Dec 022011

MSNBC is running an article entitled “Nine Jobs That Humans May Lose to Robots” that lists nine professions that are becoming increasingly automated:

  • Astronauts
  • Babysitters
  • Drivers
  • Journalists
  • Lawyers and Paralegals
  • Pharmacists
  • Rescuers
  • Soldiers
  • Store Clerks

We can expect to see more articles like this as we continue the transition that began in the final decades of the 20th Century, from an economic order driven by capital and labor to one that is driven by knowledge and service, in which the capitalist no longer can be caricatured by a Dickensian factory owner, but instead by Scott Adams’s Dilbert, a highly talented employee with specialized skills, as Peter Drucker explains in his 1993 Post-Capitalist Society.

Today, nearly a quarter-century on, we can look back to see how accurate Drucker’s predictions were, as Massachusetts Institute of Technology economists, Erik Brynjolfsson and Andrew McAfee, do in their 2011 Race against the Machine, and except for the specific technologies that Drucker cites, he was spot-on.

If you can do your job from your sofa, then that sofa can be within walking distance of your employer’s headquarters, across town, or in Jakarta. If a robot, a piece of software, or someone in Jakarta can do your job, and you are in the Global North/West, then this would be a very good time to start thinking about a career change.

In general, you have two options:

Innovation and Entrepreneurship

There is no silver bullet here. All you can do is follow your heart and heed no one’s counsel but your own. The first few times out, you probably will fall flat on your face, but console yourself with the knowledge that 95% of science is wrong, meaning that most hypotheses are rejected during the experimentation phase. However, that 5% that works is where the frontiers of knowledge and experience are expanded.

Some platitudes might be useful, but feel free to replace them with your own:

  • Follow your heart, and the money will take care of itself.
  • Set aside 20% of what you spend on equipment, and six months’ rent, so that you can cover your bills during slow periods.
  • If you create texts, music, videos, software, etc., give your work away for free.
  • Network as if your life depended on it, and remember that it is a sad dog that wag its own tail.
  • Always be learning, and be prepared to change product lines or career tracks about once every five years.

If you won the lottery, what would you do with your day? You undoubtedly are not the only human alive who is driven by whatever your answer is. There is your business plan. Don’t draft revenue projections until you’ve made several sales; you cannot predict your cash flows, if you’ve never had any. And remember that innovation is what has not been done before. If the people around you think that your idea is ludicrous, then you’re probably onto something good; if others think that your plan makes sense, then the idea is already past its expiration date, and it is already part of the background noise.

You will make mistakes and have regrets. You’ll get knocked down; get up again, and don’t let anything keep you down.


By ‘crafts’ I mean anything that must be done locally, including landscaping, plumbing, home repair, nursing, firefighting, automotive maintenance, etc. If the idea of an activity’s being outsourced overseas is absurd, then it is a craft.

You don’t have to be a hairdresser or manicurist; you can own the shop and hire hairdressers and manicurists. John D. Rockefeller famously said that he would prefer to have 1% of the money earned by 100 others than 100% that he had to earn himself.

Whichever route you choose, do not let yourself get lulled into the false security of a ‘job’. No such thing as a job exists, as is easy to see, if one considers that, if one normally works 40 hours per week, and then starts pulling ten hours of overtime per week, one does not report that one has 1.25 jobs; similarly, if one’s schedule were cut from 40 to 30 hours per week, one would not complain that one had 3/4ths of a job.

If you measure the value of your time in dollars per hour (or euros, or pesos, or yen, or yuan, or shekels, or lira, or dinar, or whatever), then you are saying that each hour of your time is as valuable as every other hour, which means that whatever you do to earn that money is ripe for automation.

If you earn $10 or $20 per hour driving a cash register, keep an eye open for self-checkout stations to be installed where you work. Ditto paralegals and bookkeepers, secretaries and executive assistants, etc.

The global economy is increasingly integrated, and borders are fading fictions. There is a cost for every benefit, and an opportunity hiding within every cost.

