Every time I open a document in Safari, a browser I only use on the iPad, and do so from a periodical that has built an iPad app, I first get a page that encourages me to download that app. But I prefer to read in the browser. One reason is that I like to follow links and stay in the browser while doing so. Perhaps this makes me a dinosaur. I could better understand the apps approach on a PC with a widescreen monitor, where the app and the browser are opened side by side. And I suppose on the iPad if I did want multimedia mixed with text, then an app might be better (though I'd hope that browser rendering would soon catch up.). As it is, I just want to read text, but from a variety of sources, and then I would like to follow some of the links provided. Is that really such an odd preference?
Sent from my iPad
Tuesday, January 31, 2012
Is Big Brother the American Media Industry?
Let's say Shirky is right in his characterization of the media industry, excerpted below and linked to his full post. What is Higher Ed doing about it? Though there are some leading lights trying to push back, it seems to me that mostly there is capitulation - limit liability, take the path of least resistance.
I think copyright law is itself bass-ackward, the DMCA a case in point. The term structure of copyright is now completely wrong. It should be under 10 years, instead of what it is - life of the creator plus 70 years. (I made the argument in my post a while back, Kopy Wrong). There is nobody to lobby for putting more stuff in the public domain, which is why we get the bad law.
I also think it is somewhat wrong, within higher ed, to leave the issue to the lawyers and leave the rest of us out of it - the law is too complicated so the rest of us can venture an intelligent opinion. What we need instead is a grass roots argument to the effect that if the law was reasonable then we'd have an obligation to obey it. The ethical issue regarding our own obligation is not something the lawyers can say much about.
In the meantime this has a 1960's feeling with the Media Industry cast as Nixonites, and folks like Shirky as hippies. I believe in causality with long lags. Our politics now is heavily influenced by what happened then. We don't need a replay. We need a better way.
I think copyright law is itself bass-ackward, the DMCA a case in point. The term structure of copyright is now completely wrong. It should be under 10 years, instead of what it is - life of the creator plus 70 years. (I made the argument in my post a while back, Kopy Wrong). There is nobody to lobby for putting more stuff in the public domain, which is why we get the bad law.
I also think it is somewhat wrong, within higher ed, to leave the issue to the lawyers and leave the rest of us out of it - the law is too complicated so the rest of us can venture an intelligent opinion. What we need instead is a grass roots argument to the effect that if the law was reasonable then we'd have an obligation to obey it. The ethical issue regarding our own obligation is not something the lawyers can say much about.
In the meantime this has a 1960's feeling with the Media Industry cast as Nixonites, and folks like Shirky as hippies. I believe in causality with long lags. Our politics now is heavily influenced by what happened then. We don't need a replay. We need a better way.
Monday, January 30, 2012
Can incentives lead to lower costs in higher ed?
Below is an excerpt from a piece in Inside Higher Ed on Obama Administration efforts to encourage colleges to contain cost and admit more low income students. Good luck to them.
These efforts might work at colleges where most instructors and high level administrators have little job mobility. Then, if there are productivity gains to be had, tuition might sensibly be held in check. But at a place like the U of I, I believe such efforts will do little or nothing. The revenue amounts in these programs won't be sufficient to make people change what they're doing. More to the point, the real drivers of cost increase are not linked closely to these grant programs. I believe what is necessary is to take take on those drivers more directly.
Eighteen months ago I wrote a post about salary caps in Higher Ed. It's the competition for star faculty that is largely responsible for the hyperinflation. We need to weaken that competition. An individual institution can't do it on its own. The entire system needs to get together on this.
These efforts might work at colleges where most instructors and high level administrators have little job mobility. Then, if there are productivity gains to be had, tuition might sensibly be held in check. But at a place like the U of I, I believe such efforts will do little or nothing. The revenue amounts in these programs won't be sufficient to make people change what they're doing. More to the point, the real drivers of cost increase are not linked closely to these grant programs. I believe what is necessary is to take take on those drivers more directly.
Eighteen months ago I wrote a post about salary caps in Higher Ed. It's the competition for star faculty that is largely responsible for the hyperinflation. We need to weaken that competition. An individual institution can't do it on its own. The entire system needs to get together on this.
Friday, January 27, 2012
Is reason taking a beating?
Last night I watched the latest episode of Real Sports on HBO. They had a segment in the spirit of Moneyball called Between the Numbers. It was about a high school football coach in Arkansas at a private school, Pulaski Academy, who based on looking at data has abandoned punting the ball on fourth down. Further after his team scores a touchdown, they always go for an onside kick. In a recent playoff game they scored 29 points before the other team got possession of the ball!
During this segment they also had a bit with a University of Chicago economist doing Freakonomics work (it wasn't Steven Levitt). He said that in the pros, going for it on fourth down made sense when the ball was between the two forty yard line markers, even if it was fourth and eight. Coaches almost always punt in this case unless it is very late in the game or if they only have a yard to go. Punting is sub-optimal in this case.
They had a different segment, this one with Sean Payton, who is famous for going for the onside kick when the Saints were in the Super Bowl. Payton said, the pros were a lot different than high school. Agreed. But surely, Payton goes by the numbers, doesn't he? Not according to this segment. Payton goes with his gut. And the gut is too cautious in most cases.
Back to high school. One idea that seems to make sense for the opposing teams that Pulaski Academy plays, is that the player are sufficiently immature and inexperienced that they will wilt under pressure. So Pulaski's strategy seems geared at putting pressure on the other team and taking pressure off its team. They don't field punts, because a muff or a fumble appear too likely.
Given the recent success of Pulaski Academy, you might think that coaches at other schools would also embrace the approach. Know how many have done so? None.
* * * * *
On the NewsHour yesterday the concluding segment was an interview with Thomas Edsall, who had been a journalist and is now on the faculty at Columbia University. He has a new book, The Age of Austerity: How Scarcity Will Remake American Politics. The thesis is that at present and in the future politics will be about playing a zero-sum game (possibly a negative-sum game). Republicans/Conservatives are disposed to play this game better than Democrats/Liberals. The former don't care so much about the overall, in particular whether there are losers, so long as they are winners. The latter do care about the overall and about fairness.
In an economy that is growing, the Democrat/Liberal approach can work. But in a zero sum world, there will be losers. If they proceed as if it is otherwise, it will be they who are the losers. President Obama seems to have learned this lesson, but only painfully and after several attempts at bipartisan solutions that went nowhere.
Once it is acknowledged that it is perfectly acceptable to fight rather than negotiate, then demagoguery becomes an acceptable tactic and paying attention to facts more a burden than an obligation. Among the current candidates for President, Newt Gingrich is the master of demagoguery. He appears to be in a dead heat with Romney and his supporters are far more exuberant.
* * * * *
I don't know what the politics of Phil Knight are. Knight is the CEO and co-founder of Nike. He is also a Penn State alumnus and he spoke at the Memorial Service for Joe Paterno, getting a standing ovation from the crowd for saying that Paterno had done the right thing in the Sandusky matter and that the blame lay elsewhere. What Knight shares with Gingrich is not politics, but rather knowing how to rouse an angry audience.
* * * * *
In the book, What the Best College Teachers Do, Ken Bain teaches us that students don't know what to do when they confront evidence that contradicts their prior held world view. Perhaps it is surprising to learn that the initial student reaction is to deny the evidence. The world view has sanctity and deep down the student wants to preserve it. The excellent teacher understands the tension the student is under. With patience and persistence, the instructor nudges the student to reconsider his position. It would be good for that position to account for the evidence that is observed. Of course, in this case Bain is referring to an academic matter. When looking at circular motion the students are apt to have an Aristotelian view. A Newtonian perspective appears unnatural. There is a getting used to period necessary to take on the new perspective. There is leadership in helping students make the transition.
