14 April 2015

How Those Wacky Social Conservatives Sound to Me

Rudolf Diesel, inventor of the Diesel engine
"That was never the intention of the founding fathers," some social conservative somewhere is saying right now.

That is such an odd thing to say. You can think that Henry Ford or Rudolf Diesel were geniuses without worrying once about what they intended for the automobile.

"GPS?!?!? That was never something Henry Ford intended for cars!"

History makes a better foundation for the future than ceiling. Unless you're afraid of so much open space.

12 April 2015

The British as Social Inventors (or, the policies that could make the UK wildly prosperous again)

The UK will elect its next prime minister in just a few weeks, on 7 May.

As an American, I envy the fact that British politics is so much more humane. But judging from the political debate earlier this month between the UK's seven major party leaders, the British seem to have lost their sense of history. Why were they the world’s leading force for centuries? Why are former British colonies so much more affluent than former colonies of Spain or France? Why is English still the world’s dominant language when it comes to business, science, and innovation? Knowing the answer to that question provides the answer to how the UK could again make its economy vibrant, perhaps even a global leader.

The simple answer is that, from before 1534 when Henry VIII severed ties with Rome to help to create the nation-state to the time that the British invented the single-payer healthcare system in 1948, the British led in social invention. And not just any sort of invention. They led in the social inventions that helped overcome that period's limit to economic progress.

Instead of discussing social inventions that redefine a century, though, political leaders are now arguing about changing tax rates or spending small percentages, each trying to find the right balance between fiscal responsibility and addressing needs. There is no sense of history now. Just a sense of responsibility. Rather than ask how to create jobs they’re asking how much unemployment and welfare they can afford. Rather than asking how to create wealth, they’re asking how much debt is reasonable. And rather than ask how to make the British once again world leaders in economic growth, they’re asking questions about how fairly government services are being shared among the poor and new immigrants. As an American I can only envy this delightful sense of fairness. In the end, though, it’s less about whether you share the mastodon kill fairly than whether you learn how to domesticate crops. If you want a great community, you don't choose between fairness and progress.
For centuries, the British were the world’s leaders at changing people’s minds about what was possible. Their social inventions were not just about what was fair or right. Their social inventions actually created wealth in ways that were unprecedented in world history.
The British National Health Service (NHS) is the oldest single-payer healthcare system in the world and is a wonderful example of social invention. The British set up a system that made healthcare a right rather than something only people above a certain income could access. Like so many of their social inventions, most of the West has since adopted some form of what the British created. (Even we Americans have taken steps towards following this example.)
But long before that, they also invented new institutions that made people more prosperous. 
In 1623, Edward Coke championed legislation - patent law - that rewarded inventors. By 1699, Thomas Savory had invented a steam engine. At that point, for the first time in thousands of years, per capita income began to rise. Because of social inventions like patent law that let people profit from the investment of time and money into new products, the British led in the industrial revolution.

The British were not just social inventors. They rapidly adopted what worked in other countries. The Dutch were the first to set up a corporation that could trade in a remote part of the globe on behalf of the state (the Dutch East India Trading Company), the first to set up a stock market (to trade shares in that one corporation) and the first to set up a central bank that could help to regulate currency and make loans on behalf of the state. The British were smart enough to adopt those inventions when they brought William and Mary over from the Netherlands in 1689 to become their monarchs, and that soon helped them to pass even the Dutch in per capita income. This was not just the kingdom that gave us the invention of the steam engine: it gave us Charles Darwin and the concept of evolution.  The British continued to innovate and tinker with these big inventions. It was the Bank of England that became the model for the world's central banks. And the eventual change they made to the corporation was even more momentous.
In 1862, the British Parliament passed the Company Act and invented the limited-liability, joint-stock company. That is, they invented the modern corporation, the best institution yet made for the creation of jobs, products, and wealth. John Micklethwait and Adrian Wooldridge called it “yet another quirky Victorian invention that changed the world.” Putting aside the fact that the Americans more fully subordinated themselves to this new institution, this transformative social invention was British.
Whether it is through patent law or the modern corporation, central banking or NHS, no people have done more than the British to make history by changing history. No people have been more ready to re-invent themselves or their institutions. 
So what could the British do now? What social inventions would shift their conversations from unemployment to job creation, from debating about how much debt they could afford to best strategies for creating wealth? It would be any social invention that would help them to overcome today’s limit to progress, which is different from the limit of a century ago – or two centuries earlier.
From about 1300 to 1700, the limit to progress was land and because the British people led in social invention and adoption that helped them to overcome the limit of land – from a nation-state and private property to standardized measurements and colonization – they became the world’s leading economy. 
From about 1700 to 1900, the limit to progress was capital and because the British people led in social invention and adoption that helped them to overcome the limit of capital – from patent laws that inspired invention to central banking policies that stabilized financial markets – they were the world’s leading economy.
From about 1900 to 2000, the limit to progress was knowledge workers. Even though the British people invented the modern corporation – the place where knowledge workers created products, wealth, and jobs through product manufacturing and invention – they lost their lead to the US, Germany, and Scandinavian countries because they were slower to realize the importance of public education. (In 1875, England’s illiteracy rates were about 10X higher than those in Germany and the Scandinavian countries.) In a world where English is the dominant language, it’s worth noting that kindergarten is a German word. The social and technological inventions that did the most to create knowledge workers and make them more productive were the ones that made communities richer and more powerful. One might argue that as the world's original capitalists, the British saw their invention of the modern corporation more as an investment tool than as a tool for making knowledge workers more productive, and lagged because - for a time - they made capital more important than labor.
The conversation the British people need to have now isn’t about how to get more land and make it more productive. Land is no longer the limit. The days of colonization and the British Empire are past. It’s not about how to get more capital and make it more productive. Trillions of pounds of capital wander the globe in search of returns. A massive infusion of capital now is as likely to sit idle in banks (or, in the form of industrial capital like robots, make labor sit idle at home) as to create jobs and wealth. It’s not even a question of how to create more knowledge workers or make them more productive. The good news is that - largely because of British social inventions - the West has overcome the limits of land, capital, and knowledge workers. The bad news is that more of those factors that no longer limit won't just fuel economic progress.

