12 June 2017

How Gaming Is Shaping a New Worldview

Mary Meeker delivered her annual Internet report Sunday. One of the points she made was about gaming.

  • Entrepreneurs are often fans of gaming, Meeker said, quoting Elon Musk, Reid Hoffman and Mark Zuckerberg. Global interactive gaming is becoming mainstream, with 2.6 billion gamers in 2017 versus 100 million in 1995. Global gaming revenue is estimated to be around $100 billion in 2016, and China is now the top market for interactive gaming.
One question she and the team at Kleiner Perkins asked was what does gaming prepare us for? I think it is teaching simulation to a generation who will need to become more adept at systems thinking.

The more one can play with the variables of a system, the better one understands it. To use a simple example, our company has software that lets a business unit forecast project completion dates based on shared resources and project priority. As you change the number of resources, project priorities, and how you model the use of resources within projects, the projected launch dates for these product development projects changes. One of the senior managers I once set up with this capability drove from Philadelphia down to Delaware each day for work. He told me that on his commute he would think about variables to change in order to explore what was possible to accelerate product launches. "I always sort of understood my business unit," he says, "but doing these simulations I came to understand it far better than I ever had. I learned what happened when I changed this variable or that one, what made a surprisingly big difference and what made hardly any difference and in what conditions. I understood the dynamics of the system in ways I never had before."

A great deal of what we see today shows graphs and numbers. "India is growing at 8% a year." "Smart phone sales are growing by 10% a year." What we have less experience with is simulations that allow us to change recent trends. "What might happen to its growth if India's move away from paper currency results in more theft from hackers?" "What happens to smart phone sales if they become a replacement for credit cards?" 

A simulation lets us do a few things. One, it lets us play with policy ideas. Two, it lets us explore the implications of entrepreneurial initiatives. Three, it helps us to better understand the way variables might interact to create emergent behavior that is the result of a the interaction of the variables in the system rather than the actions of any one variable in the system. Simulations will never be accurate. They can, however, be informative.

We are at the infancy of systems thinking in the same way that Europeans in 1700 were in the infancy of Enlightenment thinking. We will get better at simulating and thus understanding systems, systems as varied as ecosystems, financial systems, and educational systems - the variety of systems on which we're so dependent for our quality of life.

What is gaming prepare us for? It gives people practice with countless simulations, learning how changing one thing can change another, how this strategy results in an early death and this one lets you conquer the kingdom. Gaming teaches us that systems never depend on just one variable and that outcomes can never be determined even though probabilities can be changed. Gaming will make systems thinking and systems simulation intuitive to a new generation. That's pretty cool.

10 June 2017

The Biggest Danger of the GOP - Or What The Comey Hearing Drowned Out

Thursday, the House GOP passed a bill to repeal Dodd-Frank. Friday, the NASDAQ fell nearly 2%. Meanwhile, the world fixated on a UK election essentially won by the party already in power and a Comey testimony in which we learned that Trump lies. The news of the day was good cover for bad legislation. Really, really bad legislation.

A little story

A little town is divided among three groups. One group is pro-football, the other is anti-football and the third group is mostly neutral.

The anti-football group got that way because a couple of kids were seriously injured. One will be in a wheelchair for life. The anti- group simply argues that no sport is worth this risk.

The pro-football group are simply fans. They love the sport, point to the tradition, the way it gives the kids something to come together on and cheer for, the way it builds a sense of community, and how it calls young men to excellence. 

The problem is, the pro-football group has been hijacked by a sub-group so repulsed by the idea of rules to make the game safer that they've gone in the opposite direction. Call this group the football fanatics. They think that kids shouldn't even have to wear helmets if they don't want to - or can at least wear the old leather helmets that were good enough for players in the 1920s.

Here's the problem. The pro- group is only one or two spectacular injuries away from losing football altogether. And given the way the fanatics are approaching this - eliminating "silly rules that just slow down the game" like flags on late hits or tackles that involve helmet to helmet contact, etc., they have greatly raised the risk of serious injury.

The people who should be most grieved by the fanatics are the fans who care less about any specific rules of football than they do about just having the game in town. Because what the fanatics are doing is making it probable that the anti-football group will get their spectacular injuries that lead to cancelling the program.

