Category Archives: business economics

Talent effects and inequality

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My latest essay concludes,

In many industries nowadays, small teams of talented individuals can out-compete larger collections of mass workers. Elite skills, reputations, and connections can create barriers to entry that produce high returns. In some important fields, the stars get the best jobs, which in turn enables them to enhance their know-how and their reputations. And the most talented people in one field are likely to work in firms with the most talented people in other fields, creating synergies that increase their rewards even further.

Productivity divergence

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The WSJ reports,

According to data on advanced economies from the Organization for Economic Cooperation and Development, the most productive 5% of manufacturers increased their productivity by 33% between 2001 and 2013, while productivity leaders in services boosted theirs by 44%.

Over the same period, all other manufacturers managed to improve productivity by only 7%, while other service providers recorded only a 5% increase.

Think of a firm as consisting of labor, capital, and intangibles. The intangibles include knowledge and business strategy.

When intangibles hardly matter, then capital and labor ought to be about equally productive across all firms. When intangibles matter a lot, then productivity differences will widen.

The Trump Administration’s re-organization proposal

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So far, I have only skimmed parts of the reform proposal.

Reorganizations in the private sector have demonstrated that without efficient and effective implementation, even well-conceived reorganizations may fail to achieve the intended benefits. To ensure effective implementation, the President’s Management Agenda highlighted three areas (see figure to the right) which help drive effective organization transformation:
• Information Technology Modernization.
• Data, Accountability, and Transparency.
• People and the Workforce of the Future.

It is a very serious document, which you would not have expected if you only followed this Administration through tweets and media reports.

Of course, I would have liked to see something more sweeping, along the lines that I proposed six years ago. From an organization-chart perspective, the President has over 150 direct reports, and I would have reduced it to eight.

Cautious vs. disruptive

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The WSJ reports that Atul Gawande is to head the Amazon-Berkshire-Morgan health venture.

In addition to running the new venture, Dr. Gawande will continue to practice surgery and keep his position as a professor at Harvard, as well as retain a role at Ariadne Labs as chairman, according to Ariadne Labs.

I smell a nothingburger. You don’t disrupt an industry with a part-time CEO whose claim to fame as a health care reformer is advocating that doctors use checklists.

On the same day, Scott Alexander writes,

Cheap-O Psychiatry wouldn’t have an office, because offices cost money. You would Skype, from your house to mine. It wouldn’t have a receptionist, because receptionists cost money. You would book a slot in my Google Calendar. It wouldn’t have a billing department, because billing departments cost money. You would PayPal me the cost of the appointment afterwards

If you want political cover, you pick Gawande, who is revered by all. If you want to have an impact, you pick someone like Scott Alexander.

Thoughts on Theranos

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From a commenter.

narcissists use anger to cow and intimidate

…the silicon valley culture of “promise x now, figure out how to do it later,” doesn’t really work in other industries. If you combine that with criminal narcissism, you get Theranos; if you just add regular narcissism, you just get Tesla.

What’s weird about venture capitalists is that they seek out these narcissists. I remember reading about a venture capitalist who said that he looked for an entrepreneur who could. . .I forget the metaphor, but it was something equivalent to short-circuiting the rational part of your brain.

My guess is that there are too many people trying to imitate Steve Jobs and not enough people trying to imitate Patrick Collison.

Reading about the brain

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The book, Strangers to Ourselves, by Timothy Wilson, has been around a while (2002). Some of the studies and methods pre-date the awareness of replication issues. But I still find it very stimulating. Note that Hanson and Simler refer to Wilson’s work and to the book.

There are all of these views about a divided brain. Daniel Kahneman talks about system 1 and system 2. Ian McGilchrist (recent econtalk with Russ Roberts) talks about the left brain as a set of maps and the right brain as having a sense of the territory. Wilson talks about the adaptive unconscious and the conscious brain.

