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Wednesday, August 25, 2010
Commentary: Are We Entering or Exiting the Great Stagnation?
In this short video post, I ask the question: what if this is just the beginning - not the end - of the Great Stagnation? To illustrate, I contrasting the two-decades long decline of the Nikkei with the S&P (charts below) - and then discuss the central challenge the Great Stagnation really issues: rebooting capitalism. Enjoy!!
The Next (Minor) Phase of the Macropocalypse
Corporate cash hoards + lack of demand =
M&A wave.
M&A wave = consolidation = "efficiencies" + "synergies" + cost-cuts (ie, negative investment).
= more layoffs.
= a lack of demand.
--> consolidation.
Rinse, repeat.
This is another negative accelerator, another downward spiral. It's not the wage-price spiral - call it, instead, the consolidation-cost-cutting spiral.
When it kicks off, the ensuing lack of demand and underinvestment is going to make today look like a walk in the park.
See what really happens in the equations above?
Firms spend their cash hoards in acquisitions. The cash (equity, converts, whatever) goes to the shareholders of the acquired firms (ie, your retirement account). Yet, that's exactly what feeds the deflationary cycle.
You should also see this as a the first wave in a great shakeout, a great winnowing - that will slash and tear jaggedly through industrial age incumbents, and leave them shocked, stunned, and...dead.
Monday, August 23, 2010
Rebooting Capitalism, Post-Keynesian Edition
"It was Joan who set me straight. Joan Robinson. Joan, who, as a young academic in Cambridge, had sat each evening at the feet of John Maynard Keynes upon his return from a day in London, to catch up on his latest thoughts and relay them to his disciples in the other colleges. Keynes himself died in 1946 and Joan in 1983, which is a pity: not least because, were he or she alive today, they would be straightening out a few other people the way Joan helped me back in 1970.
At the time I was experimenting with indicators of consumer and business confidence to see whether they could improve the ability of Wynne Godley's models of the British economy to track the data of the day. Statistically speaking, they did a creditable job, so when Joan asked what I was doing and I told her, I was nonplussed when she replied that it was "not the point".
"Confidence indicators tell you only about the present," she said, "and that is not very important." What Maynard was concerned about, she went on, was "animal spirits" – the optimism of businessmen to borrow and spend today, even though the resulting output can be offered for sale only in a future that is intrinsically unknowable."
The tiny problem with Keynesianism is summarized neatly here. It's that animal spirits are necessary for commerce, but not sufficient for prosperity.
Consider it this way. The great bubble of the noughties was caused by animal spirits unleashed to their fullest. The result, today, is austerity.
So if all you want to do is blow bubbles, and revive a brain-dead zombieconomy, then stimulating animal spirits is the way to go. But if you want to build a fundamentally better economy, well then you've got to do more.
You've got to, in short, transform animal spirits into a high purpose, into a human spirit. One that is the will to create meaningful, enduring, thick value. That's the central challenge of 21st century economics.
The Potential Problem
According to the Hay Group, as quoted by the Economist, 57% of employees feel treated like "dispensable commodities".
I'm surprised the number's that low, actually.
Let's face it. The stuff we work on just isn't fulfilling. 100,000 person organizations strive and struggle to make...slightly better razors. To make matter worse, the work we do is still tightly controlled, scripted down to the last line, stopwatched to the nanosecond.
So we've got a situation not so different from thie assembly line, in managerial terms.
We've spent decades trying to figure out how to make employees "feel" valued. But we can't seem to do it. Why not? Perhaps we have to work on stuff of authentic, enduring, and meaningful value first. We've got to, in short, rediscover the little thing called ambition.
Unless we do, this - people feeling devalued, failing to give their best and accomplish their most, trapping firms to underperformance, and economies to stagnation - probably is the equilibrium.
Friday, August 20, 2010
The New American Dream
"Nine percent of white-collar workers have added a second job in the past year, and another 19% said they intended to take a second job sometime in 2010, according to a recent survey for CareerBuilder.com, a career website"
Let me restate that. One fifth of Americans expect to have to take a second job in the next quarter.
This is the bleak, indifferent face of austerity. The polar, painful opposite of an authentic, meaningful prosperity.
Let me offer you an analogy. America, for the last several decades, has been kind of like a giant mall, owned by a leveraged, structured hedge fund. In this mall, as in most malls, the shelves are lined with toxic, lowest common denominator junk, that's self destructive to people, communities, and happiness itself. In this mall, as in most malls, there is the illusion of abundance - purchased only at the cost of tomorrow.
The mall only offers McJobs. The bulk of returns flow to the hedge fund that owns it. But they are, of course, illusory. No real value has been created - rather, value has simply been transferred from the mall workers, to the mall shoppers, to the mall managers, to the fund managers. On each leg of its journey, it's concentrated in fewer and fewer hands. Conversely, on each leg of the journey, investment becomes less productive, moral hazard more damaging, adverse selection more intense, externalities more severe, and real wealth outflows more destructive. Here's the kicker. The workers have nowhere else to shop but the mall - but the more they do so, the poorer they get, because every round of transactions shaves another few pennies off their real wealth today, and the returns on it tomorrow.
The mall isn't an engine of prosperity. It's a masquerade, a charade, a game of musical chairs - it is, ultimately, a tool whose very purpose is only to extract value, and whose necessary side effect, then, is austerity.
If you worked at the mall long enough - well, you'd go exactly nowhere. In fact, in real terms, you'd get poorer. And so you'd probably end up having to take a second job, down the corridor.
Welcome, then, to America 2010. Call it the new American Dream: I just want enough not to have to face decades of penury and toil. Is there more work at this mall?
Want fries with that zombieconomy?
Tuesday, August 17, 2010
The Great Fake Unemployment Debate
The great unemployment debate is, to put it ham-fistedly, lame. If it suggests anything, it's that econ needs to update it's very definition of unemployment. Here's what I mean by that.
Is it "structural" - or is it "cyclical"? Structural unemployment, ie, vacancies, but no skills, hence skills mismatches - or cyclical, just a downswing in business as usual that's preventing firms from hiring workers? Is it the workers, in other words, or the firms? It is, of course, neither: the great unemployment crisis is institutional. The truth is that the bulk of today's companies are on their last legs. That's a straightforward inference from mounds of data on the accelerating rate of firm hazard (ie, how fast firms die).
Yet, tomorrow's haven't been created yet. Why not? Partly, because we've been propping up yesterday's with subsidies, hard bailouts, and soft de facto and de jure special privileges. Partly, because just as Wall St overinvested, so venture investors underinvested - we've been underinvesting in innovation for decades. And, of course, partly because we haven't even invested in the right organizational and legal vehicles for 21st century corporate activity.
Let me restate all that. The unemployment debate is terminally lame, because, as orthodox econ so often does, it assumes richer answers away to begin with. The assumption is that it must be either yesterday's firms that are unable to offer jobs today, or yesterday's workers that are unable to meet the requirements for today's jobs. A hard look at the economy suggests in no uncertain terms that exactly the obverse is the case. Unemployment today is the result of tomorrow's jobs never having been created yesterday. The jobs aren't there, in other words, because workers don't have the skills, or because firms aren't confident enough to employ workers - but because the roles, tasks, and positions of the 21st century were never created in the first place.
