Tag Archives: Business

Dear Undercover Economist – Tim Harford

“When a dinner party guest wonders how much to spend on a bottle of good wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.”

What, you might wonder, is the secret to happiness? Harford, citing Kahneman, says that sex is best, but that exercise, food, and prayer are also good. In fact, all human contact is good, except for that with your boss, which is quite bad. The secret to happiness? Don’t have sex with your boss.

Tim Harford is a frequent writer for the Financial Times, and has also published several excellent pop economics books, including The Undercover Economist. Dear Undercover Economist, however, is a collection of advice columns he published in the FT. Written in the classic style of Dear Abby columns, they use economics to answer questions about love, family, careers, and other domains. He gives advice to a man who gives bad first impressions (give a signal of quality, like giving the girl theatre tickets for a third date with him when they first meet); a student who is too busy with his karate club activities to study (gains from trade: find a weakling to do his homework and beat up the weakling’s enemies); someone looking for missing socks (give up on them: instead, focus on interchangeable parts, and just buy all identical socks); and, in response to someone concerned about inflation and the shrinking size of Mars Bars, points out they are actually a very stable unit of account, with about 20,000 bars buying you a small car for the last 70 years.

This is classic pop economics, freakonomics-style. It takes the insights of economics, particularly signalling, screening, and trade, and applies them to problems outside economics’ traditional gaze. I’m not sure I’d take the advice myself, but the columns are entertaining and well written: you could do worse if you’re trying to learn some microeconomics for yourself, or if you’re a student taking microeconomics. After all, how many other opportunities will you have to make economics fun? Overall, a great romp through the insights of economics, applied to everyday problems.

Unfinished Work – Joseph Coleman

“Denial of employment opportunity to older persons is a personal tragedy…It is also a national extravagance, wasteful of human resources. No economy can reach its maximum productivity while failing to use the skills, talents, and experience of willing workers.” – JFK, 1963

You’ve probably heard of the demographic crisis: baby boomers are getting older, people are having fewer children, and pretty soon the pension pot will be all used up on the generation that also brought you global warming. If you’re a young person, you may find the whole thing somewhat depressing: it seems like most public policies are designed to transfer money from (low-income) young people to (high-income) old, whether it’s increasing house prices, fuel subsidies for the elderly, pensions, or healthcare. If you’re the Economist, you’ve also faced a huge flood of complaints when you suggested reducing pensions for wealthy seniors in the UK, and since seniors vote and young people don’t, no one was going to listen to the suggestion anyway.

Coleman presents an alternate, possibly more valuable, perspective. Older workers are often forced out of work before they would actually want to leave, whether because of pension plan design, insufficient training, or blatant discrimination. These older workers would often have preferred to stay, particularly part-time, deriving meaning and value from their employment as they have done for decades. Letting them stay makes them better off, and also helps reduce our demographic challenge.

Unfinished Work looks at this problem from the perspective of elderly workers around the world, from Japan to Sweden, France, and the U.S. Some countries are doing well (Sweden and Japan) and others are doing poorly (France), but all have room to improve. The book’s emphasis on stories makes it more readable, but also reduces the content: the book is better at raising issues than solving them. The book also sometimes seems to lack concrete data: Coleman criticizes discrimination on the part of employers against the elderly, particularly a reluctance to train them, but there is also evidence that elderly people make less good employees. He may well be right this isn’t a large concern, but I would have appreciated some data on how big an issue it might be. Nevertheless, the book advances an important perspective on an increasingly large challenge for many Western societies. This is a problem we don’t think about often enough, and certainly haven’t solved. Unfinished Work presents an alternate framing to the divisive, young vs. old narrative, one well worth reflecting on.

You can see other reviews of Unfinished Work here.

Zero to One – Peter Thiel

“Zero to One is about how to build companies that create new things…The single most powerful pattern I have noticed is that successful people find value in unexpected places, and that they do this by thinking about business from first principles instead of formulas.”

