21 March 2017

The Attempt to Take the Judgement Out of Judging

Just call the pitches as balls and strikes, the tired analogy goes. Don't let judges act as legislators. They should, instead, be impartial interpreters of the law.

"Thou Shalt Not Kill," is one of the earliest surviving examples of a law. The text is pretty simple. Don't kill. The context makes it a little more subtle. So, in the context of war should you not kill? Conscientious objectors believe that. Do you have license to kill if you're hungry? Vegetarians don't think so. Can you kill in self defense? Or if you're really angry? 

All legal text gets applied to a situation in a particular context of actions, intent, social norms and historical precedent. Those change from situation to situation and evolve over time. A judge has to consider this context when making judgement on the text or law.

Acting as a judge inescapably involves making judgments. To pretend that it doesn't shows really poor judgement. 

13 March 2017

The Odd Collusion of the Rich and Poor to Block Progress for Security

There is a curious collusion between elites and the working class that can actually arrest progress and stop wage growth. 

You wouldn't think that the working class - people in the lower middle part of the income distribution - would willing collude with the wealthy to perpetuate what might strike others as a fairly basic income. And yet ...

There are a few concepts that come into play in this attempted explanation: extractive institutions, insecurity, and gales of creative destruction. 

Schumpeter immortalized the term, "gales of creative destruction" as a means to define how markets simultaneously create the new - "look! a horseless carriage!" -  and destroy the old - "look! Clem's closed up his horse dependent carriage shop!" By most every measure, these gales of creative destruction are the source of progress but they also threaten the folks who are currently making a perfectly good living selling the old, soon to be obsoleted product. 

When you are working class, you're not in poverty but you are not secure. Over half of Americans don't have enough savings to cover an unexpected expense of $500. For these Americans losing a job and then getting retraining for a new career are simply not a practical choice. (It might be a necessary one but it's not a practical one.)

Finally, there are extractive institutions (I first encountered this concept in Acemoglu and Robinson's book Why Nations Fail) that leave workers within them at a subsistence wage. The owners or rulers of these institutions - whether the Spaniards who ruled the encomiendas or Robert Mugabe over Zimbabwe - extract all the profit from the institutions. Among the many problems with extractive institutions is this: no one has incentive to conjure up the gales of creative destruction to create the next, best thing. Any breakthroughs in process that workers could adopt to raise profits will just flow to the pockets of the owners. People within the system won't make any more whether they work harder to smarter so they tend not to. People who control the institution aren't really interested in any progress that could create the gales of creative destruction that suddenly obsolete their system so they tend to resist progress or improvement. There is a huge difference between the poor people within the system and the rich who rule it but they do share this: they feel threatened by change and will resist it.

Progress steadily makes life better for everyone. It also tends to abruptly make life worse for at least a few: the unfortunate stockholders in Kodak when Instagram comes along, or worse, their unfortunate employees.

Politically, this is tough. The folks who lost their jobs to automation or outsourcing are acutely aware of this. The folks who are buying 1" extra of TV for 90% less are less aware of this and less passionate about it. Progress's creative gales are more evenly - and imperceptibly - spread across a population than are its destructive gales.

An aversion to change that might bring in the gales of creative destruction is shared between the insecure working class and the owners of extractive institutions who profit from the status quo. They make for odd bedfellows but both share an incentive to resist free trade and new technologies. 

12 March 2017

Bernard on Free Speech, Protests at Middlebury and When It Becomes Unreasonable to Rely on Reason

It had been awhile since I'd met with my invisible friend Bernard. He sounded a little hoarse.

"What's with your voice," I asked.
"I've been shouting at my twitter feed," he said. 
"TV, Bernard. "The phrase is 'shouting at your TV.'"
"You have to change with the times Ron." He paused. "You should have never told me about Twitter. I now get a steady stream of evidence that the world has gone mad."

We ordered our usual. I ordered the Reuben and he - as he usually did - ordered something new to him from DZ Aiken's vast menu, always first marveling at the fact that the portions were so huge and then methodically finishing everything on his plate.

"Hey, you read Charles Murray," he said. "Did you see that people at Middlebury College rioted against him the other day?" He chuckled as he surveyed the vast expanse of food on his plate. "That's one advantage to books over lectures. Nobody reading a book in the corner suddenly leaps out of his chair and riots. You bring a group together, though, and no telling what will happen." And with that he popped an entire matzo ball into his mouth. I took that as an invitation to respond.

"It does seem terribly uncivilized of a university to invite some guy to speak on your campus and then threaten him with violence when he shows up," I said.

