27 May 2018

Monarchs (Butterflies, that is) and Millennials

I went on a business trip with my wife Friday. She calls them field trips. She teaches 2nd grade and Wednesday her 7 and 8 year olds reached the end of their unit on butterflies by releasing some they had watched transform from caterpillars into butterflies. Friday they went to the IMAX to watch a movie about monarchs.

It's cliche to express wonder at the transformation from caterpillar to butterfly but the wonder is deserved. If you saw the two creatures without any knowledge that they were related, you likely wouldn't even put them in the same category, much less realize they were two stages of the same life. There's more, though.

Every fourth generation is a super butterfly. For three generations the butterfly's life expectancy is about two to six weeks. This fourth generation, though, lives for six to eight moths. It's also bigger and able to fly from Canada into the heart of Mexico, thousands of miles. The transformation from caterpillar to butterfly is genetic code triggered each generation; the transformation from regular to super butterfly is genetic code only triggered every fourth generation.

Which made me wonder whether something similar is going on in our community.

If we define a generation as 25 years, four generations back takes us to those born about 1900. These people fought in World War 1 and then were the leaders during World War 2. Their inventions, speculations, investments and desires fueled the roaring 20s, tipped into the Great Depression, and then a hot war with fascists and then a cold war with communists. When they were born in 1900, the two most common jobs were farmer and household servants (families with fewer than 3 servants were considered lower-middle class); by the time they died in the 1960s through 1990s, men had walked on the moon, the internet was linking people across the world, and the discovery of DNA had evolved into genetic engineering.

The kids at Parkland so impressed me. Millennials and younger are aware, conscientious, and the best educated generation in history. They are informed by thousands of stories and have access to millions of lives through a media that includes TV, radio, podcasts, video, social media and every other permutation of the internet.

It is, of course, a whimsical idea, but what if those kids born about 2000 - who are 4 generations removed from the generation born about 1900 - are a super generation who will carry us farther than the generations before?

26 May 2018

Product Idea: the Fiercely Reciprocal Robot

Mirrors were a phenomenal invention for promoting self-awareness. Mirrors don't make us look great but because they inform us of how we do look, they do make us look better. We can use the image they send back to correct what we can.

Our social image is tougher to discern than our physical one. We can easily see our face in a mirror; it's tougher to see how we come across to different people in different situations. For that I think it'd be interesting to get kids a fiercely reciprocal robot.

One problem with understanding how we come across is that there are different lag times and different probabilities for feedback from people. One person might patiently take our stupid jokes or tendency to volunteer "honest" feedback about how fat they look in that outfit while another will immediately take offense and avoid us later. One will put up with something from us for a couple of months before deciding that it is too much and another will put up with it for life. We don't really know how we come across as social beings and particularly for the young this process of understanding who we are to others can be slow and difficult.

A potential solution to this is the fiercely reciprocal robot. Imagine a robot that a child aged 2 to 14 could interact with. This robot would reciprocate everything from being ignored to telling amusing jokes to giving compliments to insults, handshakes to punches. If the child looked away when the robot was telling a story, the robot would look away; if the child made appropriate noises - the Ooohs and the "oh no's!" to express amazement or alarm, the robot, too, would make such noises. If the child expressed encouragement rather than complaints, the robot would be encouraging rather than complaining.  If the child were happy being with the robot then one might safely assume that the average, typical peer would also be happy to be with the child; if the child were miserable with the robot, then one might safely assume that the average, typical peer would be miserable with the child. Whatever the robot made one feel would be a reflection of what the child made others feel.

Of course you would need a "model good form" mode that might inspire the child to new behaviors. It could not be all reciprocity. Sometimes instruction is needed.

The default mode would be reciprocity, though, and this would be a great teacher and predictor. As it turns out, the average person is fiercely reciprocal. If you are kind to strangers they're generally kind to you; if you are rude to them, they're generally rude to you. For the most part, who we are dictates who people are to us. The fiercely reciprocal robot would be unique mostly in the immediacy and the relentlessness of its feedback.

A Proposal for the Reasonable Republicans Who Still Walk Among Us

Under Trump, Republicans are not just pursuing bad policy but bad strategy. As they frantically pursue policies that veer further and further right, these neo-Republicans may be driving Democrats further left.