Thiel divides the world into four: an axis of pessimism and optimism, and an axis of future-definite and future-indefinite. Entrepreneurs, he argues, rely on future-definite thinking: they believe the future can be predicted and so work to shape it. Much of the US, however, has fallen to optimistic/future-indefinite thinking. They believe the future will be better, but have no idea how or why, and so don’t bother to prepare other than to get general skills and knowledge, a process that culminates in becoming a lawyer, consultant, or banker. Thiel recommends the opposite: pick one valuable skill or area, specialize carefully, and double down to achieve enormous success.

Zero to One is Thiel’s hymn to entrepreneurs and innovators, those individuals who don’t just achieve incremental improvements (one to two), but manage a real step change in technology, going from zero to one.

In truth, for me there are a couple of points I don’t think he’s entirely thought through. He waxes eloquent about monopolies, for example, arguing that they are the best way to run a business: “the more we compete, the less we gain.” I completely agree, I’m just a little worried his ‘we’ only includes businesses, not the consumers, who take it in the shorts. That said, monopolies may also provide more resources for innovation, so the question is not as simple as economics 101 might argue. His advice to specialize the same: he’s wholly correct that if you want to be a billionaire that’s the way to go, but he doesn’t seem to have considered that it’s a high-risk strategy. The returns are so high precisely because of the enormous number of people who will fail utterly as a result.

In some ways, the book is interesting because of these weak points: it tells us what Peter Thiel, the billionaire co-founder of Paypal, believes. Paypal’s team has also achieved great things: 7 of the early employees have founded billion dollar businesses, from Youtube to Tesla to LinkedIn. It’s a success so noted that they’re sometimes referred to as the Paypal Mafia in the tech world. The team was clearly doing something right!

Business Adventures – John Brooks

“The [Tax] Code, a document longer than “War and Peace,” is phrased – inevitably, perhaps – in the sort of jargon that stuns the mind and disheartens the spirit; a fairly typical sentence, dealing with the definition of the word “employment,” starts near the bottom of page 564, includes more than a thousand words, nineteen semicolons, forty-two simple parentheses, three parentheses within parentheses, and even one unaccountable interstitial period, and comes to a gasping end, with a definitive period, near the top of page 567.”

Any book that is the favourite of both Bill Gates and Warren Buffet is self-recommending, and I feel a little second-rate saying I really liked it as well. Nevermind. Business Adventures is a great book!

What distinguishes Business Adventures from other business books is the quality of the writing. It’s a collection of New Yorker articles by John Brooks from the golden age of print journalism, and it shows. Topics include the rise and fall of Xerox (invented by accident – they just kept adding elements from the periodic table to their ink till they found one that worked, and had no idea why), the Ford Edsel (a brutal failure of a car design for Ford), income tax, cornering a market in order to destroy short sellers (sadly now illegal, which might be why short selling is so popular), the first supermarket (Piggly Wiggly Stores – the owner would become a millionaire and then go bankrupt several times), the manager of the Tennessee Valley Authority, currency crises, and a vast scope of other subjects.

It’s a hard book to find these days, but Amazon has it on Kindle. It’s tremendous, and I recommend it. For the quality of the writing, for the quality of the stories, and even for the insight. It won’t teach you to be a modern investment banker, but it will teach you about the fundamental concepts businesses and businesspeople need to think about, concepts that can often feel obscured in a haze of electronic trading and hedge funds today. As the real estate crash in the US showed, however, technology and advanced degrees are no substitute for understanding the classical principles of business.

The Principles of Scientific Management – Frederick Winslow Taylor

“We can see our forests vanishing, our water-powers going to waste, our soil being carried by floods into the sea; and the end of our coal and our iron is in sight. But our larger wastes of human effort, which go on every day through such of our acts as are blundering, ill-directed, or inefficient…are but vaguely appreciated.”