Spewing a fine spray of matzo ball as he did so, Bernard spoke. "So you're making the freedom of speech argument?"
"Well not free to chew when you're talking, but yeah. Plus Charles Murray made some really important points in his book Coming Apart about how poverty and job loss is undermining institutions like the family. That's an important conversation. If you have a process for bringing someone onto campus, you should respect it."
"Sure," Bernard said, his Adam's apple bobbing furiously either because of excitement or because he was trying to hastily swallow. "Assuming that the people on a campus are any more monolithic than a population in a country or city. But you're saying that Charles Murray had the right to speak?"
"But that is very different from the right to an audience."
"You are free to speak but that doesn't give you a right to speak on Face the Press."
"Do you mean Face the Nation or Meet the Press?"
"Meet the Nation. Whatever. Charles Murray doesn't have a right to the audience at Middlebury University."
"Well they invited him. Plus, students need to learn how to think critically about ideas they don't like. University is not a place where you go to be protected from controversial ideas. Ideas shouldn't be censored."
"Well not censored but they certainly can be mocked or belittled or demolished with data."

"Which is why they need to be brought into the open. So they can be fought. Bad ideas flourish in dark spaces like closed minds and alt-right websites," I said. My point made, I stopped to enjoy my sandwich. That proved to be a poor debate tactic because it gave Bernard time to make a little speech.

"You are so naive Ron. You think that everyone with a bad idea will suddenly abandon it when they hear a good argument? Do you really think that if you point out that every time blacks have the chance to perform in an arena where prejudice gets demolished by performance - every time they compete in a game or on a track or in music sales or making people laugh - they flourish that a racist will just stop and say, 'Oh. Good point'? Do you think that sane people didn't try to make an argument against eugenics in Germany in the 1930s? Some minds are so simple that they desperately need simple arguments. Nothing is simpler than saying that Jews are plotting to take over the world or that blacks are inferior. You're not going to argue people out of those ideas. Your only real hope is to keep them away from those ideas."

"But those college kids need to hear the arguments and hear them demolished."
"Really," Bernard look at me with a measure of pity. "Why? Why even waste the time? Should we open up our university lecture halls every time some idiot with a feeling that he's mistaken for an idea wants to tell us why women are inferior or why climate change isn't real or why dictatorships are more effective than democracies? Those ideas are toxic. They literally kill people."
"Who decides, Bernard? I think that the burden of proof lies with the people who want to shut down the debate."
"No," he said firmly. "The burden of proof lies with those who think that the idea deserves an audience. There are an infinite number of ideas. When it comes to a university, someone needs to curate those ideas, make a choice about who gets access to the audience and can later say 'I have spoken at Middlebury, Harvard, UC San Diego, and Claremont Colleges. You, too, should listen to my very important ideas.'" 

"But nowadays we don't have curators of ideas" I said. "It's a free for all. It's not like an editor will keep a community from a terrible idea. People in every community will find really bad ideas on the internet as easily as they can find porn. You can't rely on curation of bad ideas once you have the internet. Instead, you have to teach people how to defend themselves against bad ideas, have to vaccinate them with good thinking."

Bernard was quiet. "Well that's a precarious place to rest the future." He ate a little more then said, "It's the most curious thing, Ron. The older I get, the less time I have left, the more I worry about the future I won't even be part of. You'd think it would be the other way around. You're young and you have decades left, longer than you've ever experienced, and you worry about what's going to happen in the next hour or day. You get old and have days left and you start worrying about how things will play out over the next century." He ate some more. "Well, and you worry about what's for dinner."

"To me it's fascinating because really, this is a debate about what we can debate," I said.
"Yes. Or the criteria you use for judging debates." 
"So we agree," I happily exclaimed.
"This fried kreplach," he murmured "It makes me happy."
"You're not really even listening to me, are you?"
His eyes closed as he chewed, he didn't respond.

"But you know, it's a lie we tell ourselves that we got here by reason and we stay here through reason."
"What," I asked.
"In the end, all reason rests on force."
"That's quite a statement."
"Violence is at the base of every argument. At some point you conquer the other guy and say, 'Our values, our norms, our goals are going to rule from this point forward. Not yours.' In the end, we didn't argue with Nazis. We shot them."
"Well that's bleak."
"You don't win all the arguments Ron. Our founding fathers were geniuses who understood Enlightenment principles and the fact that progress was incompatible with reliance on rule by aristocracy and religion. But they didn't argue their way into independence. Middlebury University there in Vermont where your Charles Murray was run off. It was founded by Congregationalists. Do you know what they were? The descendants of Calvinists, the folks who rode over on the Mayflower. What was Calvinists' big idea? Predestination. How at odds is that with the notion of a nation of self-made men or even the ideals of a university? Predestination is at odds with the very notion of progress. Sometimes you can win an argument over generations without resorting to force, the way that the Congregationalists won the argument about predestination with their Calvinist grandparents. That's ideal. Other times, you use force against a few guys with bad ideas before they use their arguments to ruin the lives of millions."
"I don't think that we're going to see something like Nazis again Bernard." 
"I wish I shared your confidence, Ron. But regardless, there are a variety of ways to cut short a life," Bernard said. "Sometimes it is in war or concentration camps. Other times it is by acting like blacks really are inferior and there is nothing that can be done about a black man having a life expectancy ten years shorter than a white man. Any argument that suggests we simply accept that reality is already violent. You can hardly blame some people for responding to such a dangerous idea with the threat of violence. It's unreasonable to think that reason is always enough."