One might hope that having had such a lesson in college adults would then be open to the possibility that their perspective needs to change when the evidence implies a contradiction with a prior held view. Instead, it seems, for many of us our beliefs harden and evidence to the contrary gets ignored. Leadership has taken a holiday. Pandering becomes the order of the day.
During this segment they also had a bit with a University of Chicago economist doing Freakonomics work (it wasn't Steven Levitt). He said that in the pros, going for it on fourth down made sense when the ball was between the two forty yard line markers, even if it was fourth and eight. Coaches almost always punt in this case unless it is very late in the game or if they only have a yard to go. Punting is sub-optimal in this case.
They had a different segment, this one with Sean Payton, who is famous for going for the onside kick when the Saints were in the Super Bowl. Payton said, the pros were a lot different than high school. Agreed. But surely, Payton goes by the numbers, doesn't he? Not according to this segment. Payton goes with his gut. And the gut is too cautious in most cases.
Back to high school. One idea that seems to make sense for the opposing teams that Pulaski Academy plays, is that the player are sufficiently immature and inexperienced that they will wilt under pressure. So Pulaski's strategy seems geared at putting pressure on the other team and taking pressure off its team. They don't field punts, because a muff or a fumble appear too likely.
Given the recent success of Pulaski Academy, you might think that coaches at other schools would also embrace the approach. Know how many have done so? None.
* * * * *
On the NewsHour yesterday the concluding segment was an interview with Thomas Edsall, who had been a journalist and is now on the faculty at Columbia University. He has a new book, The Age of Austerity: How Scarcity Will Remake American Politics. The thesis is that at present and in the future politics will be about playing a zero-sum game (possibly a negative-sum game). Republicans/Conservatives are disposed to play this game better than Democrats/Liberals. The former don't care so much about the overall, in particular whether there are losers, so long as they are winners. The latter do care about the overall and about fairness.
In an economy that is growing, the Democrat/Liberal approach can work. But in a zero sum world, there will be losers. If they proceed as if it is otherwise, it will be they who are the losers. President Obama seems to have learned this lesson, but only painfully and after several attempts at bipartisan solutions that went nowhere.
Once it is acknowledged that it is perfectly acceptable to fight rather than negotiate, then demagoguery becomes an acceptable tactic and paying attention to facts more a burden than an obligation. Among the current candidates for President, Newt Gingrich is the master of demagoguery. He appears to be in a dead heat with Romney and his supporters are far more exuberant.
* * * * *
I don't know what the politics of Phil Knight are. Knight is the CEO and co-founder of Nike. He is also a Penn State alumnus and he spoke at the Memorial Service for Joe Paterno, getting a standing ovation from the crowd for saying that Paterno had done the right thing in the Sandusky matter and that the blame lay elsewhere. What Knight shares with Gingrich is not politics, but rather knowing how to rouse an angry audience.
* * * * *
In the book, What the Best College Teachers Do, Ken Bain teaches us that students don't know what to do when they confront evidence that contradicts their prior held world view. Perhaps it is surprising to learn that the initial student reaction is to deny the evidence. The world view has sanctity and deep down the student wants to preserve it. The excellent teacher understands the tension the student is under. With patience and persistence, the instructor nudges the student to reconsider his position. It would be good for that position to account for the evidence that is observed. Of course, in this case Bain is referring to an academic matter. When looking at circular motion the students are apt to have an Aristotelian view. A Newtonian perspective appears unnatural. There is a getting used to period necessary to take on the new perspective. There is leadership in helping students make the transition.
One might hope that having had such a lesson in college adults would then be open to the possibility that their perspective needs to change when the evidence implies a contradiction with a prior held view. Instead, it seems, for many of us our beliefs harden and evidence to the contrary gets ignored. Leadership has taken a holiday. Pandering becomes the order of the day.
Wednesday, January 25, 2012
Some markets perhaps shouldn't exist
I'm uncomfortable putting the term "market maker" to what bookies do, but I suppose that is their function. I'm also not too happy that fans express their team loyalty by betting on the team. I've got no problem with a neighborly
office pool as more social activity than anything else. But in this piece they're talking about big payouts because of very high odds and a high volume of transactions. I don't quite understand why the bookies are exposed this way, but it seems to me other possible shenanigans can readily result as a consequence of such a market.
Monday, January 23, 2012
Google Apps For Education And Blogger
Some technology is hard to test in advance, especially when it is "outside" what the Campus supports. Going into this semester, I "thought" that while Blogger wasn't part of the Google Apps set of applications, students could access Blogger using their Campus Gmail address. I thought I read that somewhere a couple of years ago. (Who knows if I read it or not? Memory and wishing it were so have merged so much for me at this point.) But in a quick search for this today, I found this from Helen Barrett of ePortfolio fame, which conveys to me that the same login and password for Google Apps should work for Blogger.
I'm requiring that my students blog this semester. And I suggested that they use Blogger, though I did offer the alternative that the students use the class Moodle site so only class members get to see the posts. One student opted for that. A different student said that Blogger would not accept their Campus login and password, though the student can access Gmail that way. I will have to verify that. If it is really true, it is a limitation in using Google Apps for instruction.
I've been told that the contract with Google allows for faculty access of Google Apps, but given the big push here on Unified Communications, the Campus has not yet rolled out the service, so I can't test this myself. However, even if it did I wonder if it still would be better to use my own Gmail account. I don't know, for example, whether the Campus account remains active even when I'm not teaching for them. And while I've got not intentions at present to teach elsewhere, the possibility exists. My prof.arvan account has YouTube and Google Docs content that could readily be used for instruction elsewhere. People around the globe access that content now.
On Campus media specialists want instructors to use Campus supported applications for branding reasons. There is some point to that view. But lots of instructors are adjuncts and there are also faculty without tenure who might end up at another university in the not too distant future. How would they best be served? If they used a Campus Google Apps account, can they readily port the content if necessary to do so?
Blogger does integrate completely with regular Gmail accounts. So from the instructor's point of view it is unclear to me what the advantage is in teaching using the Campus account. I do see the advantage in student's using this account - particularly so that instructors know who they are. The Campus provides students with a NetID that is unique at the Campus level. It need not be unique globally, however. A personal Gmail address that does not relate to the Campus NetID makes it harder for the instructor to identify the students. Many students have figured this out and have personal Gmail that clearly identifies them. It's a discretionary matter to them. In small classes, that's fine. In very large classes, however, where there can be a handful of outliers, that would create a nightmare.
I should also note that at the Campus level we never embraced ePortfolio applications, not because we were opposed to them at an intellectual level, but rather because it would have been an additional resource commitment, one we could ill afford. I don't know what the specialists in this area think now about blogs as ePortfolios, but students might come to this on their own if they were exposed to blogging in classes early on. It's something to ponder.
I'm requiring that my students blog this semester. And I suggested that they use Blogger, though I did offer the alternative that the students use the class Moodle site so only class members get to see the posts. One student opted for that. A different student said that Blogger would not accept their Campus login and password, though the student can access Gmail that way. I will have to verify that. If it is really true, it is a limitation in using Google Apps for instruction.
I've been told that the contract with Google allows for faculty access of Google Apps, but given the big push here on Unified Communications, the Campus has not yet rolled out the service, so I can't test this myself. However, even if it did I wonder if it still would be better to use my own Gmail account. I don't know, for example, whether the Campus account remains active even when I'm not teaching for them. And while I've got not intentions at present to teach elsewhere, the possibility exists. My prof.arvan account has YouTube and Google Docs content that could readily be used for instruction elsewhere. People around the globe access that content now.