Hitler would have never risen to power without communists. Communists had real power in Europe (they'd seized control of Russia shortly before Hitler emerged as a political figure) and Hitler was able to use legitimate fear of communists to win support. The way he credibly framed himself to many Germans was that he wasn't an extremist; he was only taking extreme measures to protect Germany.

A similar thing could happen in the wake of Trump. McConnell and Ryan are frantically running around, dismantling every reasonable compromise they can find. They've created a tax cut that will drive annual deficits north of a trillion a year. (That alone would have - just a few years ago much less a few decades ago - dominated media coverage.) They've rolled back regulations requiring banks demonstrate the ability to suffer a downturn without igniting a recession. (Before banking regulations of consequence, from 1900 to 1933, the US was in a recession 48% of the time. Since then it has been in recession only 14% of the time.) They are slashing funding for healthcare, even for children. They're so frightened of immigrants that they are breaking up families and losing the children of people who cross the border. They've gone after free trade, protection of national parks, gutted healthcare for the poor and are making abortion, birth control and healthcare for new mothers difficult to get, following the lead of Texas where maternal mortality is 10X higher than it is in countries like Italy or Japan. Yes. You read that right. New mothers in Texas die at double the rate they did just a few years ago, and at 10X the rate of mothers in other countries. This after policies similar to those advocated by Trump Republicans were put in place.

Now let's imagine that none of that offends or disturbs you. That is, let's imagine that you are a Republican who still supports Trump. So why should my friends and relatives who are so proud of their party find this disturbing? Because everyone else does and one of the many consequences of this is that you've just given extremists on the left what is equivalent to what the communists gave Hitler: an obviously evil and dangerous foe who justifies extremist countermeasures.

You want to roll back reasonable banking regulations? This is not just stupid in its own right; it is stupid because it could give more power to the folks on the left who have never liked banks or stock markets. You don't just raise the risk of a bad recession; you raise the risk that you could lose what has created so much wealth in this country.

You can believe that your system doesn't owe anything to the poor but even if you aren't moved by compassion, you should be moved by greed. If a growing percentage of people see no benefit in the system you defend, they will vote for it to go away. In your greed to get the next 5% of after tax income you could easily lose 50%.

I think that it is true in politics that for every action there is a reaction. The day that Obama was sworn in the country rejoiced at the end of racism .... and the enrollment level at neo-Nazi and white supremacist sites was 10X its normal rate. This reactions to actions dynamic suggests that anyone thinking a move ahead will take care not to take radical actions that will provoke a radical reaction. As Republicans continue to defend a man as reprehensible as Donald Trump, their support among people who can't get the senior discount at Denny's has steadily dropped. The GOP is the party of old white guys and those guys (us guys) are steadily dying.  If the next election were held only among those 35 and younger, Republicans would fare about as well as the Whig Party and in a few decades the "next" election will be among those 35 and younger.

I'm an old guy. I should be yelling at the Bernie Sanders kids to get off my lawn. I should be the conservative voice in American politics. Given the excesses of the Republican Party, I'm instead a flaming liberal. I believe that our financial system is wonderful and getting rich is great; and that markets should be regulated and that crooks (think Bernie Madoff) are as likely to show up on Wall Street as the back streets of poor neighbors and the rest of us need to be protected from them by smart policing and good regulations that looks as skeptically at bankers in suits as teenagers in hoodies. I think that the corporation is one of the great inventions of modern times, and that CEOs have too much unchecked power and that there should be more opportunities for employees to make as much or more than their CEOs, that the pay of CEOs ought not to be 350X that of their typical employee. I believe that for-profit pharmaceuticals and healthcare provider companies have made us healthier and that the profit-motives has driven innovation that steadily make us healthier in ways that just saving money by emphasizing low costs would not; and yet I also believe that healthcare should be a right. I believe that we do need troops ready to intervene around the world and yet I believe that this should be done sparingly and we need far, far more humility about imposing ourselves onto other people. I believe that a person who wants to treat a sperm and egg at the moment of conception no differently than a baby has that right but cannot impose such a belief onto other reasonable and decent people who think that this zygote that cannot be seen won't be anything equivalent to a person for months. I think that societies should do all they can to encourage two-parent households but that single-mothers and their children should be generously supported so that both feel appreciated and loved by the community and that kids of single parents have more opportunity. I believe only most people - not everyone - should own a gun and that no one - not even special people - should own weapons like nuclear bombs or automatic weapons specifically designed to kill dozens or millions of people.