05 March 2017

The Fourth Economy & the Popularization of Entrepreneurship (or how work evolves from farming to entrepreneurship)

Graphic created by Jacob Morch jacobmorch.com

The definition of work changes as economies evolve. The grandchildren of farmers became factory workers and the grandchildren of factory workers became knowledge workers.  There’s good reason to believe that the definition of employee will change again, this time into something like entrepreneurship.

Thomas Jefferson imagined the United States as a country of educated, gentleman farmers. Even when he became president in 1801, though, the percentage of Americans farming had begun its steady decline. Now, each month economists await the announcement of nonfarm payroll employment. Today farm jobs are not even included in the country’s defining measure of jobs lost and gained.

Alexander Hamilton’s vision of an industrialized nation turned out to be more prescient but in recent decades, manufacturing’s share of the work force has also been in steady decline. Next century, economists may await the nonmanufacturing payroll employment report.

Millions voted for Trump and his promise to bring back manufacturing jobs. As promises go, it seems more akin to a 1916 campaign promise to bring back farming jobs than an adaptation to new realities. Yet acknowledging that farming and manufacturing are unlikely to reverse their decline leaves us with the question about the source of next generation jobs.
The economy has shifted but policy has not. Until economic policy begins to address the new limit, it will continue to be ineffective.

Over the last 40 or 50 years the per capita GDP growth rate has fallen. The fallout is not just economic. It has made voters less trusting of major institutions and expressed itself in surprising victories for BREXIT and Trump. Most people now feel that “the system is broken, unfair, and failing them.”[1]

Meanwhile, one place that has done remarkably well in the last half century is Silicon Valley, a place that more than any other has become synonymous with entrepreneurship.

About a century ago, Henry Ford made business history by doubling the wages of his factory workers. Doubling. Not only was he making cars more affordable, he was paying working class people enough to buy them.

In 2016, median wages in the US were about $51,000 a year. Like Ford, Silicon Valley has doubled that. In Santa Clara County – one reasonable approximation of Silicon Valley – average wages were $117k, or 118% higher than the national average.

It’s possible that Silicon Valley is an anomaly, a place that other communities can only envy but never emulate. A more interesting possibility is that Silicon Valley is to a new entrepreneurial economy what Manchester, England of the 1700s was to a new industrial economy: just the first place to enter a new economy whose practices will eventually spread around the world.

Four Economies and Four Limits
Agricultural economies give way to industrial economies, which give way to information economies. Most people share that intuition but their understanding of what these labels mean and how to distinguish between them is fuzzy. Even industrial economies have farms and information economies have factories. It takes a little explanation, but limits can clarify the distinction between different economies and predict a fourth, entrepreneurial economy.

Period in West
1st, Agricultural
1300 to 1700
2nd, Industrial
1700 to 1900
3rd, Information
1900 to 2000
4th, Entrepreneurial
2000 to ~

Before talking about economies, imagine a factory with four stages. It gets raw materials in on one end and sends product out the other. The materials that become a finished product must pass through all four stages before they’re sold.

The numbers and height of the bar indicate how many products a stage can process in an hour. The first stage can process only 1, the second can process 2 and the fourth and final stage has the capacity to process 4 products an hour.
The customers don’t buy the unfinished product from any intermediate phase, though. They only buy product that comes out of the whole factory, product that has passed through all four phases. The question is, what is the capacity of this whole factory? How many products can it produce per hour?

The answer is 1 per hour. Your factory’s capacity is equal to the capacity of your first stage. You could call that a bottleneck, a constraint or limit. Whatever you call it, this limit defines the capacity for your whole factory. If it can only feed the next stage 1 item per hour, it doesn’t matter that the second stage has the capacity to process 2 items per hour because it won’t get product fast enough to process that many.

