Tag Archives: Business

The Origin of Wealth – Eric Beinhocker

“An African elephant is a strategy for making thermodynamic profits and reproducing in the environment of the African bush, and a Coronatae jellyfish is a strategy for making thermodynamic profits and reproducing in the environment of the deep ocean.”

Perhaps my favourite experiment discussed by Beinhocker is actually a computer simulation, run by Epstein and Axtell, named Sugarscape. In essence, they program an enormous chessboard, with piles of sugar on each square of varying heights. Agents (‘people’) are distributed across the squares with various abilities to find sugar, move around, and survival needs in terms of units of sugar. Agents are allowed to move around, eat, die, and have children, and Epstein and Axtell essentially just press go and see what happens.

What happens is a miniature economy, and one with very few assumptions embedded. Individuals move around and various patterns form: average wealth goes up, and over time average abilities increase as the more capable agents reproduce, and we see a fall in social mobility and increase in inequality as wealthy agents have children who also become wealthy. As Beinhocker rightly points out though, it is however not as simple as the skilled agents becoming wealthy; wealth levels are a function of the entire system, and no one factor appears to determine them. In other words, it’s complicated.

If the experimenters add a second type of resource, spice, then we also see trading. Trade routes develop, like virtual Silk Roads, and we see market towns, middlemen, and complex hierarchies of trade. If you want, you can even think of these as virtual investment banks and retail banks, though at some point the analogy will break down, or at least I hope so.

Beyond telling us that life is complicated, what does such a simulation give us? In broad strokes, it suggests modern economics is doing okay, at least in how it describes computer simulations: we see the development of trading as most economists would have predicted. It also gives us a lot more. It tells us what sort of fundamental conditions are necessary for an economy to appear; gives us an idea of how extremely complicated initial conditions will work themselves out; and it lets us work with entire populations where every single member is slightly different, rather than relying on simplified versions of populations as economics often does. Most of all, however, it lets us test ideas. We can introduce minor variations, and see what happens in the Sugarscape economy. Of course, our real economy is vastly different from Sugarscape, but it’s a start.

If you want to pick up The Origin of Wealth, you can get it here (or in the UK or Canada).

The Origin of Wealth – Eric Beinhocker

“This book will argue that wealth creation is the product of a simple, but profoundly powerful, three-step formula – differentiate, select, and amplify – the formula of evolution. The same process that has driven the growing order and complexity of the biosphere has driven the growing order and complexity of the ‘econosphere’.”

I can’t quite decide what I think of The Origin of Wealth. The book has considerable strengths: it contains one of the better histories of economic thought I’ve read, and its rich discussions of various economic studies and experiments are wonderful. I also found its thesis both interesting and compelling. Parts of the book, however, also feel like retreads of old ideas, with little particularly new to recommend them. I suppose what I can say is that it is excellent, but were it half as long, it would have been even better.

Focus on the good. Beinhocker is worried economics has got it wrong. When economics began, it emulated the ideas of physics, particularly equilibrium. Shortly after, however, physics abandoned the idea, and the real model for economics, Beinhocker argues, should be biology. He points to a meeting between physicists and economists in the 90s, when the physicists remarked that the economics reminded them of Cuban cars. The ingenuity of the Cubans keeping their cars running with salvaged parts was phenomenal, but they were still old cars.

The real economy, Beinhocker suggests, is determined by evolution and non-equilibrium physics. The supply of things is determined by the process of locally reducing entropy: we humans impose order on our world to create things we want. Our demand for things, in turn, is controlled by our preferences, which are determined by evolution. When you buy a shirt, it wasn’t designed: it evolved, in response to the demand of the market.

For what it’s worth, I suspect he’s probably right, and to be fair to economics it’s starting to adopt the ideas he discusses under the heading of ‘complexity economics’. The other strength of the book, however, is in some of its examples, and I liked a few of them so much I’m going to talk about them in detail later this week. So wait till then!

If you want to pick up The Origin of Wealth, you can get it here (or in the UK or Canada).

Shop Class as Soulcraft – Matthew Crawford

“This book grows out of an attempt to understand the greater sense of agency and competence I have always felt doing manual work, compared to other jobs that were officially recognized as ‘knowledge work’.”

How many people with University of Chicago PhDs in philosophy do you think become motorcycle mechanics? After you read Shop Class as Soulcraft, you can claim you know of at least one. Having gotten a well-paid position at a thinktank, Crawford left it after 5 months, and turned instead to working with his hands. He claims he’s happier for it.

Shop Class as Soulcraft is about the difference between monetary and psychic nourishment. It worries that in today’s world, it is assumed that we get the first from our jobs and the second from our two week holiday, a somewhat woeful ratio. It is in the trades, Crawford argues, that both can be found, and his book merges philosophy, psychology, a love of the local, and stories of fixing motorbikes.

In today’s world, manual labour all tends to be dismissed as mindless. Crawford suggests this arises from the error of confusing manual labour with assembly line work. Assembly line work is easily depersonalized and turned into a process, forced to respond to forces remote from where the work is done. Indeed, this was a stated goal of production when the assembly line was introduced, as it allowed the use of unskilled labour. It has little if anything to do with a trade like woodworking or fixing motorcycles, however, in which problems must be diagnosed and unique solutions formed: the jobs simply vary too much to be reduced to a single process. Modern white collar labour, in contrast, often can be, and as Crawford wisely points out, trafficking in abstraction is not the same as thinking.

