Category Archives: business economics

Emergent Ventures: first thoughts

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It is a Tyler Cowen project, with seed funding from Peter Thiel. The press release says that it is

an incubator fellowship and grant program for social entrepreneurs with highly scalable ideas for meaningfully improving society.

1. It definitely is not “Shark Tank.” I have only seen parts of a few episodes, but the entrepreneurs had very small ideas, and the sharks only cared about whether the entrepreneurs had made some progress and could demonstrate that the market had enough revenue potential.

2. In a brief podcast, when Tyler says that his comparative advantage is spotting talent, it almost made me spill my orange juice (I don’t drink coffee). If I had a dime for everyone who thinks that spotting talent is their comparative advantage, I could fund Emergent Ventures. I am not saying that Mercatus is bad at spotting talent, but are they better than Google or Andreessen, Horowitz, or Paul Graham, or. . .? I guess it depends on what domain you are talking about.

3. Maybe their slogan should be, “We’re looking for the next Robin Hanson.”

4. One way to come up with a moonshot is to think of a big, annoying problem to solve. Some possibilities that come to mind:

–the intellectual collapse of American education, including higher education and K-12.

–terrorism and the responses to terrorism

–potential use or mis-use of biotechnology, nanotechnology, and artificial intelligence

5. Have I ever had a “change-the-world” idea? Back in October of 2000, I wrote,

Now, imagine that everyone in the world is given an “ethics rating” that is analogous to a chess rating. Maybe 2500 would be the highest, and 0 would be the lowest. Your rating would affect how you could use various technologies. “Ethical grandmasters” would be allowed to do advanced research in biotechnology and robotics.

Note the passive voice. It raises the question of who is going to create and control such an “ethics rating” system. The Chinese government? They seem inclined to implement such an idea, but they are not necessarily the ones I want to see doing it.

At the time, I assumed that I would initiate the ethics rating system by designating a few people as ethical grandmasters. They would in turn rate other people, and these would rate other people, until everyone had a rating. You can read the essay to see the idea sketched out a bit more. Note that as of the time I wrote the essay, I was still left of center, as you can see from the people I named as possible ethical grandmasters.

As I re-read the essay, I think that this qualifies as a moonshot idea. It might even be worth trying.

The source of entry barriers on the Internet

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A commenter writes,

it is remarkable that internet markets with low barriers of entry often settle on monopoly/ologopoly models so quickly and easily.

Note: I am going to pick on this statement, which is one small part of a comment that otherwise makes good points.

I think that there is a significant barrier to entry on the Internet that is rather subtle. Incumbent firms know a lot more than potential new entrants, and the Internet enables them to exploit this advantage quickly and at low risk.

Suppose I am managing the incumbent firm X, and you want to enter the market with firm Y. In textbook economics, Y just has to copy what X does. But that does not work in the Internet context. Most people say that is because of network effects and lock-in, but I think there is a more important reason.

The problem with your copying me is that by the time you finish copying the current version, I will be two or three versions ahead of you. The thing is, at any point in time, I have a better idea than you do about what is sub-optimal about the current version of X. So I know which features I am going to drop, which features I am going to tweak, and which features I am going to add in my next version. You may have some guesses about all that, but you don’t have the experience that I have.

The knowledge that managers accumulate while operating a business becomes a big entry barrier. When I was the “chief scientist” of an Internet-based business in the 1990s, we were periodically spooked by VC-backed competitors who had enough capital to bury us–if they had our experience. But time after time they squandered their money trying stuff that we already knew didn’t work. One of my partners described it as like being the villain in a cartoon car race. We are the lead car and out the window we’re tossing obstacles for the other cars: nails, oil, what have you. We were engaged in “move fast and break things” before that slogan was invented.

In traditional businesses, followers tend to be more agile than leaders. In today’s Internet environment, it can be the other way around. And there is nothing that fends off competition as rudely as a market leader that is able to move faster than a follower.

A non-totalitarian future

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As I mentioned the other day, George Gilder does not accept the vision of a totalitarian future. Here is Gilder in the WSJ.

With the cryptographic revolution, he says, “we’re now in charge of our own information. For the first time in history, really, you don’t have to prove who you are, or what you are, before a transaction.” A blockchain allows users “to be anonymous if they wish, while also letting them keep a time-stamped record of all their previous transactions. It allows us to establish unimpeachable facts on the internet.”

In his new book, Life After Google, Gilder argues that the concentration of power at Google or Facebook is a temporary phenomenon. He believes that power will diffuse once again.