None of this is controversial. Unless you're a Trump supporting Republican. And given that these Republicans have decided that reasonable compromise represents an abandonment of principles, they are running full tilt into a set of policies that future generation will find baffling and offensive. This alone is enough to criticize them for but there is more; their excesses could easily provoke excesses in the other direction.

So, friends and family who have historically voted Republican but consider yourself reasonable, I have a proposal. Stop voting for candidates who support Trump. Instead, vote for Democrats who are reasonable rather than ideological. Make sure that the blue wave - which may come in months or years - brings in candidates who are moderates like me rather than the flaming liberals you like to pretend we all are.

One last thing. If you feel like you have to vote Republican regardless of how extremist the policies have become, you are are not reasonable. You are an ideologue. Your first filter should be to vote only for reasonable, intelligent, competent and decent human beings; once you have your choice of two or more such candidates, then it's great to choose based on ideological preference. If instead you filter only by ideology and then between good and reasonable people when they're available, you are reasonable only as a last resort. That's not reasonable.

04 May 2018

Maybe There is No Lesson

Someone had shared this recently:

Rule 3
"There are no mistakes, only lessons."

As is my tendency, I nodded silently. It made sense. Then, because of my tendency to over-think things (or as I like to call it, "thinking"), I thought we may too readily believe in the power of lessons.
Lessons make it sound like there is something we can carry forward from one experience to the next. Maybe the most profound experiences of life are too unique to be understood by anything that happened before or of anything to follow. They are not lessons for life. They are life. And all we have to guide us through them is our heart. And maybe that's enough.

02 May 2018

"We will loan you our trillion dollar tax cut," investors tell government

Here is an interesting pair of numbers.

In the first quarter of 2018, US companies announced $242 billion in stock buybacks. At that pace it will hit nearly one trillion dollars for the year. 

In the first half of the year, the federal government will run a deficit of $600 billion. At that pace it will borrow roughly 1.2 trillion dollars for the year.

Put differently, corporations have a trillion more than they can spend this year and the federal government needs a trillion more than it has. 

It sounds like an onion headline: "We will loan you our tax cut," investors tell government.

28 April 2018

An Argument for Embracing False Positives In Government Policy

In analysis, you have two kinds of errors: false positives and false negatives. [This blog post was inspired by Phil Rosenzweig's piece for Edge.org.]

You will make errors. You'd like to think that you put only guilty people in prison or only buy stocks that will steadily increase your wealth but .... the fact is that we're bad at understanding the past much less predicting the future.

So, given that you will make errors, it is important to ask in which direction you'd rather err. Would you rather put 10 people in prison who deserve to go free or put 10 people on the streets who deserve prison? Would you rather frequently pass on buying a stock that doubles in value again and again or frequently buy stocks whose value collapses? When you adopt an approach to investing, criminal trials or developing policy, in which direction would you rather err?

Rosenzweig points out that the type of error we would prefer depends on the context. When it comes to science, we want to avoid a false positive. The data has to be very clear for a majority of scientists to say, "We have a new theory." You don't rewrite textbooks to accommodate one study. The same thing in a trial. We need to be very certain that a person is guilty before we put them in prison for a decade.

By contrast, in business you may be more accepting of a false positive. "We think this new market has great promise," your marketing team says. An engineer on your team tells you that he thinks he can solve the design problem that has been creating big warranty costs for the company. Even if the likelihood of them being right is low, it could be perfectly rational to invest in that new market or technology. If you lose one million dollars in bad investments 9 times during the year but on the 10th time you crack open a billion dollar market, your company wins. If you wait for proof that the market is profitable ... well, it will be your competition who provides that proof, not you. The data that proves it is a good investment comes too late to inform your decision about whether or not to invest.

You don't want 9 good guys in prison in order to make sure that you keep one bad guy off the streets; you do want to lose $10,000 in 9 bad investments if it means that you make $1,000,000,000 in 1 good investment. Sometimes you want to avoid false positive sand sometimes you want to avoid false negatives.

So where does government policy fall? Do we prefer false positives or false negatives?