Which would you prefer? Good pay, but a job where every detail is spelled out for you, with no chance for autonomy or individuality, or worse pay, but a job where you can use your personal expertise to make a difference to the result? That question lies at the heart of your judgment of the Scientific Management.

I’d hate to speculate how many (or few) management consultants have read it, but Scientific Management is a seminal work in the field, quite possibly a founding work. Taylor argues that progress requires management to become more scientific: that the traditional knowledge of workers must be studied and tabulated by management, and narrow, well-defined tasks should be given to workers, with every aspect detailed. Managers shouldn’t just ask workers to carry pig iron: they should specify how far, how heavy a load, how long to rest, how often, and method of lifting.

Some of Taylor’s suggestions seem reasonable to modern ears: he recommends frequent breaks for workers and limits on hours, for example, so that workers can “work while they work” and “play while they play.” More fundamentally, one of his core suggestions is simply to gather data, which I certainly wouldn’t disagree with: finding the best weight someone can shovel without hurting their back is an experiment anyone who has shoveled snow can support.

Where Taylor runs into trouble is the extreme centralization of knowledge his system requires. As Shop Class as Soul Craft can tell you, such a reduction of worker responsibility can be dehumanizing, and long run it’s hard to believe anyone can perform well when they feel like a cog in a machine they do not understand. To be picky, his experiments are also terribly run, and the results are almost entirely attributable to selection bias, since he fires anyone who doesn’t perform: clearly average performance increases then, but it need not have anything to do with management methods.

Still, the book is worth reading, particularly if you plan to talk to MBAs very often. Even if you don’t, Taylor provides a frank commentary on how he sees the problem of management, and perhaps particularly if you disagree, it’s useful as a way to figure out what you think might work best.

Flashboys – Michael Lewis

“The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.”

In 2009, a 300 million dollar secret fiber optic line was built, so secret that workers were kept in small groups and prevented from meeting, so secret they were never told the purpose of the line or where it was going, so secret they were asked to report anyone asking questions or digging near the line. Many thought they were on a top secret government project. In truth, they were building a line from New Jersey to Chicago that would shave 1.5 milliseconds off the time data takes to flow between the two points, bringing it down to 13 milliseconds, a privilege for which banks and traders were asked to pay as much as 10 million dollars apiece. It takes, by the way, 100 milliseconds to blink your eyes.

Michael Lewis is one of my favourite financial authors: I think his coverage of the financial crisis in The Big Short was masterful, quite possibly the best book on the subject, and he’s also well known for Liar’s Poker and Moneyball. He uses individual stories to explain complex issues, and in Flashboys, he describes the new world of stock markets, a world in which the markets are black boxes in high security buildings in New Jersey and Chicago, and it’s worth millions of dollars to have your computer two feet closer to that box. Every inch counts when signals only go at 186,000 miles per second. It’s also a world with predators and prey, and Lewis is sharply critical of many of the predators, especially dark pools and high frequency traders, those who trade in a millisecond time frame.

The book has been controversial: in essence, one side argues that though high frequency trading is not implicitly bad, many of the strategies used are essentially robbery: they gather more information than others and then use their advantage to take money that would otherwise have gone to the investor. On the other side, as an ex-Goldman Sachs employee I spoke with a few days ago argued, supporters suggest that such traders play the same role traders have always played, helping bring together sellers and buyers and adding liquidity to the market. Where Lewis is weakest, in justice, is that as with any story he needs a villain, and high frequency takes the role. In truth, however, many of the problems are systematic, and a systemic change is needed, as indeed one of the protagonists attempts to do by setting up his own, fair, stock exchange.

I personally tend to find the mugging side of things more apt, but that’s up the reader. Regardless of what you decide, I can recommend Flashboys as a phenomenal way to understand the modern stock market. Lewis has made a subject few of us understand clear and entertaining, and for anyone interested in flash crashes, hedge funds, algorithmic trading, or just the financial world in general, it’s essential reading. It’s a book on finance that sold 130,000 copies in its first week, is already being turned into a film, and has spawned thousands of articles, interviews, and responses. I highly recommend it.