On Campus media specialists want instructors to use Campus supported applications for branding reasons. There is some point to that view. But lots of instructors are adjuncts and there are also faculty without tenure who might end up at another university in the not too distant future. How would they best be served? If they used a Campus Google Apps account, can they readily port the content if necessary to do so?
Blogger does integrate completely with regular Gmail accounts. So from the instructor's point of view it is unclear to me what the advantage is in teaching using the Campus account. I do see the advantage in student's using this account - particularly so that instructors know who they are. The Campus provides students with a NetID that is unique at the Campus level. It need not be unique globally, however. A personal Gmail address that does not relate to the Campus NetID makes it harder for the instructor to identify the students. Many students have figured this out and have personal Gmail that clearly identifies them. It's a discretionary matter to them. In small classes, that's fine. In very large classes, however, where there can be a handful of outliers, that would create a nightmare.
I should also note that at the Campus level we never embraced ePortfolio applications, not because we were opposed to them at an intellectual level, but rather because it would have been an additional resource commitment, one we could ill afford. I don't know what the specialists in this area think now about blogs as ePortfolios, but students might come to this on their own if they were exposed to blogging in classes early on. It's something to ponder.
Monday, January 16, 2012
The Finance Guys Chasing the New Millionaires
When I was in my late twenties I used Fidelity. I did have a financial adviser and didn't want one. Do these new techno-millionaires actually want the help? How will they determine whether it is worth it. I would guess that one or two folks who are both geek and financial wiz would write some apps and corner this market.
Sunday, January 15, 2012
Hail Mary
This Giants fan is very happy. The way the first half ended, I was incredibly pumped. It's as if the Packers gave the Giants that touchdown, with their timeout call. I'm not sure what was up with that. The earlier onside kick was also more than a bit strange. But Eli to Hakeem Nicks at the end of the half was magical. The Giants still needed to score in the second half to secure the victory, but they were clearly in control.
The Pack had a large number of dropped balls and turned the ball over more times than one should have expected. For about 50 minutes, Rodgers played well enough to win, but the rest of the Packers did not. Then everything imploded on them.
I thought the Giants would play well in this game, but really didn't know if they'd win it. I have no read on next week's game with the 49ers. Somewhere during the third quarter when it started to look like the Giants would win, I had the premonition that it would again be the Giants and Patriots in the Super Bowl, but this time the Pats would win because the Giants won the regular season game. That's a weird way of thinking about causality and like most fans, getting too far ahead of events.
I just hope it's a good game next week.
The Pack had a large number of dropped balls and turned the ball over more times than one should have expected. For about 50 minutes, Rodgers played well enough to win, but the rest of the Packers did not. Then everything imploded on them.
I thought the Giants would play well in this game, but really didn't know if they'd win it. I have no read on next week's game with the 49ers. Somewhere during the third quarter when it started to look like the Giants would win, I had the premonition that it would again be the Giants and Patriots in the Super Bowl, but this time the Pats would win because the Giants won the regular season game. That's a weird way of thinking about causality and like most fans, getting too far ahead of events.
I just hope it's a good game next week.
A Conservative columnist writing for Liberal readers and spewing bunk
I read Ross Douthat's column in the New York Times pretty regularly. He's usually thoughtful, which I appreciate, although I frequently find myself in disagreement with him, such as here. In this post I'm going to take him to task because in his most recent column, a snippet of which is below as is a link to the full piece, most of what he says is utter nonsense.
Devotees of Adam Smith might have a hard time seeing the conceptual problem. They equate the generation of private profit with the creation of social benefit. Most Conservatives revere Smith, and therein lies a big part of the problem, because this all seems tautological to them. One needs a different way to think about the issues, one where making private profit may lead to social good, but that is not a logical necessity. For that one needs to admit the possibility that private profit and social harm can co-exist.
In neoclassical economics, that is possible in the presence of negative externalities: pollution, global warming, that sort of thing. More recently Robert Frank has been writing about a Darwinian rather than Smithian approach to economic competition. The Darwinian approach admits the possibility of a mutation creating advantage for the individual and hence it is likely to propagate, while that same mutation is deleterious for the species.
One advantage of what Frank says is that when looking at individual actors we can focus on their own advantage as providing the motivation. In other words, private equity firms were motivated by the ability to make a buck. That was the goal. The goal wasn't to save American industry from increased global competition. Perhaps that was the consequence, but it certainly wasn't the goal. I hope Conservatives and Liberals alike can agree that the individual motive in Capitalism is profit.
Having separated the individual motive from the good of the system, one must look for systemic reasons as to why the behavior is beneficial (or pernicious). I'll advance several of those here.
Leveraged buyouts, which is what Private Equity firms such as Bain engage in, entail the embrace of certain risks. One argument for why they may be systematically beneficial is that the economy may not be taking sufficient risk. Risk averse individual players, even comparatively large firms, may go for the sure thing rather than take on additional risk. Because of limited liability, the leveraged buyout affords the possibility of greater embrace of opportunities that have a big potential upside. If each individual risk has a high expected return then in aggregate the taking on of more of such risk can lead to a big benefit socially.
However, the argument can also be made in reverse. This is done, for example, in John Cassidy's book How Markets Fail. Individual risks may have negative expected return, but via leverage the individuals taking the risk may be shielded from the downside. Investors who are shielded from the downside risk may indeed have a preference for highly risky investments. When this is the case it will be deleterious in aggregate, even when the risks are independent. If those risk are highly correlated, this can be the source of bubbles, the result of which can be catastrophic.
Let's turn to a different, but related argument, attributed to Clayton Christensen. In this argument, highly successful firms become too wedded to their existing product lines. Those products generate profit in the near term, but the products have limited shelf-life. Upstarts, that provide offerings which are considerably poorer in quality at present, compete by selling to a certain fringe of the market that wants cheap stuff. Over time the upstarts move down the learning curve and ultimately have product that is better in quality than the what the big guys provide, at which time they overtake the incumbents and become the dominant firms. Then the cycle repeats. There are some obvious examples that fit the bill. In 1980 IBM was clearly the dominant computer firm and Microsoft was an upstart. Before 1990, Microsoft had overtaken IBM. IBM was primarily in the mainframe business. Microsoft concentrated on software for the PC. In 1980 the PC was exotic. In 1990, it was ubiquitous.
The Christensen story is Darwinian in that many in 1980 couldn't predict the dominance of the PC ten years hence. The Christensen story is also about product market competition. That's where Schumpeterian "creative destruction" happens. If Douthat and other Conservatives, want to argue that leveraged buyouts were necessary (and remain necessary) into the future, they have to argue that somehow the product market type of creative destruction wasn't working well. A charitable reading of the Douthat column is that the product market version worked fine but the incumbents were all American firms while the upstarts were all foreign firms. So we needed a different version of upstart to keep the success domestically. That different version is via the financial capital market.
This is a very troublesome story. Note that in the Christensen story the upstarts can fail, and quite often they do fail. New small businesses exit at a very high rate. The upstarts succeed only when they get a toehold and then when they subsequently innovate faster than the incumbents. Nobody knows ahead of time that the upstarts will do this. And, near as I can tell, the private equity firms don't know either. What they do know, via the acquired firm's balance sheet, is that the incumbent is profitable, so there is money that can be taken out of the venture.
Let me turn to a third systematic issue, one I discussed in my critique of the movie Inside Job. That is to look at the indirect consequence of leveraged buyouts, which are to be found by looking at firms that are candidates to be acquired but that take defensive measures ahead of time to ward off acquisition. A priori, those defensive measures could be socially beneficial or they could be socially pernicious. It can go either way. In that other piece I argued that the consequences were mainly pernicious. The point is that hardly anybody can read a firm's balance sheet to understand its position in the medium term, let alone the long term. This puts enormous pressure on the near term, generating good current earnings and ensuring that extends for the the next few quarters. But that sort of myopia is deleterious to the long run health of the economy. Further, it encourages bubble-like thinking by making it appear that high growth rates are achievable.