Period (roughly)
Market Economy
Develop & Acquire
1300  1700
First, Agricultural
1700  1900
Second, Industrial
1900  2000
Third, Information
Knowledge Workers
2000 ~
Fourth, Entrepreneurial

So what is the limit to today's economy that social inventions must help communities to overcome? Entrepreneurship. Last century, the West popularized knowledge work. Between 1900 and 2000, the economies of the West transformed from industrial economies dependent on child labor to information economies dependent on adult education. Now, it is time to popularize entrepreneurship. The first wave of this popularization will likely be like the British adoption of Dutch institutions. That is, communities able to adopt the policies of Silicon Valley, creating an entrepreneurial region, will make great progress. The next wave will likely come in the form of changing the corporation again. This will involve making more employees more entrepreneurial, allowing them to create equity and not just products. No one has yet taken the lead in this but the British (or for that matter, the Scandinavians, Germans, Canadians, Americans or the people of Singapore) could become leading innovators in this. And just as the British became prosperous in ways that past generations could not have imagined when they boldly overcame the limits of capital, so could this next generation.

The question for today’s economy is how to create more entrepreneurs and how to make more employees more entrepreneurial. As people find creative answers to these questions, they'll create jobs for knowledge workers and will fully employ the trillions in capital that people like Marin Wolf and Ben Bernanke warn is symptom of a savings glut (or investment dearth). Knowledge workers and capital are no longer limits. Entrepreneurship is.
The British people have proven themselves incredibly creative. For centuries. There is no question about that. The only question is whether British policy makers will decide to find creative answers to the question of how to create more entrepreneurs or how to make more employees more entrepreneurial. Last time they got serious about finding ways to overcome the limit to progress through thousands of small and large social and technological inventions, they gave us the industrial revolution. Who knows what extraordinary world lies on the other side of the myriad inventions that will help the West to overcome the limit of entrepreneurship?

28 March 2015

The Religious Right - Those Christians Who Understand Christianity Better Than Christ

"I have as much authority as the pope, only fewer people believe it."
- George Carlin

83% of Americans claim to be Christian. If you have a proposal you want supported, it is a great idea to tell people that what you're advocating is Christian. Given that 83% of Americans have not read the Bible, this gives you great liberty. 

I don't mind the fact that the religious right have made up a new religion. People do that all the time - and inescapably so. Even if your intention is to conscientiously apply the words of the New Testament, you have to make judgments about what to take metaphorically and what to take literally. And of course conscientious Christians - like conscientious Jews and Muslims and Hindus and Buddhists - have to decide what to do in situations that Moses, Jesus, Mohammed, and Buddha could never have imagined (artificial insemination?), so creativity is inevitable. This is why we have over 40,000 religious denominations around the world.

I do mind that the religious right are Christians who essentially claim to understand Christianity better than Christ did. They are ignoring what he taught and making topics he ignored central to their religion. I think by that point you have an obligation to call yourself something other than Christian. 