The real story

Which brings us to capital markets.

Thursday, buried beneath the tsunami of coverage of the Comey hearing and UK election - the House passed a bill to repeal Dodd-Frank. Two major provisions of this bill set us up for another Great Recession: one provision exempts financial institutions from capital and liquidity requirements to allow them to take on more risk and another provision puts in place bankruptcy provisions in lieu of "orderly liquidation." So, financial institutions are free to take on more risk and when that risk leads to bank failure it won't be treated systematically. That is, it sets up the conditions for a run on the banks like the one that lead to the Great Depression. People will need to withdraw capital to protect themselves at the exact moment that the banking system would need more liquidity. 

Capital markets are one of the great inventions of mankind. Credit can finance the construction of high-speed trains or a cup of coffee, finance your education that launches your career or your house that becomes your home. Credit can finance research that cures an old cancer or a new product. The capital markets that have emerged since about 1700 have transformed our world, giving us longer lives, and making us more productive and happy. The joy football has brought into Americans lives is microscopic in comparison to what capital markets have brought. 

The Republicans are philosophically opposed to regulations. They are the pro-football fanatics who believe that the game of capitalism would be made better if only we removed all those troublesome rules that just get in the way of a good game. And while it's true that the game goes slower with rules and regulations, it also saves people from serious injury that comes from the failure of one or two big institutions becoming catalyst for a Great Recession. 

Real fans of football would shut out the fanatics who try to eliminate rules. Real fans of capital markets would do the same to the anti-regulation fanatics who - just years after the worst recession in nearly a century - are working to eliminate the regulations that save us from serious injury. Anyone who wants to see capital markets survive, evolve and prosper to continue to enable prosperity, will come out against this deregulation inspired by ideology. 

The biggest danger of the GOP's approach to repealing Dodd-Frank is that it will enable anti-capital market forces to make more coherent arguments against them. We now have a president who supports dictators; we can easily have a president in a decade who supports communists. If you love football, you would shut down the fanatics arguing against making it safer; if you love capital markets, you would shut down the fanatics working against making them safer. 

09 June 2017

The Real Failing of Modern Politics

Yesterday's UK election brought home what is for me the major failing of modern politics. There was little question that the biggest winner would be either Jeremy Corbyn's Labour Party or Theresa May's Conservative Party. Simply put, Corbyn wants more government spending and May wants more government austerity. These positions are distasteful to most voters because on the one hand it means more taxes and on the other it means fewer government services.

What is the biggest failing of modern politics within the West? Politicians have largely given up on promising prosperity. They've run out of tricks. W. Bush pushed capital gains tax reduction to stimulate more investment and investors pumped money into weird things like mortgage backed securities, thus setting us up for the Great Recession. Democrats push for investing more money into education but already we have more graduates than new jobs. (In 2013, the American educational system created 3.7 million college graduates (from AA and BA degrees to PhD and professional degrees) but only 2.4 million net new jobs.) What worked brilliantly in the 18th and 19th centuries (encouraging the creation and deployment of capital) and what worked fabulously in the 20th century (creating an extensive public school system to make K-12, even K-BA education the new normal) simply is not enough in this new century.

We will need capital in today's economy. More than ever. We will need well educated workers in this new economy. Again, more than ever. The difference? Capital and knowledge workers no longer lead the parade of progress. Entrepreneurship does. Any policy makers intent on creating prosperity need to focus on creating an entrepreneurial system.

One of the most spectacular inventions of the two centuries from 1700 to 1900 was the development of a financial system. Through a combination of private and public sector efforts, the West created an incredible ability to finance projects as vast as interstate highways or as small as the purchase of a coffee with a credit card. And policy makers can influence that system with changes in interest rates and other policies to stimulate or cool an economy, helping to promote the creation of jobs or to lower the rate of inflation. Our financial system is vast, complex, and rightfully the focus of policy makers throughout the economy.

One of the most incredible inventions of last century was the development of an education system that changed the experience of children from that of entering the work force at the age of 8 or 10 to that of entering university at 18 or 20. Again, this is a vast system with many moving parts but it is possible - through policy initiatives and cultural norms - to change and influence education and thus the economy through this system.