Still a different way to consider the systematic impacts is from the vantage of the Engineer versus the MBA in determining the direction for corporate America. This tension clearly existed before LBOs came into existence. A very good read on this point is David Halberstam's book, The Reckoning. In his framing, company success can be measured (a) by how innovative it is or (b) by how healthy it's balance sheet looks. Viewed this way, the LBO can be conceived as a power shift from the internal Engineers to external MBAs. Again, this can be good or bad a priori. The good part is easy conceptually. Increasing the bottom line on the balance sheet makes things better. The bad part is harder conceptually. If the pernicious consequence is to be enabled as a possibility in our thinking, it must mean there are important aspects of what the firm does that either are not captured at all on the balance sheet or are horribly mismeasured on the balance sheet. The issues are illustrated nicely in Malcolm Gladwell's piece, Overdrive: Who Really Rescued General Motors.
Let me close by noting that David Brooks on the News Hour last Friday also concluded that private equity firms such as Bain have been good for the economy overall, even if in some instances the acquired firm has gone belly up. Here I wish thoughtful Conservatives would recognize that first, they have a tendency to reach this conclusion and second, they are likely doing this with Smith or Schumpeter arguments that don't prove anything. They have an opportunity now to make this debate much more informative because surely the attacks on Romney regarding Bain will persist and just as surely Conservatives want to defend Capitalism. Neither of these are sufficient in themselves to make the case. A more direct look at consequences is needed.
Devotees of Adam Smith might have a hard time seeing the conceptual problem. They equate the generation of private profit with the creation of social benefit. Most Conservatives revere Smith, and therein lies a big part of the problem, because this all seems tautological to them. One needs a different way to think about the issues, one where making private profit may lead to social good, but that is not a logical necessity. For that one needs to admit the possibility that private profit and social harm can co-exist.
In neoclassical economics, that is possible in the presence of negative externalities: pollution, global warming, that sort of thing. More recently Robert Frank has been writing about a Darwinian rather than Smithian approach to economic competition. The Darwinian approach admits the possibility of a mutation creating advantage for the individual and hence it is likely to propagate, while that same mutation is deleterious for the species.
One advantage of what Frank says is that when looking at individual actors we can focus on their own advantage as providing the motivation. In other words, private equity firms were motivated by the ability to make a buck. That was the goal. The goal wasn't to save American industry from increased global competition. Perhaps that was the consequence, but it certainly wasn't the goal. I hope Conservatives and Liberals alike can agree that the individual motive in Capitalism is profit.
Having separated the individual motive from the good of the system, one must look for systemic reasons as to why the behavior is beneficial (or pernicious). I'll advance several of those here.
Leveraged buyouts, which is what Private Equity firms such as Bain engage in, entail the embrace of certain risks. One argument for why they may be systematically beneficial is that the economy may not be taking sufficient risk. Risk averse individual players, even comparatively large firms, may go for the sure thing rather than take on additional risk. Because of limited liability, the leveraged buyout affords the possibility of greater embrace of opportunities that have a big potential upside. If each individual risk has a high expected return then in aggregate the taking on of more of such risk can lead to a big benefit socially.
However, the argument can also be made in reverse. This is done, for example, in John Cassidy's book How Markets Fail. Individual risks may have negative expected return, but via leverage the individuals taking the risk may be shielded from the downside. Investors who are shielded from the downside risk may indeed have a preference for highly risky investments. When this is the case it will be deleterious in aggregate, even when the risks are independent. If those risk are highly correlated, this can be the source of bubbles, the result of which can be catastrophic.
Let's turn to a different, but related argument, attributed to Clayton Christensen. In this argument, highly successful firms become too wedded to their existing product lines. Those products generate profit in the near term, but the products have limited shelf-life. Upstarts, that provide offerings which are considerably poorer in quality at present, compete by selling to a certain fringe of the market that wants cheap stuff. Over time the upstarts move down the learning curve and ultimately have product that is better in quality than the what the big guys provide, at which time they overtake the incumbents and become the dominant firms. Then the cycle repeats. There are some obvious examples that fit the bill. In 1980 IBM was clearly the dominant computer firm and Microsoft was an upstart. Before 1990, Microsoft had overtaken IBM. IBM was primarily in the mainframe business. Microsoft concentrated on software for the PC. In 1980 the PC was exotic. In 1990, it was ubiquitous.
The Christensen story is Darwinian in that many in 1980 couldn't predict the dominance of the PC ten years hence. The Christensen story is also about product market competition. That's where Schumpeterian "creative destruction" happens. If Douthat and other Conservatives, want to argue that leveraged buyouts were necessary (and remain necessary) into the future, they have to argue that somehow the product market type of creative destruction wasn't working well. A charitable reading of the Douthat column is that the product market version worked fine but the incumbents were all American firms while the upstarts were all foreign firms. So we needed a different version of upstart to keep the success domestically. That different version is via the financial capital market.
This is a very troublesome story. Note that in the Christensen story the upstarts can fail, and quite often they do fail. New small businesses exit at a very high rate. The upstarts succeed only when they get a toehold and then when they subsequently innovate faster than the incumbents. Nobody knows ahead of time that the upstarts will do this. And, near as I can tell, the private equity firms don't know either. What they do know, via the acquired firm's balance sheet, is that the incumbent is profitable, so there is money that can be taken out of the venture.
Let me turn to a third systematic issue, one I discussed in my critique of the movie Inside Job. That is to look at the indirect consequence of leveraged buyouts, which are to be found by looking at firms that are candidates to be acquired but that take defensive measures ahead of time to ward off acquisition. A priori, those defensive measures could be socially beneficial or they could be socially pernicious. It can go either way. In that other piece I argued that the consequences were mainly pernicious. The point is that hardly anybody can read a firm's balance sheet to understand its position in the medium term, let alone the long term. This puts enormous pressure on the near term, generating good current earnings and ensuring that extends for the the next few quarters. But that sort of myopia is deleterious to the long run health of the economy. Further, it encourages bubble-like thinking by making it appear that high growth rates are achievable.
Still a different way to consider the systematic impacts is from the vantage of the Engineer versus the MBA in determining the direction for corporate America. This tension clearly existed before LBOs came into existence. A very good read on this point is David Halberstam's book, The Reckoning. In his framing, company success can be measured (a) by how innovative it is or (b) by how healthy it's balance sheet looks. Viewed this way, the LBO can be conceived as a power shift from the internal Engineers to external MBAs. Again, this can be good or bad a priori. The good part is easy conceptually. Increasing the bottom line on the balance sheet makes things better. The bad part is harder conceptually. If the pernicious consequence is to be enabled as a possibility in our thinking, it must mean there are important aspects of what the firm does that either are not captured at all on the balance sheet or are horribly mismeasured on the balance sheet. The issues are illustrated nicely in Malcolm Gladwell's piece, Overdrive: Who Really Rescued General Motors.
Let me close by noting that David Brooks on the News Hour last Friday also concluded that private equity firms such as Bain have been good for the economy overall, even if in some instances the acquired firm has gone belly up. Here I wish thoughtful Conservatives would recognize that first, they have a tendency to reach this conclusion and second, they are likely doing this with Smith or Schumpeter arguments that don't prove anything. They have an opportunity now to make this debate much more informative because surely the attacks on Romney regarding Bain will persist and just as surely Conservatives want to defend Capitalism. Neither of these are sufficient in themselves to make the case. A more direct look at consequences is needed.
