it results from economies of scale serve only to force suppliers to be inefficient.
The main thing to bear in mind is that hubris is ultimately its own undoing, and, in an increasingly integrated global community, regulation at the national level is increasingly anachronistic.
BEARING THE DISCLAIMER AT THE BOTTOM OF THIS PAGE IN MIND, a contrarian speculative strategy might be to sell short assets that are darlings in the popular media (i.e., subject to hubris) and buy long assets that are under intense government scrutiny (i.e., likely to migrate from unfriendly jurisdictions to friendly jurisdictions).
Those of us who live in relatively well run places can forget that corruption is a very important factor throughout most of the world.
Dutch historian and documentary photographer Jan Banning has published a 50-photograph exhibition that is “a comparative photographic study of the culture, rituals and symbols of state civil administrations and its servants in eight countries on five continents,” called Bureaucratics.
The images are a stark reminder of what awaits entrepreneurs: underpaid individuals with the power to expedite or impede progress. It is easy to vilify corrupt officials, but they are only responding to incentives and pursuing available options for which the expected benefit exceeds the expected cost, including opportunity cost. These are some of their faces.
It might be the case that borders are increasingly meaningless in our increasingly integrated global community, but bureaucrazy follows its own rules.
It is my hope to set up a low-cost online educational outlet here at Pecuniology.com. Whether I organize this as a school, a vendor of education services that caters to schools, a publisher of open educational resources, or some combination of these is yet to be determined.
One of my biggest concerns is marketing. How do I get the message out, and above all how do I compete against subsidized incumbents like, hypothetically, the University of California?
As it turns out, members of the University of California chapter of the American Federation of Teachers are very helpfully exiting the market that I intend to enter.
California Teachers Union members want to block online courses at the University of California, allegedly, in the name of protecting educational quality but much more likely in the name of protecting instructors’ salaries… not that there’s anything wrong with that.
Nonetheless, I thank them for this most generous gift.
BBC News has a wonderful article on a charter school in one of Chicago’s roughest neighborhoods that is modeled on an English private school (referred to as ‘public schools’ in British English, oddly enough), and billed by its operators as “Hogwarts in the ‘Hood“.
This reminds me of a John Stossel 20/20 special report from some years back called, provocatively, Stupid in America.
I see reports and articles like these from time to time, and I want to invest accordingly!
One part of me – the part that lives in South Florida – wants to start a school that caters to local high school pupils who would prefer to start their own businesses rather than seek employment in others’ businesses upon graduation.
Another part of me – the part that teaches Finance and Economics – recognizes that schools require physical facilities (expensive), insurance (expensive), and admissions/recruitment (expensive), and that Pecuniology.com can provide the online component of a hybrid program that focuses on business education at an established charter school anywhere in the world (time consuming, but not expensive).
Pecuniology.com has academically qualified instructors in Accounting, Economics, Finance, Information Technology, and Management, all of whom have many years of online teaching experience, and all of whom have experience with multi-ethnic and at-risk student populations.