Jesus did not condemn homosexuality but he did condemn wealth. He did not condemn abortion but he did say that people will be judged by how they treated the least - and specifies that he's talking about the least as in people who are hungry, naked, and in prison, criminals and the destitute. Jesus made no mention of either abortion or homosexuality, leaving one to assume that it didn't really matter to him as much as turning the other cheek. Jesus did not ban alcohol. His first miracle was to make water into wine, and late at the wedding party after people had drunk quite a lot.

Paul seems to have condemned homosexuality (the verse cited is not really clear) and also condemned credit (this verse is really clear). Early in the 20th century, American clergy preached against consumer credit in the same way that they preached against homosexuality in the late 20th century. 

So now people advocate a modern world with credit and standing armies and prison sentences for criminals instead of forgiveness and divorce and making alcohol illegal for people under 21 and the accumulation of wealth and all of that seems to me like progress. We ought to embrace that without pretending that it aligns with Christ's teaching, though. If you argue for such things, you can't just say, "It's Christian." You have to make your case (and by the way, there are pretty good cases for these.) 

Meanwhile, if you want to claim that at the instant of conception that sperm and egg - human life that is not considered a human being - becomes a person, fine. Make your argument. But don't pretend that you are making it as a Christian, that something Christ said backs you on this point. Same with smaller government and the insistence that individuals not be supported by a welfare state. There are arguments for ignoring the poor but they stem from the teachings of people like Ayn Rand (who was an atheist) not Jesus. (There are religious arguments for not having a welfare state. As it turns out, the less financially secure people feel, the more likely they are to be religious. According to Jonathon Haidt, this is the primary reason that Americans are more religious than Europeans.)

I don't just have a problem with the religious right's insistence on bringing their religion into the public sphere. I have a problem with the fact that they've mis-labeled it as Christianity. 

12 March 2015

As a Matter of Fact, This is the Spanish Inquisition (or Why Singapore and Canada are More Affluent Than the Philippines and Mexico)