Thursday, January 12, 2012
Delivering an outlier great performance
One thing that strikes you in seeing Brandon Paul do post-game interviews - he has his head screwed on right. Having the game of his career, he starts out talking about his early turnovers. They were dreadful. He had four in the first few minutes. That he could play in a truly divine state thereafter is a lesson. You have to take the bad with the good. Suppose you do that. What should you expect moving forward about future performance?
If the outlier great performance sets the norm for future play, Brandon Paul is the next incarnation of Michael Jordan. Supposedly, there were many NBA scouts in the stands for Tuesday's Illini-OSU game. They were there to look at other players. If Paul can replicate his performance yesterday, and do so with some regularity, he is a lottery pick, perhaps the number one choice in the draft. The scouts have to be thinking that too.
In one of the interviews I watched, Paul talked about forgetting entirely the last play, or the last game. It will have no direct impact on what's immediately ahead. To always be in the moment, and perform admirably on a consistent basis is something well beyond ordinary human capacity. Most of us can't do it. To always be in the moment and perform admirably on occasion is still remarkably high quality stuff. Staying in the moment instead of getting ahead of ourselves or waxing nostalgic is very had to do.
There is a question on a team of how much the individual should just blend in and how much he should assert himself. This question has been vexing for Paul. He clearly has the most athletic ability, evidenced by his vertical leaping. But he has been rather inconsistent. DJ Richardson has been the more consistent shooter. Sam Maniscalco is the only senior starter and the point guard. So both of them should be leaders on the team. Recently, Joseph Bertrand has produced outlier excellence. On that basis he too should be a leader. These are reasons for Paul to blend in. But Maniscalco and Richardson have been hurt and Bertrand started to look over matched in the game. On paper, Ohio State was the better team. It definitely was Paul's time to shine.
Were you to forecast what's next for Paul, you'd be right to include his entire performance this season as the basis, not just the Ohio State game. On offense he's been erratic. His defense, however, has been more consistently good. His defense keys his offense. Excellence on one end of the court allows him to relax at the other end. The good offensive performance comes after some defensive excellence, seemingly allowing him to no longer feel he has to prove himself so he can just play. It would be great if he could do that at the start of the game. Alas he's human and thus too self-conscious at the outset. He's apt to make bonehead plays that way and one bad turn leads to another.
A sensible forecast predicts regression to mean. Paul must intuit that. And yet he's also witnessed the full upside of his own potential. It will be fascinating to watch how he deals with this the rest of the season. There are probably basketball skill things he can improve on to increase his consistency on offense. But I suspect for him most of this will be a mental battle, the outcome of which will be determined by what he really wants and how he learns to live with himself when he is unsatisfied with his own performance.
If the outlier great performance sets the norm for future play, Brandon Paul is the next incarnation of Michael Jordan. Supposedly, there were many NBA scouts in the stands for Tuesday's Illini-OSU game. They were there to look at other players. If Paul can replicate his performance yesterday, and do so with some regularity, he is a lottery pick, perhaps the number one choice in the draft. The scouts have to be thinking that too.
In one of the interviews I watched, Paul talked about forgetting entirely the last play, or the last game. It will have no direct impact on what's immediately ahead. To always be in the moment, and perform admirably on a consistent basis is something well beyond ordinary human capacity. Most of us can't do it. To always be in the moment and perform admirably on occasion is still remarkably high quality stuff. Staying in the moment instead of getting ahead of ourselves or waxing nostalgic is very had to do.
There is a question on a team of how much the individual should just blend in and how much he should assert himself. This question has been vexing for Paul. He clearly has the most athletic ability, evidenced by his vertical leaping. But he has been rather inconsistent. DJ Richardson has been the more consistent shooter. Sam Maniscalco is the only senior starter and the point guard. So both of them should be leaders on the team. Recently, Joseph Bertrand has produced outlier excellence. On that basis he too should be a leader. These are reasons for Paul to blend in. But Maniscalco and Richardson have been hurt and Bertrand started to look over matched in the game. On paper, Ohio State was the better team. It definitely was Paul's time to shine.
Were you to forecast what's next for Paul, you'd be right to include his entire performance this season as the basis, not just the Ohio State game. On offense he's been erratic. His defense, however, has been more consistently good. His defense keys his offense. Excellence on one end of the court allows him to relax at the other end. The good offensive performance comes after some defensive excellence, seemingly allowing him to no longer feel he has to prove himself so he can just play. It would be great if he could do that at the start of the game. Alas he's human and thus too self-conscious at the outset. He's apt to make bonehead plays that way and one bad turn leads to another.
A sensible forecast predicts regression to mean. Paul must intuit that. And yet he's also witnessed the full upside of his own potential. It will be fascinating to watch how he deals with this the rest of the season. There are probably basketball skill things he can improve on to increase his consistency on offense. But I suspect for him most of this will be a mental battle, the outcome of which will be determined by what he really wants and how he learns to live with himself when he is unsatisfied with his own performance.
Wednesday, January 11, 2012
What to make of the New Hampshire Primary results
Dana Milbank had an interesting column today about ordinary people not showing up much at the campaign events in New Hampshire, but there were droves of reporters following the candidates. His conclusion was that the voters are simply less engaged this time around.
From here I counted about 4000 more voters than in 2008, approximately a 1.7% increase. (The total participation is not very large, in a national context.) Last night on the News Hour they talked about how Democrats/Independent voters were participating in the Republican Primary this time around. Huntsman was doing well with these people. But I don't see any way to determine the magnitude of this effect, given the information we are provided. Maybe exit polling data will shed some light on this. Some of that is on the CNN site. There they report that Democrats were 4% of the Republican Primary this time around.
Ross Douthat also had an interesting blog post about the candidates competing for second place, imitating like strategies from 2008, which weren't successful. Of course that was Romney in second place four years ago, and today he is the frontrunner. But Douthat dismissed any of the others in the current field as potential front runners for years from now, if President Obama wins reelection. I wonder if any of them are competing for the Vice President slot. Would a Romney/Santorum ticket, for example, energize the base, or simply repel independent voters?
The weather has been remarkably mild. Huntsman seems to appear outside without a coat. Presumably, the impact of that would be to increase participation.
On can envision the primary process as hardening the eventual winner, better preparing him for the Presidential campaign. But the presence of Super PACs makes it look like there will be much venom and vitriol among the candidates, turning off many potential voters.
Huffington Post did report that Obama won on the Democrats side, but I couldn't find the vote totals. It would be interesting to looks at overall participation and compare that with 2008. I haven't seed that reported.
From here I counted about 4000 more voters than in 2008, approximately a 1.7% increase. (The total participation is not very large, in a national context.) Last night on the News Hour they talked about how Democrats/Independent voters were participating in the Republican Primary this time around. Huntsman was doing well with these people. But I don't see any way to determine the magnitude of this effect, given the information we are provided. Maybe exit polling data will shed some light on this. Some of that is on the CNN site. There they report that Democrats were 4% of the Republican Primary this time around.
Ross Douthat also had an interesting blog post about the candidates competing for second place, imitating like strategies from 2008, which weren't successful. Of course that was Romney in second place four years ago, and today he is the frontrunner. But Douthat dismissed any of the others in the current field as potential front runners for years from now, if President Obama wins reelection. I wonder if any of them are competing for the Vice President slot. Would a Romney/Santorum ticket, for example, energize the base, or simply repel independent voters?
The weather has been remarkably mild. Huntsman seems to appear outside without a coat. Presumably, the impact of that would be to increase participation.
On can envision the primary process as hardening the eventual winner, better preparing him for the Presidential campaign. But the presence of Super PACs makes it look like there will be much venom and vitriol among the candidates, turning off many potential voters.
Huffington Post did report that Obama won on the Democrats side, but I couldn't find the vote totals. It would be interesting to looks at overall participation and compare that with 2008. I haven't seed that reported.
