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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 ... |
About Me
Forgive me, but I'm (mostly) an economist. My real blog is here, at Harvard Business Review. I'm the Director of the Havas Media Lab. I give lots of talks, speeches, and workshops. This year, they're focused on reconceiving capitalism.
I started Bubblegen as a blog when I was doing my MBA. It turned into a strategy and innovation advisory boutique that worked with top-tier investors, entrepreneurs, and blue-chip corporates to build a better kind of business.
I studied neuroscience at McGill, did an MBA and research with Gary Hamel at London Business School, and more postgraduate work in economics, strategy, and innovation at Oxford. Before I grew up, I was a writer, banker, derivatives trader, and strategist. I live around here, in London.
If you'd like to get in touch, you're welcome to drop me a line anytime.
101
I write a lot - and a lot of what I write can feel opaque, until you're familiar with some of my key concepts. So here's a crash course in Umair 101.
(Soon :)
Tuesday, December 15, 2009
Why Does Wall St Love Healthcare Reform?
Because the current bill has no healthcare reform in it. There are no changes to either market structure, industry structure, reporting, or incentive structures.
In fact, it's a de facto bailout of health insurers. Welcome back our old friends rescission, premium inflation, and price discrimination - all flavours of moral hazard. Say goodbye to, well, better health care.
Why does Wall St love healthcare reform? As the chart shows, money's poured into health insurers over the past few days - hot money from hedge funds in search of, by the microsecond, fake, value-destructive alpha. Why? Because a massive transfer of wealth from society to pharma/hmo shareholders is written into the so-called reform bill.
One so large, I'd wager it's going to be, along with a broken financial sector, one of the final nails in the coffin of American economic competitiveness.
But hey - I'd expect nothing less from our retardedly broken Senate. Thanks, old white dudes who run the world.
Tuesday, November 24, 2009
The Private Equity Shuffle
A nice illustration of how under the rules of financial capitalism, endless games are played with companies.
But rarely does the private equity shuffle create value of any significance.
See the problem with an economy run by beancounters shuffling companies like they were trading cards?
It's simple.
If private equity investors could actually create value by shuffling companies, the same companies wouldn't keep being shuffled ad infinitum. They'd improve to the point that they wouldn't need further restructuring. Conversely, the fact that companies are flipped like pancakes is a dead giveaway that the entire asset class is rent-seeking writ large.
The Anti-Google Counter-Revolution
Dear Geniuses,
Blocking Google is about as smart as eating a pound of plutonium.
The problem isn't that Google's being an evil monopolist. It's that you used to be evil monopolists, and failed to invest in the quality of production.
Today, you're faced with the same dilemma every fading monopolist is. What do we do now that we suck?
The answer's really, really, really simple. Stop sucking.
But you're trying to create artificial scarcity instead. That might have worked in the 20th century - but it's a suicide bomb in the 21st. In a hyperconnected world, creating artificial scarcity kills orthodox businesses dead. That's because though you can block Google, there's no way to block people from using Google to find stuff that doesn't suck.
See the problem? The Force is so not with you.
Luv,
Umair
The Lame Brain-Dead Evil Ponziconomy
"...Many shoppers say they entered their e-mail address and pushed a large "Yes" button on the ad because it appears to be a $10 cash-back offer or coupon. Many of those that complain say they thought they were being rewarded by the retailer for making a purchase.
Written in much smaller print within the ad are the full terms of the deal. A customer is notified there that by providing their e-mail address they are joining a membership program and agreeing to pay one of the marketing firms a monthly fee, typically between $10 and $20."
"Value creation"? Nope. Just (deceptive) value transfer.
Are Banks Terrorists?
Whoa - what a deliberately incendiary title. Or is it?
Consider, for a moment, what was revealed today. The Bank of England extended £62 billion in "undisclosed support" to RBS and Halifax two weeks after Lehman imploded.
From an ethical, economic, and managerial perspective, it's not just questionable - that's outrageous.
Here's why.
The logic of terrorism is simple. To intimidate a state into action or inaction. If you don't give us what we want, we'll blow something up. Do it - or else.
Exactly the same logic has been at work throughout the financial crisis. The state has been terrorized into action - and inaction. Too big to fail is a weapon of economic intimidation - just like a bomb threat. If you don’t give us a bailout, the financial system will fail. If you disclose it, the financial system will fail. You have no option but to give us exactly what we want - cash, now, on our terms.
