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Arguing in My Spare Time, April 1998 - November 1998

Title DateStarts WithEnds With
From Allocating Capital to Allocating Talent04-24As an economist, I believe that institutions evolve in order to solve economic problems. In an agricultural economy, land is the scarce resource. In an industrial economy, capital is a scarce resource. The institutions that evolved in an industrial economy differ from those in an agricultural economy. This raises the question: what is the economic problem today, and how might institutions evolve in order to address it?As a software development model, open source code modified by individual developers overseen by "referees" may be very powerful. However, it needs an economic model to go along with it. Pure altruism will not last long as an energy source for productive activity. Any institutional solution to the central economic issue of allocating talent must ensure that talented people are paid to work on important problems.
The Junta Hypothesis05-03"The latest reports show the economy continued to expand. . .At the same time, average wages and benefits are rising at a slower pace than last year. And prices of things produced here are rising at an annual rate of less than 1 percent.The metaphor aside, the Junta hypothesis is that the behavior of economic indicators such as unemployment and corporate profits reflects the ability of large corporations to hold down labor compensation. The issue of what this means for the future of large corporations is a topic for a future essay.
The Junta Hypothesis, part 205-20"What is truly startling is not how fast and small computers have become but how stupid they remain." -- Paul Krugman. reprinted in "The Accidental Theorist"Rather, the ability to substitute generic software for firm-specific systems has reduced the negotiating leverage of workers who have non-transferable skills tied to those systems, thereby lowering labor costs.
Thoughts on Scale, Scope, and Bureaucracy06-05"Oh, there will still be programmers. Most will work at software vendors, creating components. A few still will be around your IS shop, keeping legacy systems limping along until they can be replaced."That might lead to a sort of vicious cycle in which smaller firms become ever more fast-moving and larger firms become ever more bureacratic. Eventually, that would have an adverse impact on the profits of the larger firms.
Should Corporations Encourage More Risk-Taking?06-22Recently, I attended a conference organized by FastCompany, an interesting 2-year-old business magazine. Many of the attendees were middle managers of large corporations.the middle manager's incentives would be skewed toward taking unjustifiable risks. Bureaucratic controls and limits on upside incentives may be an appropriate adaptation for correcting this potential bias.
Unleashing the Killer Essay07-04Larry Downes and Chunka Mui have developed an interesting speculative hypothesis concerning the trend in the relative advantages of large firms and small firms. This hypothesis can be found in their recent book. 4. The increased important of talent relative to capital is likely to lower entry costs relative to imitation costs.

If these hypotheses are correct, then they add up to a case for saying that trends favor small firms.

Equity Without Capital07-28"Test your students by asking them to value Internet stocks. If they give you an answer, flunk them."

--Warren Buffet

My guess is that at some point we are going to run out of people willing to pay ever-higher prices for these lottery tickets called Internet stocks. At that point, we will realize that other solutions to the talent-allocation problem have more relevance going forward.
Deconstructing McKinsey08-06What I call a McKinsey business plan is a plan that starts out with costs much larger than revenues for one or two years, and then has revenues grow much more rapidly than costs forever. The result--on paper--is that once the business has reached the breakeven point, it is on a trajectory to earn ever-increasing profits.For a Yahoo or an Amazon.com to be worth billions of dollars, when the cost of developing their products is a small fraction of that, suggests that investors believe implicitly that the barriers to entry are in the billions. This is the achilles heel in the McKinsey business plan: the faith in the existence of barriers to entry, a faith that often is out of touch with reality.
"King of Hearts" Rules (review of Varian and Shapiro)08-29Hal Varian kindly sent me a prepublication copy of "Information Rules," a book that will appeal to everyone who reads these essays. Varian, a renowned economist now at Berkeley, co-authored the book with Carl Shapiro, another star in the profession. Fortunately, relative to the aimst essays, "Information Rules" does not tackle every issue or resolve every question. Indeed, it stimulated me to continue pondering and writing on these topics.
Saving vs. Innovation09-09We are going to try to sort out four determinants of economic performance:

1. cylical factors
2. management techniques
3. saving
4. innovation

Patting ourselves on the back feels good. However, it may be another decade before we know whether there has been any increase in long-term economic growth that can be attributed to a higher rate of innovation.
But Who Owns It?09-18Late in 1994, I was trying to sell some executives at a major bank on the idea of using the Web to attract mortgage customers. At that time, I had to give a pretty basic introduction to the Internet and how it worked. One of the executives kept coming back to the question, "But who owns it?" In the short run, our economy is underpaying people as workers and over-paying them as entrepeneurs. In the long run, these pricing relationships may change. Eventually, the question of who gets paid a healthy amount to work in a business could be less tightly coupled to the question of who owns the business.
Stealth Trends on the Internet09-27The purpose of this essay is to point out three trends that have sneaked up on many people who follow computers and the Internet. These trends are:

1. The fact that this is 1998, not 1996
2. The sudden death of the personal computer
3. The search engines are into their second round of failure

The Internet architecture favors firms that are specialized and excellent, not firms that are eclectic and mediocre. The search engines seem to me to be going in exactly the wrong direction, which is why I see the "portal" concept as the second phase of failure for these companies.
Information Haves and Have-nots10-11In the fall of 1994, I went to my daughter's middle school for a meeting of a parents' advisory group to help the school make use of technology. The school had just received $1 million dollars of computers, networking equipment, and assorted gadgets as part of a Federal grant. Well-informed consumers will protect themselves, but poorly-informed consumers can be exploited more easily by firms that make better use of information.
Break up Microsoft?10-17Microsoft is the poster child for the economic concepts of "network effects" and "lock-in effects." These are effects that allegedly can cause a bad social outcome.In conclusion, the case for breaking up Microsoft may be difficult to make. It might not change things very much. Or it could strengthen Microsoft in both markets. Itís not as obvious as the case for breaking up AOL.
Is This Risk Necessary?11-01Most of us are familiar with stories of secretaries at high-tech firms becoming millionaires, thanks to stock options. These stories are presented as heartwarming illustrations of the capitalist system at its best.However, the economic case for stock options is disturbingly weak. My guess is that once the stock market euphoria has passed, the euphoria over stock options as a compensation tool will pass, also.
Risk, Leverage, and Talent11-10In finance, leverage refers to the ratio of debt to equity. A firm that has issued a lot of debt relative to equity is said to be highly levered. The attempt by people and the market to find the right balance of risk and leverage with respect to human talent will be a major issue going forward.
Summing Up11-18I have been writing these essays for a year, and I believe that I have used up over 85 percent of my ideas on the topic that is at the intersection of economics and software.we are not willing to suffer with Windows NT. From my perspective, NT looks like a classic white elephant software project.
The Nurture Assumption (book review)11-27"The Nurture Assumption," by Judith Rich Harris, raises issues at two levels. At a substantive level, it questions the role that parenting style plays in childhood development. At a methodological level, it raises the question about what counts as valid empirical research in developmental psychology.One also can believe that peer groups affect personality, even though I suspect that this, too, will prove difficult to verify. Whatever one chooses to believe, it would be a mistake to place too much confidence in those beliefs. That is the main take-away I draw from this fascinating book.