Think about it this way. We've underinvested severely, for example, in next-gen transportation and green construction. So the positions of "high-speed train network manager" or "renewable materials engineer" don't exist yet. Nor do the skills that make them up. Because - nor do the companies that could offer them. That's neither "structural" nor "cyclical" - it's institutional.
The unemplyment crisis just another facet of the bigger, more sweeping crisis: one of severe, structural misallocation. Of, ultimately, deep, perhaps fatal, institutional disrepair.
21st Century Monetary Policy
"...Here’s my proposal. We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public.
During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle."
Fantastic. Now there's some institutional innovation for you: radically democratizing, decentralizing, and deconcentrating central banking as we know it.
And he even nails the real ethical justification for positive sum wealth transfers later in the post. Beautiful stuff.
Rebalancing the Global Economy
"...The important thing isn’t China’s ranking, nor the total value of China’s production, nor even the extraordinary speed by which China has reached #2.
What’s most important is the share China’s production received and consumed by the Chinese themselves. The problem is it continues to drop.
China has dozens of billionaires but the vast majority of the Chinese are still extremely poor. The typical Chinese lives off the equivalent of about $3,600 a year. That puts him behind workers in 126 other countries. (The typical Japanese earns the equivalent of about $39,000; the typical American, $46,400.)
If the wages and purchasing power of Chinese households continues to rise more slowly than China’s capacity to produce goods and services — more slowly than China’s corporate profits and the government’s share of national income — we’re all in trouble."
From a sharp post by Robert Reich. In other words, in terms of GDP, China rocketed to number 2. But in terms of GDP per capita, China's not even in the top hundred countries.
Think about that for a second. Because written into it is the next great stage of the global macropocalypse. Think China's going to save the world (or at least the global economy)? Unfortunately, unless per capita GDP skyrockets, and purchasing power explodes - it probably won't, anytime soon.
What the startling mismatch between those two numbers - without parallel in modern economic history - implies is a economy with structurally shaky foundations. The price of an exchange rate regime that subsidizes exports is lending to those who are buying exports in the first place (ie, buying dollars, and selling RMB, to put it crudely). So domestic consumption isn't just foregone - it's systemically, structurally limited. That China has a stunted retail finance sector, with constraints on consumer lending, that it has failed to shift past intermediate goods heavy industries, that it's service sector is underdeveloped, and that it has overinvested in a classic heavy, industrialized asset bubble - all are inevitable symptoms of this deeper imbalance; one of, essentially, overproduction.
Call it, if you like, an institutionalized general glut. Too many Hummers for too few dollars, euros, and renminbi. So the question is: who will continue buying into the decayed institutions of industrial age capitalism - and who will make the leap to creating 21st century capitalism?
Reconceiving the Economic Institutions of Capitalism
"...Another "innovation" was the use of company scrip instead of US currency to pay wages. Scrip was only good at the company store. This assured that mining companies recaptured through monopoly prices some of the wages they paid. It occasionally allowed them to raise wages without eroding their profits (since they could recover the wage rise through higher store prices and housing rents).
Company stores and company towns were a way for those with economic and political power to extract a few more dollars from the people doing a lot of the work and assuming a lot of the workplace risk. Like investment bankers who apparently couldn't come up with (as Joe Stiglitz put it in Freefall) a good mortgage product with"low transaction costs and low interest rates" that "would have helped people manage the risk of home ownership, including protection in the event their house loses value or borrowers lose their job," so some coal companies could not come up with a means of providing necessary housing and food to employees without also further impoverishing workers and enriching owners. That lack of creative, far-sighted innovation got them (and us) unions and excessive regulation. A communist plot? Hardly. More like capitalist myopia, something that seems to plague certain sectors of our capitalist economy in ways that doom them (and us) to repeat the past."
If we're going to reboot capitalism, the first bullet point on the agenda might just be, as I've recently discussed, a higher purpose on which to found a better set of institutions. One that insulates and protects companies, people, and countries from myopia, unnovation, and rent-seeking - as embodied in company towns, company stores, CDO's, Big Macs...
The list, of course, is endless. But the wealth it has destroyed isn't. That's the point - and the problem.
Were The Noughties a Lost Decade?
(Indices top to bottom, DJIA, S&P 500, Nasdaq Composite).
Sunday, August 15, 2010
The Morality of the Market and Rebooting Capitalism
“This is a type of abandonment, through disinterest,” said Hiroshi Takahashi, a professor at the International University of Health and Welfare in Tokyo. “Now we see the reality of aging in a more urbanized society where communal bonds are deteriorating.”
Link.
What a telling, incisive quote. The morality of the market says: you're only "worth" as much as your (the net present value of your) marginal productivity. If you're no longer productive, a good indentured servant to the .01% of the population that's "super-rich", a toiling serf tossed a few bits of bread by the plutocrats - well, then the market no longer cares about you. So "abandonment through disinterest" is a pretty good way to describe the great crisis of nihilism at the heart of industrial age capitalism.
And it starkly highlights just why capitalism as know it needs a great reboot, a fundamentally new contract with people and societies. Because, of course, it's exactly that threat of abandonment that's led Japan's youth, in a hyperrational response, to abandon yesterday's institutions right back, shunning work en masse. Abandonment is met with abandonment: it's an arms race, in which everyone ultimately loses, as long-run productivity dries up, trust vanishes, innovation withers, investment fails, risk spirals out of control, and capital is consistently, chronically misallocated.
Today, the economy is a broken machine: one that extracts value, steps on tomorrow, transfers wealth. But what it must become is a tool to ignite the spark of an enduring prosperity.
Saturday, August 14, 2010
Thursday, August 12, 2010
Wednesday, August 11, 2010
Want Fries With That Ponziconomy?
Lately, there's a refrain from some corners that real wages have risen over the last couple of years, so this isn't really a recession to be worried about, etc, etc. The chart on the left, from Richard Green's excellent blog, suggests a very different story.
It shows that the ratio of wages to national income peaked around 1970, and has been falling ever since.
Unless you want to argue that the marginal productivity of the average American has been declining for 40 years, there's something very wrong with this picture. It lends credence to my argument (and Robert Reich's) that Americans didn't just overleverage themselves because they're venal and greedy - but, rather, because, if they wanted to tread water, they had to. It lends credence to the argument that what we don't need is more "labour market flexibility", but a radically more efficient labour market structurally.
In the big picture, what it suggests, in no uncertain terms, is a Ponziconomy: one where value is appropriated from workers, by the gears of the other components of national income - like, for example, corporate profits. You can't have a working economy where the average worker's earning less for doing more - because, of course, the incentives for investment and education dry up, the returns to human capital collapse, and savings rates implode. That's the kind of prosperity only a sucker would accept - a false prosperity in every sense of the word - one which is just a game of musical chairs.
A More Authentic Prosperity
I'm often asked: what is a more authentic prosperity, anyways? Aren't we prospering? Not exactly.
Consider these numbers from the Commerce Department. "On average, personal income dropped 1.8% in 2009, following a 2.7% increase in 2007".
