bidness


You may remember my prediction that by 2100 corporations would be run as democracies rather than monarchies, an idea I also put into the Incatena.  This was partly based on conviction and observation, as well as the experience of a few collectively owned and/or run companies.

But there’s a new poster child for democratic governance of corporation– Valve, as explained and put in context here by its resident economist, Yanis Varoufakis.

Some companies famously allow employees to put a fraction of their time– 10% or 20%– into projects of their own choice.  At Valve, that percentage is 100%.  All employees choose which projects to work on.  And Valve is famously successful.

The immediate advantages are obvious: you’re not stuck in a job or project you hate, so motivation and retention are high. Plus dumb ideas, even if they come from the CEO, are likely to be suppressed.

Now, Valve makes creative stuff, so intuitively this model fits their business.  Still, it’s worth pointing out that most creative-stuff companies, from EA to book publishers to Hollywood, are as hierarchical as any tsardom.  If anything, creative types are more capricious and unresponsive than (say) manufacturers.  Physical things usually come with their own metrics, but who’s going to tell George Lucas that he’s doing storytelling wrong?

The obvious objection is that if your company performs a service, like banking or insurance or flying planes, there’s a lot of scutwork and it wouldn’t get done with the Valve model.  (This is my pet theory, in fact, on why Episode 3 and/or Half-Life 3 hasn’t come out.)  But this isn’t so much of a showstopper as a problem to be solved.  If it even exists: we won’t know if the model fails for banking till someone actually runs a bank this way.

As Varoufakis puts it, the genius of the market is that incentives take care of this problem society-wide.  If not enough people are making veeblefetzers, then there’s an incentive for entrepreneurs to get into that market.  In the Valve model the incentive internally is really employee interest, and fortunately people are interested in different things.  If that alone isn’t enough, there’s always more traditional incentives, like raising pay in the scutwork department.  Or maybe it turns out that you outsource the scutwork to a company that specializes in it (and which itself could be run democratically).

Why haven’t more companies tried this approach?  It can’t be because it doesn’t work or scale, because it hasn’t been tried enough for us to know that.  So I think it’s inertia.  People are just too used to the tycoon, despite a couple hundred years’ experience showing that most tycoons aren’t that smart after all.  (There were brilliant kings, too, but that doesn’t make monarchy a real success.)

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I recently got into a conversation with a work colleague regarding piracy. Specifically, the basic assumption that I came to is that internet piracy of media is that we do not value the artist’s effort in production, nor do we comprehend the inherent monetary value of art (I positioned it as a symptom of post-modernism, that art is for art’s sake, and art-for-monetary’s sake is blasphemous.) He stated that the cost of media is just too high, and he also opposes (much like a lot of things) certain studios so refuses to give them his money, but still wants to enjoy the media produced under their umbrella. My question is, knowing that you have written on this before: What are your initial thoughts on the MegaUpload extradition? And what are your thoughts pertaining to the idea of media piracy— why do we do it? Ultimately, I’m not trying to understand why the government is wrong in trying to push SOPA and PIPA through, nor am I trying to figure out which one of us was right, if any, just your opinions on the subject.

—Nikolai

As a content creator myself, I think people should pay for their art.  (Except sometimes; see below.)

But in general, I think ‘piracy’ is a sign of market failure, and disappears when providers make it easy to get content in whatever form is desired.  My best argument for this is the enormous success of Steam.  Steam is at root a DRM system, but it’s so packed with features for the gamer that it’s actually a pleasure to use, and I don’t buy games any other way now.  You can buy your games there, see what games your friends are playing, chat with them, use games on multiple computers and platforms.  There are frequent sales, so those $60 games will soon be available for half that— or wait a year and get them for under $10.  You can review games or get links to other reviews before you buy.  You automatically get updates and patches.  I recall an interview with Gabe Newell where he said people thought Steam was crazy to get into Russia, which is notorious for piracy, but they’ve done very well there.