And… the machines are lurking… watching… biding their time… Make your peace with them.

Invest accordingly.

Prof. Evans

Oct 232011

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
Self-Actualization Universal Ethic Synthesis Public Good
Self-Esteem “Question Authority” Evaluation Commodity
Social Law & Order Analysis Imperfect Competition
“Be Nice” Application Oligopoly
Safety Egoism Definition Monopoly
Survival Pain/Pleasure Identification Command

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.

Invest accordingly.

Prof. Evans

*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.

Oct 172011

Based on a post from 14 March 2009

In early 2009 independent economic policy analyst, Geoff Gitlen, modestly proposed an intriguing solution for future banking crises that Occupy Wall Street activists would do well to embrace: reorganize all banks as non-profit organizations.

[Note: The following is my interpretation of the Gitlen Plan. If it isn't in quotation marks, Mr. Gitlen didn't say it.]

The rationale for the Gitlen Plan is straightforward and unexceptional. Already, credit unions in the USA operate as non-profit organizations, and it would be a small step to expand this to include all institutions that are regulated by the Fed or the Office of the Comptroller of the Currency (OCC). Commercial banks already are among the most heavily regulated firms in the economically developed parts of the world. Bank managers are encumbered by all manner of restrictions on how they can conduct their businesses, and they are burdened by social requirements, e.g., ethnic, gender, racial, and socioeconomic preferences in lending that favor individuals who are members of politically favored groups. Meanwhile, depositors are insured against loss, which removes one source of critical oversight.

Reorganizing banks as non-profit organizations would be much less radical than having the central government buy controlling interests in them, as we saw in 2008/2009.

For starters, non-profit status would remove the perverse incentives that lead the managers of insured banks to engage in highly risky and politically motivated — or mandated — practices. If banks operated so as to cover their expenses, but not to seek excessive profits, the same way that the Red Cross, the United Way, and other large charities operate, bank executives still could earn salaries that are many times the national average, work in prestigious and comfortable offices, and jet around the world to exotic places and hobnob with power brokers and washed-up pop stars.

However, they would not be under pressure from shareholders to take on the kinds of risks that led to the S&L Crisis and the recent housing/subprime mess.

Gitlen argues, given that banks do not operate as normal commercial enterprises, why take half-measures? Rather than perpetuate one-foot-on-the-brake-one-foot-on-the-gas [accelerator] policies, where regulators compel banks to pursue social goals on the one hand, and banks have coopted regulators* on the other hand, Gitlen argues that we should heave this syncretic mess overboard to the sharks and crabs and embrace an institutional structure that could be more harmonious with the realities of modern banking.

The Gitlen Plan is in stark contrast to libertarian calls for deregulation, free banking, and market discipline, which have no hope of gaining political traction in today’s climate, where otherwise intelligent individuals can decry the current crisis — with utterly straight faces and in the sincerest tones — as a failure of unbridled capitalism, even though the firms at the center of the crisis are among the most heavily regulated in the world, outside of healthcare. With this kind of doublethink passing as conventional wisdom from the corner pub to the halls of Congress, we must choose among viable options and put away our dog-eared copies of Atlas Shrugged, Human Action, and Das Kapital for now.

Gitlen has identified one such option:

Reorganize banks as non-profit organizations, and let those individuals who work for banks and chafe at the notion of working for a charitable organization seek employment in private equity funds and offshore finance centers, like Bermuda, Grand Cayman, Hong Kong, Nassau, and Singapore.

As in all things in life, there is a cost for every benefit, and the Gitlen Plan is not cost-free, but the choice is not between utopia and the status quo, but between available options. Given the worldwide movement for change loosely organized under the Occupy Wall Street banner, the Gitlen Plan could be the most viable option.

Invest accordingly.

Prof. Evans

* For more on regulatory capture and the current crisis, see Buiter (2008) (Warning: PDF).

Oct 162011

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 costto 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).

Invest accordingly.

Prof. Evans