When those raw numbers are adjusted for real standards of living, income drops even further, to near double digit territory. And that doesn't even get into wealth - which hasn't just eroded, but imploded, for the vast majority of Americans.
An authentic prosperity doesn't mean I win, you lose. That doesn't even meet the basic criterion of Pareto efficiency, the weakest and most meaningless weapon in the economic arsenal. It means, at minimum, that when you win - at least I don't lose.
Yet, exactly the opposite's been happening. It's a brain-dead way to think about running an economy - one where there is no room for investment, no real incentives for innovation, no growth in skills, and meaningless, joyless work filling up each dreary day. In other words, a Ponziconomy.
Which is why the great challenge of the 21st century - for countries, companies, entrepreneurs, and investors - is seeding a more authentic prosperity.
The Lost Quarter Century
 From a very interesting analysis by the San Francisco Fed (the red line's an indicator of aggregate expectations of another recession).
Of course, you shouldn't need numbers to tell you this. It should be plain to see for anyone not cooped up on Mars. On Planet Earth, the global economy has had major, burning problems for the last half-decade.
And though you might have heard plenty of spin and hype coming from the banking lobby, central banks, treasury secretaries, and other assorted folks, the truth is simple.
We haven't done anything to fix the problems (toxic debt, ruinous incentives, broken institutions, a surfeit of higher order capital, invisible, tuned-out shareholders and empty equity, and, of course, the ultimate result of all that, thin value). Not a single meaningful thing. So, of course, to imagine that we'd wake up one day and they'd magically be gone - well, that was a daydream.
Reality is uglier. This is, not to put too fine a point on it, an instant replay of Japan, circa 1990. And we're headed exactly for another lost decade.
The only question now is: how many are we prepared to lose?
The Institutional Revolution
"Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?
East Asian examples (South Korea, Taiwan, China) seem to suggest the former. But how, then, can one explain the fact that almost all wealthy countries – except those that owe their riches to natural resources alone – are democratic? Should political openness precede, rather than follow, economic growth?
When we look at systematic historical evidence, instead of individual cases, we find that authoritarianism buys little in terms of economic growth. For every authoritarian country that has managed to grow rapidly, there are several that have floundered. For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.
Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies."
Of course, this bodes ill not for East Asia - which is marchings towards deeper democracy - but for America, which is floundering as an authentic democracy. Hence, the instabilities Rodrik cites sending tectonic shocks rippling across the economic landscape.
If one wanted to connect some dots, you might link this to Frank's recent post about spending is concentrated in a smaller and smaller number of ultra-rich hands, and how that creates vulnerability, disinvestment, and other assorted nasty effects.
It's not a recession, but an institutional decline; the real rot's in the fabric of our most basic political, social, and economic institutions, the bulk of which are as obsolete as the toxic junk lining the bleak exurban shelves.
The Great Rebalancing
"...in the past decade, our rate of food waste has more than doubled.
According to a recent study, over 40% of the food produced in America is wasted each year, and only 2% of this waste is composted. Food waste is now the second largest waste stream sent to landfills, where it produces methane, a deadly greenhouse gas...
...Americans on average still spend proportionally less than any other nation on food. According to research compiled by the USDA, 6.9% of household spending in America was on food, compared to 13.7% in France and 45.7% in Indonesia."
A very nice article that highlights just how deep America's hyperconsumption problem really is - and just how far it has to go towards the necessary rebalancing with durable, productive investment, higher order returns, and deep efficiency.
The idea that this is a mere "recession" overlooks the deeper institutional rot that has allowed the economy to develop deep structural problems in every market, that misallocate every kind of capital severely. It's not a recession - it's something much more profound, and darker.
Tuesday, August 10, 2010
Plutonomy, Ponziconomy, and Capitalism
"According to new research from Moody’s Analytics, the top 5% of Americans by income account for 37% of all consumer outlays.
By contrast, the bottom 80% by income account for 39.5% of all consumer outlays.
In the third quarter of 1990, the top 5% accounted for 25% of consumer outlays. That held relatively steady until the mid-1990s, when it started inching up past 30%. It dipped in 2003 and again in 2008, but started surging in 2009 amid the greatest bull market rally in history, with the Dow Jones Industry Average rising nearly 50% in the last nine months of the year.
The data may be a further sign that the U.S. is becoming a Plutonomy–an economy dependent on the spending and investing of the wealthy. And Plutonomies are far less stable than economies built on more evenly distributed income and mass consumption."
From a fantastic post by Robert Frank. Plutonomy is another word for Ponziconomy, of course--because, to use a crude example, if the richest 5 people in society capture 99 percent of the gains, well, the work you're doing isn't really enriching you, your family, your community, etc. In fact, just as the words "feudal economy" are a bit of an oxymoron, so is Plutonomy--there's no real economy at work there, just the brutal, whirling mechanisms of violence, expropriation, and appropriation.
So I'd go further than Frank, and argue that global economy's a Plutonomy--and therein lie the real reasons for the depression we're in.
Friedman's Law, or Why It's Hard to Discuss the Future of Capitalism
"Here and there, the grandiose legacy of a country in love with freedom of movement must be celebrated, even as we figure out new and more efficient ways to get around. Now, more than ever, we need Hummer, in all its defiant, obnoxious, thoroughly American glory."
I'm invoking a new rule. It's called Friedman's Law. Like Godwin's Law, it says, in discussions of next-gen capitalism, when someone refers, inevitably, to communism, the discussion's over. It's named for the great Milton Friedman--who was smart enough never to dismiss discussions about the future of capitalism simply by invoking a ghastly straw man, but always argued his corner with grace and force.
An example. Yesterday, a fellow called Matt DeBord sent me a series of the most bone-headed tweets I've ever received: an automotive and econ journalist (really??), he argued that clusters and charter cities were "trekkie-nomics" (ie, communist, socialist, collectivist). In point of hard, cold, fact, both are ideas pioneered by diehard neoclassical econ Nobel Laureates, whose essence is to make markets.
Any serious econ journalist should either 1) know that, 2) ask an expert when they don't know that, or 3) not invoke the spectre of communism, and, instead learn that for themselves.
So the above is a quote by an article from Matt DeBord, which might place all the above in context. Do I even need to connect the dots for you?
Some people can't grapple with challenges of a creating better future because they don't really want one.
21st Century Capitalism and the Ponziconomy
"The fight on Capitol Hill over whether to extend the Bush tax cuts is about many things: deficit reduction, economic stimulus, supply-side ideology. But at its core is a simple question: who counts as rich?"
Link. Wrong debate--wrong question. The question isn't who to tax next. It's the taxes we already pay.
Consider. "Corporate profit" is largely a tax--not real value, but value transferred from you to shareholders. The fumes smogging up our skies are a tax. The junkfood lining the bleak exurban shelves is a tax. Every big-box store is a tax sucking the life, heart, and soul out of town. The brain-dead ads on robo-repeat every 10 minutes on all 500 channels are a tax. China's currency games, which export unemployment and instability, are a tax. Wall St's institutional structure is a tax. The hidden charges and fees that constitute most "business models" are the epitome of a tax. The corporation itself--limited in liability, evanescently, asymmetrically devoid of risk, cost, and responsibility--is a tax.