By contrast, we still have not developed a comparable entrepreneurial system. That is the work of our generation. We can lower interest rates and increase borrowing, change educational standards and increase the number of students who get a high school diploma or a graduate degree in business or education. Meanwhile, our relationship to entrepreneurs is about what it was to education in the 1800s. In 1800 most communities supported freedom of speech and thought but they largely left education to autodidacts and elites, self-taught gentlemen who could afford libraries, trips abroad or time at a university. The masses were not expected to get much of an education. In 2000, most communities support the ideas of entrepreneurship and grant a measure of freedom to private citizens to try their hand at starting a business. Entrepreneurship is left to those who are strong enough to push against the system or financially supported enough to fund a venture that might take years to become profitable. (The children of the affluent are far more likely to become entrepreneurs.) We don't expect the masses to consider - or even know how to approach - entrepreneurship. Unlike education, we have yet to popularize entrepreneurship.

Rather than force communities to choose between cutting services or cutting taxes, really effective politicians will engage in a conversation about how to create prosperity. During the 20th century, not only did families end up with vastly more income but they were able to fund a vastly larger government. There wasn't a trade off. The private AND public sector got enormously better. Prosperity gives you that option.

My own sense is that until communities throughout the West get as serious about the work of popularizing entrepreneurship, they'll continue to pursue a politics of divisiveness that forces communities to choose between the lesser of two lessers rather than the greater of two mores.

02 June 2017

Job Growth During the Trump Administration and Beyond

In the last year, the number employed has gone up 1.8 million but the number in the labor force has gone up only 1.1 million. Because the number employed has gone up faster than the number in the labor force, the unemployment rate has dropped (from 4.7% to 4.3%).

Since 1983, the unemployment rate has been lower than its current 4.3% just 5% of the time - and all of that between 1999 and 2001. Outside of that period, it's never been lower than it is now.

So what does that mean when it comes to forecasting job growth? It means that at some point between now and the end of 2018, the unemployment rate will be as low as it can go. At that point the rate of job growth will be limited by the rate of labor force growth.

Labor force growth in the last year has been nearly 100,000 a month. (And shrank by more than 400,000 people in May as baby boomers retired and fewer Americans looked for work.)  During the recovery from 2011 to 2016, job growth averaged 203,000. That gap is not sustainable at full employment.

This makes a couple of things predictable for the Trump term.
1. Job growth in the first four years of Trump's administration will be about half what it was in the last four years of Obama's administration. (Closer to 100,000 jobs a month than 214,000).
2. We will have our first month of negative job growth within the next 18 months. (Simply put, given normal variation, a median value of 100k is far more vulnerable to slipping below zero than is a median value of 200k. For instance, in March the economy created only 50,000 jobs.)

There are other factors.

On a positive note, the labor force participation rate could rise, prolonging the time when job growth exceeds labor force growth.

On a negative note, Trump's policies will discourage immigration of all kinds. Tourism has already dropped. Universities are reporting fewer applicants from abroad. This sort of things takes time to show up in numbers but as foreigners are less willing to live in an xenophobic America, we lose twice. Once because those immigrants don't come here to join our workforce and a second time because as they choose to live and work in places like Eindhoven, Netherlands or Vancouver, British Columbia, they create more jobs in those communities rather than ours. An Iranian who works on robotic sensors will help to make a team successful in some other country and all of the jobs that ripple out from that effort - the project managers and administrators within his company or the restaurateur or furniture salesperson outside of his company -  will be in a different country as well.

Pew forecasts 18 million fewer potential workers without immigration. In such a scenario, the number employed would shrink for decades, shrinking the economy with it.

You might easily dismiss this prospect of a sharp decline in immigration as unthinkable. Of course just a year ago, the thought that Republicans would be arguing that we should ally with Russia rather than NATO would have been unthinkable, as would have cuts of 21% to National Health Institute (NIH) or slashing Medicare by half. Trump is disruptive and prides himself on that. It would be silly to bet on him reversing his position on immigration.

