Category Archives: business economics

Start-ups and hardship

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Handle, who has been on a comment roll in recent weeks, wrote

it’s easy for kids to make and keep close – sometimes lifelong – friends when they see the same other kids at school, church, sports, and around the neighborhood for palling around. . .

. . .even while one thinks one is suffocating from claustrophobia and lack of privacy and just wants to bail out to the other, atomized anonymity side where the grass is greener, when people actually leave, they discover pretty quickly they feel terrible, isolated, lonely, uprooted, and aimless, and it can take a long time to adjust, and some never quite recover. Prison and the military are two good examples of that, but start-up culture seems to be similar in some respects.

The comment refers to Sebastian Junger’s claim that people derive satisfaction and meaning out of being associated with small groups under hardship. Imagine a stereotypical start-up, in which a handful of people work very long hours in an environment that is challenging, uncertain, and ambiguous.

When I started a business, I repeatedly watched The Compleat Beatles, a documentary about the iconic band. I picked up on a couple of points.

1. Because the narrator said that they were lucky to meet the right people at the right time, I made an effort to meet a lot of people (something I have not done before or since).

2. The film describes the hardship that the Beatles endured in Hamburg, where they lived in slum conditions and played exhausting marathon sets. A fellow musician said that with the long sets and tough audiences, “Either you got good or you gave up.” Taking that to heart, I often worked late into the night, even though the traffic to my site was on the order of 100 visitors a week when I got started.

No such thing as a free ledger

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1. Joseph Abadi and Markus Brunnermeier write,

A centralized ledger writer extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes honest reporting. Decentralized ledgers provide static incentives for honesty through computationally expensive Proof-of-Work algorithms

Thanks to a reader for sending me the paper. I am not sure that I buy, or even comprehend, the paper’s perspective on blockchain. But my takeaway is that you cannot just look at the costs imposed by centralized record-keepers and say “all those costs just go away with blockchain.” Other costs are introduced.

2. Sarah Oh writes,

Eric Budish of the University of Chicago presented that decentralized trust—a key component of blockchain—is expensive at scale, and more traditional, non-blockchain, mechanisms of trust like the rule of law and governance may be cheaper.

There ain’t no such thing as a free ledger.

Tyler, Marc, and Ben

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That is, Cowen, Andreessen, and Horowitz, in a 40-minute podcast. I chose to annotate it. Annotating is, like writing a book review, a way for me to absorb the material. Some excerpts from my essay:

1. As far as I can tell, blockchain can only help to prevent one type of cheating: digital forgery. If blockchain is going to have a killer app, then it has to enable a transaction to take place where the only impediment to undertaking such a transaction currently is the threat of digital forgery.

I would add that digital money faces the threat of digital forgery. But digital money also faces other impediments. ICYMI, my whole point is that other impediments to trust are, in the grand scheme of things, much more important.

2. New listening technology strikes me as incremental, not revolutionary. Portable radios are a very old technology. I listened to the Beatles sing “When I’m 64” on a transistor radio when I was 13. Now I’m 64.

3. Could AR and VR become a big part of everyone’s life? In my opinion, yes. Have the breakthroughs necessary for that to happen occurred or are they on the verge of occurring? In my opinion, no.

I would add that I do not know what the key breakthroughs will be. In fact, we will only have a better idea in hindsight. Who knew ahead of time that the breakthroughs needed to make mobile Internet access a winning technology had taken place by 2007 but not earlier?

4. I assume that in Israel and China, security issues provide an arena for cultural mixing between government and technology. Presumably, there is also some cultural mixing between Silicon Valley and part of the American military and homeland security apparatus.

Klassic: the two systems people work under

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A reader suggested an old blog post on two systems.

In the business system, your status comes from market acceptance. If the market likes your offering, you have high status. To hold onto that status, you must deal with competition. Ultimately, you have to accept the choices that consumers make.