You can get a copy here, or just read the Amazon reviews.

The National Dream – Pierre Burton

“Nothing would ever be the same again. The tight little Canada of Confederation was already obsolete; the new Canada of the railway was about to be born. There was not a single man, woman or child in the nation who would not be in some way affected, often drastically, by the tortured decision made in Ottawa that night.”

It’s easy to forget how important railways were in North American development. Without them, however, history could have been very different in both the US and Canada, not only economically but politically. Railways weren’t just a way to ship goods; they were a lifeline to remote areas, often deciding whether a particular territory would join the larger federation, stay independent, or even join another country, as the US once envisaged for the area between Alaska and Washington (now part of Canada).

Indeed, the 1885 railway across Canada is perhaps the most notable example of the influence of railways, as well as an example of just how much effort it took to get the railways built. The railway crossed thousands of miles of almost unexplored territory, with no other transport links to send construction materials or supplies; bottomless mud (one lake with a mud bottom had 220,000 yards of gravel poured into it before the contractors went bankrupt, while another had piles driven 96 feet below the surface before they hit bedrock); huge mountains; strikes by workers over the terrible conditions; constant drinking as a result of the cold; and continuous accidents and explosions from poorly handled nitroglycerine, which needs to be kept warm to be stable, not an easy task in Canadian winters.

Most of all, though, the book is about political difficulties. The politicians, the contractors, and pretty much everyone else involved in the railroads at that time, both Canadian and American, were, to paraphrase the book, up to their sideburns in corruption. False companies, bribes, patronage, sudden disappearances and falsified bankruptices: no effort was spared, and above it all the worry of some politicians that without the railway, the West Coast would never join Canada at all.

To be honest, the book goes into more detail than I think most would want: unless you have a particular interest in this period, it is perhaps not suitable for a general reader. If you are interested, however, the railways played a key role in the development of the West, and the corruption that went with it makes for entertaining, if mildly depressing, reading.

The Price of Civilization – Jeffrey Sachs

“In our crowded and unstable world of 7 billion people, we need to dial down the propaganda and relentless shrieking of the mass media and reconnect with more basic human values. We need…to refocus our attention as individuals, consumers, and virtuous citizens, to what is most important in bringing us economic fulfillment and well-being.”

Disclosure first: I find Jeffrey Sachs somewhat frustrating. To my mind, his Millennium Villages project is an embarrassment – there’s no shame in starting a project that doesn’t work, but to refuse to release data to try to prevent others from finding out and continuing to support it damages the entire development movement (See Freakonomics blog, Wikipedia, etc.). It perhaps makes me unfairly cynical when he calls for government transparency and reform, so keep that in mind.

With that preamble, I found his book disappointing. I picked it up because the thesis sounded great, that the cause of America’s woes was a moral failure in its elites. I think this is an underdiscussed topic: the change in moral norms over the past 50 years means what once would be socially unacceptable, such as accepting an enormous salary and spending it entirely consumption, is now routine. In Ancient Rome, the wealthy were expected to spend most of their fortunes on public works, and did so because that was the norm. In some ways I like that model of the world: I think contributing to our communities is enormously important. I don’t know how to get there from here though: increasing taxes coerces contributions, which may be useful but is I think different from people wanting to contribute on their own. Anyway, despite Sach’s thesis statement, that’s not what the book is about.

The book focuses on ideas Sachs has introduced before. If this is your introduction to the subject, this or his earlier books are useful: he’s left wing but not partisan, believing both democrats and republicans are terrible. If you’ve spent a while thinking about the issues or read his other books though, there’s not much new here. He lists the classic problems facing the US, economic, political, social, and psychological, and then possible solutions, with a focus on increased taxes on the wealthy and mindfulness by citizens, and people engaging with the process. He has some suggestions I really enjoy, like requiring the US President to spend a few minutes every State of the Union outlining how the policies he’s mentioned will affect Americans 50 years from now, but most feel well-worn.