Three other huge variables are trade deals, climate change technology, and cuts to science funding. If Trump slaps tariffs onto trading partners and sets off a trade war, our economy will slump. If his policies continue to focus on protecting coal mining jobs that originated in 1740 rather than creating new technologies and jobs in alternative energy, our economy will fail to thrive. If he slashes funding for science and research (like his proposed 21% cut to NIH), he will undermine the creation of new products and technologies that would create jobs in two to twenty years.

Job growth will be less vibrant under Trump. (And to be fair, it would have been with anyone, from Sanders to Clinton to Bush to Trump.) If he gets his way with policy proposals on immigration, trade, and defunding the development of alternative energy and other technologies (new medicines that could have emerged from NIH research, for instance), we will be measuring the net loss of jobs each year, not their creation, tracking a steady decline of 100,000 jobs each month rather than bemoaning a gain of only 200,000 a month as anemic.

31 May 2017

The Simple Solution to the US Trade Deficit with Germany

If you spend more each month than you make, you will run a personal deficit.

If a country buys more than it sells, it will run a trade deficit.

One of the simplest determinants of whether or not a country is spending more than it makes is determined by its government accounts. If a government has a surplus, the country will tend to have a trade surplus; if a government runs a deficit, the country will tend to have a trade deficit. Generally - but not always - the government is big enough that it will cast the swing vote, if you will, as to whether the country as a whole spends more than it saves and, thus, runs a trade deficit or trade surplus.

Trump has called the Germans very bad because the US runs a trade deficit with Germany. Germany's government ran a government surplus of about $27 billion last year. The US federal government is projected run a deficit of about $400 billion and Trump's proposed budget would probably increase the debt by about $1.7 trillion over the next decade. Our government deficit loosely translates into a trade deficit.

Assuming that Trump has more influence over the US federal budget than he does over German consumers and companies, if he were sincere about reducing the trade deficit he would reduce the federal deficit.

Or he could send angry tweets that insist the real problem is Germans who save too much rather than a US government that can't agree on how to finance its spending.

28 May 2017

Prophets Who Create By Reforming

Well, it’s certainly true that all great religions deal with the same conflicts of politics and violence, and the struggle to reconcile with the realities of a changing, evolving and modern world. I think there’s this misunderstanding, among most people of faith, that prophets sort of grow up in some kind of cultural or religious vacuum. That a prophet is somebody that just plopped down to earth from heaven, and with a ready-made message, in which they found a brand-new religion. But prophets don’t invent religions. Prophets are reformers of the religions that they themselves grow up in. Jesus did not invent Christianity. Jesus was a Jew. He was reforming Judaism. The Buddha did not invent Buddhism. The Buddha was a Hindu. He was reforming Hinduism.
- Reza Aslan,
taken from Krista Tippet's book, Becoming Wise

Magic Math in Trump's Budget: How an Imaginary $2 Trillion Gets Spent Twice

Trump's new budget plan forecast $2 trillion in additional revenues because of economic growth and then simultaneously applied that $2 trillion to a tax cut and to a deficit reduction. This faster economic growth will both increase revenues in the form of higher taxes and fund a tax cut in the form of lower taxes. Wrap your mind around that.  It is as if Trump's Budget Direct Mick Mulvaney (people say he's Irish but it seems clear that he's a goblin) said, "The amount we get in extra taxes will pay down the deficit AND will let us cut taxes by that same amount." It's like someone has won $100,000 in the lottery and excitedly announces their plan to pay down their $100,000 in debt and spend $100,000 on new cars and travel. It's double counting.

It might be that the Trump administration is that sloppy. Or it might be that they trust that they have so undermined the credibility of the press by continually calling it fake news that they will be able to ignore or brush off any reporting that points this out. They are operating in a fact free zone.

If that's not enough, there is more. Where does this extra $2 trillion over 10 years come from? It's existence comes from an assumption that the economy will grow by 3% a year for a decade. How likely is that?

Well, since 1948, the longest stretch during which GDP growth exceeded 3% was 6 years. (From 1961 to 1966, when Johnson's New Deal was increasing government spending, defense spending for Vietnam was just ramping up, and the baby boomers were starting school and driving their parents to buy more housing, clothes, and cars.) It has been eleven years since GDP growth has been as high as 3% (exactly 3% in 2005, and 3.1% the year before that.) In this century - since 2000 - GDP growth has not even averaged 2%, much less 3%.

