Transitioning between economies

new_economyIf we go back a few hundred years prior to the industrial revolution, most countries in the world had what is referred to as an agrarian economy. The central principles of this is that the majority of capital is allocated towards activities linked to agricultural production. The result of this is a largely decentralized population, because people tend to live where it was possible to grow food, while supply-chains were not efficient enough and we lacked the technology to preserve food during transport.

This is the situation that much of the world is still in, people live on small, rural and family owned farms. Mixed crop production is still common, as people try to have production of their own staples, and the production is largely done by traditional methods.

Sure, goods that are not food are still produced, but at a smaller and much more local scale in such an economy. There are factories, but they tend to be small, and work largely off collectives or guilds of artisans.

The industrial revolution provided manufacturing jobs on a scale not seen before, and the capital made its transition away from agriculture and country estates to real estate in cities and manufacturing plants. This enabled us to produce both a higher quality and quantity of goods through specialization. This brings something referred to as “economies of scale” into the mix, which is basically that the cost of production drops with additional units as fixed costs are distributed across an increasing number of units.

Combined with higher levels of specialization, meaning that people get really good at one thing, rather than having to be passable at 4 or 5 things, means that production efficiency goes up, which means a higher production at less inputs. This continued to happen throughout the 19th and 20th century where manufacturing slowly became the giant industry that was the engine of the economies of the United States and most of Western Europe. You make stuff in your country and sell it both in your own country and to trading partners internationally. As long as you had a largely domestic production, you got jobs and good standards of living for your citizens. You get a nice import-export balance, and a nice boost to GDP every year. As communications improved and you could export more and more goods, someone had a bright idea that if wages are lower outside of your country, and most of your market is inside your country, you could in theory produce in lets say Asia, then ship and import the goods into your own country to sell them there.

This would bring down cost, while maintaining margins, resulting in a higher return on capital invested. This efficiency bug bit into most of manufacturing starting with Taylorism and still going strong today with consulting companies ready to “Pimp your Profits” with the latest and greatest in buzzwords and PowerPoint presentations.

All the while this was going on and we were slowly making the transition from a mostly local, then regional, then national and then finally international economy, someone theorized that if you reduced tax burden on the wealthiest citizens, it followed that their tax savings would go towards investing in more business to make even more money. This follows fairly logically from the 3 things you can do with money, save, spend or invest. The wealthy tend to spend less of their income as a percentage than the less wealthy, they tend to know that savings accounts are the worst place to put your money and as they are wealthy they have a proven track-record of earning good returns on capital.

This logic is sound, but as we had also made the transition from a mostly national economy, where fair enough regional variances played into where you would build your factory, but it benefited the country giving the tax cut. We were now living in a global economy, where national circumstances still played a part, but where the options for where to invest were much greater. For instance, a U.S tycoon who would have picked starting a factory in Mississippi in 1960, could now establish his factory in Guandong province in China, or in Malaysia or Vietnam, and actually save money when the books were done.

Now, most people when the think about it logically, understand that if it is cheaper to make something in China, then ship it to America by long-haul and container ship, something has to be a little wrong. People understand that if they go into their kitchen and make a sandwich, that sandwich will be cheaper than if they drive to a cafe down the street and buy it.

The reason was a mixture of scale economies in shipping, production, government incentives in the US and China, scale of production, low wages, and a host of other things.  However, this wouldn’t have been a problem if the Western world had understood the basics of Adam Smith, that some countries develop competitive advantages and that these change over time.

When this happens, you can either try to impose tariffs or other forms of barriers to secure domestic jobs, or you can adapt to the changes and get ahead of them. This was unfortunately what the West failed to do.

The knowledge economy and the service economy are both the suggested replacements for the manufacturing sector that is being lost to countries where higher ROI is earned in manufacturing. We can discuss why the ROI is better in those countries, which are things ranging from failing to deal with externalities, asymmetric subsidies/programs/incentives, bad trade deals, lower wages, and a range of other things. Or we can do the rational thing in my mind, which is to look at the road forward.

When the west transitioned from the agrarian economy to the industrial economy, there were robberbarons, and horrible working conditions, people thought all humans would be replaced by machines, and a range of other things. The core problem with losing the manufacturing sector, is that there was nothing to replace the myriad of low-skilled jobs available to what is the major part of the population.

I could argue this in multiple ways, but the easiest way to put it, is that the industrial revolution, followed by the green revolution and advances in medicine lead to a drastic population increase, which meant more jobs were needed, and those jobs were found in manufacturing. There are simply too many people competing for the same manufacturing and service jobs, on a global scale. To borrow one part of Michael Porter’s 5 forces, the barriers to entry are very low for manufacturing jobs.