Philosophe
Aujourd'hui j'ai soixante moins trois ans.
Sometimes, subtraction is better than addition.
Tuesday, January 10, 2012
Eli versus Discount Double Check
I wanted to write something about the game next Sunday, without actually writing something about the game. Wary of The Jinx I was looking for a different angle. So I thought to compare the quarterbacks as they do commercials and otherwise appear on TV. Eli is particularly bland in a post game interview. After the lopsided win over the Falcons, he seemed to go out of his way to avoid saying anything controversial. On the other side of the field, they've shown that State Farm commercial so much around here that it seems rather obnoxious. I know they've got a sequel now, and I saw that some Packer fans love it. But it didn't do anything for me. Presumably State Farm wants customers who are not Packer fans.
I did my "research" on this by going to YouTube and watching more spots than I had originally intended. What I learned was this. The Manning family is a franchise. They market each other really well and are quite professional about it. For example, there is an interview that Archie is doing on some early morning show, and Eli is calling in before he goes to football practice. There are at least two ESPN spots with Eli and Peyton, that plays on the sibling rivalry. That gives Eli a big advantage. I watched Eli on Letterman the week after the Super Bowl win in 2008. The audience was really pumped up for him, so he was surprisingly good, comparing the victory to the Miracle On Ice.
Then I watched Aaron Rodgers, first on the Jimmy Kimmel show, then with Ellen Degeneres. He too was pretty good. Apparently he's quite a prankster, at least in part to keep his teammates loose. He seemed to enjoy himself in this setting.
So, on this, I'd say it's a tie. They'll have to find some other way to seek advantage.
I did my "research" on this by going to YouTube and watching more spots than I had originally intended. What I learned was this. The Manning family is a franchise. They market each other really well and are quite professional about it. For example, there is an interview that Archie is doing on some early morning show, and Eli is calling in before he goes to football practice. There are at least two ESPN spots with Eli and Peyton, that plays on the sibling rivalry. That gives Eli a big advantage. I watched Eli on Letterman the week after the Super Bowl win in 2008. The audience was really pumped up for him, so he was surprisingly good, comparing the victory to the Miracle On Ice.
Then I watched Aaron Rodgers, first on the Jimmy Kimmel show, then with Ellen Degeneres. He too was pretty good. Apparently he's quite a prankster, at least in part to keep his teammates loose. He seemed to enjoy himself in this setting.
So, on this, I'd say it's a tie. They'll have to find some other way to seek advantage.
Monday, January 09, 2012
Possibility and Optimism
My economics training has me thinking about decision making under uncertainty as determined by subjective probability. But as an old dog I think that's the wrong trick so I'm going to suggest something else here. I don't really care about likelihood, at least if it is above a certain threshold. What I care about, is that there is a chance, a decent chance. Then I can get pumped up about that and focused on it. Here are some examples.
* * * * *
The Illini Men's Basketball team has been playing mediocre, with one exception, the offense of Joseph Bertrand. In the last game, a squeaker home win over Nebraska, Bertrand was 11 for 12 from the field. None of those were three point shots. They were all runners/floaters. Mark Jackson, when he was point guard of the Knicks way back when, used to shoot this sort of shot and then I really didn't like it, it seemed somewhat out of control. Bertrand, in contrast, is an artist with this shot. It looks like it can't miss. The part that is really hard to figure is that Bertrand has only started 3 games, and wasn't even the sixth man earlier in the season. But he has come on like gangbusters since the Mizzou game, where he kept us in that one.
Tomorrow night we play Ohio State. On paper, they should trample us. But I'm thinking upset. Yesterday I read somewhere that the reason Bertrand has been so successful is that the opponents have been double teaming Meyers Leonard and it allows Bertrand to get open. Leonard has actually not looked too good the last few games, except on a handful of plays. One wonders if Ohio State will pay more attention to Bertrand and therefore that Leonard will be freer to perform up to snuff. And one also wonders if Bertrand can keep up with the high level of play in spite of the attention he will garner. He moves and that makes him harder to defend.
We'll see tomorrow night.
* * * * *
Politics has seemed increasingly dreary as of late. Yet Bill Keller has a column today that perked me right up. It's about Hillary Clinton becoming the Vice Presidential candidate in a scenario that has Joe Biden ultimately becoming Secretary of State. I hadn't given it any consideration previously, but it sounds to me like a really good idea, not just making it much more likely that President Obama would win reelection, but also generating substantial coattails for Congressional elections. Keller points out that Joe Biden is 5 years older than Hillary Clinton and for this reason, if no other, he is not a likely Presidential candidate in 2016. Clinton would be the front runner. And right now she would put a lot of spark into an otherwise dispirited electorate.
* * * * *
I'm in the middle of reading Creative Experience by Mary Parker Follett. I am enjoying it a lot. It may very well be that the Progressive movement of the early part of the twentieth century provides the political philosophy with which I'm most comfortable. Follett is a contemporary of Herbert Croly. I read his book, The Promise of American Life, for a course on American Political Thought that I took when I was an undergraduate. She acknowledges him in the introduction to Creative Experience.
Follett argues for a focus on the whole, which she claims is different (not better, just different) from its constituent parts. This requires an understanding of the underlying dynamic. Things are always in a state of flux. Static conception are pernicious because they masks this. She also views subject and object as co-participants in shaping the whole. Creative experience flows out of that.
I'm wondering whether Follett's work might be teachable to undergrads, in a course on leadership, and if I would be able to teach it. I'm not sure, but it seems possible. Likewise, I wonder if peers would enjoy reading it. Is it my peculiar disposition that makes this book appealing, or perhaps the times in which we live? I "found" this book by reading On Not Being Able To Paint which, in turn, I found by reading Between the Devil and The Dragon. This seems to me an interesting trilogy for a leadership class.
* * * * *
I wonder if we can consciously allocate our time to the possible and reduce time spent on blockages or on procrastination. I'm going to try to allocate more of my time this way and see if I can stick to it.
* * * * *
The Illini Men's Basketball team has been playing mediocre, with one exception, the offense of Joseph Bertrand. In the last game, a squeaker home win over Nebraska, Bertrand was 11 for 12 from the field. None of those were three point shots. They were all runners/floaters. Mark Jackson, when he was point guard of the Knicks way back when, used to shoot this sort of shot and then I really didn't like it, it seemed somewhat out of control. Bertrand, in contrast, is an artist with this shot. It looks like it can't miss. The part that is really hard to figure is that Bertrand has only started 3 games, and wasn't even the sixth man earlier in the season. But he has come on like gangbusters since the Mizzou game, where he kept us in that one.
Tomorrow night we play Ohio State. On paper, they should trample us. But I'm thinking upset. Yesterday I read somewhere that the reason Bertrand has been so successful is that the opponents have been double teaming Meyers Leonard and it allows Bertrand to get open. Leonard has actually not looked too good the last few games, except on a handful of plays. One wonders if Ohio State will pay more attention to Bertrand and therefore that Leonard will be freer to perform up to snuff. And one also wonders if Bertrand can keep up with the high level of play in spite of the attention he will garner. He moves and that makes him harder to defend.
We'll see tomorrow night.
* * * * *
Politics has seemed increasingly dreary as of late. Yet Bill Keller has a column today that perked me right up. It's about Hillary Clinton becoming the Vice Presidential candidate in a scenario that has Joe Biden ultimately becoming Secretary of State. I hadn't given it any consideration previously, but it sounds to me like a really good idea, not just making it much more likely that President Obama would win reelection, but also generating substantial coattails for Congressional elections. Keller points out that Joe Biden is 5 years older than Hillary Clinton and for this reason, if no other, he is not a likely Presidential candidate in 2016. Clinton would be the front runner. And right now she would put a lot of spark into an otherwise dispirited electorate.