The goal of terrorism is this. To coerce a state into fundamentally betraying it's foundational principles - thus, creating a contradiction within the system itself, causing citizens to lose confidence in their own basic institutions.
And by that logic, banks won. Not only did they get trillions in bailouts, now, it turns out, they got secret bailouts.
See the irony?
The point of financial regulators is to enforce transparency. Without good information, markets can't work. But regulators hid information from the public instead. Like any good terrorist, banks actually turned the system against itself.
Now, we must all ask: can we trust our regulators? Or will they continue to leave our society at the mercy of the economic equivalent of roadside bombs?
This is a challenging post, and I don’t mean to minimize the damage terrorism does. If anything, I want to highlight just how deep the problems with orthodox capitalism are.
20th century capitalism isn't fit for 21st century economics. It's time to reboot this broken machine. There can be no clearer example why: the very machinery built to protect society spun on its axis, and was forced to protect those who harm society instead.
Monday, July 27, 2009
Econ 101 for Wall St: The Economics of HFT
There's been a ton of discussion about high-frequency trading and market microstructure lately. Here's a great summary in the NYT.
What's missing from the conversation is the basic economics at hand. Here's a summary.
The problem is two kinds of efficiency - and the second outweighs the gains from the first.
If algos can discover higher values, that's fine. It unlocks allocative efficiency: goods are allocated to their highest valued, or most productive, uses.
The problem is that the market for algos is not efficient. It is a big, fat market failure happening in real time. Flash orders displayed to some but not others are an information asymmetry that subverts subvert competitive efficiency. The rebates (read: bribes) that exchanges grant for "providing liquidity" are just a side payment that does exactly the same thing: they create a new source of scale economies for the deepest-pocketed traders, that are essentially switching costs to not defect to rival platforms.
What's the point of subverting competitive efficiency? To enable not price discovery, but price discrimination. Authentic price discovery is prevented by side payments, that ensure that prices float well above value. Flash orders ensure it.
What is the biggest problem with this arrangement? Prices will never be forced down to marginal cost. In fact, the dynamics are these: algos compete to discover higher values, unlocking allocative efficiency. Yet, without competitive efficiency, the algos capture a larger and larger share of that allocative efficiency.
In the end, this market microstructure eats itself: the returns to people on either side of the trade vanish.
Sound familiar? It should. Liquidity that needs rebates isn't real liquidity. Just like SUVs subsidized by cheap gas aren't real transportation. Just like pharma companies that rely on subverting markets don't provide real healthcare.
It's just business as usual in our awesomely lame Ponzi zombieconomy.
Want fries with that unemployment check?
Today in Capitalism 2.0
1. Skilled immigrants are leaving the States. Why? The reason isn't money: it's meaning:
"The position will pay a fraction of the salary he had been earning in the private sector—about $15,000 compared with $100,000—but it will offer considerably more job security and the freedom to do the exploratory research he wants to do"
Like I keep saying: what's missing from Capitalism 1.0 is meaning.
2. The only graph you need to see about healthcare reform.
3. The big problem with econ is a lack of ethics. Krugman in 2000:
"...You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative?"
This is the same logic that Krugman doesn't apply to the wretched of the USA. Now that the Great Compression is underway, it's clear that our own Ponzi sweatshop zombieconomy created little real value.
4. Rehab? Are you kidding me? What rehab? Did I miss meaningful reform? Is this not the same world where Goldman just booked record profits for the same old shell game masquerading as real value creation?
You can't rehabilitate Zombies. Resident Evil wasn't won by Medicines Sans Frontieres.
5. Can the Kindle improve on the book? Wrong (way wrong) question. Right question: can the Kindle alter incentives so publishers no longer churn out the myopic, disposable fluff that's destroyed the book "industry"? Can Bezos create incentives for the production of, well, real books once again - the kind that lead to sustainable profitability? Can the Kindle reignite a moribund industry?
The question is not one of product innovation - but of institutional innovation.
6. Context is king. Everywhere, even in fashion (though the NYT should have written about the awesome Polyvore a long time ago).
7. Just for the fun of it, a golden oldie of um massive unnovation.
6. Does Iceland tell us that failure is the best answer to crisis? Yup. Too big to fail is also too fail to recover.
Another day, another dollar in the Zombieconomy.