Dee Hock was the founding CEO of VISA, the man who dreamed up the modern credit card. He said that every policy has intended effects and unintended effects; you always get the unintended effects. Whatever you try in government policy has a very good chance of leading to some behavior you hoped to avoid. If you make heroin illegal, you drive up its price which can drive up the crime rate as users steal to pay for it. If you force companies to file more paperwork and conduct more studies before allowing them to go public, your community ends up with fewer startups. Even knowing this you may decide it is better to make heroin illegal or save investors from scams masquerading as legitimate startups, but you should anticipate such consequences from policies. Expecting to get policy right on the first attempt is like thinking you can write code without debugging. I think that argues for embracing policy as something more like investments than criminal trials; we want to try 9 things that fail in order to try the one thing that will make our communities better.

Progress does not mean getting rid of problems. Progress means solving better problems. In one century parents face the problem of getting their kids enough to eat to stay alive. In the next century parents face the problem of getting their kids to eat healthy. They are both problems but the second is so very, very much better than the first. Good policy isn't necessarily predictable and it certainly isn't flawless; it can, though, bring us to the point of dealing with a better set of problems. If you don't try new things your problems never get better.

One other reason to treat policy as a place where it is better to have false positives is that, ultimately, our standard of living is a product of our knowledge. In David Deutsch's fascinating book The Beginning of Infinity, he makes the argument that it simply isn't true that the earth is - alone among the places we know in this universe - the one place that is safe for us to inhabit. Or, rather, he points out that the claim is not that simple. As it turns out, most of us live in places where we'd die without knowledge of how to make and wear clothes, shelter, heating or air conditioning. We don't actually live on a particularly friendly planet, he points out, so much as we now have knowledge that allows us to live in hostile places like Fairbanks, Alaska or Phoenix, Arizona. With even more knowledge we can figure out how to live in even more hostile places like the moon or Mars. Where we can live or even how well we live is a product of knowledge. We know how to combat infection now, so our lives are longer. We know how to provide potable - that is, safe to drink - water straight out of a tap to anyone in the country; that simple knowledge may have done more to extend life expectancy than all the very cool drugs discovered in the last century.

One big reason to try things that may not work is that we will create more knowledge. Curiously, the very fact that policies have unintended effects is one more reason to try new things: every test or trial has the potential to reveal new knowledge. Again, it is the accumulation of knowledge that will make our lives better. Experiences that result in new knowledge can fuel progress.

One last thing. Our condition has changed in recent centuries in ways that suggests that we should more actively make mistakes. If all you have is $1,000, you should probably invest that $1,000 cautiously; if you have $10,000,000, you should take some risks with $1,000 increments. When a bad move is likely to result in starvation, it's a pretty good idea to avoid false positives, to insist on certainty and err towards clinging to traditions. You can't blame people from 1500 for wanting certainty. But as we gain prosperity and margin for error ... well, errors are easier to make. Our condition is better than it was centuries ago; that should make us more bold in trying new things.

A huge percentage of scientific research does not result in anything cool or useful. A majority of business startups fail. Yet a prosperous community that is making progress will have lots of both kinds of activity going on, innovation and entrepreneurship that is more likely to fail than succeed. Government policy should be treated more like these domains than the courtroom where we look for overwhelming proof before moving forward. When it comes to progress, it is less about looking at existing evidence than it is about creating new evidence, less about what we have proven than what we might prove.

26 April 2018

Macron May Have Just Emerged as the New Leader of the West

Given that Trump has retreated into fear and nationalism, Macron may emerge as the new leader of the West.

In April of 2016, Macron founded his En Marche party.

In April of 2017, Macron won the election that put him against Marine Le Pen in the May runoff election to become president of France.
In April of 2018, Macron addressed US Congress in the most articulate defense of post-WWII West since Trump was sworn in.

The guy just hit 40 in December.

To appreciate what a surprising character he is, consider this:
The American Macron is 37 and still 18 months away from starting her new political party before winning the 2020 presidential election.

Macron spent a fair bit of the speech articulating his beliefs which should have made most audiences say, "Yeah, well obviously" just 5 years ago but today smack of controversy because of what Trump has forced on us. Here are a couple of passages that deserve consideration.

I believe in democracy....To protect our democracies, we have to fight against the ever-growing virus of fake news, which exposes our people to irrational fear and imaginary risks. ...Without reason, without truth, there is no real democracy -- because democracy is about true choices and rational decisions. The corruption of information is an attempt to corrode the very spirit of our democracies.