The Spanish Inquisition
Put people in a terrible position.
I don’t even like to think about it.
Well sometimes, I like to think about it.
-          Randy Newman
After the discovery of the new world, Spain should have gained an insurmountable advantage over all the rest of the West. At its peak, the Spanish Empire ruled about 13% of the earth, a swath of land exceeded up until then only by the Mongols, whose expansion had been stopped by the first use of gunpowder in a cannon during the mid-thirteenth century. Instead, France and England surpassed Spain in economic development. Spain even lost a prolonged war against the tiny Netherlands. It was not just a brute measure of land that mattered to progress in the first economy. Social invention and revolution were essential.
As trade grew in importance, so did diversity. If everyone is the same, has the same things, there is no value in trading. As people and economies become more distinct, trade becomes even more valuable. In the midst of this first economy, Isabella and Ferdinand tried to make Spain pure. They did it by subordinating their emerging nation-state to religion. This was to prove economically disastrous, but not in their lifetime.
Isabella (1451-1504) and Ferdinand (1452-1516) rightfully realized that Europe was not just getting exposure to new products with the emergent global trade. Europe was losing its cultural purity as the network of Jews, Muslims, and Asians who formed the trade network along the orient exposed Europeans to strange beliefs and practices. One response was to draw best practices from these new people. Spain tried instead to reject them.
After conquering Granada - the last Muslim territory in what is now Spain - these Catholic Monarchs gave Jews and Muslims the choice to convert or leave. This could have made the economy collapse, since so many Jews filled the role of financiers, chief public officers, and artisans but a seeming miracle saved them.
Ferdinand decided to finance Columbus’s venture. Ferdinand had purchased a copy of Ptolemy’s Geography and confirmed what Columbus told them about how short a route he might find to the Indies. (Ptolemy had made a little miscalculation in his estimate of the circumference of the earth, persuading readers that the distance from Europe to Asia by heading west was about as far as the distance from Europe to America. Columbus died believing that he had found this route. He never realized he had instead found a new world.) The decision to finance Columbus’s venture was part of their decision not to rely on so many nonbelievers. They knew that they needed economic breakthroughs to replace the infidels who formed such a big part of the economy.
“They announced an official policy of homogeneity of cultural practices, dress and religion, and the ruthless suppression of local custom, ritual, and belief. In spite of the fact that the growing prosperity of Spain, as of other European nations, depended on vigorous and heterogeneous trade throughout the known world, and in spite of the fact that the artisanal skills which supported lucrative industries like carpet manufacture, ceramics or brocade-weaving were tightly associated with specific ethnic and religious groupings, the victorious Spanish regime declared ethnic and doctrinal purity as the foundations of the stability of the new state.” [1]
Their bold moved paid off. In 1521, Cortes conquered Mexico and by 1533, Pissarro had conquered Peru. The Americas provided a staggering amount of gold and silver. Between 1516 and 1520, Spain’s average yearly income in gold was 200,000 pesos; between 1551 and 1555 it was nearly 2,000,000.[2] “By 1650, 16,000 tons of silver had come to Europe, to say nothing of 180 tons of gold objects."[3]
It would be hard to turn this treasure into economic stagnation but, in their pursuit of purity, Spain did.
Further, the flow of gold seemed to distort Spain’s economy. No agricultural advances were made during the prosperity of Charles’s reign; with a monopoly on selling supplies to the New World, there was no pressure to improve methods. Commercial techniques in the sixteenth century remained basically unchanged from those imported by Italian merchants during medieval times. Following a century of falling prices, Spain suffered unprecedented inflation. Currency was gold and silver and both poured in from the New World. From 1501 to 1550, prices more than doubled; by the end of the century, they had quadrupled. With prices rising so much faster in Spain than in the rest of Europe, Spain’s products soon could not compete with foreign goods. The Genoese “flooded the country with cheap manufactured products, designed especially for the Indies, to the serious detriment of local industry.”[4]
Spain used its income to buy goods rather than develop its own productive capacity, leading the Venetian ambassador to write, “The gold that comes from the Indies does on Spain as rain does on a roof—it pours on her and it flows away.”[5]
Worst of all, Spain moved in the opposite direction of England and France. Rather than subordinate the church to the state, it brutally asserted church power. As the rest of the West was gradually lurching towards something akin to religious freedom, Ferdinand and Isabella launched the infamous Spanish Inquisition.
While the English were gradually accepting freedom of thought, the Spanish were insisting on purity of thought. While the Spanish were out conquering the people in the new world, the English were giving more freedoms to the people in their own. Freeman rose to prominence in England, increasingly taking the place of serfs as farmers. Spain made slaves of Mexicans and Peruvians, forcing them to work in mines in brutal conditions that shortened their lives by decades.
It seems odd to contrast English farmers to Spanish conquistadors. Yet it was something as prosaic as farming that fueled England’s economic progress, bringing it to a point that it could challenge the supremacy of an empire that had so much of the newly discovered Americas even as its emperor ruled a large portion of Europe. Leading what could be called a “food- producing revolution,” English farmers were a key reason that “In the eighteenth century European agriculture was already capable of obtaining about two and a half times the yield on its seed normal in the Middle Ages. . . .By 1750 the best English agriculture was the best in the world. The most advanced techniques were practiced and the integration of agriculture with a commercial market economy had gone furthest in England, whose lead was to be maintained for another century or so."[6]
When the Spanish established colonies in foreign lands, they were exploiting and extracting. When the British began colonizing later, they were actually bringing with them a blend of technological and social inventions that made land more productive. To this day, former British colonies generally outperform former colonies of France and Spain. In Africa, former British colony Ghana has per capita GDP about 4X higher than the former French colony Democratic Republic of Congo. In North America, per capita incomes in Canada are about 5X higher than in Mexico, a country that had formerly been under Spanish and French rule. In Southeast Asia, Singapore has per capita income that is about 20X higher than the Philippines, where Spain left a legacy of medieval Catholic family planning. As with a family, past generations largely define prosperity or poverty. History does not stay in the past. It even defines the options you have for tomorrow.
The mix of social and technological inventions that made land more productive – as transformative as they were – proved to be mere prelude to the big revolutions of the industrial economy.

[1] Lisa Jardine, Worldly Goods: A New History of the Renaissance (New York:
W.W. Norton & Company, 1996), 86–88.
[2] Gertrude von  Schwarzenfeld, Charles V: Father of Europe (Chicago: Henry Regnery Company, 1957), 261–62.
[3] Roberts, The Penguin History of the World, 620.
[4] Vicens, An Economic History of Spain, 336–37.
[5] Carlo M. Cipolla, Guns, Sails, and Empires: Technological Innovation and the Early Phases of European Expansion, 1400–1700 (Manhattan, Kans.: Sunflower University Press, 1965, Sixth Printing 2002), 36.
[6] Roberts, The Penguin History of the World , 679.