In the other system, which applies to permanent government employees, teachers, and professors, status comes from credentials. You automatically get more money if you have a higher degree. You can acquire tenure, which insulates you from job loss. (During the recent recession, compare the rate of job loss among people in system A with that in system B.) Finally, you operate on the basis of authority. In government, you can force people to obey your edicts. In education, you can force students to take your courses–or, better yet, to pay your salary even though hardly any students enroll in your courses.

There is more at the link, and I probably should have written even more.

Mariana Mazzucato

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I found myself frustrated by her conversation with Russ Roberts. She repeatedly points out that government has funded successful innovations. The implication, in her view, is that we should pay higher taxes in order to fund more innovation.

But the question is whether the government or the private sector is structurally more suited to spending money on innovation. It seems to me that Russ could not get Ms. Mazzucato to discuss the issue at that level. Trading anecdotes back and forth about particular private-sector and public-sector successes and failures is not constructive. I gave up listening well before the podcast ended.

I like to break down innovation into experimentation, evaluation, and evolution. I think that government has a disadvantage at all three.

Any one organization is limited in the number of experiments on which it can focus. When the government was focused on landing on the moon, it succeeded. But it is hard for any one organization, not just government, to focus on a lot of experiments at once.

When it comes to evaluating experiments, everybody is overly optimistic about their own projects. But in the private sector, the subjective evaluation of the project champions is subordinate to the third-party evaluation of consumers. In the public sector, the legislators and bureaucrats who champion a project also are doing the evaluation.

Finally, when it comes to evolution, government has no natural mechanism to shut down unworthy projects. When a private-sector project is not producing value, it loses money and gets terminated.

Twenty years ago, I wrote an essay in which I explained why, contrary to what some pundits were arguing, middle managers should not be encouraged to take more risks inside corporations. In essence, I made a “skin in the game” argument. That argument applies very strongly to the case of government-funded risk-taking, in which the cost of failure is not borne by the decision-makers.

Paul Romer on management

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From the conversation with Tyler Cowen.

the typical situation of an IT team or a research unit in a place like the bank is that there’s this almost unlimited set of requests you get, of which you can process only a subset. So you need some transparency about how is it you’re selecting the things you actually work on, given the many things people want.

This really resonated with me. One of the differences between a sub-Dunbar and super-Dunbar organization is that you need a formal process to prioritize projects. When I started at Freddie Mac, they didn’t have this, and the result was a hodge-podge of systems developed on different platforms using different data models. It was only around 1989 or 1990 that a woman in the IT division put together a rational process for explicitly setting project priorities. I was one of the people on that project, and I learned a lot from it.

You’d think that it has to be obvious that top management has to determine the priorities of staff. But in fact without a formal process, it’s like the senior executives can push buttons but nothing happens. Top priorities go unaddressed while employees lower down work on putting out fires or doing things that they find personally satisfying.

And on a different topic, but also resonating with me, Romer says,

I think there’s a slightly different culture in the Midwest compared to the East Coast, and there’s enough of a difference so that when you go from one to the other, you have maybe a little bit of a sense of being an outsider. Maybe those things have filtered into my work.

I felt like an outsider from my first week at Swarthmore College. I remember running into another freshman, from Chicago, and immediately feeling that he and I had a lot in common. He and i talked for several hours. Also, I wrote a lot of long letters to friends from high school, trying to explain my sense of dislocation. After a few weeks, I adjusted to where I could function among the East Coasters. But in a sense I remained an outsider.

Back then, by the way, the cultural differences were not heavily political, as they are today. I think that we Midwesterners were tougher in some sense. We were better at relating to ordinary people than the students who had spent their whole lives isolated in wealthy suburbs and prep schools.

Fragility

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Andreas Kern and Cora Jungbluth write,

Driven by an almost uninterrupted property boom, household debt has exploded. China’s home ownership is now the highest in the world at 89.68 %, rising from almost zero two decades ago.

Did you know that? I sure didn’t. Anyway, the point of the article is that China’s firms, households, and government have taken on very high levels of debt. This would seem to make the Chinese economy fragile.