The music industry earned a lot of hatred for attempting to continue its lucrative old model— selling physical CDs for $20 a pop— well into the electronic age.  Their business model had very little to do with helping artists; they wanted the profits of the manufacturer / distributor… precisely those costs that go away with electronic distribution.  I don’t know the figures, but I’d guess that most people are pretty happy buying single songs from iTunes for a buck.

The next battleground is movies.  Why haven’t the studios come up with a Steam-like service where all movies are available on all platforms, at reasonable prices?  Instead of tracking down pirates and alienating customers, they should be figuring out a feature-packed, cheap distribution system of their own.

During the SOPA fight many people pointed out the absurdity of the jobs claims made by the industry, which were based on the idea that any pirated viewing represents a full theater admission lost.  Of course it doesn’t.  If someone wasn’t able to pirate the movie, he would probably have skipped it, or waited till it was free on TV or at the library.  Or maybe he’d pay $1 for a used DVD, or $2.50 for an iPad version.

Many businesses have discovered the joys of variable pricing— Tim Harford’s The Undercover Economist goes into detail on this.  Econ 101 tells you that there’s a single price— let’s say $17.95— where the supply curve and demand curve intersect, and which maximizes sales and profits.  Econ 101 is wrong!  All those consumers who’d happily pay $10, or $5, or $1, don’t get what they want, so their sales are lost.  And those consumers who’d pay $50 or $100 aren’t being milked for enough simoleons!

It’s not easy to work up a pricing scheme where everyone pays the maximum they’re willing to… but plenty of markets do their damnedest to try.  Airlines are very good at this— it’s almost the case that no two flyers get the same price.  Books are a good example: you can get a hardcover for $25, a trade paperback for $15, a mass market paperback for $9, a Kindle for $5, a used book for $3, a library book for free.  Steam approximates this for video games, the chief variables being willingness to wait, and assiduousness in checking sales.  (Game companies have even figured out how to get the really motivated customers to spend more, largely with premium editions and DLC.)

And note, there’s a role in this model for free.  I don’t mind if you lend your copy of the LCK to a friend, or donate it to the local library!  A certain amount of free distribution builds recognition and good will, and in the long run increases sales.  (Neil Gaiman has experimented with giving books away for a limited time; it always increases actual sales as well.)

Plus, art needs art as a source of ideas and inspirations— it would be a bad thing if the heirs of Shakespeare controlled performance of his plays.  It’s right there in the Constitution: copyright is a balance between the interest of creators and consumers.  The sign that the balance has gone too far toward the consumers would be that artists are starving and not producing any art— and they’re not!  We’re awash in art!

If I read anti-industry people too much, I start to sympathize with the conglomerates.  People make all sorts of rationalization for what sounds like entitlement and miserliness.  But really such things are a reaction to the obvious greed and stupidity of the distributors (who aren’t even the creators).  If your friend doesn’t want to pay $17.95, that doesn’t justify him in paying $0, but if they were smart the distributors would find a way to get him to pay $5, or whatever.

I also think we’re going through a slow transition from a system dominated by middlemen, to one where artists handle their own production and distribution, and of course the middlemen are squawking.  But it’s their own fault for not adapting.  Books and music, and even indie movies, could easily be produced by their creators.  Maybe not blockbuster movies, but somehow I don’t think we’ll ever have too few of those.

 

 

Wow.  Sometimes for the most stinging critiques of capitalism, you need to look in a business magazine.  Such as Steve Denning’s article in Forbes on the catastrophe that is managing companies to maximize stockholder value.  (The article in turn is a review of Roger Martin’s Fixing the Game).

The culprit turns out to be Jensen & Meckling’s infamous 1976 paper which argued that CEOs should be incentivized to share the concerns of shareholders, which was to be done by giving them massive amounts of company stock.  The CEOs didn’t object, of course, since this meant obscene amounts of money. 

What this led to was an epidemic of short-term thinking, a shorter business cycle, corruption and business scandals, and an orientation toward gaming the system (e.g. looting the pension fund, or outsourcing, in order to meet quarterly targets).  And as a kicker, the system fails at its own intended purpose: stockholder value has grown slower than back when companies were managed to maximize real-world benefits for customers.  