Service jobs are also have somewhat low entry barriers, however the trouble with service jobs is that they do require something that most factory jobs do not, namely people skills. Few people really care who produces the things they want to buy, hence the high amount of people tweeting to raise the minimum wage and that everyone deserves good working conditions on an Iphone. However, people do not tend to like their waiter to be impolite, brash, or a host of other things that do not cause problems if you work an assembly line.

Then comes the knowledge economy, the next leap forward where human knowledge, lead by the STEM fields are set to become the focal point for the next 100 years or so. Yet, we lack STEM graduates, we lack people with basic scientific knowledge, despite having the World’s best universities in the west, we have a population that are not equipped to take the next step into knowledge production. We also have states that are living in the manufacturing bubble, with tax systems, regulations and laws that are not adapted to things like the software industry, biotechnology or many of the new frontiers. Only, unlike the transition from the agrarian period to the industrial period, where regulations, laws, enforcements, incentives and international trade did not exist. We now have regulations, laws, enforcements, incentives and international trade that is not adapted to the future. Where the industrial revolution had plentiful labor as it required no-skilled labor, that even children could do. The knowledge economy requires a highly skilled population with a level of education that may be unattainable for the vast majority of people. Knowledge economy jobs have much higher barriers to entry than manufacturing or service jobs.

This indicates that the transition from manufacturing/service economy, to knowledge and technology economy may be a brutal transition for the West. The late bloomers to the party such as the BRIC countries still have a lot of manufacturing demand from their own countries, whereas western countries largely import their goods from other countries in the name of cheap and efficient. This could play out a couple of ways once robots become more advanced and can take over more manufacturing jobs. The most likely one; the air pops out of the manufacturing balloon for good, and the up and coming countries collapse as their source of cheap labor is no longer a competitive advantage and production is moved back to the west.

The transition to the knowledge economy should have started a long time ago, with the boomers being the last manufacturing generation, and Gen X being the first knowledge economy generation. Unfortunately, this requires fundamental changes in our governments, our economy and our school systems. The school system is designed to create great manufacturing workers, and is built around the needs of someone running a factory. The government is built on the back of “brick and mortar” and manufacturing and the economy is largely built around geographic requirements.

Where a company used to have huge amounts of capital sunk into their physical locations and equipment, now moving your business can be as easy as copying data from one warehouse to another. In some cases, its a matter of putting some data on a flash-drive and getting on a plane. Where industries changed over decades, and products hit the down cycle after 50 years, we are now seeing software companies going from nothing, to billions to nothing in 2 – 3 years in some cases. This speed with which innovation and creative destruction happens has increased massively, while most of our governments are still acting as if this is 1960.

Conclusions/summary

What has happened is an increase in instability. When most production and consumption was local, then local factors largely influenced people lives in a controlled manner. There were external factors such as plagues, or wars, but many small towns around Europe didn’t experience much change during the second world war, life went on as it always had.

Where companies spent decades building their brick and mortar models, going from local, to regional to national and finally international, then planned strategy made a lot of sense. So did heavy investments in efficiency and scale economies.

If we go back 15 years, there were no smart phones, laptops were expensive and fairly rare. Very few people had broadband and were using dial up and ISDN lines to connect to the internet. There was no facebook, no twitter, no wordpress, Apple was suffering from a long-term decline, Samsung was virtually unheard of, and google were the guys powering Yahoo.

Change simply happens faster, and gets more press, this is why you see a growth in “change management consulting“, or “How to become a flexible organization“. This in and of itself creates the “innovation wars” where “big leaps” become more and more rare, due to the need for “incremental innovation” to stay relevant for the next quarterly presentation. The trouble is though, that change makes it very hard to make big, long-term investments due to the uncertainty you have to deal with.

 

 

 

 

On the subject of morality

moralityThis is one of those topics I normally keep my hands (and mind) off because it tends to be a heavily value laden area of philosophy. While there are pragmatic arguments to be made for most things, they largely tend to be post-hoc rationalizations rather then true reason. The cornerstone of ethics and morality is trying to answer the question “what is good” and “what is bad”. From a realistic perspective, it is highly likely that as humans are social animals, morality and in-group behavioral characteristics that strengthen the group. Will have lead to those that have them out-breeding those who did not, and thus resulting in an in-born sense of morality, tempered by socialization.

Thus, if morality is merely the expression of instinct in regards to maintaining group cohesion, it follows that it can be ignored. However high number of group members doing so would result in lowered in-group cohesion, it follows that we would have to develop systems to enforce the mean of the behavior. These are our social methods for enforcing behavior criteria in a group, that are expressed in a multitude of social situations. From shunning, shaming, obligations, and fear of sanctions, these are all methods to enforce behavior and thought, just as some behaviors are used to both reward and incentivize pro-social behavior.