Let's get real. So the real debate isn't about whether the super-rich should pay another percentage point of two of tax, though it's indisputable to anyone except an economist or a retarded vampire bat that they should.
The real debate is about the taxes we're already forced to bear, every second of every day - and turning them inside, so those who've spent the last century and more enjoying the luxury of benefiting from them don't. And real incentives for explosively more productive, enduring investment finally surface.
It's time to reboot capitalism for the 21st century. Ponziconomy: all the above is what the word really means. And unless we can extricate ourselves from it's ever tightening grip, well there is no future--just a long, slow slide into penury.
Monday, August 09, 2010
Rebooting Capitalism for the 21st Century
"Landless and illiterate, drowned by debt, Mr. Bhuria and his ailing children have staggered into the hospital ward after falling through India’s social safety net. They should receive subsidized government food and cooking fuel. They do not. The older children should be enrolled in school and receiving a free daily lunch. They are not. And they are hardly alone: India’s eight poorest states have more people in poverty — an estimated 421 million — than Africa’s 26 poorest nations, one study recently reported.
...Should the country begin to unshackle the poor from the inefficient, decades-old government food distribution system and try something radical, like simply giving out food coupons, or cash?
Sonia Gandhi, is pushing to create a constitutional right to food and expand the existing entitlement so that every Indian family would qualify for a monthly 77-pound bag of grain, sugar and kerosene."
Link. I'm often asked: what can developing countries do to kickstart 21st century economies?
The answer is: their challenge is the same as developed countries: getting serious about institutional innovation.
Consider a very simple point. There's enough food in the world to feed the world. But not everyone gets fed. Yesterday's institutions don't allocate it efficiently. Corrupt bureaucrats certainly play their role. But so do speculators, "investors", and, well, you. So the challenge is designing better institutions.
The real opportunity for developing countries lies here. While the developed world, hidebound by inertia, rendered sclerotic by fatcats smacking their lips at every trough, languishes, failing to meet the challenge of institutional innovation--smarter nations can take a great leap into the future.
The time is now. And it always has been now.
Threadneedle Street vs 21st Century Capitalism
"...At the Bank of England they are scratching their heads. Across town at the Victoria Street offices of Vince Cable's Department for Business, Innovation and Skills there are the same perplexed looks. Everyone is asking why UK businesses are unable to export their way out of recession.
Last month, manufacturers were especially gloomy about export orders. The purchasing managers index (PMI), an important monthly snapshot of manufacturing activity, collapsed to an 11-month low of 50.8."
So why can't Britain export it's way out of recession? Um, the answer's pretty obvious. Unless the British people are ready to accept wages lower the Bangladeshis--or until they can spark the industries of the future, for which the world is ready to pay a steep premium, then exports are a non-starter. It's not just about making stuff. It's not just about--for developed countries--about making more cheap stuff.
It's about making the stuff of the 21st century, as I've been discussing on my HBR blog. Developed countries don't have a clue how to do that--because they're still basically industrial age economies, clothed in slightly more fashionable outfits. But take away the superficial gloss, and what you're left with are economies that still churn out reams of toxic junk, whose basic economics--borrow to the hilt, buy low, mass produce, mega-market, and the world, people, society, and communities be damned, for the pursuit of near-term shareholder value--have changed not a whit for the better part of a century.
Britain, when you can do stuff that's not the above--when you can shift past the brain-dead economics of the industrial age--then let's talk about exporting your way out of recession. Until then--want fries with that Ponziconomy?
The State of the Ponziconomy
 Could there be a clearer--and perhaps more heart-rending--picture of an economy in deep, systemic, structural decline? Probably not.
What people are spending more on, in relative terms, as incomes dwindle--what they're substituting spending for, as budgets decline in real terms--are the most basic of necessities.
Oh, and goods for which monopoly power allows incumbents to reap fat profits, sans meaningful innovation of any kind (hi, telcos).
Needless to say, consumption patterns like these bode (very) ill for the next decade--because they fail to support a single one of the structural changes (new industries, new institutions, new markets, the localization of capital flows, risk sharing, etc) necessary to spark the rebirth of prosperity. Instead, they point to a Ponziconomy--where people and societies run harder and harder, only to move backwards.
It's a vicious circle, a bad equilibrium, a game of musical chairs--a masquerade of wealth creation. Except the masks are coming off.
Monday, July 26, 2010
Economics for Humans
"Experiments suggest that happiness raises productivity by increase workers' effort. Economists may need to take the emotional state of economic agents seriously..”
Link. Ah, the dismal science.
Down and Out in the Zombieconomy
The Economist asks: "Is America facing an increase in structural unemployment?"
Many very interesting answers, by Acemoglu, Sumner, and Thoma, among others.
Of course, my answer is: yes. But for a different reason. It's not that Americans don't have the right level of "skills". It doesn't take a double PhD to make awesome stuff - rather, it takes passion, imagination, and dedication. I'd point, instead of skills gaps, to severe, systemic capital misallocation. We've overinvested in yesterday's industries to the point that they're now the walking dead - but the cost, of course, has been failing to seed tomorrow's.
We don't have awesome jobs because we've propped up zombie companies that create, largely, McJobs - when they create any at all. Conversely, the incentives for entrepreneurship are drying up, thanks to a broken ventureconomy.
So how do we fix the problem? By creating the institutions of the 21st century. Etc - you know the score (if you don't, check recent posts).
Saturday, July 24, 2010
The Age of Wisdom
What, then, are we transitioning to? I call it the Age of Wisdom.
Here's a tiny but resonant example of its predecessor: the Age of Strategy. Dell's been relying on side payments from Intel, to exclusively utilize Intel chips, to make it's earnings estimates.
"...Mr. Rollins wrote to Michael S. Dell, the company’s founder, that “for 3 qtrs now, Intel money has made the qtr. A bad way to run the railroad,” according to the S.E.C.
Later, Mr. Rollins wrote to Mr. Dell about Intel, saying “We are going to have to get off their drug . . . “. There was much more.
The information disgorgement came as the S.E.C. hit Dell with accounting fraud charges, and the company settled the matter with a $100 million fine and no admission of any wrongdoing.
At the heart of the S.E.C.’s complaint against Dell was the claim that Dell hid its reliance on rebates from Intel from investors."
Let me be blunt. This is the essence of a Ponziconomy. Dell's so-called value creation wasnt; it was a sham, value transferred from customers, by denying them the right to choose chips, to shareholders, via Intel. Authentic economic value was left in the lurch.
The Age of Wisdom is about building, well, wiser companies, that power a real economy. Not one that's built on Ponzi economics. Dell's example isn't the exception - it's the rule. Most industries are characterized by these masquerades of value creation. Today's great challenge is understanding that while "strategic" behaviour might be a foundation for near-term advantage - only wisdom is the basis for authentic prosperity.
Friday, July 23, 2010
The Great Transition
A fantastically scary chart from Tim Duy - and a very nice analysis to accompany it.