These things can be fixed, though it will require legal changes.  E.g. MArtin favors repealigng the “safe harbor” provision and FASB 142, both of which require executives to make predictions about stock performance and penalize them for not making targets. 

In short, companies that focus on delighting the customer not only do better for those customers, and for their employees, but they make more money and thus keep the stockholders happier too.  The whole trend of overpaying the CEO isn’t merely a great injustice; it’s also bad business.

 

 

Venkatesh Rao has a fascinating, mind-blowing, and somewhat half-baked post on the history of the corporation from 1600 to 2100.  If you like Big Exciting Ideas you’ll like it.

I like his little diagram of, well, Things That Influence History:

Venk diagram

 He explains:

On the scale of days or weeks, culture, politics and war matter a lot more in shaping our daily lives. But those forces fundamentally cancel out over longer periods.  They are mostly noise, historically speaking. They don’t cause creative-destructive, unidirectional change (whether or not you think of that change as “progress” is a different matter).

Business though, as an expression of the force of unidirectional technological evolution, has a destabilizing unidirectional effect. It is technology, acting through business and Schumpeterian creative-destruction, that drives monotonic, historicist change, for good or bad. Business is the locus where the non-human force of technological change sneaks into the human sphere.

Which however suggests that there should really be an even smaller, harder circle called “Technology”.  Science and technology don’t always have to go through business to get things done.

He divides the history of the corportaion neatly into two periods: one in which corporations largely invested in the control of space, which largely meant getting direct and exclusive access to physical resources in a zero-sum mercantilist world; and one in which they sought to control time– i.e. what we usually call productivity, which involves that deep embrace of technology. 

I have some quibbles over some of his details.  I think he focuses on the East India Company too much, because he’s part of the Anglosphere.  He mentions the Dutch VOC but only barely; but the story he tells of a corporation taking over a key supply region (the EIC, Bengal, 1757) was foreshadowed a hundred years earlier by the VOC in the Spice Islands.  (Indeed, just as the EIC is largely why there was a British India, the VOC is largely why there is an Indonesia.)

He has an interesting idea, Peak Attention.  Time-mining, he says, has its limits.  The premodern lifestyle had huge sinks of wasted time which technology could save: think of all the time it took to chop down trees, wash clothes, cook meals.  This fits in with Yglesias’s point about surprising unproductivity in mid-20C America: insurance used to be done by door-to-door sales, backed up by hordes of pencil pushers and people who looked things up in printed tables.

But, says Rao, there are limits to how much more attention can be mined.  Corporations today are reduced to remining time already saved: e.g. convincing people to watch your new TV show on your computer instead of going to a movie theater.

I’m not so sure about this.  For one thing, it seems to be confusing productivity with leisure time.  So far as I can see, productivity in work can keep increasing for a very long time.  Whatever your job, there’s going to be something that can be done to speed it up; and if this process is repeated enough, entirely new job categories will be created. 

Productivity can increase leisure time, but only if that’s a social value… in the US, so far as I can see, it isn’t; if anything companies are demanding more from their workers.  

The article kind of falls apart when it comes to explaining what’s next.  Rao thinks the heyday of the corporation is over, but doesn’t really explain why, besides referencing Ronald Coase.  He starts to talk like this:

How do we measure Coasean growth? I have no idea. I am open to suggestions. All I know is that the metric will need to be hyper-personalized and relative to individuals rather than countries, corporations or the global economy. There will be a meaningful notion of Venkat’s rate of Coasean growth, but no equivalent for larger entities.

The fundamental scarce resource that Coasean growth discovers and colonizes is neither space, nor time. It is perspective.

Digging a bit deeper, this seems to refer to “cloudworking” and other blue-sky notions that the mid-20C corporate workforce is over.  I haven’t read enough to be sure what he’s talking about, but my initial reaction is that he’s mistaken an increase in corporate power for its opposite.  The cradle-to-grave job such as my father had is gone not because workers wanted to be free, but because labor is nearly powerless, and because job requirements are far less static.