* * * * *
I'm in the middle of reading Creative Experience by Mary Parker Follett. I am enjoying it a lot. It may very well be that the Progressive movement of the early part of the twentieth century provides the political philosophy with which I'm most comfortable. Follett is a contemporary of Herbert Croly. I read his book, The Promise of American Life, for a course on American Political Thought that I took when I was an undergraduate. She acknowledges him in the introduction to Creative Experience.
Follett argues for a focus on the whole, which she claims is different (not better, just different) from its constituent parts. This requires an understanding of the underlying dynamic. Things are always in a state of flux. Static conception are pernicious because they masks this. She also views subject and object as co-participants in shaping the whole. Creative experience flows out of that.
I'm wondering whether Follett's work might be teachable to undergrads, in a course on leadership, and if I would be able to teach it. I'm not sure, but it seems possible. Likewise, I wonder if peers would enjoy reading it. Is it my peculiar disposition that makes this book appealing, or perhaps the times in which we live? I "found" this book by reading On Not Being Able To Paint which, in turn, I found by reading Between the Devil and The Dragon. This seems to me an interesting trilogy for a leadership class.
* * * * *
I wonder if we can consciously allocate our time to the possible and reduce time spent on blockages or on procrastination. I'm going to try to allocate more of my time this way and see if I can stick to it.
Sunday, January 08, 2012
Counting Your Chickens Too Early
If the Giants are good enough and lucky enough to win next week, where they most certainly will be the underdog, there will then be ample time to make comparisons with the playoffs in January 2008. Today we should just enjoy the win. Folks have a tendency of getting ahead of themselves.
Friday, January 06, 2012
Fra-jeel-ee
It's now thirty years since Sherwin Rosen published his piece on the Economics of Superstars, a theoretical argument that income rewards disproportionately the most talented or most charismatic in a field, with the ability to distribute services to customers the limitation in the generation of such rewards. At the time of writing that piece, Rosen probably didn't know of Bill Gates. Surely Rosen didn't anticipate the Internet era in 1981. Yet if you're looking for prescience among economists, there it is. Over time, as we've moved to the knowledge economy, an increasing amount of economic activity has become subject to a Rosen-style argument. And with that you have an economic theory of rising inequality, the huge wealth of the 0.1% a consequence of the communications and computing revolution.
Tyler Cowen jumps onto the Rosen bandwagon in his essay The Inequality that Matters. It is a piece that rubbed me the wrong way and here I will take issue with it. Cowen's conclusion is that indeed in the Financial Sector of the economy the huge wealth of the people at the top is troublesome, but elsewhere it is fine and what you'd like to see. And at the bottom of the income distribution, well, things aren't so bad really. It's a pretty picture, but I think he's wrong on both counts.
At the bottom of the distribution, there is this recent piece about the near poor, who together with the poor constitute one third of the entire population. Further, many of the near poor are in two-parent households and are white, full time workers. It's just that their jobs don't afford them much of an income. They live paycheck to paycheck, with essentially no margin for income disruption. Cowen uses a pejorative, "threshold earner," to characterize many low income people. Presumably, these people earn just up to a threshold and then choose to not work beyond that. If it were true, this would make low income a matter of choice and therefore not a source of public concern or public policy. The piece about the near poor, however, makes clear that the big issue is opportunities for such people to make a decent living. Many were middle class and have since slid into this more precarious state. Capitalism isn't doing well by these people, who are struggling to make it. In this sense capitalism is itself fragile. One can hope the problem is due to the business cycle and is not a long term structural issue. With the economy in the doldrums, it is hard to tell.
Cowen also misses the boat on income generation at the high end of the distribution. He points out first that pre-tax income was far more unequal under Bush than it was thirty years earlier. So it can't be the Bush tax cuts that explain this inequality. He next points out next in comparing the incomes of J.K. Rowling and Tiger Woods in the recent past to the incomes of Charles Dickens and Arnold Palmer in their hedays, well it's really no comparison. The incomes of the former swamp the incomes of the latter. This is perfectly in accord with Rosen, so all is good in the world.
To determine health of the system, however, the point is not to look at the incomes of the superstars themselves, but rather look at the superstar wannabes. What is their condition? Rosen had a wry wit that showed up even in his published work. He points out one market characterized by superstars is the textbook market for Economic Principles. There are many competitor textbooks that vie for the few top slots, and several of those competitor books are nearly as good as the market leaders and perhaps even better. But they haven't gotten a broad adoption, which as things viral goes, begats further broad adoption. Some economists devote their scarce time and energy to write these alternative texts, on the off chance that theirs will break through into the top echelon. This marks a healthy ecosystem. There are some dominant leaders but lots of competition to replace them. Economists would call this a case where there are no or only very few entry barriers to entry.
Now think of stories about how Bill Gates or Steve Jobs or Mark Zuckerberg got started. Each was passionate about his enterprise from the get go. The very early work involved only a few compatriots, who had the same vision. These were essentially skunkwork projects. Great success emerging out of a skunkworks background is part of the American folklore. For example, see the movie Tucker for a Hollywood rendition of the Horatio Alger story. It means the opportunity is available to anyone. All that is needed is the core idea, the will to succeed, and some luck.
The notion that luck plays a role in determining the winner is part and parcel of Darwin's Theory of Evolution. Stephen Jay Gould tells us that most of us were taught the wrong metaphor about evolution, thinking of it as a tree trunk. Instead, evolution looks like a bush with many branches, each viable. Then natural selection comes along and picks one of the branches in a way we couldn't have foreseen in advance. Recently, Robert Frank has been touting Darwin over Adam Smith as the rightful father of economics, because Darwin's approach to competition is more robust and seems a better predictor of actuality. The key difference is that Darwin's approach allows for successful mutations that provide individual advantage but that are threatening to the species (and perhaps to the entire ecosystem). Frank provides us with an example from nature. Of the species elk, the males have horns that are too large, the burden in carrying them greater than the advantage they afford against other predators. But in head to head competition with other male elk, they are a benefit and hence it is a trait selected for in Darwinian competition.
Cowen does find elk-horn-like competition in financial markets. But he doesn't even deign to consider that possibility elsewhere in the economy. Are there other sectors of the economy where the big guys, winners in earlier competitions, beat up on the little guys? For example, do the big guys aim to to rig the next game to played so they reap the spoils from victory while letting others get to hold the bag when the approach doesn't pan out? This is the thesis of Winner Takes All Politics, yet Cowen will have none of Hacker and Pierson's work. Nor does Cowen discuss that with bigger prizes for the superstars, winners in previous competitions aim to win the next competition not by a skunkworks approach or a diversity of various skunkworks projects, but rather by making a big splash, one blockbuster after another. The Right hates when government does this, because government doesn't know how to pick winners. But they are quite content to pick winners themselves, in essence ignoring the essential role luck plays.
Yet the argument for what drives inequality is not sufficient to make Frank's point about species threatening but successful mutations. One needs to make a further argument that what we're seeing is a negative sum game. Such an argument would be of the form that the big guys are crowding out the little guys, raising the costs of getting into the game for them. Is there evidence of that sort too? Yes, there is. There is credit rationing now, especially for small business loans. It means many new ventures can't get to first base. This too makes the economy more fragile. Again one hopes that it is only business cycle problem and that credit will become more readily available to small business when the economy rebounds. But one wonders if this will be a lingering problem. The irony is that there is a lot of cash in the system. Who holds the cash? The big guys do.
My view is that capitalism has gotten much more brittle and short sighted over the last thirty years. Many people who are very good capitalists don't see the harm to the system they have caused by their own success. (Mitt Romney comes to mind here with his work for Bain Capital.) Many people have become very good at playing the game. There are fewer who seem to be able to think through whether it is the right game to be playing. That's the question to be asking.