What you might read this chart to say is several things - my take. First, that we're failing utterly to renew the industrial base, and seed the industries of the 21st century. Second, that this is really is a Great Transition - and that the jobs that died can't and won't be resurrected because they've been shifted, more or less permanently, elsewhere. Third, given corporate cash hoards, that today's CEOs are pretty much bereft of ideas about what to invest in, and why. And fourth and last, that the problem of global excess capacity has yet - despite the difficulties we've already faced - barely surfaced at all.
All four, of course, imply a new Depression, replete with deflation, stagnation, disinvestment, and mega-shakeout. There is no recovery because it wasn't a simple recession - but end of one economic era, and the painful, clamorous birth of another.
Thursday, July 22, 2010
Macropocalypse, 2010 Edition
"...if lots of bad debts have been incurred, and if the amount of time it will take to wind them down and return to healthier levels of consumption and investment is too long, it is better that there be an orderly writeoff of a large chunk of the debt overhang. Alas, this was not central to the bailouts of the last two years as it should have been, even though the financial system had accumulated trillions of dollars in bad debt. Either we do this in a rational, civilized way, or the economy will sputter until default breaks out chaotically".
Link. What have we learned from Japan? Apparently, nothing.
The single biggest reason Japan's lost decade wore on was an obdurate refusal by comically textbook crony capitalists to discover and eliminate toxic debt.
Sound familiar? It should. Suffice it to say that little to zero effort has been made in Europe or America to do likewise. The toxic load has merely been shifted from the private sector's balance sheets, to the public sector's.
All that does is transfer risk - not eliminate it. Yet, until it's eliminated, demand and investment cannot feasibly grow, and people will resort to all sorts of risk management tips and tricks (like deferring consumption, etc, etc) - which are, you guessed it, the spark of deflation.
Oh, wait - that sounds just like Japan...
So perhaps, then, you see why I used to call all this, circa 2006, the Macropocalypse.
The Great Transition (High-Concept Version)
"...Consequently, the greybeards summarily expelled both philosophy and history from the graduate economics curriculum, and then they chased it out of the undergraduate curriculum as well. This latter exile was the bitterest, if only because many undergraduates often want to ask why the profession believes what it does, since their own allegiances are still in the process of being formed. The excuse tendered to repress this demand was that the students needed still more mathematics preparation, more statistics, and more tutelage in “theory,” which meant in practice a boot camp regimen consisting of endless working of problem sets, problem sets, and more problem sets, until the poor tyros were so dizzy they didn’t have the spunk left to interrogate the masses of journal articles they had struggled to absorb.
How this encouraged students to become acquainted with the shape of the economy was a bit of a mystery—or maybe it telegraphed the lesson that you didn’t need to attend to the specifics of actual existing economies.10 It was brainwashing, pure and simple, carried out under the banner of rigor. Then, by the 1990s there was no longer any call for offering courses in philosophy or history of doctrine any longer, since there were no economists with sufficient training (not to mention interest) left in order to staff the courses."
Indeed. Perhaps the most depressing part of my own tiny career so far has been seeing the yawning gap between economics as it's theorized, economics as it's taught - and economics as it's lived and practiced.
Suffice it to say, then, that economics is in the initial, tiny throes of a titanic paradigm shift. Too much toxic water has passed under the bridge - and will pass - for econ as we know it to be resurrected, I'd venture. Consider, for a second, just how long - and how deep - the depression we're entering now is likely to be. How seriously will, then, the axioms of yesterday be taken by a dazed, shocked world - still baffled by seemingly unrecoverable prosperity - in, say 2012? 2015?
Econ's next great paradigm is going to be founded on people - not product. As, when you think about, it was in Adam Smith's day.
The Institutional Revolution
"While economists and policy-makers debate the short and medium-term remedies to the crisis, there is an incredibly surprising and under-discussed consensus emerging for the longer run. From the Financial Times to the South Centre there is agreement that the United States and East Asia (notably China) have to change the ‘structures’ of their economies.
The US has to stop over-consuming on credit and actually produce things for export again. East Asian nations have to slow down their over-reliance on exports and increase domestic consumption. Another way of putting it: the key actors in the world economy need to undergo structural change.
So are we all structuralists now?"
Link. Now we're getting to the root of the real crisis. Yes, economies need structural reshaping and reform.
Where will it come from? That's the big question. Macroeconomics often sheds little light on the answer, apart from various currency and tax regime games.
The better answer is this: from a new set of institutions. It's institutions which are the iron cage trapping us in the industrial age. It's only by rebuilding them that we can kickstart enduring structural change - instead of the minor-league product and market level changes today's decision-makers are mistakenly seeking. As I've been discussing at length here, here, and at my HBR blog in general.
Let me make that as crystal clear: no new institutions, no prosperity. Thinking about a lost decade? Think about several.
Today's policy-makers are putting tiny band aids on a gaping wound. The wound is an economy whose fundamental building blocks have eroded. No real value can be created atop them any longer. Until new ones are laid down, enjoy turning perma-Japanese.
The Great Transition
Economic security is a nice starting point to think about a real prosperity. Because it's meaningful to people. An average net worth of millions ain't worth much if it's consistently and intensely at risk.
The Utopia Merchants
"The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the “conclusion” that there is nothing for macroeconomic policy to do".
The real utopia isn't the idea of building a better economics. It's the one economics as we know it already assumes; the one that was promised to us under the terms of yesterday's tired institutions.
It is by confronting those utopian assumptions, and squaring them with the tremendous shortcomings of market orthodoxy and financial capitalism in the real world, that new paths to prosperity will be unlocked.
And, I'd venture to guess, only by doing so.
Monday, July 19, 2010
The Great Transition
It's not a recession. It's a Great Transition. Yesterday's jobs didn't vanish - they died.
What will replace them? Not the same old ones, recovered ones - but fundamentally new ones, in a more meaningful economy.
Social Strategies: Generosity
"Ms. Castillo had long dreamed of a bigger, sturdier house, but three months ago something happened that finally made it possible: she landed a job at one of the world’s most unusual garment factories. Industry experts say it is a pioneer in the developing world because it pays a “living wage” — in this case, three times the average pay of the country’s apparel workers — and allows workers to join a union without a fight".
Link. A textbook example of the tectonic change happening in what it means to be a capitalist.
The Great Transition
It's not a recession. The problems are structural, woven into the fabric of the industrial age.
Social Strategies: Generosity
"When Gneezy told customers that half of the $12.95 price tag would go to charity, only 0.57% riders bought a photo – a pathetic increase over the standard price plan. This is akin to the practices of “corporate social responsibility” that many companies practice, where they try to demonstrate a sense of social consciousness. But financially, this approach had minimal benefits. It led to more sales, but once you take away the amount given to charity, the sound of hollow coffers came ringing out. You see the same thing on eBay. If people say that 10% of their earnings go to charity, their items only sell for around 2% more.
But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof. Around 4.5% of the customers asked for a photo (up 9 times from the standard price plan), and on average, each one paid $5.33 for the privilege. Even after taking away the charitable donations, that still left Gneezy with a decent profit."
Link. Point: 21st century business models are more radical than most of us ever imagine.