I had dinner tonight with my old pal Harry (hi Harry), who has a macabre career… basically, outsourcing jobs.

He explained what’s happening when two companies merge and some particular function gets taken apart and shipped elsewhere.  I’ve seen such things from the ground, and it’s not pretty.  I think the employees’ expectation is something like this: Company A has function X, and it works pretty well.  B has function X’ and it works OK too.  Why not either keep both X and X’, or at least pick one of the two, keeping as much of the personnel as possible?  After all, there’s a huge investment in these people; they have an enormous stock of knowledge we ought to retain, and just getting rid of people will cause enormous strain and distrust.

The view from 30,000 feet: the new company doesn’t want X or X’.  It wants a standardized, dumbed-down X” that can be done by high school graduates in a small town.  Such an organization easily scales up as the company grows, and can also be easily moved to seek lower wages.  The key point: the skill mix, chief/Indian ratio, and wages of the original X and X’ teams are all wrong.  It’s essentially the process of turning skilled craft work into unskilled assembly line labor, and the original workers would be miserable being transmuted into X”.

It occurred to me that the vaunted mobility of American workers is indirect.  Company A is going to lose department X and all its workers; some other location is going to get a bunch of new jobs in X”.   This won’t involve anyone moving from X to X”; the laid-off workers will find new jobs near their homes; the new ones are found from local resources.  The new location may become a slightly more desirable place to live and some other people will start to move there.

If this is how capitalism works, why don’t capitalist countries continually get poorer?  Historically, the answer is that this is only half of the process.  The other is that, as enterprises grow, entirely new kinds of jobs open up, at a higher skill level.  We no longer need cottage industry weavers and farmers; instead we need paper pushers, marketers, cinematographers, bridal consultants, statisticians, real estate lawyers, software engineers, yoga instructors, outsourcing experts, and a host of other more sophisticated jobs.

Is the whole process still balanced?  Damned if I know.  In the ’90s it was; as fast as jobs were outsourced, new ones were created domestically.  In the ’00s it looked unbalanced— American business just seemed to stop creating jobs.

If you’re looking at careers or something, the take-home lesson is this: find a job that’s not easily moved to Shanghai.  Some jobs are too local to move: lawn care, nursing, plumbing.  Others are still American specialties and safe— for now.

I just read Nassim Nicholas Taleb’s The Black Swan— a remarkable book, though one feels it is not quite as remarkable as the author thinks it is.

With a characteristic breeziness, Taleb redefines Black Swans to mean highly improbable yet highly consequential events.  (The traditional idea was a reversal of expected ideas— before Australia was discovered people thought all swans were white— but without the factor of importance; the color of swans is pretty trivial.)  Taleb points out Black Swans are all around us: 9/11, the Great Depression, most inventions and bestsellers.

Can I save you $17?  Maybe.  The main points are these:

  • Black Swans make a hash of predictability in history and especially economics.  All those financial experts with their carefully tuned risk management programs are charlatans.  Any prediction of the medium future will be made ludicrous by Black Swans.
  • They can hardly be dismissed as “aberrations”.  E.g., in the last fifty years, half the gain in value in U.S. stocks is due to just ten days of trading.
  • Many varying factors, especially biological— e.g. height or age— can be understood with a simple bell curve, a normal distribution.  Taleb calls this world Mediocristan.  But other variables, such as income or sales or the death counts of wars, are highly non-normal, and expectations based on the bell curve will produce serious errors; this is Extremistan.  And increasingly we all live in Extremistan.
  • More technically: in a normal distribution, the tails rapidly fall off.  You will occasionally see a 7-foot man; you will never see a 50-foot man.  The distribution of something like income or book sales or market changes, is non-normal, with a fat tail: you simply can’t put an upper limit on them based on statistics alone.  You’ll occasionally see a $70K income; you will fairly often see a $500K one; you can’t rule out $500,000K.  To put it another way, in a normal distribution instances more than three standard deviations (sigmas) from the mean are vanishingly rare; in a non-normal one you can easily find instances six or ten sigmas out.
  • People are just not made to wrap their minds around Black Swans.  We try to rationalize them after the fact, but we are also prone to building systems that exclude them.