I believe in concrete action. I believe the solutions are in our hands.I believe in the liberation of the individual, and in the freedom and responsibility of everyone to build their own lives and pursue happiness.
I believe in the power of intelligently-regulated market economies. We are experiencing the positive impact of our current economic globalization, with innovation, with job creation. We see, however, the abuses of globalized capitalism, and digital disruptions, which jeopardize the stability of our economies and democracies.I believe facing these challenges requires the opposite of massive deregulation and extreme nationalism.Commercial [Trade] war is not the proper answer to these evolutions. We need free and fair trade, for sure. A commercial war opposing allies is not consistent with our mission, with our history, with our current commitments to global security. At the end of the day, it would destroy jobs, increase prices, and the middle class will have to pay for it.I believe we can build the right answers to legitimate concerns regarding trade imbalances, excesses and overcapacities, by negotiating through the World Trade Organization and building cooperative solutions.We wrote these rules; we should follow them....
I believe in building a better future for our children, which requires offering them a planet that is still habitable in 25 years.

The full transcript is here:


Clinton, Dubya, and Trump were all born within months of each other. It seems that we're past the expiration date on that "boomers as leader" model and I'm getting excited about the prospect of turning things over to the younger generation.

Vive la France!

22 April 2018

You'll Always Be an Idiot at Most Things

Jeff Bezos is the world's richest guy, worth $112 billion at age 54.

In his annual letter as CEO of Amazon, he shared some advice about high standards that struck me as valuable. 

It is worth reading in it's entirety here:

One of the questions he asks is 

whether high standards are universal or domain specific. In other words, if you have high standards in one area, do you automatically have high standards elsewhere? I believe high standards are domain specific, and that you have to learn high standards separately in every arena of interest.  

Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or non-existent, and certainly not world class. It’s critical to be open to that likelihood.

I would go further and word it a little differently. You will always be awful at most things. 

Let's say that you are an eloquent, wonderful speaker. It would be widely impressive if you were a great speaker in two or three languages (most people do well to pull off eloquence in one) but regardless, you will be an absolutely hopeless speaker in the vast majority of the world's languages. You're limited even within your own domain of speaking.

And let's say that you're wonderful at toplologic phases of matter within math theory. Generally speaking, the closer you are to world's best the more specific is your knowledge. If you're an expert in one math domain you are likely only okay at other math theories or speed of computation, say. And of course you will eventually hit academic areas (medieval history, epigenetics, etc.) in which your knowledge and mastery are woefully short of the standards we'd expect of someone earning a bachelor's degree in that subject.

Even baseball players are rarely great hitters and great pitchers; such people come along about once per generation. The Angels have such a player in Shohei Ohtani, an incredible player who has an ERA of 3.6 and batting average of .333. He's amazing, but this is something I know: no NBA or NHL playoff team wants his help right now. Ohtani is terrible at most sports. (Well, terrible by world-class standards. You'd likely still be happy to have him on your team - any team - at a family reunion picnic.)

We're awful at most things, okay at a few, and - if we're lucky - wonderful at one or two.

So what does this mean? First of all, as Bezos points out, be humble. Secondly, know your limitations or trust the guidance of someone who does, someone who can tell you what you're great at and can do for a career and what you might just want to do for fun, what to improve at and what to simply abandon. Third, realize that you will always need other people; they can do well things that you can't do at all. Fourth, be careful about believing that your success in one thing predicts anything about success in another. And that brings me to Trump.

Trump might be the most gifted media magnet of my lifetime. He grabs our attention and holds it. 40% of Americans love him and 60% hate him but everyone stares aghast. He drove up the ratings of the very media outlets he attacks, simultaneously working to undermine their credibility by hollering "fake news!" while driving up their ratings by causing us all to tune in to see what crazy things he's said and done and whether today he has moved closer or farther from criminal charges. He's a natural genius at media.

Sadly for us citizens, high standards are domain specific. Trump doesn't understand how dependent are modern markets on trade, immigration, and disruption. He dismisses science and experts as less credible than his gut or the TV pundits he finds most appealing. This natural genius at media is a natural idiot at policy.