Until you increase the capacity of the first stage, you will not increase the capacity of your factory. So, you experiment. Maybe you speed up the process, simplify the process or just buy a second machine for that first stage. However you do it, you eventually double the capacity of this first stage to get a picture like this:

The good news is that by doubling the capacity of the first stage you have just doubled output for the whole factory. Armed with the knowledge that focusing on the first stage makes all the difference, you continue to experiment and invest in improving that first stage until you find a way to double its capacity again.

This time, though, doubling the capacity of your first stage does not change your factory output. Why? You were so successful at improving the first stage that it is no longer the limit to your factory. Your limit has shifted elsewhere.

Two lessons from your factory could apply to any system.[2]
  •        To improve the system, you have to focus on the limit, and
  •        Success eventually shifts the limit.

So, what limits an economy? In every introductory economics course, students learn that there are just four factors of production: land, capital, labor, and entrepreneurship. Anything of value created by an economy depends on some mix of these four factors and one of those would have to be the limit at any given stage of economic development. Land includes all natural resources, from herring to oil, acreage and cotton. Capital includes the financial and industrial tools that transform those natural resources into finished products, the factories that can turn cotton into clothing and the stocks or bonds that finance the machines and factories. After the industrial revolution, the labor of knowledge workers – people like accountants, engineers and advertisers – who manipulate the symbols of things rather than actual things was the most defining labor. Finally, entrepreneurship brings together land, capital and labor into a profitable enterprise.

The four phases of a factory can become four factors of production in an economy and we can examine limits to an economy in the same way that we examined limits to the factory. The output of an economy can be measured by things like jobs or wealth, income or GDP.

Different limits create different economies
Agricultural economies are limited by land. Wealth between 1300 and 1700 didn’t result from advances in information technology (not that the Gutenberg Press wasn’t disruptive) but instead came from trade, conquest, and colonization with faraway lands and creating nation-states and private property in your own land.

An industrial economy is limited by capital. Between 1700 and 1900, the creation of wealth was less about exploration, conquest and colonization than it was about building the factories that could turn raw materials into finished goods and then build out canals and railroads to distribute those goods. Wool and cotton became fashion. Iron ore became railroads. Skyscrapers rose in cities and cars emerged to drive between them.

An information economy is limited by knowledge workers. Between 1900 and 2000, it wasn’t enough to have factories that could make more products than anyone had ever seen before. They had to be the right products (which required marketing and design expertise) made for and sent to the right places (which took manufacturing and distribution knowledge) by the right methods (which took advertising and retail display experts.)

An information economy emerges after an industrial economy. Before the automation of the industrial economy, you need workers to manipulate actual things, afterwards, machines can do that and  labor can shift its focus to manipulating symbols. The sequence from agricultural to industrial to information economies is not just an historical sequence, it’s a logical one.

Period in West
1st, Agricultural
1300 to 1700
2nd, Industrial
1700 to 1900
3rd, Information
Knowledge Workers
1900 to 2000
4th, Entrepreneurial
2000 to ~

Economies are complicated and progress is slow so it makes sense that as communities gradually overcome limits they’ll cling to the processes that once made them great. Like the factory manager who keeps doubling the capacity of his first process step to no avail, communities can continue to create foreign colonies, spending huge sums on a global empire even after they’ve entered an industrial economy. Or more recently, they might pump money into their economy or create graduates past the point that capital or knowledge workers actually limit the rise in per capita GDP. It is almost inevitable that communities will continue to do what they’re now good at even after reaching a point of diminishing benefit. Cultures last longer than cost-benefit analysis and new practices become old habits.

An additional complication is that there are always pockets within a larger community that face earlier limits, and those limits define local culture and politics. When natural resources are the basis for wealth in a region, for instance, it will be more religious and more inclined towards policies like a strong military that support the notion of a zero-sum economy. It’s not the ingenuity of people that creates an oil field but is instead just a gift of God or nature. And that oil field doesn’t get larger because we decided to share it. Either I own it or you do, and rather than win-win we’re going to have a winner and a loser in this exchange. There will always be regions that lead or lag in development and thus will lead or lag in the reality they experience and that informs their convictions. It’s not just that a person living in rural Kentucky has a different political philosophy than her peer in Cambridge, MA; the daily reality that informs her perspective is different.
One other way to understand a limit is to look at its price. Scarce factors are expensive and abundant factors are cheap.