Yes, it's easy to think of ways to nitpick at this study. But it's equally easy to point out that yesterday's lame, toxic, brain-dead business models are causing titans to tumble.
So perhaps the future of business isn't what we often think it might be.
Wednesday, July 14, 2010
Stimulating the Zombieconomy
Via Brad Delong, Mark Zandi says stimulus's effects are about to fade.
What we need more than stimulus is institutional reform. Stimulus sans reform is going to merely produce what we've got today: a jobless, meaningless so-called recovery.
Why? It's time to wise up to the simple fact that we built a Ponziconomy. Authentic prosperity under its regime has hit its limits - as the last post on jobs begins to show. Value isn't created by the institutions of industrial age capitalism as much as its transferred.
What's the magnitude of that value transfer? As Raghu Rajan notes in his new book Fault Lines: “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. 60%? And that's not even counting costs to the environment, tomorrow's generations, etc. Industrial age capitalism isn't, any longer, a value creation machine - it's a broken machine that transfers value instead. Hence, the term Ponziconomy: it's a game of musical chairs (to put politely).
Stimulating a zombieconomy and bringing it back to life is a poor choice to make. It's not yesterday's tired, lame, brain-dead organizations we need to keep on life support, and resurrect. Sowing the seeds of organizations that can create radically meaningful work, life, and play for the 21st century? That's the challenge - and it's less about stimulus than about building a new set of institutions for a radically interdependent economy.
Double-dip? Recovery? Wrong question. Investing in Constructive Capitalists - whether countries, blue-chips, or startups is where today's most significant and enduring returns are found - because they're rebooting capitalism from the ground up.
Why Can't America Create Jobs?
Here are two very interesting (perhaps jaw-dropping) charts, the first from Daniel Indiviglio, and the second from Scott Winship.
 The second one is a more concise summary of the issue. What does it say? That there are six unemployed job-seekers for each job opening in the States today.
Consider that, for a moment - in light of the people you perhaps know or have heard of who are trying desperately to find not even a career, but just work, and have been for months or years. The numbers suggest simply that there's not enough work to go around: the demand for jobs vastly exceeds their supply.
Why? The chart barely begins to tell the deeper story. For decades now, we've been replacing real jobs - those where skills can be renewed, benefits earned, and dignity gained - with McJobs: rote, formulaic tasks, where people are cogs in giant organizational machines. The purpose of these vast engines? Churning out endless reams of toxic junk - not meaningful, awesome stuff.
What this chart really shows is the decline of a Ponziconomy - one unsustainable in its deepest sense. It "prospered" by dehumanizing its "workers", literally stripping them of wealth. So, today, the tables have finally turned: stripped of wealth, those same people can't create enough "demand" to fuel the Ponziconomy - hence, jobs crisis.
On the other side of the world, the opposite effect is being felt. In China, workers are gaining bargaining power, and a middle class is rising. But this is a zero-sum game, not a sustainable prosperity: one middles class vanishes, another rises in its place. Just as America is learning, the hard-way, the limitations of industrial age capitalism, so China inevitably will have to deal with its own crisis of false abundance, and the chronic capital and labour misallocations that are its aftershocks.
That's why: it's time to reboot capitalism. What this great crisis of labor really is? A transition from one stage of capitalism to the next. The charts show, literally, the economy shedding the skin of the industrial age - one struggling to undergo a metamorphosis. The next evolution? As I've been discussing, it's one where work, life, and play are organized in radically better ways, to achieve a higher purpose, and do meaningful stuff that matters the most - to fuel a more authentic prosperity.
Tuesday, July 13, 2010
Asymmetrical (Mis)allocation
It's easy to misallocate capital. It's really, really hard to reallocate it.
Banks misallocated loans. People misallocated debt to meaningless, toxic junk, like"consumer goods", McMansions, and SUVs. Corporations are now hoarding "profit" - that misallocated capital coming full circle.
So here's the problem: call it an allocation asymmetry, if you like. Misallocating capital takes markets a couple of years, as "investors" pile in by the nanosecond. But reallocating it takes institutions - like courts, local governments, Congress, international trade treaties, etc - decades.
The misallocations above are going to take the better part of the teens to untangle, and then cut apart. We haven't even scraped the surface of the massive misallocation of debt banks made - little, if any, effort has been made to reveal or value the scale and depth of toxic debt. Lawsuits and the like will go on for years, chasing debt-laden households. It will corporations many, many years to unwind the cash on their balance sheets.
It's that asymmetry that's truly dangerous for the global economy - because what it suggests, at the end of the day, is a steepening of systematic risk, that should be reflected in higher interest rates. Or, worse, their monetary equivalent: deflation. Either one, of course, is where lost decades begin.
In that context, companies, countries, and people who can reallocate resources with greater agility will possess an explosive new source of advantage - in both financial and economic terms.
The Construction of Unemployment
So the census is over. And the temp jobs it created are about to vanish. America's going to have to face up to the fact that its economy is broken, unable to create "jobs".
Why?
You know the standard answers: China, evil corporations, low skills.
Here's a very different suggestion. We construct the economy every day with the choices we make. So could it be that this great hollowing out is the equilibrium outcome of our preferences?
Let me explain - and allow to me to over-generalize for a moment. Let's say you want a loaf of bread. How many of us will pay an extra 15-30% for a loaf from the local baker, versus a loaf from the local hypermarket? Yet, because we won't, the bakery - and its jobs - vanish.
After all, why would you pay a slight premium, for goods that are substitutes? Except, of course, they're not - really. Your bakery has radically different incentives than your local hypermarket, and might just offer you a significantly higher level of artisanship, skill, service - and trust. Yet, it's exactly those we don't seem to value.
There are many orthodox explanations for today's great jobs crisis. All certainly play a role.
But I think there's a deeper cause. It's not valuing the human; putting product over people; failing to prefer the stuff that is skilled work in the first place. We don't have better jobs because we don't and won't invest in creating them.
But that's about to change, as naked consumption must become investment. We're on the verge of a tectonic shift in preferences in developed countries - away from meaningless junk, and towards meaningful work, life, and play.
So the question for tomorrow's revolutionaries is: can you create the jobs of the 21st century, instead of hollowing out the jobs of the 20th? Companies, countries, and people that can - well, I have a hunch they will find that advantage flows inexorably their way.
Sunday, July 04, 2010
I'm feeling kinda bored. Like I just might begin blogging with a vengeance again.
Friday, June 25, 2010
Ethical Capitalism and Metaproductivity
Chad Syverson asks a very interesting question: what are the fundamental determinants of productivity? He reviews many of the orthodox answers, nicely and concisely.
My answer, as I've discussed at length, is a little different. Though all the factors Chad reviews are certainly important - high quality inputs, managerial practices, competition, input market flexibility, and the like - I'd like to ask a question. What if there's a missing variable entirely from the production function as we know it?
Think about it this way. Ethical capital can be thought of as the rules, tools, and practices for defining and refining values that an economy possesses. So without ethical capital, an economy will never be able to fully develop productive preferences in the first place. So though it may have machines, talent, energy, resources of all kinds - only ethical capital can ensure that all those resources have, attached to them, discount rates that reflect their true long-run worth, depreciation rates that reflect their true long-run sustainability, and interest rates that reflect their true long-run opportunity costs.