08 March 2015

Lindsey Graham Insists the Economy is No Better Than it Was at the Height of the Great Recession (The Republican Dilemma)

Since Obama has taken office on January 20, 2009, the NASDAQ has more than tripled and the S&P 500 has more than doubled, unemployment has been cut in half and the deficit has been cut by about three-quarters. Instead of losing 5 million jobs a year - its worst performance since the 1930s - it is gaining 3 million jobs a year - its best performance since 1999.

Lindsey Graham was asked Sunday whether he would admit that the economy was getting better even though he had warned Americans that Obama would destroy the economy.

"I think that we do have stagnant middle-class wage growth, and I think the labor participation rate is at an all-time low," Graham said. "So if your argument is that we’re on the road to recovery, we had a sound economy under President Obama, no I don’t agree with that at all."
Still not on the road to recovery. This in a nutshell is the dilemma Republican candidates face in their run for the presidency. Here are their options.

  1. Deny that the economy was great under Clinton and Obama but terrible under Bush. With this strategy they have to sell American voters on the narrative that George W. Bush had just gotten the economy into good shape, just managed to recover from Clinton's reckless mismanagement, when Obama came along and wrecked it again. Because Democratic presidents actually make things worse - or at best, don't really improve things - Americans should once again put their faith in a Republican president, perhaps even another Bush. If this sounds like a bad strategy, remember that more Louisiana Republicans blame the government's poor response in the wake of Katrina on Obama than on Bush. Katrina happened 3 years before Obama took office, whereas the Great Recession, which started 6 months before Obama won the election, hit hardest during Obama's first year.
  2. Admit that the economy was great under Clinton and Obama but terrible under Bush. With this strategy they have to convince American voters that while the economy will perform great in spite of awful policies (that is to say, Clinton and Obama were incredibly lucky) and will perform disastrously in spite of great policies (which is to say that Bush just had bad luck), American voters should care deeply about who is president because otherwise .... well, otherwise things could become, you know, either bad or good ... it's hard to tell. It might not even make a difference. But it might make a difference. It might even make a different difference than we previously thought it would. You know.

So while Lindsey Graham sounds like either a liar or an idiot for denying that the economy has actually done well during Obama's presidency, he can never admit it because then he has to admit one of two things that would lose him voters: either Democratic president's policies are good for the economy or president's policies don't matter. To acknowledge reality would force him to change his position.

Of course Graham and his fellow GOP candidates are not going after thoughtful voters - just 51% of voters. This strategy of denial could work for them.

Numbers since Obama took office.

The NASDAQ is up 242%, and the broader measure of the S&P 500 is up 144%.

Unemployment is 5.5%, nearly half the 10% it peaked at shortly after Obama took office.

The deficit as % of GDP has been reduced 72%, more than half, from 9.8% of GDP to 2.8% of GDP.

The year Obama took office the economy lost 5.1 million jobs and last year it created 3.1 million jobs, a swing of 8.2 million.

07 March 2015

350th Anniversary of Newton's Miracle Year and the Scientific Peer-Reviewed Journal

Perhaps all we need to see a flowering of creativity is a mini-apocalypse. Not a collapse of society or bombings that destroy buildings and people. Just a loss of electricity for, say, 2 to 6 months. Maybe even a virus targeted at anyone under 65 that blocks them from the internet, TV or radio.

Leo Buscaglia had a great line. His kids would say, "Dad! I'm bored." "Good," he would respond. "Let me know how it works out."

Undistracted by the glut of information in this information age, forced to amuse themselves with their own inventions and insights, it would be fascinating to see what was produced. It was such conditions that created two extraordinary advances in science.

Yesterday was the 350th anniversary of the first peer-reviewed, scientific journal, a model we continue to use to this day. It is also the anniversary of Newton's annus mirabilis, or miracle year. A plague had driven everyone out of Cambridge, and Newton, full of ideas in an intellectually fecund place like Cambridge, suddenly found himself stuck at his mothers's home, alone, with time enough to fully develop his ideas. He went home in 1665 and by 1666 he had developed integral calculus, verified the composite nature of light with experiments and calculated that gravity holds the moon in orbit to the earth (this last proof presumably involved only equations and no actual experiments). It was an extraordinary set of breakthroughs, laying the foundation for Newtonian physics, a cornerstone for Enlightenment thinking.

Whether the same plague forced the British Royal Society to resort to peer reviewed literature instead of their regular meetings is unclear. What is clear is that such journals have made the 350 years since the most extraordinary time in all of history.

Read about the 350th anniversary of  The Philosophical Transactions of the Royal Society here at the Guardian. Thanks to Bret Bearup's always interesting, often hilarious, mind for alerting me to this big deal. 

06 March 2015

Are We On Track to Create 4 Million Jobs in 2015?