So is there reason to believe that economic growth will bump up 50%? (3% is 50% more than 2%.)

Curiously, per capita GDP growth has been incredibly stable since after the Civil War. Here it is by decade. (Source data here.)
Note that in only one decade has per capita GDP growth been more than 3%; in the 1940s, when the US was spending a huge amount of money first fighting Nazis and then rebuilding Europe and Japan, per person GDP growth was nearly 4%. World War 2 was the catalyst. Pull out that decade and you can see that per capita GDP growth has never averaged 3% for a decade. 

And here is a phenomenal statistic. Pull out the 1940s and the average per capita GDP growth since the 1870s has been 1.88%. The average GDP growth in this century? 1.88%.

GDP growth bounces over 3% in healthy and normal decades but it does not stay much above 2% for any length of time without a growth in the workforce. A growth in the workforce depends on immigration and birth rate.

So, will GDP bounce up to 3% for a decade? Only if Donald decides to encourage immigration. (Insert laughter here.) Millennials will cause a growth in the workforce during this next decade to offset baby boomer retirements but it won't be enough to cause a noticeable surge. 

Trump's budget plan doesn't just use the same $2 trillion to simultaneously pay down debt and cut taxes. It forecasts this additional $2 trillion by assuming GDP growth we've only experienced in one out of the last fourteen decades. It's not just that he and Mulvaney are spending this money twice; it's imaginary money.

83% of what Trump says ranges from half-true to pants on fire. Only 17% of what he says is mostly true or simply true. It's little wonder that with such disregard for facts he would put out a plan that shows such utter disregard for simple arithmetic or reasonable assumptions. He continues to show his contempt for Americans' ability to reason. So far, assuming that we're all stupid has worked out well for him. It doesn't seem like it'll work out as well for the rest of us.

Thomas More's Utopia - How Poverty Makes for Bad Government

A century ago, Thomas More published Utopia. More was beheaded by Henry VIII when he refused to break with Rome and pledge allegiance to Henry rather than the pope and Erasmus helped him to publish Utopia. 500 years ago the modern nation-state was emerging and it created a thicket of issues that had to do with the question of policies and authority and the very identity of a people. More's Utopia was his way of dealing with this, using a fictional place to model what a country could be. It's an imaginative leap that's not just fanciful but helpful as a way to define what could be but has not yet been experienced. (In Utopia, More argues against private property. Centuries later, the Soviet Union honored him for this early definition of communism.) One of the more fascinating acts of social experimentation since has happened when Utopians have tried to create communities that break with tradition.

One of the arguments that apparently prevailed at the time was over this notion of wealth and poverty. Here, More attacks the notion that it is better to rule a poor people. This is one section of his book that still seems relevant.

19th Century Dancing Utopians
And they think it is the prince's interest, ... as if it were his advantage that his people should have neither riches nor liberty; since these things make them less easy and less willing to submit to a cruel and unjust government; whereas necessity and poverty blunt them, make them patient, beat them down, and break that height of spirit, that might otherwise dispose them to rebel. Now what if after all these propositions were made, I should rise up and assert, that such councils were both unbecoming a king, and mischievous to him: and that not only his honor but his safety consisted more in his people's wealth, than in his own; if I should show that they choose a king for their own sake, and not for his; that by his care and endeavors they may be both easy and safe; and that therefore a prince ought to take more care of his people's happiness than of his own, as a shepherd is to take more care of his flock than of himself."It is also certain that they are much mistaken that think the poverty of a nation is a means of the public safety. Who quarrel more than beggars? Who does more earnestly long for a change, than he that is uneasy in his present circumstances? And who run to create confusions with so desperate a boldness, as those who have nothing to lose hope to gain by them? If a king should fall under such contempt or envy, that he could not keep his subjects in their duty, but by oppression and ill usage, and by rendering them poor and miserable, it were certainly better for him to quit his kingdom, than to retain it by such methods, as makes him while he keeps the name of authority, lose the majesty due to it. Nor is it so becoming the dignity of a king to reign over beggars, as over rich and happy subjects. And therefore Fabricius, a man of a noble and exalted temper, said, he would rather govern rich men than be rich himself; since for one man to abound in wealth and pleasure, when all about him are mourning and groaning, is to be a jailer and not a king.