Sunday, April 26, 2009
Latest Work
My latest writing is at my Edge Economy blog at Harvard Business.
Contact
If you want to drop me a line, here's how. I'm umairh on Twitter. My email address is umairhaque /at/ gmail. You can Skype me at umair.haque. Or you're welcome to leave a comment here or at my blog at Harvard Business.
Speaking Schedule
Here's a selection of a few of the public events in my speaking schedule for this year.
Supernova, San Francisco, December 1
SOMESSO, London, May 15
Next 09, Hamburg, May 5
Oxford Internet Institute Policy Forum, London, April 27
The Second International Venture Capital in Emerging Markets Conference, Istanbul, April 17
BRITE/Columbia Business School, NYC, March 4
Tuesday, January 27, 2009
Everything That's Wrong With Industrial-era Business
"This is part of a larger strategy. This is a unique time and we intend in six months to a year to have a number of brand names," said Bradley Snyder, principal and managing director at Gordon Brothers. "We see it as a completely opportunistic time. If not now, then when? We have virtually unlimited capital for this project."
It's all there in one pithy quote: an opportunistic play to invest "capital" in a "brand" which is part of a larger "strategy".
What's left unmentioned? Anything remotely to do with authentic, durable value creation.
A nice illustration of why our economy is melting down.
How to Turn a Recession into a Depression, Pt 139939
Pump liquidity into moribund industries, without creating the incentives or oversight necessary for structural reinvention and radical innovation = propping up yesterday, instead of investing in tomorrow.
Excellent move - if you're short the pound.
Wednesday, November 05, 2008
Change the World?
Yes we did.
!!!!!!!!!!!
Tuesday, November 04, 2008
Welcome to the 21st Century
The 20th century was like this.
The 21st century is going to be like this.
"I ask you to believe -- not just in my ability to bring about change, but in yours. You can choose hope over fear, unity over division, the promise of change over the power of the status quo. If you give me your vote, we won't just win this election -- together, we will change this country and change the world."
See the difference?
Get out and vote.
*bonus reading:
"He told of his encounter with Edith Childs, a city councilwoman from Greenwood, S.C., who had lifted his spirits at the start of his campaign when his rallies were small and no one gave him a chance. She inspired him with her chant of "Fired up and ready to go."
It's a story he's told hundreds of times but probably never so well. He lingered for effect, described the councilwoman's church hat with a broad theatrical sweep of his hand and somehow was able to convey a time when he was small and vulnerable to the crowd of 90,000 that came to see him. "That's how this thing started," he said. "It shows you what one voice can do. One voice can change a room, and if it can change a room, it can change a city, and if it can change a city, it can change a state, and if it can change a state then it can change a nation and if it can change a nation it can change a world."
Wednesday, September 17, 2008
Lessons From the Macropocalypse
I have been wracking my head trying to write a post for my HBS blog about the macropocalypse.
There's so much to say.
For now, I will say this: the Fed bailing out AIG is kind of jaw-dropping as a total evisceration of the bedrock of the financial system - and orthodox finance and economics.
The real point is this. The time is now.
Now is the time for revolutionaries to step up and build something better, something more real, and something greater.
There will probably never - at least in our lifetimes - be an opportunity for total economic reinvention this tremendous.
Or this meaningful. Because that's what it's really about - not shareholder value, money, or "competitive advantage".
But doing something that means something.
Tuesday, September 16, 2008
Macropocalypse: Endgame
Quick note from Seedcamp. I have a really, really feeling that today will be really bad. I'm pretty certain that yesterday was by no means the culmination of the collapse. If AIG goes down, we are in serious trouble of a systemic and catastrophic breakdown and unwinding.
Tuesday, September 09, 2008
Friday, August 08, 2008
Abnormal
Scott has a point, but I think that Facebook isn't exactly "normal" in terms of expectations, influence, or liquidity options, the secondary markets involved in what's "normal" aren't often made relatively open, the shares traded in them don't go at a >100% discount, and my guess (though the info is opaque) is they're not largely sold directly to private equity, etc...
Look. I think a very thin market in Facebook shares at a $15 bil valuation might be OK. But a larger, more open one at a $5b valuation kind of sends not a great signal. The signal is that Facebook might go straight to some kind of restructuring - which is really the point of the post.
Forget what's "normal" for a second - because there is no meaningful statistical "normal" in industries like venture. Just think about the strategic logic for a second.