Some people are born with a strong internal locus of control, and are less influenced by the social methods of control. These are often themed contrarians, or iconoclasts. Some people are born with crossed wires in terms of genetics meaning they do not innately possess the pro-social behavior genes. Some, are even born without gene control and are immune to social control, these are sociopaths.

As humans love finding patterns and seem to love codifying those patterns even more, we developed systems in the field called “ethics” out of which there are two main forms.

Deontological ethics

This is a fancy word for “rule based ethics” the primary example of this area is the categorical imperative by Immanuel Kant, which states (paraphrase) “Act always as if your action will become natural law.” Which is to say that you should always handle yourself as if everyone else who gets in the same situation will act exactly as you did. This is a useful perspective, but it also underlines the limitations of this field of ethics.

The primary sources for deontological ethics are often religious texts such as the Bible (The 10 commandments, Golden Rule). One could argue that the legal system as well is a form of rule based ethics in inception, but not necessarily in practice.

The principle of deontological ethics is that whether or not an act is good, depends on whether it is according to the rule. The consequences of the act do not matter. For instance, if you have a rule that states “You shall always save someone’s life if you can” then saving Hitler’s life would have been a good act. Intent matters, consequences do not.

Consequentialist ethics

This style of ethics is a different beast overall, here only consequences matter, not intent. So, if you save someone’s life, and they grow up to be Hitler, then that act was a bad act. This ethical/moral position can be summarized in reductio ad absurdum as “The end justifies the means”. Based on my exploration of the subject-matter, I haven’t really found many philosophers espousing the virtues of this style of ethics. This may be due to its association with more “barbarian” and “Machiavellian” tribes in the past, that were perceived by the more civilized states at the time as not having rule of law.

Perhaps it has to do with the simple fact that most of us would undoubtedly be deeply immoral if the full consequences of some of our past engagements were explored. Even simpler, as consequences often cannot be predicted prior to an action, it has no prescriptive value. Or, the easiest of them all, it offers no control over a population and no way to punish that population for stepping out of line.

The discussion

Which style of ethics should a modern man adopt? Deontological ethics will offer an easy to follow set of rules, but it would depend on how generalized the system is, and how expansive it is. A simple rule like the categorical imperative (in the formulation above) is highly general requiring a large amount of rational thought and consideration. However it will be adequate and adaptable to most situations. On the other hand,  if the man selects a system such as Islam, or hardline Christianity, both of those characteristics will go down.

By selecting a consequentialist approach to ethics, he has the greatest flexibility, but no way to determine if his life is moral before viewing it in retrospect. One could even inquire whether a flexible moral system is even a moral system at all if the same act can be both immoral and moral depending on context. This is one of the more difficult aspects of Kant’s imperative in practice.

If a man who has had a string of bad luck, he is desolate, destitute, and depressed, isolated, irritated and inconsolable. If this man kills himself, then according to the categorical imperative, we need to imagine what the consequences would be if every man in his situation did so. I’m certain that many men have felt this way at some point and have gone on to live great lives once recovered. Therefore, it follows that this is an immoral act, due to the wasted potential. On the other hand, I’m sure many men have never recovered, and spend the rest of their lives living lives of quiet desperation. Therefore it follows that his act would be a moral one.

The dangers of morality and ethics

Morality and ethics are dangerous, they are by nature subjective and thus by adopting too stringent of a requirement for yourself, will put you at a disadvantage, on the other hand, not being stringent enough would most likely put you into the company of persons you perhaps do not want to be associated with. Illimitableman touched on this in an article on Machiavellianism and morality [1] where he writes:

Only intelligent men can really discuss the nuance of ethics and thus, whatever their disposition, cognisantly find a balance between altruism and sadism, principle and incentive. Of course if one is innately sadistic, only the discipline of volition can suppress such a thing.

This is the key to finding a moral system for yourself that strikes the desired balance of realism and pragmatism vs altruism and nativity.  I use the term nativity here to mean “belief that human beings are inherently good“. A general belief that humans are inherently good will expose you to very high risks in situations where humans are not good, and makes you vulnerable to predators. A generally altruistic perspective, leads you open to be taken advantage of, from misguided faith in reciprocity. A high degree of realism, will make you prone to view the world through the law of the jungle, and when combined with a high degree of pragmatism, to the end justifies the means and “whatever works”.

The irony of this discussion is that we are left with the two things I started this discussion with, the combination of your genetics and your experiences that have shaped your life. Morality not being a fixed concept, it is merely a habit. If you are used to putting the needs of everyone else before your own, if you feel guilty when you say no or have been screwed over time and time again, you just need to train new habits. It will not feel good when you change a habit, it rarely does at first, but over time your life will improve.