Today's jobs report has great news and yet it'll likely be reported with lots of caveats and caution.

Last year the economy created over 3 million jobs, something it hadn't done since 1999. And yet in the first two months of 2015, the economy has created 50% more jobs than it did in the first two months of 2014. 50% more. A rate that would translate into more than 4 million jobs for 2015. The American economy has created 4 million jobs only once, back in 1978. Back then, the labor force was only 100,000. Today it is 157,000, so creating 4 million jobs in 2015 would be more akin to creating 3 million in 1978. It is very plausible.

The unemployment rate is dropping faster now than it was at the beginning of the economic recovery. It's is now at 5.5% and yet the drop in unemployment rate is accelerating. Consumer confidence is up, credit markets are loosening, and companies are hiring. 

But of course people will be commenting on wages. Inflation is near zero and wages are growing about 2.1% a year. Is that good? 

What is curious about 2.1% wage growth? It will double wages in 33 years, meaning that the roughly $50,000 median wage for 2000 will be $100,000 in 2033, $200,000 in 2066, and $400,000 in 2100. Sound outlandish? It is what happened last century. And of course we will be able to buy things at the end of the century that we could not buy at its beginning. For instance, this week I ordered a personal genetic analysis kit for $79, a considerable discount from the $3 billion it cost for the first human genome sequencing completed in 2000, the first year of this century. It's impossible to predict what remarkable things our grandchildren will be able to buy in 2100 with their $400,000 salary.

And yet, all of today's analysis will begin or end with caveats about how wage growth isn't really growing enough ... about how people are still dropping out of the job market ... about how there is still some question about the recovery. It's hard to break the gloom and doom addiction, but this is, quite simply, more good news.

24 February 2015

Jeb Bush as Republican IQ Test

There is a very real possibility that a father and his two sons will be presidents of this great country for two full decades (George H.'s 4 years plus George W.'s 8 plus Jeb's 8). Three men from one family to reach the top position in their field out of a nation of 300 million. It would be an unprecedented achievement for any family in any field, from entrepreneurship and pop music, to literature and science.

A Martian would be convinced that the Bush family must have some extraordinary mix of speaking ability, empathy, and policy genius to have so consistently won the hearts of the American people. It would be harder for mere earthlings to reach that conclusion.

You can hear Jeb Bush in his biggest speech yet, speaking to foreign policy here. I encourage you to listen for the full 35 seconds.

There is not a single utterance - or tongue stumble - that Jeb makes that is any different from those made by his brother. He's talking about foreign policy, about responding to the threat of terrorism. This is obviously a narrative about how to conduct ourselves in a post 9-11 world.

His conclusion? "We have no reason to apologize for our leadership."  This is probably the most frightening thing he uttered, suggesting as it does that either family pride, happy ignorance of actual events, or a stubborn denial has convinced him that there is nothing he would have done any differently than his brother.

Now you might believe that George W. simply had a string of bad luck. Possibly. It is also possible that the man who rightfully characterized himself as "the decider" made the worst series of decisions of any president in history.

His office was seeing a lot of communication in the summer of 2001 that Condi Rice - his National Security Adviser - categorized as "Osama bin Laden determined to strike in US." He decided to vacation at his ranch for the whole of August before 9-11.

15 of the 19 9-11 hijackers were from Saudi Arabia. Not one was from Afghanistan or Iraq. Bush decided to invade Afghanistan and Iraq.

Lawrence Lindsey was director of the National Economic Council when the invasion of Iraq began. Donald Rumsfeld estimated the Iraq war and occupation would cost $50 billion. Lindsey suggested it might cost $200 billion. Bush decided that Lindsey should be "forced to resign" and Rumsfeld should be trusted. So far, the attack and occupation of Iraq has cost about $2 trillion, 10X Lindsey's offensive estimate.

Never in the history of this amazing country has any president decided to finance a war with a tax cut. Well, not until George W. made that decision. Dubya inherited a budget surplus of $236 billion . The year he decided to invade Iraq with a tax cut, he created a deficit of $378 billion, a swing of  $614 billion from just three years earlier. By his last year in office, his annual deficit had grown another trillion dollars. From Clinton's last year to Bush's last year, the deficit grew by as much as Canada's entire GDP.  Only 10 of the world's 200-some countries have GDP larger than Canada.

Well it may have been expensive, but at least Iraq was worth it, right? It's hard to imagine how you'd argue that.

2,977 people were killed on 9-11. In the invasion and occupations of Afghanistan and Iraq, 6,717 service people have died and even that tragic number is only 4% of the 150,000 Iraqis who've been killed since our invasion.