27 May 2017

How Real Estate Has Distorted Trump's View of Economics

There is never just one economy. One person experiences the pain of a shrinking industry and another the exhilaration of a rapidly expanding one. "The economy" is an abstraction that no one person experiences and affects us each differently. One person can be happily working and getting rich and literally walk by another person on his way to work, a person who is homeless and miserable. We could probably use a million categories to describe the many and varied experiences individuals have of the global economy. We all piece together our picture of how the economy works with incomplete data. If you're Donald Trump - a man who eschews abstractions, models and data - that individual experience becomes the basis for a worldview, his single data point becoming the source of his confidence that he understands the economy.  He does not.

The guy who makes his money in real estate lives in a different economy from the guy who makes his money creating new technology or building a company. Here's the trick, though. Real estate is only worth more today than it was 50 years ago because there are more people bidding for it and those people make more money. Why do they make more money? Because folks have figured out how to create new technologies and new industries. If technologies and businesses hadn't evolved in the last half century, real estate wouldn't have gone up much in value. The value of real estate depends on the value of work in that area that produces new technologies, products, and companies. Real estate far away from where people are working to create value is worth far less. In Menlo Park - the heart of Silicon Valley - the median home price is nearly $2 million; the median home price in Kansas is $125,000, about 1/15th of the price in Silicon Valley. The real estate in Menlo Park is worth more because that community is more adept at wealth creation not because the land is better for crops.

How do you make money in real estate? You bid more for the property at the corner of 5th and Broadway than the other guy. And then you hold onto it. If you own that property, no one else does. And to be fair, you add value by developing the right kind of property. You create apartments or offices that command a premium - or at least a competitive - price. Negotiations matter at every turn. If you pay 6% interest on the loan to finance this property you might make no profit; if you can negotiate a deal for a loan at 3%, you might make millions in profit. Getting tenants to pay $3,500 in rent instead of $3,000 could make the difference between having enough capital in five years to buy more real estate, to expand your empire, and just paying down debt on the property you own. In real estate, you face a series of win-lose negotiations that result in either you or the other guy getting the property, you or the tenant pocketing an extra $500 a month or the banker taking all your profit or just half.  Posturing, bluffing, negotiating and cajoling are keys to success in this world.

How do you make money in the creation of companies, technologies, and products? (What I'll just call the entrepreneurial economy.) You humble yourself before reality. People don't bluff their way into interfaces that users find addictive, that compel them to spend hours with your app. You can't bluff a chip fresh from fab into revealing its bugs. You have to problem-solve, test, challenge beliefs and collect data. And how do you create a new market? You reach out to customers to listen and to potential partners who have some special skill set or knowledge you need. This entrepreneurial world is full of win-win negotiations. If you capture the market, your suppliers and partners win; if you lose the market, your suppliers and partners lose. Nobody creates something new alone. Menlo Park is full of immigrants who have been drawn from all around the world in the search for the best employees, partners, and entrepreneurs able to create what is next. You need to collaborate with the best regardless of their eye color or accent.

Real estate rewards bluffing. Tech development punishes it. If you lie your way into financing or a partnership in developing something new and can't deliver, what you've talked your way into is worthless. Do that more than once and your reputation will also be worthless. By contrast, if you lie your way into a great deal on a loan or a property, you win. It's still yours at the end of the negotiation. Generally speaking, negotiations around the creation of something new just give you permission to collaborate in creating something valuable. Negotiations around the purchase of real estate gives you what is valuable.

The entrepreneurial economy requires that you loosely hold beliefs, continually willing to challenge them with new ideas, possibilities and data. To discover what is newly true before anyone else could mean creating a new industry and billions in wealth. In this world, you're rewarded for challenging your beliefs.

Of course your employees realize this; you don't hire the best employees in Silicon Valley without offering them equity in your company. Again, to win means embracing a win-win mindset. You either bring along others or you don't move forward; billionaire Mark Cuban claims to have created more than 300 millionaires in the process of creating his wealth. It's rare that you hear the story of a successful entrepreneur who has not made others rich in the process.