Now, I'm not saying I'm "right" - the post is there for us to discuss what Facebook's options are.
Tuesday, August 05, 2008
The New New Thing
"...That said, none of this means the bailout is a mistake. "My own view is that the world isn't fair," says Zvi Bodie, finance professor at Boston University. "But would it be fair to put the economy into a deep recession or depression? I don't think so."
There's the rub. If the monetary and fiscal authorities are right in their judgment that the risk of an economic plunge of frightening proportions is real, then the Herculean actions they're taking are fair to all of us. What's more, if innovation is the core dynamic in a capitalist economy, the engine of growth and higher living standards, then there will be booms and busts, especially during periods of rapid technological change. It's in the nature of the beast. Like it or not, limiting the downside damage when the boom goes bust is a critical part of the monetary authorities job."
Wow. Are you joking?
That this logic is actually somehow reasonable is fairly depressing. The logic of collective responsibility is actually the logic of anti-markets: the more we invest in bailing banks out, the longer and nastier the crisis is gonna be, and the less productive the economy is going to remain.
Honestly, I don't even wanna write about any of this much anymore. It's almost inexpressibly lame.
Admin + Sales 2.0
Guys, I'm on vacation.
So I decided to let my friend Kashif write some posts on Sales 2.0. I think you should give him a chance - the writing needs work, I agree, but he's got some interesting things to say.
If you really have a bone to pick, (as usual) leave a comment.
NB - I will consider guest posts on a regular basis - just email me. I will publish those I think are interesting, provocative, relevant, etc.
Bringing Sales 2.0 To Life
So how can organizations make Sales 2.0 happen?
First things first, Sales 2.0-enabled organizations see the correlation between customer intimacy and sales results. Shocking! There are 4 characteristics world-class 2.0 sales organizations, they:
- Maximize selling time- remove mundane tasks associated with sales
- Define a clear sales process focused on high value activities
- Detail the mechanics of a meaningful conversations
- Synchronize selling activities with the buying process
In this space, Landslide and InsideView stand out for their innovative approach to time-tested problems. For the evolving sales organization, the good news is that they recently announced a partnership. Awesome, this space is really picking up momentum.
Landslide has turned traditional CRM on its head by putting a premium on sales rep time and consistently enable sales force effectiveness. Remember the sales organization needs to maximize time with prospects and Landslide helps enable that-
- Details your organization's sales process and the tools required at each step
- Provides a free sales assistant service for sales reps (off-shoring snobs, their service is US-based)
- 80% of all functionality is enabled from one screen...within 3 clicks
Insideview- quite simply provides a mash-up of the results that can be used by sales organizations. Why is it good? It works.
Remember our definition of Sales 2.0 is really fundamental: increase proximity to prospects. We will continue to explore innovative companies that help maximize sales rep time and minimize the tasks/ activities that steer reps away from this goal. These are the true Sales 2.0 pioneers.
With that, we take the first steps towards greater sales force effectiveness. Coming up next: what are sales organizations doing wrong?
Sunday, August 03, 2008
Sales 2.0
Sales 2.0 is a new approach to B2B sales. Quite simply, the Sales 2.0 approach provides sales organizations:
- Increased proximity to prospects
- The ability to replicate and standardize selling best practices
- Superior visibility into sales rep effectiveness
The result is greater intimacy with your prospects/ repeat customers. However the process in effect actually works in reverse:
- Top organizations understand what their best sales reps do to sell effectively
- Understanding high value sales activities helps detail the sales process steps
- Sales 2.0 organizations then take this best process and standardize it across the sales team. In effect, they can upgrade the behavior of their mediocre sales reps.
- Of course, the end result is increased proximity to prospects and customers (and implicitly, increased sales with effective use of resources)
The ability to implement this change is enabled by sales 2.0 applications and tools. At this point a good question to ask is:
What about the Sales 2.0 social network?
So far, it's been difficult to see an application has been able to define meta-social network at an organizational level. However, I believe that social networks do exist within within sales. The sales social networks in any given territory are informal social networks that are clustered around prospects with a similar profile or problem set. The best sales reps are able to recognize, understand, build, penetrate, and connect within these sales social networks at a local level and that defines their ongoing success. Engaging the social network is part of the sales reps best practice.
Sales 2.0 applications help you recognize and implement such best practices. Coming up next: How?
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