He ends with the idea that it will all sort itself out because the Millennial generation is socially liberal (in the American sense) and ethnically diverse. He may well be right in that, and he’s certainly right on some of the other issues, but I’m not sure I got much out of the book. It all felt just a bit too standard for my taste.

The Art of War – Sun Tzu

Having reviewed Good Strategy, Bad Strategy earlier, I thought it might be worth posting some quotes from Sun Tzu’s Art of War to provide some balance – there’s nothing like going back to the classics, after all.

Deception

“All warfare is based on deception.”

“Hold out baits to entice the enemy. Feign disorder, then crush him.”

Leadership

“Confront your soldiers with the deed itself; never let them know your design. When the outlook is bright, bring it before their eyes; but tell them nothing when the situation is gloomy.”

“At the critical moment, the leader of an army acts like one who has climbed up a height and then kicks away the ladder behind him. He carries his men deep into hostile territory before he shows his hand.”

Victory

“To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.”

“The clever combatant imposes his will on the enemy, but does not allow the enemy’s will to be imposed on him.”

“Numerical weakness comes from having to prepare against possible attacks; numerical strength, from compelling our adversary to make these preparations against us.”

“In war, the way is to avoid what is strong and to strike at what is weak.”

“In raiding and plundering be like fire, in immovability like a mountain.”

Want more? Get it here (or in the UK or Canada). Or, join the email list to your right for more subtle illumination…

Good Strategy, Bad Strategy – Richard Rumelt

“The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.”

John Kay (the British economist, not the guy who invented the flying shuttle) recently came out with his five book recommendations on economics in the real world. Since I hadn’t read it, I thought I’d pick up Good Strategy, Bad Strategy.

Overall, I’m impressed. Rumelt is an academic who studies strategy, and his clarity and insight does him credit. All he wants is structured thinking, and his book reads like a how-to tutorial: though he usually applies it in the context of business or national defense, it could equally relate to strategy in almost any field. CEOs often read things like Sun Tzu’s Art of War, and this book comes as close as any I’ve read to making that seem reasonable.

Rumelt is worried that much of what is done today is bad strategy, for which he has a specific definition. Bad strategy correlates with fluff, a failure to face core challenges, mistaking goals for strategy, and bad strategic objectives. Too many businesses, he points out, have a strategy of having 20% growth in sales for the next 5 years. That’s not a strategy – it’s at best a goal, and quite possibly wishful thinking.

Strategies are made up of three things. First, diagnose the problem. Second, come up with a guiding policy. And third, derive a set of coherent actions that allow you to implement that guiding policy. Too many organizations neglect the first and third steps, and are thus far too vague in doing the second. A doctor, in contrast, diagnoses a problem, chooses a therapeutic approach as a guiding policy, and then recommends specific medicines, diets, and therapy as a result of the guiding policy. Action is the key to strategy: goals and theories are only part of the story.

A lot of the book feels straightforward, or at least not complicated. As Rumelt points out, however, in a world where we are often increasingly focused on the short term, there is value in forcing ourselves to think strategically. Consultants, he suggests, are not valuable because they suggest you write a checklist: they’re valuable because you actually write one when they suggest it, when otherwise you might never get around to it. I’m not sure I learned anything revolutionary while reading, but I did think deeply and in new ways about strategy and how we make decisions.

Both as a breakdown of how to think about strategy and a source of fun stories about business, Good Strategy, Bad Strategy does well. Perhaps a little too long and repetitive in parts, but it was well worth the read, and I suspect would be even more useful for someone directly involved in business.

If you want to pick up Good Strategy, Bad Strategy yourself, you can get it here (or in the UK or Canada). Or, join the subtle illumination email list and absorb strategy from reading!