The success of the second economy made capital abundant. Traditional bankers who emerged from the second economy (many of our current banking practices were defined in England by 1900) carefully loaned out money, trying to minimize the risk of losing capital. Venture capitalists, by contrast, treat capital as abundant and fully expect to lose quite a few investments. Given they’re taking equity in a new firm rather than hoping to get back capital with interest, they know that only a fraction of their investments need to succeed in order for them to get great returns. Traditional banking evolved when capital was scarce: venture capitalists evolved when capital was abundant.
What is scarce now? Entrepreneurship and we can see that in its price. At 31, Bill Gates became the richest self-made billionaire in history. A generation later, Mark Zuckerberg became a billionaire at 24. The price of capital is the interest rate and towards the end of last year, investors owned about $12 trillion in negative interest rate bonds. Trillion. We have a glut of capital and a shortage of entrepreneurs, which suggests that effective policy would focus on increasing the supply of entrepreneurs rather than the supply of capital. Between 1700 and 1900, we learned how to increase the supply of capital through a variety of means, from popularizing savings and investment (from founding father proverbs like “A penny saved …” to expanding the number of people who bought wartime bonds and then later became savers) to changing the money supply or interest rates. If policy makers think that we’re short of capital, they can quickly pump billions into the economy. There are no comparable policy levers for increasing levels of entrepreneurship. Not yet.

When The Old Limits No Longer Limit
If capital were still a limit, we’d be in great shape. The S&P 500 have $1.5 trillion in cash and in the third quarter of last year they paid out $200 billion in dividends and stock buybacks. Banks excess reserves have dropped from their August 2014 high of $2.7 trillion but are still at a staggering $1.9 trillion.[3] (Before the Great Recession, excess reserves in the US were closer to $1.5 billion.)

Our education system helped us to overcome the limit of knowledge workers. In 1900, less than 10% of 14 to 17 year olds were formally enrolled in education. By 2000, less than 10% were not. In a century, the US went from an industrial economy dependent on child labor to an information economy dependent on adult education. That helped to transform life in the 20th century, real incomes increasing 6X to 8X and life expectancy rising from 47 to 77.

If knowledge workers and their information technology were still a limit, creating more graduates would help to create more jobs. In 2013, the American education system created 3.7 million graduates, everything from folks with AA degrees to PhDs and all the degrees in between. That same year, the economy ended the year with 2.4 million more jobs than it had at the start. We’re creating graduates faster than we’re creating jobs, 15 new graduates for every 10 net new jobs. It’s no wonder that student debt is becoming a growing issue.

It’s not just ineffectual to pursue old policies in a new economy. It can be dangerous.

A glut of money creates problems. Investors in search of returns, unwilling to accept negative interest rate bonds, too readily bought expensive things like tech stocks in 1999 or subprime mortgage instruments in 2007. Trillions in investments can create a series of bubbles and busts as it wanders the earth like a murmuration of starlings in search of returns.

A glut of graduates creates problems. Young people not only start careers with mounting debt but find it more difficult to find jobs they could not have worked with just a high school diploma. Millennials who are the best-educated generation in history nevertheless fear that they’ll be the first generation in American history to do worse than their parents. (This student debt will also make it tougher for them to finance startups. As medical school has become more expensive, for example, the percentage of doctors working for large groups or hospital has gone up relative to those who start a private practice.)

One consequence of continuing to pursue dated policies is that it makes it tougher to pursue any policy. When incomes are steadily rising, politics is civil. Families can pay a little more in taxes to support schools and help the poor while still taking home more pay after taxes. When incomes are stagnant, politics becomes more divisive. Few people like the idea of not supporting education or the sick but if the choice is between that or less take home pay? Well, the conversation becomes more heated and compromise is harder to reach on top of the fact that everyone starts this policy conversation disenchanted and bewildered.

We don’t need to jettison incredible financial and educational systems that are essentially over-producing, creating more capital or graduates than we can fully employ. We just have to stop looking to those systems as the means to create jobs and wealth. As we become successful at overcoming this new limit of entrepreneurship, we’ll be able to fully employ capital and college grads. Eventually, we will even create enough demand for them to bid their prices up further.

The Central Question of Every Economy
The central question for any generation concerned about economic progress is how to overcome its limit, not the limit of its grandparents or founding fathers. Creative answers to that question result in a new economy and a very different community.

In retrospect, the central question of economic development from about 1700 to 1900 was simple: how do we get more capital and make it more productive? The creative answers to this included everything from the Dutch stock market, Rothschild’s international bond market and the British banking system to the spinning jenny, steam engine, and continuous production technology. (The question is simple. The answers can be complicated.)

The central question of last century was, how do we create more knowledge workers and make them more productive? The creative answers to this included the popularization of K-12 education, the modern university, R&D labs, the modern corporation and information technology.

The question that policy makers everywhere – city hall and senate floor, corporate boardrooms and universities – should now ask has two parts:
  •       How do we create more entrepreneurs and make them more effective?
  •        How do we make employees more entrepreneurial?