He enumerates a few common errors; my favorite is the ludic fallacy: generalizing from toy models (especially games) to complex human systems.  Sometimes naming something is a powerful move; I think this one is a useful addition to the lexicon of skepticism.  Games of chance, in particular, are lousy metaphors (because they largely follow normal distributions).

Taleb is a financial trader and amateur philosopher, highly opinionated and often witty.  He reserves a particular scorn for quants (financial analysts with mathematical models that are apparently all based on normal distributions), economists, CEOs, central bankers, and the French.  In the first edition statisticians are on the list too, but by now he’s learned not to alienate them.

Did Mr. Whiz Kid make money during the present crisis?  Oh sure; he doesn’t even consider the 2008 crash a Black Swan; he’d expected a meltdown for years.  (As he points out, Black Swans are relative to the observer.)

I’d say I go along with most of what he says; like most skeptics he gets a little overexcited about what we don’t know.  Occasionally there’s no one more naïve than a habitual rebel: they’re so used to dismissing authority that they’ll accept some nonconventional idea just because a friend brought it up.  (An example is a throwaway line claiming that there’s nothing wrong with high-fat diets; he offers no backing except a friend’s say-so.  Similarly, he mentions that his newest strategy is a hedge against hyperinflation.  Hyperinflation??)

I don’t think history or even economics are as hopeless as he says.  Indeed, his favorite investing strategy (put 90% of your money in ultra-safe investments like government bonds; put the rest, what you can afford to lose, in diverse ventures that have a chance of great success) assumes that there are safe investments, that not everyone is an idiot.  Or to put it another way, our skepticism should be specific.  Alan Greenspan’s claims that the markets had risk under control, or febrile 1990s claims that the new economy validated dot-com business models with no income, were not only foolish, but dead wrong.  That doesn’t mean that everything in economics is wrong.

My other reservation is that I kept expecting Taleb to get to the real meat, and it felt like he never did.  There’s plenty more in the book, but he spends most of it making the basic points over and over in different ways rather than getting into details.  E.g. at one point he deigns to explain that non-normal distributions can be identified by their kurtosis.  That I understand; I used to work for SPSS.  But he doesn’t bother even to tell us what are the telling values for the kurtosis.

Similarly, he has an interesting section on scalable and non-scalable jobs; the first, like book-writing, software sales, and  financial trading, more clients can be added without additional work: the same book can be sold to 100 or 1 million readers; it takes no more effort to trade 100 than 100,000 shares.  In non-scalable jobs, like dentistry, farming, or prostitution, more clients mean more work.  Scalable jobs are in Extremistan; they have an all-or-nothing reward structure.  And more and more jobs are scalable— e.g. ‘musician’ used to be a non-scalable job, as there was a limit to how many people could hear a given musician; now it’s scalable— a small group of artists can get 90% of the market and the rewards, and they don’t even have to be alive.  That’s a useful distinction to make.  But wouldn’t it be interesting to quantify how many jobs are scalable, and how this has changed over time?  Not to Taleb, apparently.

On the other hand, if your reaction to all this is “Yeah, but…” or “Fine, there are aberrations, who cares”, you probably need to read the whole book to get the ideas farther into your brain.  We’re rationalizing creatures, but there is no valid rationalization that turns non-normal into normal distributions.

…if they interviewed them the way they interview developers:

1. What’s  ROI stand for?  Have you ever used this concept?

2. What is an MBO?  Give an example.

3. Name three ways a PERT chart differs from a Gantt chart.

4. If you had to explain it to a junior manager, how would you describe what “venture capital” does?

5. Define “delegation”.  How does it differ from “assignment”?

6. What are all the ways a company could raise capital?

The point here isn’t that the questions are easy, though many are.  It’s that they aren’t tests of managerial skill; they’re pop quizzes on management theory.  Surely what you’re really interested in isn’t whether someone can define the buzzwords the same way the books do; it’s what they’ve done and whether it worked.

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