Trump has made his wealth through real estate, which rewards zero-sum thinking and behavior in ways that the entrepreneurial economy does not. One of the many problems with this is that it is the entrepreneurial economy that is going to create jobs and wealth for the next generation. The zero-sum portion of the economy is just going to follow the success of the entrepreneurial portion of our economy.

Trump wants to put up walls because he believes that value is something you protect, like a moat around a castle. It's not. At least not in the entrepreneurial economy. Value comes out of creating connections and expanding networks of suppliers, customers, and technologies. (Think of the millions of technologies, apps, and supplier and retail networks that have built up around the iPhone, for instance.) Walls that isolate sections of this network destroy value rather than create it in the same way that sectioning off portions of your brain would destroy it. Breaking down walls - not erecting them - creates value.

Had Trump made his billions in tech rather than real estate, his beliefs about the economy would be much different. (Or even if he read books or listened to others who had been in this other economy.)  One of the many problems with his economy is that only one person (or organization) can own the property at the corner of Fifth and Broadway. It inherently accepts scarcity and the notion that there are elites and then the rest. By contrast, the entrepreneur realizes there are always more problems to solve, more value to create; his making billions from the creation and sale of a smart phone actually means that you can now make billions from creating and selling an app. The entrepreneur sees opportunities for progress in every direction.

One of the most important concepts behind the entrepreneurial economy is the concept of variable sum, the notion that how we cooperate or compete will change the total value we have to share. In a zero-sum economy, the land has value regardless of our actions. If I get that land or you get it, that land's value is the same. What differs is how much of that value I got. In a variable-sum economy, the product I'm creating might sell hundreds of units a year or hundreds of millions of units; how we work together can make the difference between whether that market is worth billions or thousands. Your behavior and approach will be wildly different depending on whether you see the economy or market as variable sum or zero-sum.

All indications are that Trump sees the economy as zero-sum. He is going to stop Germans from selling so many cars and the Chinese from making so many of our products and he's going to make sure that jobs stay in America. He says nothing that indicates an awareness of how China and Germany and Africa and the US can jointly become more prosperous through trade, through a blend of competition and cooperation, mutual investment and development. He's determined to be the guy who owns the skyscraper at the corner of Broadway and Fifth once the negotiations are over.  (And this is just one reason that despots like Putin, Erdogan and the Saudis so appeal to him. This is their world and worldview.) He's not trying to create; he's trying to conquer.  His is a medieval mind in a modern world. The more success he has in walling off this economy and treating it like a zero-sum game, the less prosperous this economy will be.

04 May 2017

The Curious Solipsism of Donald Trump

From Wikipedia
Solipsism (Listeni/ˈsɒlpsɪzəm/; from Latin solus, meaning 'alone', and ipse, meaning 'self')[1] is the philosophical idea that only one's own mind is sure to exist. As an epistemological position, solipsism holds that knowledge of anything outside one's own mind is unsure; the external world and other minds cannot be known and might not exist outside the mind. As a metaphysical position, solipsism goes further to the conclusion that the world and other minds do not exist.

If Donald Trump didn't know it before, nobody knew it before.

"Nobody knew that [ ....] was so difficult." (Where the brackets are filled, alternatively, by healthcare, China and North Korea, NAFTA, etc.)

If it hasn't happened to Donald Trump before, it hasn't happened to anyone before.

The Fake News media is officially out of control. They will do or say anything in order to get attention - never been a time like this!

Not only has it never happened before, there has never even been a time like this in the history of the world.

This solipsism of Trump is partly intellectual - showing a lack of curiosity in history or ideas - and partly emotional. It's not obvious that he cares about the experiences of anyone but him. When he talks, he talks about his ideas and shows little or no interest in the perspective or values of anyone else. Everywhere he goes, he looks around and confirms that he's the center of the universe.

Curiously, his reality has become ours. In terms of media coverage, he has become the center of the world. If he manages to control Congress, his conviction that he's the center of the universe will actually be substantiated by actual events. Once upon a time, you had to be king to have your personal solipsism confirmed by everyone around you.