Trump should be both an example and a warning for all of us. We all should aspire to be even 1% as good at something as Trump is at media. And if we should be lucky, talented, and obsessed enough to pull that off, we should immediately remember that no matter how good we are at that one thing, we are still an idiot at most things.

And this is kind of cool. It means no matter how good you are, you can admire someone else - billions of others - as better than you. Even if you are Shoehei Ohtani or LeBron James, you could literally be tutored on millions of topics by other people who have mastered things that you won't do, much less be bad at.

So go do your thing. Become great at it if you can. And then be humble about it because, you're an idiot at most things. As Deming said, "You can trust a man who knows his limitations." And your limitations are nearly limitless. 

17 April 2018

James Joyce, Schrodinger, Multiverses and Virtual Reality

In 1939, James Joyce of Dublin released Finnegan's Wake, a stream of consciousness novel that suggested that each mind was it's own little universe and a community was collection of these parallel universes briefly connected by shared events and then almost immediately fractured again into tiny, independent streams by the different narratives we give to these same events.
In 1952, Schrodinger was in Dublin and after warning his audience that what he was about to say sounded lunatic, he said that his equations suggested that there were a variety of histories that had all happened, which David Duetsch suggests in The Beginning of Infinity was the introduction of the idea of multiverses.
It sounds fanciful but quantum physics suggests that there are parallel universes. Each time there is a choice point - you call either Mary or Prudence for a date - what actually happens is that there are now two universes that branch off from that choice; in one we trace the ripple effect of Mary rejecting you and in the other we trace the ripple effect of Prudence saying, "Yes! I will marry you!" And of course each of those paths has its own set of infinite ripples.
Virtual reality might result in a world where Joyce's notion of personal consciousness as its own virtual world would be given a new dimension. You don't just imagine a different world; you experience it.
Perhaps in that world one person lifts his hand to swing a sword, another to caress a lover, another to pick an apple, and each move is nonetheless synchronized as the players are unwittingly all working the same factory line even while they think they're in their own world. In this particular multiverse, the person who best understands how to create the technology that simultaneously maximizes coordination and individual initiative is the person who has the most wealth and power .... but of course what she will do that wealth and power that makes her feel any more special than her many minions slaying dragons in their world while assembling parts in hers is hard to guess.

23 March 2018

How Real Estate Has Made Trump's Economic Policies so Dangerous

Probably the most insidious way that real estate has shaped 
Trump's mind is that it has given him a zero-sum worldview.

An acre next to the Empire State Building would have cost $90 million in 2006, 30,000X what an acre in Kansas costs. New York's real estate market is dominated by corporations and family wealth and if your grandfather didn't have the bravado or wisdom to buy an acre of Manhattan, you probably don't own one now. Jared Kushner and Donald Trump didn't move from Kansas as young men and buy acreage; they come from real estate families.

Trump Tower Chicago, photo from Ron Davison
Real estate is a weird industry and it colors Trump's worldview in a variety of ways. It makes him better understand family dynasties and prefer the certainty of dictators to democracies, think of wealth as something just created "out there," and - worst of all - gives him a zero-sum worldview.

Dynasties and Development

If Angela Merkel loved Trump, it wouldn't noticeably change his odds of getting a Trump Tower Berlin. If Vladimir Putin loved Trump, it enormously changes his odds of a Trump Tower Moscow.

Real estate developers need permits and dictators are better able to provide those than democracies, and this is one of the simple, often overlooked reasons why Trump pays a disproportionate amount of attention to dictators rather than presidents.

Real estate also needs financing.

In 2007, just before the mortgage crisis bust, the Kushner family paid roughly $2 billion for 666 5th Avenue. It has caused them trouble ever since. Mueller is investigating Kushner family finances. (Jared's dad has already served time in prison.) For instance, the Kushner family met with Qatar for financing for their 666 property and later, after Qatar said no, Kushner worked with the Saudi's on a blockade of Qatar. Financing is key to success in real estate and Trump and Kushner have trouble getting loans from American banks, which also explains their fondness for dictators. (For more on these stories and Jared Kushner, listen to Robert Wright's interview with Elizabeth Spiers.)

This entanglement with foreign powers - from Russia to Saudi Arabia - is key to understanding how Trump and Kushner see politics. They aren't going to offend the entities who may be a source of loans or approvals for big developments. Presidents of a democracy cannot make you rich; dictators can.

