I’ve been reading quite a bit of Brian Arthur’s writing lately. He’s a “complexity economist” from the Santa Fe institute and a pretty interesting all around thinker. Need to put together a bigger writeup of his ideas, but wanted to share his steps on how technology forms the economy around itself from his book Complexity and the Economy:
The steps involved yield the following algorithm for the formation of the economy.
1. A novel technology appears. It is created from particular existing ones, and enters the active collection as a novel element.
2. The novel element becomes available to replace existing technologies and components in existing technologies.
3. The novel element sets up further “needs” or opportunity niches for supporting technologies and organizational arrangements.
4. If old displaced technologies fade from the collective, their ancillary needs are dropped. The opportunity niches they provide disappear with them, and the elements that in turn fill these may become inactive.
5. The novel element becomes available as a potential component in further technologies—further elements.
6. The economy—the pattern of goods and services produced and consumed—readjusts to these steps. Costs and prices (and therefore incentives for novel technologies) change accordingly.
This week’s NYTimes Magazine economics column is all about timesheets. While the whole thing is worth a read, I found the history of timesheets especially interesting:
The notion of charging by units of time was popularized in the 1950s, when the American Bar Association was becoming alarmed that the income of lawyers was falling precipitously behind that of doctors (and, worse, dentists). The A.B.A. published an influential pamphlet, “The 1958 Lawyer and His 1938 Dollar,” which suggested that the industry should eschew fixed-rate fees and replicate the profitable efficiencies of mass-production manufacturing. Factories sold widgets, the idea went, and so lawyers should sell their services in simple, easy-to-manage units. The A.B.A. suggested a unit of time — the hour — which would allow a well-run firm to oversee its staff’s productivity as mechanically as a conveyor belt managed its throughput. This led to generations of junior associates working through the night in hopes of making partner and abusing the next crop. It was adopted by countless other service professionals, including accountants.
Interesting perspective (and data) on the effect of online retailing and the general environment on malls:
I agree with the above perspectives, although I believe they likely understate the eventual impact on malls. A report from Co-Star observes that there are more than 200 malls with over 250,000 square feet that have vacancy rates of 35% or higher, a “clear marker for shopping center distress.” These malls are becoming ghost towns. They are not viable now and will only get less so as online continues to steal retail sales from brick-and-mortar stores. Continued bankruptcies among historic mall anchors will increase the pressure on these marginal malls, as will store closures from retailers working to optimize their business. Hundreds of malls will soon need to be repurposed or demolished. Strong malls will stay strong for a while, as retailers are willing to pay for traffic and customers from failed malls seek offline alternatives, but even they stand in the path of the shift of retail spending from offline to online.
Living in New York it’s easy to forget the importance of malls in retail. Haven’t ever completely understood why that is exactly, but the malls in New York (the only two I can think of off the top of my head are South Street Seaport and Herald Square) feel like afterthoughts and are filled with stores that feel out of place in an otherwise retail-hungry city.
I’ve written in the past about what market leaders do to build categories, and frequently I cite Google as the best example of these strategies. Their approach with laying down fiber and providing really cheap, super fast internet in Kansas City is no exception. Like it did with Chrome (at least at the beginning), Google is trying to jumpstart a stagnant market:
If you are one of the lucky few Kansas City natives to have already signed up for Google Fiber, I don’t begrudge you one megabit; your ancestors had to deal with the Dust Bowl, you deserve a little extra bandwidth. But at its heart, Google’s attempt at being its own ISP is much more about forcing the entrenched service providers — the Verizon’s and Time Warner’s and AT&T’s of this world — to step up their games than it is about making this particular business a raving financial success. When I asked the Google spokeswoman what the ultimate goal of all this was, she replied that Google wants “to make the web better and faster for all users.” The implication is that they don’t necessarily want to do it all by themselves.
For whatever reason I’ve been listening to a lot of podcasts lately. One of my favorites is Planet Money from NPR. Their latest episode is a really interesting look at why Coca-Cola stayed 5 cents for 70 years. Turns out there are two primary reasons: First, the company got into a crazy deal with the bottlers where it was selling syrup at a fixed price of 90 cents a gallon. Because it was a dumb deal and Coke knew it they realized they needed a way to keep the price from spiraling out of control. Their solution was advertising. Because they couldn’t control the sale price they just went out to the market and told everyone it was 5 cents a bottle, meaning retailers were left with no choice but to sell it for the price consumers expected. The second reason is a little less exciting, but still interesting. Apparently Coca-Cola had an insane amount of vending machines around and they were all 5 cents. After getting out of their contract they could raise the price, but they didn’t want to double it and the machine couldn’t take anything but nickels. They tried (and failed) to lobby the government for a 7.5 cent coin, but eventually just kept the price as it was (with a brief period of giving every eighth consumer an empty bottle to artificially raise the price in a crazy way).