You can think about that more simply this way: ethical capital is the set of rules ensures that the rate of return we seek isn't merely stolen from the next guy, the environment, or the future. If we don't have it, today's productivity gains are likely to be an illusion - unsustainable at best, a prelude to decline at worst.
Conversely, only ethical capital can ensure that externalities become the exception, not the rule - again, exploding productive capacity, by making sure that, for example, Deepwater Horizons are less likely to happen, and destroy, to some degree, the productive capacity of an entire region for decades.
And perhaps most deeply - only ethical capital can ensure that economies actually are built on (measures and concepts) that matters to humans - not just beancounters. That means updating what we conceive of as the economy - redefining GDP, etc, which I've also recently discussed in detail.
So the argument brings us to an interesting - and perhaps unexpected - place.
Perhaps the real problem is the industrial age definition of productivity. Which I'll take a stab at updating for a roiling, seething 21st century in my forthcoming book.
Wednesday, April 07, 2010
Investors Letter: The Roaring Teens?
"...After months of penny-pinching amid the recession, new figures — showing an improving job market, rising factory output and increased retail sales — suggest that consumers are no longer restricting their budgets to necessities like food and medicine. They are starting to buy clothes, jewelry and even cars again.
The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”"
Welcome to...the Roaring Teens? More than a few investors I've spoken to recently think that because consumption appears to be skyrocketing upwards again, all's well that end's well. And on the basis of that conclusion, they're ready to pump capital back into the same old industrial era assets and businesses.
Would that it were so. A slightly deeper logic suggests a very different conclusion.
Consumption is what broke the global economy. What's going to fix it - and what are likely to be tomorrow's most significant returns - differ radically.
What's happening is this. From the consumer's perspective, disposable income has risen sharply.
Now, that's a striking graph - note how sharply it peaks, and the sudden inflection points. They suggest a combination of drivers at work. First, that Geithner's bag of tricks "worked", at least in the near term, and for the consumer. Second, that the mortgage default are, if anything, understating impact. Third, that the impact of rate resets and other kinds of contractual contingencies was more severe than we thought.
So where's that cash going? Unfortunately, not into the right place. Americans should be saving probably around 6% of their incomes, to yield a sustainable current account deficit. But look at the very, very end of this graph.
What do you see? The savings rate is nosediving, hard. Far from 6%, it's closer to 3% - half what it should be.
It's as if Americans believe the crisis never happened, that it was all a fiction - and that tomorrow can be just like the day before yesterday.
Of course, it can't. Needless to say, American consumption is (still) being financed by China essentially buying dollars. But today, China's got to invest, instead, in more productive assets than low-yield loans to Uncle Sam. And it's got to free room for domestic consumption.
Both will happen by letting the renminbi adjust (and, of course, the stage is being set for exactly that). Whether this month, next month, or next year - doesn't matter. When it does, America's grateful return to yesterday's consumption path will be revealed as an illusion, and develeraging will have no choice but to begin in earnest.
Deep recovery for the global economy depends on the American consumer becoming the American saver, investor, and builder. That, in turn, depends on a new generation of businesses, that lay the foundations for tomorrow's industries, sectors, and markets. Those businesses - Constructive Capitalists - are what fuel meaningful investment in people, communities, and society, not just naked consumption by them.
Betting on a return to yesterday - as many consumers are essentially doing - is a poor choice to make. A better idea is betting on a more constructive tomorrow.
Sunday, April 04, 2010
Social Strategies: Choreography
Kickstarter's a killer example of social strategy in action. It's an example of one of the most complex - but almost most disruptive - social strategies: choreography. In the choreography strategy, a new architecture for interaction between buyers and sellers is crafted from the ground up. Literally, the steps of the dance of economic exchange are newly choreographed.
Examples of choreography are tough to find. Most industries and markets have had largely the same choreography for decades, some for centuries. LinkedIn didn't change the choregraphy of recruitment, for example - it just made the steps in an existing dance slightly easier to perform.
So consider Kickstarter's new choreography for a new sec. A total amount to be raised is explicitly stated, and pledges are made conditional on everyone else's pledges exceeding the desired amount. From a technical perspective, Kickstarter is letting one party (like a band) buy a psuedo- binary call option from N others, where the strike price is the fundraising amount, and the option either pays off in full, or not at all. The steps of the dance are altered.
That's a new choreography for stuff like books, music, and film: one that promises to unlock significant efficiency gains. More information is aggregated at less effort, risk is transferred, atomized, and spread, and, perhaps most interestingly, Kickstarter users are themselves beginning to align risk with reward (by offering funders limited edition stuff, etc).
So will Kickstarter take off? Anywhere outside a prop trading desk, these economcis are pretty radical. To really ignite a financial disruption, Kickstarter might wanna think about the other half of the equation. Kickstarter pledges are still illiquid investments. But what if they were tradeable instruments?
Now that would be a radical new choreography. It would move beyond the simple risk-spreading economics of a binary call option - to the self-organizing network effects of a market.
It's just one idea. The bigger idea is choreography itself, and it's power as a path to advantage. So the question is this. Most organizations are choreographed. Are you choreographing?
Friday, April 02, 2010
Social Strategies: Clarity
Recently, at my HBR blog, I discussed shifting from 20th century strategy to a new approach: social strategy. The simplest social strategy is clarity - and here's a killer example.
"Two researchers at HP Labs, Sitaram Asur and Bernardo Huberman, have discovered that you can actually use Twitter mentions to predict how well a movie will do in it's first couple weekends of release. What's more, the method works even better than the most accurate method currently in use, the Hollywood Stock Exchange (HSX)."
Twitter, in other words, offers media decision-makers more clarity about which movies are people are likely to value most. How? By unbundling conversations, letting people send and receive in real-time, more knowledge is aggregated faster.
It's a fascinating - and telling - example. Movie studios think of social media as another channel by which to market the same old lame blockbusters.
But clarity is a better strategy. Huberman and Asur's work suggests that a far more productive use of social media is learning how to make better movies in the first place. Now that's radical. Expand that across industries, and the future of strategy begins to come into stark relief.
Thursday, April 01, 2010
The McJobs Big Bang
Lately, the word on the Street is: jobs boom.
What's interesting is that analysts are far more bullish than economists proper about the prospects of jobs booming once again. The consensus amongst economists, I think, is far more pessimistic.
Here's what's really happening. We're trading yesterday's jobs - relatively high value, secure, jobs, with career paths and safety nets, of a sort, at least - for the opposite: low value, insecure, often temporary, narrow, and limited jobs, with no safety nets, and little skills gains.
We are, in short, trading real jobs for McJobs. The so-called jobs boom is, examined more closely, a Big Bang of McJobs. That conclusion's as tight as a drum: the rational person needs only to look at the underemployment numbers to see it confirmed.
"...A measure of underemployment that counts those people has almost doubled over the past two years, to 15.6 percent."
The question is: why a Big Bang in McJobs? The answer's simple. Yesterday's industrial economy is today's zombieconomy. Yesterday's businesses are slowly but surely dying, and the entire base of the economy is in decay. Replacing real jobs with McJobs is just another way to keep it afloat a few months longer.