Creative answers to these simple questions will transform the economy. We now have a financial system and an education system. We don’t have an entrepreneurial system but instead expect our entrepreneurs just to show up, like autodidacts in 1800. Changing will be an odd, fascinating and profitable project. Think about educating students to be prepared to become entrepreneurs in the same way that we now educate students to become university students and knowledge workers, for instance, or changing the definition of employee.

Changing the Definition of Work. Again.

Perhaps more interesting than the question of how to create more entrepreneurs is the question of how to make employees more entrepreneurial. We – rightfully – make a big deal about national economic policy. It’s worth keeping in mind that measured by GDP or revenue, of the 100 biggest economic entities only 31 are countries; the other 69 are corporations. (Walmart’s $480 billion in revenue would put it just between Sweden and Belgium’s GDP.) Corporate policy deserves as much discussion as national policy if we’re interested in progress. The most important topic in this discussion might be to ask what it means to be an employee in a time when AI like IBM’s Watson is liable to automate knowledge work in the same way that capital automated manual work.

Think about changing employment so that employees within a corporation had as much freedom to pursue new ventures as citizens within a country. Roughly 800,000 Americans make more than the $400,000 a year that we pay the president.[4] That sort of thing was unthinkable in Egypt under Hosni Mubarak or France under King Louis XIV, but as nation-states evolve, people within them have the potential to prosper more than even the head of state. Contrast that with how evolved the corporation is. While it’s common for professional athletes or portfolio managers to make more than their managers, it is rare that anyone inside a traditional Fortune 500 firm makes more than the CEO. What if employees could become more entrepreneurial, were able to create equity by taking existing products into new markets or by leading product and business development efforts that are akin to startup activities? And what if the success of those ventures could actually result in their making more than the head of the company in the same way that an American entrepreneur has the potential to make more than the American president? This dispersion of power and pay is just one way that the popularization of entrepreneurship will change the corporation.

Overcoming the limit of entrepreneurship will require and result in new legislation, new education, and new definitions of what it means to be an employee. As importantly, it will continue in a grand tradition of the west, doing for business what earlier economies did for religion, politics, and finance. That is, it will expand freedom for the individual. There is no way to make employees more entrepreneurial without giving them more freedom.

There are interesting examples of popularizing entrepreneurship within companies. Ricardo Semler did something interesting with his Brazilian company Semco. He gave his employees freedom to negotiate work arrangements. People working side by side on the factory floor doing similar work might have very different arrangements. One was paid hourly, another a monthly salary, another paid by piecework and another might actually be paying Semco to use equipment to make product that she – the employee – could later sell herself. Uber lets “employees” accept or reject specific fares and take just one fare a week or work all day. Amazon’s marketplace and Apple’s iTunes are platforms that let companies and entrepreneurs sell their own products. P&G is among the companies who richly reward successful product development leads whose responsibilities overlap quite a bit with entrepreneurs. All of these are examples of enabling entrepreneurship, blurring the boundary between traditional definitions of employee and entrepreneur, and giving the employee more freedom to define their own work and its results.

This matter of employees gaining more autonomy is not incidental to progress. Autonomy is a way to define progress and each new economy has given the individual in the West more freedom. If you have shoes you have more options about where to go than if you are barefoot; if you have a car you have even more options. If you live in a democracy, you have more options about what to believe and how to live than if you live in a theocracy. If you have a credit card you have more options than if you need to approach a banker to request a loan for a specific item, or can’t get a loan at all. If you have the freedom to create equity as an employee you have more freedom than if you’re expected to adhere to a process someone else defined.

The popularization of entrepreneurship will increase our product options and levels of wealth. Progress, though, is only partly about more and better products. That is only one way that our lives expand to include more options. The first economy didn’t just bring potatoes and tomatoes to Europe; it brought religious freedom. The second economy didn’t just bring fashion and automobiles to households; it brought democratic freedoms. And the third economy didn’t just give us radio and the polio vaccine; it made capitalists out of knowledge workers, giving them financial options that people in 1900 would have found as baffling as the internet. The fourth economy will transform business and work in the same way that the first three economies transformed religion, politics, and finance. That is, it will give us more autonomy, as economic progress always does.

As you might imagine, there is a great deal more to this new economy than would can be captured here. My book, The Fourth Economy: Inventing Western Civilization, can be found here. It's a longer read but it does explain progress from the Dark Ages to about 2050.

[1] https://twitter.com/Bill_Gross/status/821245915579240448
[2] Eli Goldratt, author of The Goal and Critical Chain popularized the ideas of Theory of Constraints (TOC) in the 1980s and 1990s within many Fortune 500 companies and government agencies.
[3] https://fred.stlouisfed.org/series/EXCSRESNS
[4] https://www.ssa.gov/cgi-bin/netcomp.cgi?year=2015

04 March 2017

What Hitler Taught Trump About Rallies

It's worth remembering that Trump had a book of Hitler's speeches by his bed. Here's one of Hitler's quotes about speeches at rallies.