Where I a skeptical of his view is that I believe that the power that the top companies have comes from their skills at strategy and managing software development. Those skills are highly concentrated, and I do not see that changing.

Intangible sources of star firms

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we find that the star firms whose returns are diverging from the rest of the firms are in industries that require high cognitive skills and that in these industries average returns are higher. In industries where the tasks involve routine manual skills and which score low on non-routine cognitive and complex problem solving skills, we see lower returns and don’t see the star firms pulling away from the rest.

That is from Meghana Ayyagari, Asli Demirgüç-Kunt, and Vojislav Maksimovic. Pointer from Tyler Cowen.

No surprise, of course. My intuition for quite a while has been that star firms are those that manage the task of software development and business strategy in the age of the Internet particularly well.

A China bull

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Peter Diamandis sounds like one.

these homegrown Chinese tech giants are driving China’s AI revolution at an unprecedented pace, building out everything from autonomous vehicles and smart cities to facial recognition capabilities and AI-driven healthcare platforms.

He is referring to Baidu, Alibaba, and Tencent. The quote is from his “blog,” Abundance Insider, which currently is available by email subscription (free) but not on the web.

Advice to teenagers

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Patrick Collison writes,

If you’re 10–20: These are prime years!

. . .Above all else, don’t make the mistake of judging your success based on your current peer group. By all means make friends but being weird as a teenager is generally good.

There is much more at the link. Pointer from Tyler Cowen.

I read this as saying, “Go against your programming as a teenager.” I figure that teenagers are programmed to care above all about their status within their peer group. You become defined by your friends.

When I graduated high school, a remarkably wise classmate wrote in my yearbook a message saying gently that she preferred it when I stepped out of the role that I had defined for myself (or fallen into) within my group of friends. This inspired me to re-define myself when I went away to college.

So my advice is to look for opportunities to redefine yourself. When I went to graduate school, I took up folk dancing as a hobby, even though I had been afraid to dance before. When I worked at the Fed and at Freddie Mac, I made a lot of lateral moves in order to fend off boredom. But I think I stayed in both places too long. I take the view that working in a large organization is like attending school. You get through the curriculum in a few years, and then it’s time to graduate. To put this another way, each organization has its own culture. Once you have experienced that culture for a few years, the best way to learn and grow is to experience a different organizational culture.

Working at Freddie Mac (back in the late 1980s and early 1990s), I was defined by others as someone who could come up with a vision but could not execute. Starting my own business was a chance to redefine myself. I recommend starting a business, because it is an educational experience, even if it doesn’t work out.

Proprietary IT and competitive success

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In the WSJ, Christopher Mims wrote,

IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. It’s different from our standard understanding of R&D in that this software is used solely by the company, and isn’t part of products developed for its customers.

Today’s big winners went all in, says James Bessen, an economist who teaches at Boston University School of Law and who recently wrote a new paper on the policy challenges of automation and artificial intelligence. Tech companies such as Google, Facebook, Amazon and Apple—as well as other giants including General Motors and Nissan in the automotive sector, and Pfizer and Roche in pharmaceuticals—built their own software and even their own hardware, inventing and perfecting their own processes instead of aligning their business model with some outside developer’s idea of it.

The research is by James Bessen. Robin Hanson has comments. He wonders why good internal software could not be made available to other companies.

I have not read Bessen’s work, but I worry about two related issues.

1. Survivor bias.

2. Correlation vs. causation.

If you were to ask me what I think of the idea of developing internal software vs. using stuff off the shelf, I would advise most companies not to go for internal software. It’s easy to mess up, and once you mess up, you are at a dire competitive disadvantage. My guess is that developing proprietary software is a very high-risk strategy. Granted, some companies at the top of the outcomes distribution have gone that route. But I also expect to find plenty of firms who tried that approach at the bottom of the outcomes distribution.

As for cause and effect, you can’t build an effective software system around a chaotic business process. My guess is that the companies with the most well-analyzed, logical business processes have the best software systems. But the software system is not the driver.

Subscriptions and durable goods rental

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In the WSJ, Philip Delves Broughton reviews Subscribed by Tien Tzuo with Gabe Weisert.

Husqvarna, the Swedish maker of forestry and garden tools, maintains what it calls the Husqvarna Battery Box out of a Stockholm parking lot. The handyman’s hut offers subscribers access to hedge trimmers, chain saws, leaf blowers and other equipment; users pay a flat monthly fee to borrow the tools and return them when they’re done.