The real problem is this. We haven't reinvented the economy for the 21st century. When we create tomorrow's industries, tomorrow's jobs will appear in droves. Until we do, though the numbers may show a "jobs boom", there will be little gains in the real economy to match.
McJobs, after all, are no path to prosperity - just a path to the acceleration of decline.
A Mini-Case Study in The New Economics of Advantage
"Pfizer, the world’s largest drug maker, said Wednesday that it paid about $20 million to 4,500 doctors and other medical professionals for consulting and speaking on its behalf in the last six months of 2009, its first public accounting of payments to the people who decide which drugs to recommend.
Pfizer also paid $15.3 million to 250 academic medical centers and other research groups for clinical trials in the same period."
Interesting. So why is Pfizer acting so constructively? Because, well, the costs of not acting constructively just went up radically:
"A spokeswoman for Pfizer, Kristen E. Neese, said most of the disclosures were required by an integrity agreement that the company signed in August to settle a federal investigation into the illegal promotion of drugs for off-label uses."
There are a couple of very interesting points to note.
Pharma players "invest" in "relationships" with doctors to control their key distribution channels. And these numbers suggest, under the rules of industrial era capitalism, just what a great investment that was. For a few tens of millions, Pfizer reaped marginal returns roughly numbering in the hundreds of millions.
But that was yesterday. The costs of giving side payments to doctors just went up radically, now that regulators are on the offensive. Regulators are on the offensive, of course, because pharma is failing to create meaningful, authentic, thick value in the first place. Let's put that in strategic terms: the opportunity cost of creating thin value, today, is leaving yourself open to fiercer, more frequent, and more intense attack.
And that puts pharma on the back foot. The dominant business design has been based not on making radically more effective drugs - but on marketing yesterday's drugs more effectively; discovering new segments and markets, gaining exclusive access to them, and building patent thickets to deter rivals from entering them. That game's over. And it's not entirely clear what pharma's going to do about it. Now, for example, that Pfizer's disclosing it's numbers, the incentives for doctors to bid up the price of their (ahem) services are significantly enhanced.
Wednesday, March 31, 2010
Unvarnished and the Economics of Antisocial Media
Let's talk about an interesting new startup for a sec: Unvarnished. It's an open feedback system, with a few notable catches. You can't delete bad feedback, and feedback is loosely anonymous (in the sense that it's untraceable to anyone's real-world identity).
The really big problem with Unvarnished is simple - so simple, the founders have completely and totally overlooked it. For the average person, the supply of bad feedback vastly exceeds the supply of good feedback. If you had perfect professional feedback, you'd be a CEO (or better yet, retired before the age of 25). So Unvarnished is inherently biased against the average Joe, who inherently has more negative than positive feedback - that is, after all, what being a mid-level professional means.
But wait, there's more. So much more.
Consider a hypothetical Unvarnished post about...Steve Jobs.
"Obsessive, megalomaniacal, abusive, control freak. Responsible for screwing up a major product that nearly led to the collapse of a major Silicon Valley company".
Sounds pretty bad, gives one pause. Except, of course, it gives us exactly the wrong information about the value of Steve to Apple. Jobs is the world's most valuable CEO, by a long way - but Unvarnished wouldn't give you much hint of that.
Why would that post surface? What about Unvarnished's so-called democratic self-regulation? There isn't any, really. The "community" has no better information about the veracity of a reviewer than my goldfish does, and asking them to vote a reviewer up or down is about as meaningful as asking my goldfish to choose the bicycle he likes the best.
Asymmetrical information - and a massive oversupply of bads - inevitably breed massive adverse selection. Unvarnished is a breeding ground for adverse selection in feedback itself. The least accurate, most overly negative feedback will rise to the top, making hiring decisions even less efficient than they are today.
Here's another, simpler, way to look at it. Unvarnished is a social Ponzi scheme - borrowing reputation from another, to amp up one's own (until one's own gets trashed). Those economics are so 20th century, it hurts.
Unvarnished is the endgame of the "social web". I'm going to mark it as the day the "social web" became antisocial. Increasingly, today's "social web" doesn't empower people. It empowers hate, exclusion, and polarization, to put it bluntly. That's as lame and brain-dead as what went on on Wall St a few years back: hurting others to extract value from them. Except, of course, Wall St actually made billions. Social media's as bankrupt financially as it is ethically and economically: a trifecta of lameness.
Count me out of this charade of faux sociality. You - investor, entrepreneur, banker, student, whomever - might want to rethink it too. It's time to build a better economy. And that sure ain't gonna happen by building miniature social Ponziconomies.
Tuesday, March 30, 2010
Chicken or Egg? DNA.
There's an interesting discussion taking place about the causes of the crisis - and crises in general. Was it a global savings glut that caused an asset bubble - or did an asset bubble invoke the need for more financing, inducing larger savings?
It may sound arcane, but it has tremendous implication for policy and strategy. If asset bubbles lead to savings gluts (rather than vice versa), then monitoring and puncturing them at the macroprudential level takes precedence over interest rate manipulation and inflation targeting.
For companies, there's an even more interesting implication. Evil, lame 20th century corporations depend critically on global consumption rates staying sky-high in at least some parts of the globe - financed by excess savings in others. So this research suggests that strategy 2.0 begins by not fuelling asset bubbles, but puncturing them gently - so imbalances never spiral out of control.
Yet, I think the question of root causes hasn't been fully addressed yet.Which came first - the chicken, or the egg? The DNA. That's my take on the above debate. The real root cause of crises and collapses are in the institutional DNA. When institutions are hollowed and emptied, a crash, a collapse - or a series of them - is the inevitable result. Amrica's asset bubbles and China's savings gluts are manifestations of a deeper bankruptcy - institutional bankruptcy, that renders both economies unable to allocate capital productively in the first place.
Daily Tweets
Here's a collection of my tweets from yesterday (thanks, Viewsflow).
adage.com - 59% of people multi-task when watching TV, tablet & mobile devices easier to play with while watching than computers. ... | Mashable - the textbook example of the social media bubble. ... | dmwmedia.com - it's nice, but is quora gonna help build a better financial/media/edu/health industry? <- ventureconomy in decay ... | blogs.wsj.com - wall st says: there's about to be a "jobs boom". i'm calling bs. weclome to your mcjob.http://nyti.ms/dcZXiK ... | blogs.wsj.com - totally bogus. these will be revised downwards without a doubt. ... | blogs.wsj.com - after the liquidity trap? the liquidity exit trap. (via @umairh) ... | adage.com - econ 101 suggested long ago: the same old lame ads would never make hulu (etc) seriously profitable. so here you go. ... | bit.ly - Facebook Wants You to “Like” Brands ... | Business Insider - Smart! Microsoft Chose 'Bing' Over 'Bang' For Its Search Engine Name $MSFT by @jwyarow ... | runway.blogs.nytimes.com - interesting discussion on magazines. polyvore + ipad = fashion 2.0. ... | hulu.com - Future of food, amazing #food #agriculture #health ... |
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