A mass rally is designed to switch off the thinking process. Only then will the people be ready to accept the magical simplifications before which all resistance crumbles.
-        Hitler

Trump is offering to chase imaginary monsters like economic carnage and out of control crime and immigration. One beauty of getting people to agree to chase imaginary monsters is that you can - at any time - just turn on the light and claim victory. "Look! The job market is now healthy!"

03 March 2017

The Battle to Rise Above the Genetic Imperative

The Economist just tweeted out this fact of the day:
In 2007, Google searches for "Kim Kardashian" overtook searches for "climate change."

All the primates seem terribly interested in the lives of alpha males and their cohorts. They track who is in favor and who is out. Not just opportunities to mate but one's own survival can depend on how attuned one is to the social dynamics that determine who is in and who is out, who is popular and who is not. The politics of high school and who is popular have deep genetic roots.

Apparently this urge never stops. Last night visiting a friend who is dying in a hospice facility, he said that as he lays in bed his mind continues to come back to the same thoughts. "What thoughts," my wife asked. "The politics of this place. So many people think they are superior to you." To our dying breath, I thought. Wow. And then I realized that it is past that: "we" are going to heaven and you are not is one of the oldest stories of civilization. Not just in groups and out groups in high school but straight through eternity.

Meanwhile, carbon emissions are changing the climate. Chicago had no snow on the ground in January or February for the first time in 146 years. Permafrost that has been intact since the end of the last ice age 10,000 years ago is now collapsing. In states throughout the US, communities are setting new records for heat. Places in Oklahoma - home to our new EPA secretary who sees climate change as a hoax - hit 100 in February for the first time on record.

We did not evolve to worry about climate change in the same way that we evolved to worry about who is in and who is out in celebrity circles. It's stylish to berate the media for what they cover but right now our media is profit-driven. They don't have an incentive to cover what they should; instead, they have incentive to cover what we're programmed to care about. We do have these big brains but what they like to do is fixate on the same things the chimps do: food, sex, our progeny and social status. Religion was one attempt to raise people above the genetic imperative, imploring us to rise above the world, flesh and devil. Science and the modern world is yet another attempt to elevate our concerns to something that wouldn't occur to a fellow primate. No matter whether it's with pulpit or lectern, though, it's a tough battle to wage.

01 March 2017

Trump's Bold Solutions to Imaginary Problems: Address to Joint Session of Congress on the last day of February 2017

I did not see Trump's speech but read it. My initial reaction is that it was filled with about equal number of promises that are too general to ever be broken and promises to fix problems that don't exist. He made general promises more akin to "I'll be a great husband," rather than specific, measurable promises like, "I'll massage your back, do the laundry but not cook dinner." He is going to be a great president but we don't really know what he means by that. And he repeatedly framed improving situations as awful, promising to fix what hardly seems broken.

What Trump said ...
My commentary ...
A new chapter —
— of American greatness is now beginning. A new national pride is sweeping across our nation, and a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is the renewal of the American spirit. 
That's an interesting spin on lowest approval ratings ever for a president''s first month. Or maybe he meant to say that a new surge of optimism is the impossible dream when so many Americans disapprove of your performance.
Dying industries will come roaring back to life ... Our terrible drug epidemic will slow down and ultimately stop, and our neglected inner cities will see a rebirth of hope, safety, and opportunity.
Trump continues to play the role of economic savior, promising to bring back the dead or dying. There's a little problem with this plan: manufacturing as a percentage of the American workforce has been steadily falling since about 1930. It's not a product of NAFTA or China joining the global economy. It's a product of our industrial economy becoming an information economy and of manual work being steadily automated.  He's exaggerating inner cities' plight - rural America is shrinking faster than any downtown - but if he really wants to revive an area he won't do it with manufacturing and mining jobs.