Go check out the whole thing.
I don’t know what it says about me, but I’m a sucker for thousand-word stories on things like shipping pallets. Luckily for me, Slate has gone ahead and written one (or rather they wrote one back in August). Here’s a little taste:
Pallet history is both humble and dramatic. As Pallet Enterprise (“For 30 years the leading pallet and sawmill magazine”) recounts, pallets grew out of simple wooden “skids”, which had been used to help transport goods from shore to ship and were, essentially, pallets without a bottom set of boards, hand-loaded by longshoremen and then, typically, hoisted by winch into a ship’s cargo hold. Both skids and pallets allowed shippers to “unitize” goods, with clear efficiency benefits: “According to an article in a 1931 railway trade magazine, three days were required to unload a boxcar containing 13,000 cases of unpalletized canned goods. When the same amount of goods was loaded into the boxcar on pallets or skids, the identical task took only four hours.”
If that doesn’t make you want to read it, I don’t know what will.
Two interesting nuggets in Ezra Klein’s story about studying economics in video games. First, a question I’ve asked myself many times about Facebook and currency:
“Just for example,” Castronova says, “Facebook has an entire currency system that isn’t taxed or regulated. At what point does that threaten what the Federal Reserve does?”
Next it’s a broader point about what effect video games have on the economy-at-large:
There’s also a question of whether actions in online worlds count as real-life economic activity. “Say someone is playing Eve Online for a whole week and not providing services in real life,” Guðmundsson says. “That would hurt GDP [the measure of real-life economic growth], but it would increase the Gross User Product in the virtual world. So did overall value creation really decline?”
An aside in the book I’m reading sparked a thought I figured might be worth sharing. First, the snippet:
From our e-mail providers to our mobile-phone carriers, most companies’ business models are too lucrative to risk by mishandling our personal information and angering the consumer. So it is safe to say that despite the many potential risks represented by the volumes of data available, our past is relatively well safeguarded.
Which reminded me a lot of economic definition of brand. Here’s The Economist’s dictionary of terms on the meaning of brand:
Many economists regard brands as a good thing, however. A brand provides a guarantee of reliability and quality. Consumer trust is the basis of all brand values. So companies that own the brands have an immense incentive to work to retain that trust. Brands have value only where consumers have choice. The arrival of foreign brands, and the emergence of domestic brands, in former communist and other poorer countries points to an increase in competition from which consumers gain. Because a strong brand often requires expensive advertising and good marketing, it can raise both price and barriers to entry. But not to insurperable levels: brands fade as tastes change; if quality is not maintained, neither is the brand.
A brand is a promise: The more valuable it is, the less a company can afford it to be broken.
I wonder, though, whether that’s as true now as it was in earlier times. The example I’ve heard most for thinking of brands in this is not killing your customers. You pay more for a Pepsi than some random house brand because you know it won’t be poisoned (you also know it will always taste the same). But something seems to be changing, especially with digital brands. Maybe it’s that there’s more of them or maybe we have far lower expectations, but I feel like large brands frequently have data breaches or other terrible things and we forgive them in a way that doesn’t really jibe with the two paragraphs above.
If we don’t hold our brands responsible, the very meaning of brand changes. Part of it is that it’s easier to show outrage than it ever was, so when people get up in arms about Facebook’s latest privacy change I suspect it’s not real. Part of it may be the insanity of the news cycle: TJ Maxx loses millions of credit cards and its only a big deal for a day. But none of it explains how a bunch of banks that nearly sunk the economy are able to bounce back (except, maybe, regular brand laws don’t apply to oligopolies).
No matter what, something is different and its important that we understand what it means.
Paul Krugman wrote an interesting little post on the use of language by liberals and conservatives over the last few years. His basic argument is that while conservatives complained of “political correctness” from liberals, they’ve now taken on the strategy to a frightening degree: “Thus, even talking about ‘the wealthy’ brings angry denunciations; we’re supposed to call them ‘job creators’. Even talking about inequality is ‘class warfare’.”