We pumped enormous amounts of money, armaments, and military expertise into that area. ISIS is now well armed and has been able to tap into outrage to make that region a parody of Bush's vision of Iraq as a "beacon of hope." I'm not sure what data would support the claim that Iraq was a success.

Putting aside the fact that randomly pulling a professor from any American university's department of policy would yield someone more grounded in facts and sound theory than Jeb, it is enough to be alarmed that this man sees no reason to apologize for American (read, my brother's) foreign policy. All of these atrocious outcomes and THERE IS NOTHING TO LEARN HERE is the conclusion the man is hoping we will make. Given he can't admit that his big brother made a single mistake, he can't learn a thing from Dubya's disastrous administration. With no learning, there is no progress.

The Republican Party has been given an IQ test. If they choose Jeb, they will prove that they've  slipped from linkage to facts and theory into the realm of ideology. Ideologues don't deal in theories. They deal in unchanging principles. They don't learn and adapt. They persevere. They don't just reject evolution in theory. They reject it in practice.

The Republican Party emerged in the mid-1800s when the Whig Party died. If Republicans decide they are ideologues rather than pragmatists, if they nominate another Bush or someone like him, they will follow the path of the Whigs, dying out as the last of the baby boomers who so fondly remember Reagan die out. Curiously, this party that  is home to so many who resist science has a simple choice: evolve or die. That evolution starts with - if not an apology for past policies than at least a radical change in them. It is harder to imagine Jeb Bush leading this change than it is to imagine Tito Jackson becoming more famous than his siblings Michael and Janet.

20 February 2015

Confusing STEM Education, Innovation and Entrepreneurship

Innovation is a form of technological invention. Human genome sequencing that results from a swab from the inside of your cheek, for instance. Or mounting lightweight cameras onto helmets or drones to capture video of skiing from the perspective of the skier or the surfer from the perspective of a sea gull, for example.

Entrepreneurship is a form of social invention. 23andMe, the company that sells a personal genome test, for instance. Or GoPro, the company that sells cameras for use in odd places like drones or dashboards, or example.

The skills for innovation and entrepreneurship can overlap but they don't have to. By 1900, Andrew Carnegie was probably the richest man in the world. Carnegie's early success depended on a process patented by Henry Bessemer. Carnegie was a businessperson who knew how to solve new problems with strong, affordable steel that could be used to build skyscrapers and railroads. Steve Jobs did not invent the computer (although his partner Steve Wozniak did make some advances in circuit board design that helped to evolve it).

You could be innovative but not entrepreneurial. R&D labs are full of brilliant scientists who really could not tell you the commercial application of their efforts. And of course you can be entrepreneurial without being innovative. Starbucks original founders did not invent coffee roasting. McDonalds' Dick and Mac (fortunately for us, their most famous burger was named after Mac) did not invent the hamburger. The original founders of these companies were not even the ones who made the brands wildly successful. Ray Kroc and Howard Schulz have their names forever associated with McDonalds and Starbucks because they made them an international success and took the companies public.

There is a great deal of emphasis on STEM education - science, technology, engineering, and math majors. This is nice. It helps with innovation and we can always use more STEM graduates. They're probably the group least likely to be unemployed.

But even STEM graduates might not become innovators. They might not develop new technologies and products. That depends on particular sorts of institutions as varied as good grad schools, a strong financial community willing to bet on long-shots (venture capitalists, for instance) and strong R&D labs within universities and corporations.

And of course, those innovators may never become entrepreneurs. The skills required for product invention do not automatically lend themselves to entrepreneurship.

On that note, here is a fascinating chart that shows the gap between STEM and innovation. The gap between innovation and entrepreneurship is even wider. The policies that encourage each are very different but it's not obvious that policy makers make that distinction.

30 January 2015

Why Corporations Could Get Higher Returns Than VCs

Daniel Kahneman is the only psychology professor to have won a Nobel Prize in Economics. His studies with Adam Tversky on how people value things is one of the reasons. They suggest something counter-intuitive about risk.

In one study, Kahneman ran a few scenarios with coffee mugs from a person’s alma mater. In one scenario, he gave people the mug and let them “take ownership” before offering to buy it back from them. In the other study, he let people buy the mug that was not yet in their possession. On the surface, you would think that they would value the mug the same way in both instances, but they didn’t. He had to pay, on average, $7 and some change to buy the mugs back from people. By contrast, he had to sell the mug for about $3 and change to get them to buy when they did not already own it. Kahneman’s conclusion was that people put a higher price on loss than they do gain. It is more painful to lose what you have than never get something comparable. He had to pay people twice as much to give up their mugs as they were willing to pay to buy them.