Since my election, Ford, Fiat, Chrysler, General Motors, Sprint, Softbank, Lockheed, Wal Mart, and many others have announced they will invest billions and billions of dollars in the United States and will create tens of thousands of new American jobs.
For reference, each month the America economy creates (and destroys) millions of jobs. Millions. (The difference between the number created and the number destroyed gives the net number of jobs gained, which is typically between 100,000 to 300,000 during a healthy expansion, as we've had in the 6 years.) Making deals with companies that may add tens of thousands of new jobs is a rounding error in a typical month - much less in a 4 year term - in this delightfully dynamic economy. 
The stock market has gained almost $3 trillion in value since the election on November 8, a record.
This is great. It also has pushed P/E ratios to a heady level that suggests it'll be tough to continue at this pace for another four years. Even so, this rise is rational: with tax cuts and deregulation, short-term profits should go up. It will take longer to find out what sort of trade deals he'll make and what that will do to the economy.
We have begun to drain the swamp of government corruption
Trump continues to make personal deals with foreign countries. The most suspicious example of this was China granting him a coveted and long-denied trademark just days after his win. This trademark will be worth millions to Trump.
We want all Americans to succeed, but that can’t happen in an environment of lawless chaos.
Lawless chaos? Violent crime has been steadily dropping since about 1980. Illegal immigration has been steadily dropping since at least the Great Recession. Trump is determined to take drastic measures to solve two imaginary problems: lawless chaos and a surge in illegal immigration. It's like a the father of a teenager cracking down on bed wetting, a problem that had disappeared about ten years earlier. 

Not only has illegal immigration slowed in the last 8 years or so, immigrants are less likely to commit crimes than native born Americans, as can be see in this graph.

Tonight, as I outlined the next steps we must take as a country, we must honestly acknowledge the circumstances we inherited. 94 million Americans are out of the labor force.
The economy Trump inherited is in stark contrast to the one Obama inherited. 76 months in a row, the economy has created jobs; breaking the old record of 48 months by roughly 2.5 years. In the year before Obama took office, the economy lost 4.4 million jobs; in the year before Trump took office, it created 2.2 million jobs. Put differently, the economy created 6.6 million more jobs in the year before Trump took office than it did in the year before Obama did. So how can Trump make it sound like he's inherited economic carnage? 

This 94 million out of the labor force number is one of the weirdest that Trump has cited. How does he arrive at this number he's repeatedly mentioned? He uses the labor force participation rate. This is a measure of folks not working or looking for work who are over the age of 16. If you are a 28 year old house husband or retired at the age of 71 or a 19 year old at university, you are counted as a non-participant. My 81 year old, retired mother is part of this 94 million. If you are over 16 and are not working or looking for a job, you are part of Trump's 94 million.  
We have measures of the labor force participation rate that date back to January of 1948. That year, life expectancy for men was 64.6. Today life expectancy is 76.2. The percentage of people who are retired now is higher than it has ever been - in part because people are living longer and in part because people are so much more affluent than they were in 1948. This alone would drive down labor force participation rates. But to offset that, women have joined the workforce in larger numbers.  These are just two of the demographic changes over time that have shaped this number since 1948. What is the net effect of these and other factors? 
Between 1948 and 2017, labor force participation rate has averaged 62.9%. What is it as of January 2017? 62.9%. Since 1948, the rate has ranged from 58.1% to 67.3% but the labor force participation rate for our most recent month is exactly what it has averaged since we began measuring it. To say that it's a problem now is to say that it has been a problem since just after World War II. Funny that no one has mentioned it before Trump, much less used it as proof that they'd inherited an economy in terrible shape because by that measure, every president has inherited an economic mess.
When Trump says that 94 million Americans are out of the labor force, he's decrying the fact that young mothers, old retirees, the idle rich, the handicapped and others have chosen not to work- in roughly the same proportion as they have since the end of World War II nearly 70 years ago. But how else to make an unemployment rate of 4.7% (a rate one standard deviation below average) sound bad? To say that he's inherited an awful economy is like saying that nobody since Reagan won by a wider margin of electoral college victory; it's wrong unless you discount all the other data points.
Trump's speech promised bold solutions to the imaginary problems of labor force participation rates, illegal immigration rates, violent crime and a loss of manufacturing jobs. Labor force participation rates are exactly at their historic average, and violent crime and illegal immigration have been steadily trending downwards for decades. A dwindling number of manufacturing jobs is a sign of progress in the same way that a dwindling number of farming jobs was. During the 1800s the American economy transitioned from an agricultural to industrial economy; during the 1900s, it transitioned from an industrial economy to an information economy.  These two transitions have meant a dwindling percentage of the workforce has been needed for farming and manufacturing. It's not a sign of economic apocalypse that we no longer have 90% of the labor force farming; it's a sign of progress.
Trump has consistently shown a disinterest in facts but even when he does pay attention to a current number he fails to put that within larger trends. It's tough to understand what should happen when you don't even understand what has happened. Trump's grasp on the situation is about as tenuous as his grasp on the facts.

This from CBS news on the 94 million not in the labor force.
14.6 million are students, 43.7 million are retired, and 28.4 million are disabled or out of work for family reasons (looking after a family member like a child or elderly parent).