Wilson’s point is that what we mean by our “self” is the conscious brain. But a lot of information is processed and decisions are made by the unconscious brain. The conscious brain is not the executive making all the decisions, nor is it a spectator/commentator without influence. It is somewhere in between.

I am interested in the overall question of moral behavior. My current thoughts are these:

1. The simplest moral heuristic is simply “Do what you observe other people doing.” If other people are driving between 65 and 70, then do that. If the sign says that the speed limit is 55, then that introduces some dissonance, but you still are probably better off doing what other people do.

2. If you don’t do what other people do, then you are defecting. If everyone defected a lot, then we probably could not have a workable society. But if nobody ever defected, then there would never be any improvement at all.

3. Moral life consists of choosing between obeying the simplest heuristic or defecting. I would say that to the extent that you are unable to make those decisions consciously, you lack moral capacity.

4. But our conscious brains can rationalize all sorts of behavior. Our instinct is to disguise or deny behavior that might make us look bad. We go so far as to disguise it or deny it to ourselves.

5. Be careful what you believe about yourself. Going back to Elizabeth Holmes and Theranos, she seemed to believe that she was another Steve Jobs. This gave her a license to fire anyone who told her something she did not want to hear. It’s now obvious that she treated constructive critics as if they were hopeless malcontents, but ex ante that was harder to see. Making the opposite mistake–treating a hopeless malcontent like a constructive critic–can also be costly.

A book recommendation

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John Carreyrou’s book on Theranos, founded by Elizabeth Holmes. The title is Bad Blood. Recommended by Patrick Collision.

These days, I find myself pondering issues of morality and ethics a lot. We are all flawed. How do some of us manage to avoid going downhill and becoming really bad?

This book raises many questions. How could so many people have been fooled? It seems like a lot of the people she fooled were male. We’re they vulnerable because she was a woman?

Truly experimental firms

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by John List, on corporate social responsibility.

My initial inclination is: firm does a good thing; worker reciprocates to firm by working harder; and the world is a better place. Everyone’s better off. But what this suggests is that there’s something deeper on the psychological side, that it’s not just triggering this reciprocity from workers. C.S.R. is also triggering something deeper, which the researchers in this area call moral licensing.

Pointer from Tyler Cowen. Read the whole transcript, to see the research method. He actually starts firms and hires workers in order to do controlled experiments.

Patrick Collison on corporate culture

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Asked about what sorts of feedback mechanisms he tries to put in place, He says,

I really think it’s too early to answer that, in the sense that I can tell you what I think today and the changes we’ve made over the last year and things like that. Stripe has been a thousand-person organization … or has been a more-than-500-person organization for just over a year. We’re beginners at this! Three years ago, Stripe was under 100 people

Again, pointer from Tyler Cowen.

It sounds as though Stripe has only recently gone from being sub-Dunbar (fewer than 150 people) to super-Dunbar (more than 150). That is a really challenging transition. In a sub-Dunbar organization, informal communication channels work best. In a super-Dunbar organization, much more structure is required. As a result, it feels as though the organization is becoming stale and bureaucratic.

I joined Freddie Mac late in 1986, not long after the company moved definitively into the super-Dunbar range. Some people who operated effectively in the sub-Dunbar phase became dysfunctional in the super-Dunbar phase, and even those who were still effective often were less happy. I think even the CEO felt less comfortable with the larger organization.

Can online tracking beat credit scoring?

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Tobias Berg and others have an abstract that says,

We analyze the information content of the digital footprint – information that people leave online simply by accessing or registering on a website – for predicting consumer default. Using more than 250,000 observations, we show that even simple, easily accessible variables from the digital footprint equal or exceed the information content of credit bureau (FICO) scores. Furthermore, the discriminatory power for unscorable customers is very similar to that of scorable customers. Our results have potentially wide implications for financial intermediaries’ business models, for access to credit for the unbanked, and for the behavior of consumers, firms, and regulators in the digital sphere.

This is interesting for many reasons.