Fragility in my mind means something that can fail catastrophically, with spillover effects that are impossible to contain. Something that can fail gracefully is not fragile. That is why the retail sector is not as fragile as the banking sector. Closing down Sears does not create huge spillover effects.

In general, what are the sources of fragility that we might worry about? Unsustainable government debt is high on my list. I suspect also that the electric grid is fragile. Bruce Schneier has me concerned with the Internet of Things.

Are the big tech firms fragile? Can Amazon fail gracefully, of would it necessarily fail catastrophically?

Tyler Cowen, NSF, and DARPA

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Cowen writes,

Let’s start with some possible institutional failures in mainstream philanthropy. Many foundations have large staffs, and so a proposal must go through several layers of approval before it can receive support or even reach the desk of the final decision-maker. Too many vetoes are possible, which means relatively conservative, consensus-oriented proposals emerge at the end of the process. Furthermore, each layer of approval is enmeshed in an agency game, further cementing the conservatism. It is not usually career-enhancing to advance a risky or controversial proposal to one’s superiors.

This also describes the National Science Foundation. You can see how an institution like this would be biased toward funding mainstream incumbents rather than innovative, heterodox projects. It’s fine to have a lot of research money go through this model, but you also want some alternative funding mechanisms in order to have a healthy ecosystem.

Think of DARPA in its heyday. The approval process had fewer layers. Choices were more idiosyncratic.

I think where DARPA succeeded was when it had two other elements. One was a vision, in particular Licklider’s vision for computing. The other was a network of creative people. Licklider knew where to find the groups that could move his vision forward.

In his Emergent Ventures initiative, it seems to me that Cowen is not relying on his network. And I don’t see a guiding vision. It is more scattershot. That may be a valid model. But I prefer the DARPA model.

If I had the money to dole out, I would do so based on overall vision. One vision is for “rules and norms for competitive governance.” The idea would be to develop the legal framework that would allow people living side by side, in existing locations (not seasteads or charter cities), to have more choice in government services and policies. The widely-unread Unchecked and Unbalanced includes more of my thoughts about that. Of course, some of you are thinking, “Go back to the founding fathers,” but it’s not as simple as that. The founding fathers did not provide for a society in which the preponderance of people, and an even bigger preponderance of economic activity, could be found in large cities.

The other vision I have concerns economic research. I would promote an agenda that I call disaggregating the economy.

But for neither of these visions do I have anything resembling a network.

Bruce Schneier watch

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Farhad Manjoo in the NYT writes,

Mr. Schneier argues that the economic and technical incentives of the internet-of-things industry do not align with security and privacy for society generally. Putting a computer in everything turns the whole world into a computer security threat — and the hacks and bugs uncovered in just the last few weeks at Facebook and Google illustrate how difficult digital security is even for the biggest tech companies. In a roboticized world, hacks would not just affect your data but could endanger your property, your life and even national security.

. . .Mr. Schneier is painting government intervention not as a panacea but as a speed bump, a way for us humans to catch up to the technological advances. Regulation and government oversight slow down innovation — that’s one reason techies don’t like it. But when uncertain global dangers are involved, taking a minute isn’t a terrible idea.

My bet would be that when it comes to securing the Internet of Things, government will be more of a problem than a solution.

Rebecca Henderson on disruption to organizational architecture

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Tim Harford writes, [link added]

The message of Henderson’s work with Kim Clark and others is that when companies or institutions are faced with an organisationally disruptive innovation, there is no simple solution. There may be no solution at all. “I’m sorry it’s not more management guru-ish,” she tells me, laughing. “But anybody who’s really any good at this will tell you that this is hard.”

The story is that if you are the market leader in widgets and someone inside your firm comes across a better widget, then you can adopt the innovation without any organizational stress. But if you are, say, a copier company and someone inside your firm comes across the components for a personal computer, you have no organizational mechanism for paying attention to the innovation and nurturing it along.

Read the whole thing (Harford is entertaining, as always), but be skeptical. Swiss watchmakers were in the watch business, so you wouldn’t think that digital watches would require total re-thinking from an organizational standpoint. But digital watches still eluded them.