 

 

 

[1] Morality & Machiavellianism

Gendernomics: Risk management, how to avoid getting burned

Risk matrixRisk is defined by ISO 31000 as the effect of uncertainty on objectives. Risk management is focused on identifying, analyzing, and mitigating risk. There are multiple types of risk used in business and there are multiple types of risk in the SMV. You have risk coming from legislation, risks coming from the social sphere, health risks and plate risk.

The most commonly known method for assessing risk is based on a risk matrix where the risk is equal to probability plus impact. For instance high probability and high impact is a high risk. High probability and negligible impact is a low risk. Mathematically this can be done easily too, if something has a 50% chance of happening and if it happened the cost would be $100.000, then the risk is $50.000

Often risks are divided into known known; risks we are aware of, and understand. Unknown known, risks we are not aware of but understand. Known unknown risks we are aware of but do not understand, and unknown unknown, risks we neither are aware of or understand. Continue reading

Musings on universality and intellectual integrity

UniversalityNoam Chomsky once defined Universality in terms of morality as “If it’s right for me, it’s right for you, if it’s wrong for you, it is wrong for me” in a 2007 interview. This is a fairly short and to the point definition for moral universality. The opposite of this is moral relativism in its many forms, which always makes morals a conditional case. Our laws are in theory based on universality, an act is illegal regardless of who performed it. One could argue that in practice it may work out differently, but the theory and system is designed to be as close to universal as possible. Moral relativism on the other hand, is the position that moral statements are right or wrong only based on a specific standpoint, for instance culture or historical period.

For instance, most of the western world today would consider slavery morally abhorrent, while most of the western world would have considered it perfectly permissible, and even benevolent in some cases if we travel back 300 years. If you view this as “slavery is always wrong” you are a universalist, if you view it as “slavery was ok back then, because of the times” you are a relativist.

Now, both cases tend to end up in the wrong to varying degrees. For instance, universalism may argue that killing someone is always wrong, whereas relativists would argue that each individual case of killing would have to be evaluated. For the most part, our justice system works around the inherent universalism by adding things like  “tiers of killing badness” such as first degree, second degree, third degree, manslaughter, self-defense and so on. However, this does not mean that the justice system is relativistic, it just means that it takes into account the circumstances of an action. You will be charged, and in a court of law a jury of your peers will determine your guilt. Continue reading

The baseline-parallel model for effective learning and work

outliersI’ve mentioned this model a few times on Twitter and after getting a few questions on how it works I figured I’d write a short post explaining this philosophy. In the book outliers Malcolm Gladwell outlines the principle of the 10.000 hours of practice that someone has to put in to become an expert on something. When learning a language we often focus on cramming in as much as we can about how the grammar works and as many words as humanly possible. You may need 10000 words to be fluent, but only about 2000 to be conversational.

The second principle is based on that once you have built a solid foundation, you can cut back the work and maintain that foundation indefinitely with a lot less effort than you had to put in while building it.

When we see examples of renaissanse men in modern culture, we usually get to see the finished product, a man in his late 30s to early 50s, who is a polyglot, a subject matter expert in his field, has multiple other areas of expertise, and a range of other skills that it surprises you to find out when he shows them off. However, we do not see how he builds his impressive arsenal of skills for the 20 – 40 years prior to demonstrating them to you.

Now, I’m going to tell you how to be a Renaissance man. Continue reading

Building blocks of betas and female narcissists

Cowed-04-23-14-392x400Incentive theory is a subset of research on “human motivation” or as I like to call how “How to dangle the carrot and wave the stick around“. For instance, if you’re running a sales office, and you need more sales, what is more effective? Bonuses or threats of people being fired? It comes from a field of psychology made famous and pioneered by B.F. Skinner who did a lot of work on operant conditioning. Those of you who read my post on expectancy theory and equity theory are already partially familiar with this concept and some of its effects.

Sometimes such incentives can have positive effects, such as when you offer a major bonus to the best salesperson. Sometimes they can have very unfortunate effects when the encourage hiring patterns that focus highly on “social fit” and less on ability, education or experience. Sometimes it can have positive effects, such as seeing a quarterback getting laid like a rockstar and that encouraging young boys to try to be good at football. Other times it can have negative effects, such as when a “nice guy” notices that all the guys he knows with girlfriends like to tool them up once in a while and decides that in order to get a girlfriend he has to become the type of guy who tools up women.

A core principle of incentive theory is that people do what you are encouraging them to do in order to reach their goals. If a man wants to get laid like a rockstar, he will adopt the behaviors that make that happen. The 2008 financial crisis is interesting in this respect, in that the system encouraged the very behavior and recruited personalities prone to such behavior, that almost lead to a systemic collapse.

Continue reading