This makes sense. You might feel the pang of a relationship that fails to materialize but that is nowhere near as devastating as a divorce. Not getting the job is rarely as painful as being laid off. Loss is painful and we put a premium on avoiding the loss of valuable things.
This is one reason that Warren Buffet is worth so much. He sells insurance. People pay a premium to avoid loss. Richard Thaler discovered that people would not pay more than $200 to avoid the 1 in 1,000 chance of immediate death, which suggests they value this added probability about the same as a smart phone. But if you offer to pay someone to accept 1 in 1,000 odds of immediate death, they refuse it even for $50,000.[1]

Just to be clear on this oddly paradoxical approach to risk, here are the scenarios.

Scenario 1: You have a choice between two pills to cure what ails you. The $1 pill has a one in a 1,000 chance of killing you immediately. The premium pill eliminates this chance. How much extra will you pay for the premium pill?
Research suggests that the average person will not pay more than $200 for the premium pill.

Scenario 2: You are offered pay to be in a research study, testing the $1 pill that carries a one in a 1,000 chance of killing you immediately. How much will you demand to take this risk?
Research suggests that the average person will not do it even for $50,000. 

Oddly, this does not result from a difference in the probability of death: in both cases, it is one in 1,000. These two scenarios offer the exact same risk, the exact same chance of death. One measures how little you are willing to lose to avoid the risk and the other measures how much you have to gain to accept the risk. The pain of loss is much greater than the allure of gain. We do not feel so bad about losing out on big gains but we desperately try to avoid even small losses.

These differences in how we value risk help to explain why the derivatives, junk bond and futures markets are worth trillions. Smart investors will buy risk from people at a discount. Now that would just be interesting if it were not for something really fascinating that it suggest about how corporations could use behavioral psychology and the popularization of entrepreneurship to earn returns that venture capitalists would envy.

The prime candidates for entrepreneurial ventures are actually people in their 30s and 40s. Their startups are less likely to fail and reasonably so. They have more experience than people in their 20s and more drive than people in their 50s. They have learned about processes, products and people and typically know at least one industry reasonably well. But they have one major disadvantage in comparison to the twenty-something crowd: they have so much to lose.

Imagine a 40 year old who has been in the industry – any industry – long enough to have a potentially lucrative idea. He knows a cheaper way to make an old product or has an idea for an innovative new product or how to create a new market. He also knows that executing this idea will require capital. And leaving his job. And working at risk for at least a year – more often 3 to 7 years. It is not hard to imagine that at 40, he has been married for 10 or 12 years. His children are 9 and 7 and he has a small amount saved for their college. He is 8 years into his 30-year mortgage. He is 10 years into his job and now gets 4 weeks of vacation and is fully vested in the 401(k), which is just starting to seem sizable – but still not enough for retirement. The man has a lot to lose. Most importantly, he puts more weight on the cost of losing all that than he does on the potential gain from his entrepreneurial venture.
The twenty-five year old, by contrast, has almost nothing to lose. For this reason alone, she might be the better candidate for entrepreneurship.

If Kahneman’s studies are right, our 40 year old values what he has now vs. what he could have at a rate of about 2 to 1. If Thaler is right, he values it at a rate of at least 250 to 1. In any case, the emotional cost of losing what he already has is great. He would be sick to wake up at 47 with no 401(k), no business, no money for college for his 16 and 14 year old children, and no equity in his home. The prospect of this is more terrifying than the hope of waking up at 47 to a net worth of $5 or 10 million and the expectation of doubling that every 2 to 5 years. His preference for the second scenario is not as great as his desire to avoid the first. Loss is more sharply felt than gain.

This suggests that corporations have a great deal to make by offering entrepreneurial opportunities to their employees. Countless employees who could be great entrepreneurs shy away from the prospect because they have something to lose. What a corporation would have to offer as a percentage of returns would be less – perhaps considerably less – than what a venture capitalist or traditional banker would have to offer. A successful venture could return considerably more to the corporation than it might to the venture capitalists simply because the employee as entrepreneur would have so much less to lose than the employee who leaves his job to become an entrepreneur.

[1] Peter L. Bernstein, Capital Ideas Evolving [John L. Wiley & Sons, Hoboken, New Jersey, 2007] p. 15.

Stay tuned. This is an excerpt from an update to The Fourth Economy: Inventing Western Civilization, soon to be released with revisions. In the 20th century, we popularized knowledge work. In this generation we will popularize entrepreneurship. This is going to be big.