03 May 2017

Where Economic and Psychological Progress are at Odds (a partial explanation of how obviously bad policies can make for good politics)

Trump listens to his gut. While he may not be self-made man, his facts are, and he shows a disinterest in sustained thinking or nuanced thoughts.

His reliance on instinct and disdain for theory has taken him past what we know of how economies work to what he feels about how individuals feel about psychology of work. Freud could better explain Trump's economic policies than could Keynes.

Over the last couple of centuries, the economy has obviously made us more prosperous. Our prosperity from our work has increased more obviously than our contentment, though. What has obviously worked economically has less obviously worked psychologically. This is partly because of division of labor.

Adam Smith's Wealth of Nations, the book that was arguably the first to define capitalism, opens with the account of division of labor as a force that had multiplied productivity.

THE greatest improvement in the productive powers of labour … seem to have been the effects of the division of labour. ,,,, To take an example ... the trade of the pin-maker. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving, the head; to make the head requires two or three distinct operations; to put it on is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands ... Each person... might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day …

By Smith’s calculation, division of labor bumped up productivity somewhere between 240 to 4,800 times. As Smith’s Wealth of Nations was published in 1776, for the first time since the ancient Greeks, productivity began to rise in the West.

If anything, this process has accelerated and deepened. This month I'm working with a client's product development team intent on rolling out a next generation computer chip that can be used in self-driving cars. The team involved in planning includes a couple of folks from Scotland, a couple from India, one from Malaysia, a couple from China and one from Austin, TX. The team working on project tasks includes an even larger swath of countries. 

We don’t just divide labor to focus on different tasks within a factory. We now divide labor across continents.

But this comes with a price. What makes us more affluent makes it more difficult to be engaged. Division of labor makes it harder for employees to see – or experience – how their tasks feed into finished products. And when a product is dependent on the efforts of so many people, it becomes harder to feel as though your own efforts make a difference.

Obviously gales of creative destruction that obsolete jobs, companies and even whole industries are the most visible element fueling the support for Trump’s promise of a national economy that won’t lose jobs to overseas competition. I suspect, though, that this curious alienation that comes from the steady division of labor that has started with pins and extended to transistors so small that their state can be changed by subatomic particles (true story), is a big part of why we don’t feel more certain of the gains that have come through this process that has made us part of a global economy.

Trump's protectionist policies will stymie this force for progress. His economic policies are awful. To me, the fact that policies which reverse the increased specialization and global trade take us backwards is hardly worth arguing. (Although I have argued it here.) The bigger question is why Trump's anti-trade policies won so many converts. I think the answer is, in part, psychological. Progress has made us more affluent; it has also made it harder for us to be engaged in our work.

Csizkzentmihalyi reported on a studies of where people find flow. People doing more traditional work like farming are more likely to find flow - or engagement - work. People doing more modern work are more likely to find flow in leisure. Tasks that we can see the whole of - building a cabinet or sheering sheep or cooking a meal - are tasks that are easier to find flow in than tasks that are merely some small part of a larger process. 

What does this mean? Economic progress is at odds with psychological well being. As our work becomes more specialized and we're more productive, we run the risk of becoming less engaged in our work and less happy. 

I do think there is a fix for this and it goes back to Csikszentmihayli's work on flow. For the last 100 years - well, at least the last 50 years or so -  we've focused on the quality of the product, what we experience as consumers. At its current peak of evolution, this focus on what customers experience with your product is called UX, or user experience. It's a big deal and rightfully so. It's a big part of how we've made the post-Adam Smith rise in productivity translate into more happiness as a consumer. What's next? We focus on our work as producers. We can create video games that engage and delight; we can also design work - just as we design products - to engage and delight.

I won't pretend that the only problem with globalization is that specialization can lead to stronger feelings of alienation than more traditional work. I will say, though, that as we become better at designing work to engage us when we are wearing our producer hat, jobs and work will become less a matter of angst and anger than it has in recent decades and will make it easier to sustain support for a process that has not only made us more affluent than our ancestors but more affluent than they could even imagine.

27 April 2017

Adam Smith on What Disturbs the Peace of Society

The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires.
- Adam Smith, The Theory of Moral Sentiments

[from Antonio Garcia Martinez's Chaos Monkeys.]