The Magical Origins of Wealth

Homes in Detroit cost $44,600 and $1.3 million in San Francisco.  For the same price, you could buy one home in San Francisco or 29 in Detroit, where you could sleep in a different home every day of the month.

People who bought an apartment building or couple of rental homes in San Francisco 30 years ago have "done well" in spite of the fact that what they actually did is no different from what people who bought real estate in Detroit did. Real estate is derivative; if it is located in a community that knows how to create jobs and wealth, its price goes up.

William J. Bernstein claims that the simplest predictor of home prices is the mortgage payments folks can afford. What someone buying or selling real estate does isn't the determinant of whether it sells for $50k or $500k; that price is determined by what the local community is doing to either create jobs that pay $15,000 a year or $150,000.

Had the Trump and Kushner families settled in Detroit and owned real estate there, they'd either be small time or even bankrupt as a result of borrowing heavily to buy property that dropped - rather than soared - in price. Given they had the good sense to be born into New York real estate families, they are rich. Or at least have really big mortgages.

If you own or develop real estate in a prosperous area, it's easy to think of wealth as something that just magically happens. Trump never mentions economic development plans that involve investment in R&D or education. In his mind, it is enough to simply deregulate and let economic development happen.


Probably the worst way that real estate has shaped Trump's worldview, though, is this: real estate is probably the most zero-sum industry in the US and success in it can easily drive a win-lose or at best win attitude.

The first economy, an agricultural economy from about 1300 to 1700, was land based and the easiest thing to see about an acre or oil well is that if you get it I won't. One of us wins and another loses. War and the emergence of standing armies, guns, cannons, and artillery defined a great deal of this time and the conquest of land was key to prosperity.

You were likely born in the third economy, an information economy from about 1900 to 2000. If I give you an acre and you give me an acre - assuming they are comparable acres - neither of us comes out ahead. By contrast, if I give you an idea and you give me an idea - assuming they are comparable ideas - we both come out ahead.

In this fourth economy, an entrepreneurial economy from about 2000 to 2050, collaboration is even more important. 20 years ago, a typical product development team I worked with would sub out about 10% of its work to an outside company; now it is more likely to be a third. Specialization and the drive for the best collaborators has made teams even more reliant on outside companies, and folks working on teams who have either moved from another country or now work in another country. Customers will only buy a world-class product, whether that means incredibly cheap or incredibly good or both. To get a world-class product you need to collaborate with team members from all over the world and everyone in the process needs to benefit.

If the third economy was win-win, the fourth economy is win-win-win-win-win; investors, employees, partners, customers, and entrepreneurs all have to win for an enterprise to work. If even one of those groups thinks they'll lose, they can scuttle the whole enterprise.

Trump's zero-sum sensibilities are at odds with modern economic realities. Acreage is zero-sum. If you get that building at 666 5th Avenue, I don't. Deal-making is critical to success and Trump's deals are win-lose. The thought that Canada, Mexico AND the US could all be winning from NAFTA is laughable to Trump; in his mind, someone is either winning or losing in trade relationships. (And apparently his measure of who is winning or losing is the trade deficit, an odd scorecard that distorts so much.)

The real estate industry has to be one of the most zero-sum industries in the US. The fact that this is the industry Trump rose out of makes him far more likely to take a win-lose approach with other nations, whether in trade wars or real ones.

In his book Sapiens, Yuval Noah Harari makes an interesting point about California. If a foreign power conquered it in 1850, during California's gold rush, they would get most of the wealth. If a foreign power conquered California today, it would chase away all the wealth that now is in the form of people and their ideas, networks, companies and industries rather than in the form of gold nuggets that could be seized along with the land. Once upon a time conquest captured wealth; now it destroys it.

In this willingness to go to war to "win," Trump shows a lack of understanding of how modern economies work, a failure to understand that it is networks of trade and idea exchange that spill across borders that need to be protected and not land that neatly fits within borders. Taking a win-lose approach to fourth economy realities threatens the wealth and jobs that make a community prosperous.

14 March 2018

The Libertarian Philosophy - A Truth (often ignored) and a Misconception (largely embraced)

Libertarians advocate one thing that seems to me obviously right (but is often resisted) and another obviously wrong (but nonetheless wins the approval of most Americans).