My guess is that a central issue in these sorts of businesses is pickup/delivery/installation logistics. Take the yellow, green, and orange bicycles that lately I have seen strewn around the area. I suspect that, on average, the users of this bikes disperse them to less convenient locations than where they pick them up. That leaves the company with the task of going around and retrieving the bikes and moving them closer to where people might want to start biking. I doubt the business model in that case.

Jeffrey Pfeffer on leadership

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I watched the video of his Google talk on his book Leadership BS, where he was interviewed by Karen May, who I think functions in management development at the company. Several take-aways:

1. Management advice is a field filled with baloney sandwiches, which can be defined as opinions not backed by any statistical evidence. Pfeffer is very strong on that point.

2. There is an inherent tension in leadership between doing what is best for the leader’s career, doing what is best for organizational success, and doing what is best for employees. You can never attain perfect alignment of those.

3. Intellectual curiosity is an important but all-too-rare trait at high levels in a company. One symptom is that many executives do not read any books at all.

About minute 32 or 33 of the video, in the midst of all this talk about the need to be evidence-based and scientific rather than base leadership behavior on hunches and anecdotes, Karen May says that Google prides itself on looking at evidence and data in its management approach. The video was shot in November of 2015. Since then, we have seen James Damore fired for exhibiting these traits. Which relates to another take-away:

4. Hypocrisy is pervasive in the workplace, as Robin Hanson could have told you. Pfeffer points out that what leaders say they value and how they actually behave are not necessarily aligned. So before you believe “How to work with Arnold” you should do some due diligence and talk to people who have worked with me.

By the way, here was my route to the Pfeffer video:

The Medium site suggested to me that I would like Ryan Holiday’s list of book recommendations, so I checked it out. These recommendations included Robert Greene’s 48 Laws of Power. I was intrigued by the Kindle sample, but not convinced to buy it. So I researched Greene on Wikipedia, and I found a Wikipedia page on that specific book. The Wikipedia article included a quote from Pfeffer complaining that the book was not evidence-based. So then I looked up Pfeffer. I am going to investigate Pfeffer’s book on power. Meanwhile, when I Googled Pfeffer, I found many YouTube videos. So far, I have only watched the one.

How to work with Arnold

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Stripe Press has launched, with a book called High Growth Handbook, by Elad Gil, about taking a successful start-up through the stage where it has hundreds of employees. Books scheduled for later release include one from Tyler Cowen and a revised edition of Martin Gurri’s Revolt of the Public that includes a forward from yours truly.

I liked parts of Gil’s book. It focuses on an interesting phase for a business–not a start-up, not mature, but in the process of growing from sub-Dunbar to super-Dunbar, from a tribal band to a Weberian bureaucracy.

But I would have been much more demanding as an editor. I would have gotten rid of all the advice that I think is non-actionable, “Make sure you hire a ____ who is smart.” “Don’t do too little X, but don’t do too much, either.” etc. On some topics, I would have pressed for more specific examples, as when the author interviews Patrick Collison, who says

some of these companies–by no means all, but some of them–are in the process of making either major cultural or organizational errors

You don’t have to name names, but at least describe one or two of the types of errors you are talking about.

In fact, I would have asked Gil to devote more discussion to companies that failed in the high-growth phase. What went wrong at MySpace? Netscape? AOL? Napster?

There are some actionable ideas in the book. One of them is for an executive to circulate a document that describes “how to work with me.” If I had thought of doing something like this back when I was in business, here are some things I could have written, some to communicate with my supervisor, some to communicate with people working for me:

1. Don’t give me too many things to do at once. I need to feel like I have my work under control.

2. If you want me to do something that requires my utmost concentration, let me work on it in the morning.

3. If you want me to do something that I hate doing, find someone else to do it.

4. I often give vague project assignments. Push back with clarifying questions, until you know what to do or until I back off because I realize that I don’t really know what I want.

5. When I give a deadline, it is the last possible moment to complete a project. When you miss a deadline, I am devastated. When you just make a deadline, I am disappointed. Get it done sooner.

6. I hate it when people focus on assigning blame. When something goes wrong, focus on fixing it.

7. I like sharing interesting articles and books that I come across. Feel free to do the same with me.

8. I believe in hiring people for attitude and ability, not for experience.

9. The key attitude is being oriented toward solving problems rather than just complaining. I will not tolerate a chronic complainer.

10. I’ll let a software developer get away with being a prima donna*, if you’ve got the right combination of ability, conscientiousness, and stamina. Show me you can really get stuff done, in which case I’d rather keep you happy and let other employees get annoyed than the other way around.

*I define a prima donna as someone who thinks that their superior talent demands recognition and special treatment