Tyler Cowen jumps onto the Rosen bandwagon in his essay The Inequality that Matters. It is a piece that rubbed me the wrong way and here I will take issue with it. Cowen's conclusion is that indeed in the Financial Sector of the economy the huge wealth of the people at the top is troublesome, but elsewhere it is fine and what you'd like to see. And at the bottom of the income distribution, well, things aren't so bad really. It's a pretty picture, but I think he's wrong on both counts.
At the bottom of the distribution, there is this recent piece about the near poor, who together with the poor constitute one third of the entire population. Further, many of the near poor are in two-parent households and are white, full time workers. It's just that their jobs don't afford them much of an income. They live paycheck to paycheck, with essentially no margin for income disruption. Cowen uses a pejorative, "threshold earner," to characterize many low income people. Presumably, these people earn just up to a threshold and then choose to not work beyond that. If it were true, this would make low income a matter of choice and therefore not a source of public concern or public policy. The piece about the near poor, however, makes clear that the big issue is opportunities for such people to make a decent living. Many were middle class and have since slid into this more precarious state. Capitalism isn't doing well by these people, who are struggling to make it. In this sense capitalism is itself fragile. One can hope the problem is due to the business cycle and is not a long term structural issue. With the economy in the doldrums, it is hard to tell.
Cowen also misses the boat on income generation at the high end of the distribution. He points out first that pre-tax income was far more unequal under Bush than it was thirty years earlier. So it can't be the Bush tax cuts that explain this inequality. He next points out next in comparing the incomes of J.K. Rowling and Tiger Woods in the recent past to the incomes of Charles Dickens and Arnold Palmer in their hedays, well it's really no comparison. The incomes of the former swamp the incomes of the latter. This is perfectly in accord with Rosen, so all is good in the world.
To determine health of the system, however, the point is not to look at the incomes of the superstars themselves, but rather look at the superstar wannabes. What is their condition? Rosen had a wry wit that showed up even in his published work. He points out one market characterized by superstars is the textbook market for Economic Principles. There are many competitor textbooks that vie for the few top slots, and several of those competitor books are nearly as good as the market leaders and perhaps even better. But they haven't gotten a broad adoption, which as things viral goes, begats further broad adoption. Some economists devote their scarce time and energy to write these alternative texts, on the off chance that theirs will break through into the top echelon. This marks a healthy ecosystem. There are some dominant leaders but lots of competition to replace them. Economists would call this a case where there are no or only very few entry barriers to entry.
Now think of stories about how Bill Gates or Steve Jobs or Mark Zuckerberg got started. Each was passionate about his enterprise from the get go. The very early work involved only a few compatriots, who had the same vision. These were essentially skunkwork projects. Great success emerging out of a skunkworks background is part of the American folklore. For example, see the movie Tucker for a Hollywood rendition of the Horatio Alger story. It means the opportunity is available to anyone. All that is needed is the core idea, the will to succeed, and some luck.
The notion that luck plays a role in determining the winner is part and parcel of Darwin's Theory of Evolution. Stephen Jay Gould tells us that most of us were taught the wrong metaphor about evolution, thinking of it as a tree trunk. Instead, evolution looks like a bush with many branches, each viable. Then natural selection comes along and picks one of the branches in a way we couldn't have foreseen in advance. Recently, Robert Frank has been touting Darwin over Adam Smith as the rightful father of economics, because Darwin's approach to competition is more robust and seems a better predictor of actuality. The key difference is that Darwin's approach allows for successful mutations that provide individual advantage but that are threatening to the species (and perhaps to the entire ecosystem). Frank provides us with an example from nature. Of the species elk, the males have horns that are too large, the burden in carrying them greater than the advantage they afford against other predators. But in head to head competition with other male elk, they are a benefit and hence it is a trait selected for in Darwinian competition.
Cowen does find elk-horn-like competition in financial markets. But he doesn't even deign to consider that possibility elsewhere in the economy. Are there other sectors of the economy where the big guys, winners in earlier competitions, beat up on the little guys? For example, do the big guys aim to to rig the next game to played so they reap the spoils from victory while letting others get to hold the bag when the approach doesn't pan out? This is the thesis of Winner Takes All Politics, yet Cowen will have none of Hacker and Pierson's work. Nor does Cowen discuss that with bigger prizes for the superstars, winners in previous competitions aim to win the next competition not by a skunkworks approach or a diversity of various skunkworks projects, but rather by making a big splash, one blockbuster after another. The Right hates when government does this, because government doesn't know how to pick winners. But they are quite content to pick winners themselves, in essence ignoring the essential role luck plays.
Yet the argument for what drives inequality is not sufficient to make Frank's point about species threatening but successful mutations. One needs to make a further argument that what we're seeing is a negative sum game. Such an argument would be of the form that the big guys are crowding out the little guys, raising the costs of getting into the game for them. Is there evidence of that sort too? Yes, there is. There is credit rationing now, especially for small business loans. It means many new ventures can't get to first base. This too makes the economy more fragile. Again one hopes that it is only business cycle problem and that credit will become more readily available to small business when the economy rebounds. But one wonders if this will be a lingering problem. The irony is that there is a lot of cash in the system. Who holds the cash? The big guys do.
My view is that capitalism has gotten much more brittle and short sighted over the last thirty years. Many people who are very good capitalists don't see the harm to the system they have caused by their own success. (Mitt Romney comes to mind here with his work for Bain Capital.) Many people have become very good at playing the game. There are fewer who seem to be able to think through whether it is the right game to be playing. That's the question to be asking.
Wednesday, January 04, 2012
Pluralities and Choosing Candidates
Romney "wins" the Iowa Caucuses, but only by a hair. More than 3/4 of those voting opted for somebody else. With so many candidates, this is a case where it might be nice to see what the voters' second and third choices were. As the field narrows, those preferences will matter, as will whether the voters continue to participate if their first choice is eliminated.
This is also a reminder that when there are multiple candidates and none is a clear-cut winner, there may be no right way to determine the winner. There can be "cycles" in the voting preference, as illustrated by the Condorcet Paradox. Weighted voting, known as a Borda Count, is thought of as a way to determine a choice in this instance, though in the textbook example given in the previous link, weighted voting would produce a tie between all three candidates. More generally, with weighted voting it is possible to change the winner by altering the weights. That is not a very satisfying result. Alas, Arrow's Impossibility Theorem says we can't do better than that.
This is also a reminder that when there are multiple candidates and none is a clear-cut winner, there may be no right way to determine the winner. There can be "cycles" in the voting preference, as illustrated by the Condorcet Paradox. Weighted voting, known as a Borda Count, is thought of as a way to determine a choice in this instance, though in the textbook example given in the previous link, weighted voting would produce a tie between all three candidates. More generally, with weighted voting it is possible to change the winner by altering the weights. That is not a very satisfying result. Alas, Arrow's Impossibility Theorem says we can't do better than that.
Monday, January 02, 2012
Getting a read on the G-Men
Next week we'll learn if the Giants are for real or if they've simply lucked through playing some mediocre teams the last couple of weeks. The Defense did look good last night, especially in the first half when the game was determined.
After wearing an Illinois T-shirt on Saturday and seeing the Basketball team get clobbered by Purdue, I chose to wear a plain T-shirt yesterday. Not wanting to mess with the Jinx, I'll be similarly adorned when the Giants play Atlanta.
After wearing an Illinois T-shirt on Saturday and seeing the Basketball team get clobbered by Purdue, I chose to wear a plain T-shirt yesterday. Not wanting to mess with the Jinx, I'll be similarly adorned when the Giants play Atlanta.