It’s an interesting way to think about it, but it’s not actually what I wanted to share. He ends the post with this story of how science fiction worked in the Soviet Union:
The author — if anyone remembers where this came from — noted that most science fiction is about one of two thoughts: “if only”, or “if this goes on”. Both were subversive, from the Soviet point of view: the first implied that things could be better, the second that there was something wrong with the way things are. So stories had to be written about “if only this goes on”, extolling the wonders of being wonderful Soviets.
Was poking around my Kindle highlights (looking to see if there was a way to export them easily) and I ran across a quote from Zlatan Ibrahimovic’s biography “I Am Zlatan”. I was going to post that and then I thought, maybe I should just post lots of sports stuff in one big post, so that’s what I’m doing. No rhyme or reason here, just some interesting sports-related stuff I’ve run into lately.
First the quote from Zlatan on a player’s relationship with their team:
The management owned my flesh and bones, in a sense. A footballer at my level is a bit like an orange. The club squeezes it until there’s no juice left, and then it’s time to sell the guy on. That might sound harsh, but that’s how it is. It’s part of the game. We’re owned by the club, and we’re not there to improve our health; we’re there to win, and sometimes even the doctors don’t know where they stand. Should they view the players as patients or as products in the team? After all, they’re not working in a general hospital, they’re part of the team. And then you’ve got yourself. You can speak up. You can even scream, this isn’t working. I’m in too much pain. Nobody knows your body better than you yourself.
Everything from Grantland has been amazing lately. I think that’s the best site going on the web right now. It houses my favorite sportswriter, Brian Phillips (if you haven’t read it, I can’t recommend his ~100 part series of his Football Manager escapades), everything else is generally excellent, and I read the funniest thing I’ve read in awhile there recently. Here’s Bill Simmons on Dexter Pittman’s flagrant foul at the end of Miami/Indiana game 5 (here’s the video in case you missed it):
Dexter: “Yeah, that!”
LeBron: “I saw it, thanks for that. You’re probably getting suspended, though.”
Dexter: “Yeah, but he’ll never give you the choke sign again, that’s for sure! I SHOWED HIM!”
LeBron: “You sure did, Darius.”
LeBron: “I mean Dexter.”
Dexter: “If you want, I could try to run him over in the parking lot as he’s walking to the Pacers’ bus.”
LeBron: “No, I think we’re cool.”
Dexter: “You want to grab something to eat?”
LeBron: “I can’t, I made plans.”
Dexter: “Want to play video games sometime?”
LeBron: “I don’t really play video games anymore.”
Dexter: “Well, if you ever want to hang, lemme know.”
LeBron: “Sure thing, Darius.”
In other NBA-related reading, Wages of Wins, which tries to put some science behind the ranking of players, has been excellent throughout the playoffs. Here’s how they explained Lebron’s play in case you were curious:
A superstar gives your team a five point edge being on the court. With this scale in hand let’s point something out. LeBron James has played 10 playoff games so far this season. In 4 of them, he’s put up a PoP of +10!
Lebron is playing twice as good as a superstar in the playoffs. That’s mind boggling. Oh, and before I finish the basketball section, the New Yorker wrote a little about former Knick, Latrell Spreewell.
On to soccer, put this on Tumblr earlier, but Michael Bradley’s goal against Scotland was magical. If you missed the insane last day of Premier League soccer in the UK, I highly recommend reading 200 Percent’s recap.
And since I’m writing about sports, if you’ve never read it, go back and read David Foster Wallace’s “profile” of Roger Federer from 2006. It’s magic.
That’s all, have a good Memorial Day.
Interesting thought from Daniel Kahneman (by way of this Economist article) on the role of overconfidence in the economy:
A cheery disposition may be necessary for societies to function. Daniel Kahneman, a psychologist and Nobel economics laureate, has a chapter in his book “Thinking Fast and Slow” which describes overconfidence as “the engine of capitalism”. No entrepreneur can be sure that his planned investment will succeed but if no one took a risk, new products and jobs would never be created. A certain blindness to the odds may be necessary.