A general trust in markets seems to me the most important thing they get right. Market solutions don't require consensus or bringing along committees and citizen action groups or the popular vote. An entrepreneur can just try something and assuming they can convince the right mix of investors and employees to go along, they have a chance to change how we live. That's pretty cool and the libertarians' trust in individuals seems to me repeatedly justified by the on-going success of entrepreneurs whose success may never have been predicted by any majority opinion.

The problem with market-driven progress is that it blows in on gales of creative destruction. Solar power can close down coal mines; digital photography can close down picture development kiosks. The status quo has a lot of wealth and power and part of what libertarians get right is that because of this power, government tends towards crony capitalism that protects existing industries in order to protect those investors and employees rather than forcing them to respond to the market. Government can become an obstacle to progress. Look at the coal miners in West Virginia, an industry that began in 1740. If we protect the 44 year old miner today, how much longer do we need to save his job? For two more generations? Two more years? What is society's obligation to protect him? Some politicians will say that for as many generations as he'll vote for you to go to DC to protect him and as long as the coal mining investors will fund your political campaign. Industries that would have a rough time getting thousands from a venture capitalist are sometimes successful at getting billions from governments.

Libertarians' belief that we should let markets disrupt and create new wealth and jobs even while eradicating old jobs and wealth is something I think is right. Still, it seems easy to find programs that protect industries (think of our enormous subsidies to farming and oil). This feel likes a truth often ignored.

So what do I think they get obviously wrong? This notion that government should then be small. I believe that successful markets depend on robust government programs in at least two ways. People always want protection and security. If you are not going to protect their jobs and industries, you need to offer them some personal protection. This, to me, means healthy unemployment insurance, jobs retraining and really hefty subsidies to kindergarten through grad school education, among other things. I also believe that we can hardly spend too much on research at places like the Center for Disease Control or National Health Institute or the National Science Foundation.

I have worked with hundreds of product development firms within companies, from startups funding only one project to Fortune 50 firms with thousands of projects. They develop new products. They need a product that can launch soon. The pharmaceutical companies have the longest development window - about a decade - but most target product launches within about 2 to 4 years. You've heard of R&D, research and development? This is D, the development. It's important. It's crucial. As cliche as it sounds, it can change the lives of investors and consumers. The iPhone is an example of development. The rightful focus of private companies is the D in R&D.

Research is hugely uncertain, though. It will probably result in nothing. If it does result in something cool it may happen a decade or three later than you expected. Not every cool thing becomes profitable. Because of this, corporations rarely finance research and it needs to be heavily funded by government, by groups like DARPA (the Defense Advanced Research Projects Agency) or the University of California. This research - the R - is crucial to corporations' later development - the D. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Corporations try to find a way to translate R that has taken one to two decades into D that takes two to four years. It's a pretty cool system.

The libertarian fantasy that communities work well with lean governments is wrong on two counts: a community that learns to sail the gales of creative destruction makes its people feel secure with change rather than resistant to it (which requires a strong welfare state) and getting the research to the point that companies can make it profitable takes considerable public sector leadership.

James Watt, employee at University
of  Glasgow, the same university that
employed professor Adam Smith
The contest between the public and private sector is not zero sum. A strong public sector can make the private sector healthier, and vice versa. (And obviously by strong I don't mean power over, the power of corporate lobbyists to choke government or for governments agencies to choke corporations. Instead, I mean power to, the way that advances in one lead to advances in the other, each enabling the other.)

When a libertarian talks about how markets are more innovative than government programs and how individuals should be given freedom to pursue what they think will make them happy, nod knowingly and agree with him. (Libertarians are twice as likely to be men, so this is probably a "him" you're talking to.)  Say something like, "Yeah. The pursuit of happiness. It's literally in our founding documents."  

When he tells you that this means governments should be much smaller, laugh at his naivete. (Libertarian men love when you do that because then they chuckle with you and say, "Well, you can't blame me for wanting lower taxes.") 

The formula that has seemed to work for progress is to let entrepreneurs and companies rapidly change our world while funding the cost of their creativity with research and education and then funding the cost of their disruption with welfare, unemployment insurance, universal healthcare and - yep - more education and jobs training. Who pays for those government programs? Everyone, but the ones who pay the most are the ones who succeed the most: those successful entrepreneurs and companies who so benefit from being part of a system that knows how to create and then harness the gales of creative destruction.