I really need to read Kahneman’s book …
Pretty excellent post by Brad Delong on the things he’s gotten wrong in his career (he calls it “mark-my-beliefs-to-market” time). Some good ones in there, including: “My belief that economists as a group understood as much about the causes of recessions and depressions as John Stuart Mill understood in 1829: that a downturn is a shortfall of planned spending at full employment below income caused by an excess demand for financial assets, and it is cured by either (a) having the government do the spending-in-excess-of-income that the private sector will not, or (b) having the government flood the zone with financial assets so that there is no longer an economy-wide excess demand for them.”
I’d love to see this from lots of folks … Maybe I’ll try to work on mine for the end of the year. Seems like a worthy pursuit.
Just in case you thought running and airline was a good business, the FT puts that to rest:
Warren Buffett’s quip about how shooting down the Wright brothers would have been a great service to capitalism is backed up by ugly numbers. In the entire recorded history of the US airline industry, cumulative earnings have been negative $33bn.
I’ve been doing a lot of thinking about the economy and American job market lately. Part of it is the natural byproduct of being a news consumer and the other is a result of starting a company during a recession. Anyway, I agree with the Economist on how we got here:
But today’s jobs pain is about more than the aftermath of the financial crisis. Globalisation and technological innovation are bringing about long-term changes in the world economy that are altering the structure of the labour market. As a result, unemployment is likely to remain high in the rich economies even as it falls in the poorer ones. Edmund Phelps, a Nobel prize-winning economist, thinks that in America the “natural rate” of unemployment (below which higher demand would push up inflation) in the medium term is now around 7.5%, significantly higher than only a few years ago.
But I’ve been thinking about a bit of a different angle on globalization. Sure part of it is about outsourcing (the article discusses oDesk, which is task-based outsourcing instead of job-based). I think that’s certainly part of the picture, but the more interesting globalization story to me is about the increasing ability of American companies to be successful without a strong American economy.
Again, my regular caveat is that I’m not an economist and my knowledge of how it all works comes from reading a bunch of articles on the internet. With that said, I’ve gotten to spend some time around some very large multinational corporations over the years and it’s impossible to miss the opportunity they see in developing markets. In the past I assume companies were more successful selling goods to consumers when the American economy was strong. Now that they’re selling worldwide, they can afford a weaker American market with global consumers picking up the slack.
For the first time, it seems to me, the American economy isn’t completely aligned with the needs of America’s companies. When a big company creates global jobs they are also creating consumers for the own goods, something that wasn’t true on the same scale 50 years ago. If you’re an American corporation with a global workforce who are you responsible to: The country you reside or the people you employ?
Again, not sure what this means, or if it’s even a valid economic argument, but it strikes me as a change that isn’t really being discussed.
Back in August I wondered about the long-term effect of the move to a software world:
Software companies optimize themselves to operate with as few humans as possible and many of them seek to replace functions that humans once performed. The net loss seems irreplaceable to me, even if everyone in the world knew how to write code. I’m no economist and I hope I’m wrong for lots of reasons, but I’ve been unable to find an answer in my head or in my conversations with others that satisfies me.
Since that time we haven’t seen much of an improvement as far as the economy or jobs numbers go and it looks like some other folks are asking the same questions I am (or, more likely, I’m asking the same questions they are). TechCrunch has a nice roundup of the conversation (via Henrik), including a link to an Economist blog post that argues the rate of jobs being destroyed by software is simply faster than the rate of jobs being created:
Another implication is that technology is no longer creating new jobs at a rate that replaces old ones made obsolete elsewhere in the economy. All told, Mr Ford has identified over 50m jobs in America—nearly 40% of all employment—which, to a greater or lesser extent, could be performed by a piece of software running on a computer. Within a decade, many of them are likely to vanish. “The bar which technology needs to hurdle in order to displace many of us in the workplace,” the author notes, “is much lower than we really imagine.”
Again, I’m not an economist and certainly hate to think I might be on the side of the luddite fallacy, but what if this time is different?
Yesterday I posted a link to the Michael Lewis profile/review of Daniel Kahneman’s new book. Since yesterday I’ve repeated this little nugget on how Kahneman discovered behavioral economics three times and thought it was worth sharing:
I can still recite its [a 1970s paper on the psychological assumptions of economic theory] first sentence: “The agent of economic theory is rational, selfish, and his tastes do not change.”
I was astonished. My economic colleagues worked in the building next door, but I had not appreciated the profound difference between our intellectual worlds. To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable.
It’s a nice way to think about the difference between psychology and economics.