For Crawford, “real knowledge arises through confrontations with real things:” it is in facing the real world, with universal standards like ‘does the engine run?’ that we truly test ourselves. In the corporate environment, on the other hand, accountability is at best diffuse, and we rarely have any sort of independent standard by which to judge our success.

In the end, the best jobs engage the human faculties as much as possible. For some people, this is in the life of the mind. For others, it is in the trades. If Crawford is arguing for anything, it is for people to pick careers based on what is good for their soul, not just what is good for their wallet or the respect of society. He believes that can be found in the trades, and though I probably believe it will vary widely between people, I’m happy to agree they’re worth a try.

In Praise of Slow – Carl Honoré

“And yet some things cannot, should not, be sped up. They take time; they need slowness. When you accelerate things that should not be accelerated, when you forget how to slow down, there is a price to pay.”

“Does it really make sense to speed-read Proust, make love in half the time or cook every meal in the microwave?”

I’m going about this backwards, because I reviewed Honoré’s more recent book, The Slow Fix, several months ago, and am now reviewing his older one. Worse yet, I think I like his newer book more, so the need for this review is debatable, since the two are on very similar topics. Apologies to all who find that irritating.

My reasons for preferring his second book are twofold. First, this first can feel dated: it predates the financial crisis, and there are a few sections where that shows. More broadly, though, his second book simply has the better stories and anecdotes of the success of slow, and that’s what makes it such a pleasure to read.

All that said, there are definitely still pearls of wisdom to be found here. Honoré is careful to say that many things can and should be done quickly. Some things, though, must be done slowly, and in the modern world it’s not clear we remember that. How many of us, for example, wince when we read the letter from the Harvard Dean of undergraduates to new students, which suggests that “empty time is not a vacuum to be filled…It is the thing that enables the other things on your mind to be creatively rearranged, like the empty square in the 4×4 puzzle that makes it possible to move the other 15 pieces around.”

I read recently that most people don’t listen to each other; when they’re not talking, they mentally rehearse what they’re going to say next. That’s why most conversations proceed without pauses, and yet when you think about it, that’s crazy: does no one ever need to stop and think? Fitting in writing blog posts with the rest of my life, I’m the last person to claim speed isn’t useful, but I think there’s a deeper point to be made here. If we don’t remember to stop and slow down over what matters, we may reach a point where nothing feels like it matters.

No amazon links today: you can slowly navigate there yourself, and see if you see any other books that look good on the way there! Or, you could just join the Subtle Illumination email list.

Debt: The First 5,000 Years – David Graeber

“How is it that moral obligations between people come to be thought of as debts and as a result, end up justifying behavior that would otherwise seem utterly immoral?”

A friend recommended Debt: The First 5,000 Years as a veritable bible of the Occupy movement, so I thought I’d pick it up. Its concern is distinguishing between moral obligations, as occur in a human economy, and market obligations (debts) that occur in a commercial economy. Graeber is worried that our modern economy has confused the two. Financial debts are denominated in money, and so are easily enforceable and transferable: moral obligations, like owing someone a favour, are not.

The book asks great questions, questions that aren’t studied nearly enough, like the effect of being in a perpetual state of debt on humanity, whether early cultures truly used a barter system (answer: usually only with strangers, not within the village, where non-market bonds held sway), whether debts of money and debts of morality are the same, and whether alternative systems to the current one exist. Overall, though, I was disappointed. His answers often feel confused, often asserting something only to disagree a few paragraphs later, or introducing what often felt like irrelevant distinctions instead of meaningful insights.

Unfortunately, as a result I struggled to find the book compelling. He makes blanket statements that barter economies never existed or world literatures condemned lending, for example, before backtracking and noting large exceptions shortly after. He also asserts that debts in monetary units are enforced by violence while moral debts are not, yet surely social norms and codes of behaviour, including what may be seen as a debt to society, were frequently enforced by violence. If you’re willing to overlook such claims, however, there are also important insights: it’s probably true that monetary debt’s ability to be transferred between creditors makes it more impersonal, and so justifies otherwise outrageous behaviour, for example. There are also great stories in it, like the discussion of the Tiv, who worried about being tricked into turning into witches by being fed human flesh.

The book does therefore have strengths. The questions and stories are interesting, and if a psychologist happens to write a book about the effects of debt on the human psyche, I’d definitely read it. For the nature of financial markets and moral markets, however, I found Michael Sandel more compelling and more clear, and for studies of how ancient cultures felt about debt and exchange, I’d turn first to Jared Diamond. If this is a subject you’re interested in, it’s definitely worth picking up Debt, but I’d start first with Diamond or Sandel, to get a grounding in the subject.

You can get a copy of Debt here (or in the UK or Canada). Or, wait for my review of Diamond’s The World until Yesterday, which I’ll post in the next few weeks.

Getting to Plan B – John Mullins and Randy Komisar

“[T]his is not a book about ‘business planning.’ It’s a book about, in a sense, ‘business discovering.’”

Business planning is a major industry, with management consultants, industry experts, and other finance professionals all spending significant time attempting to predict the future of a firm (see Antifragile for why that doesn’t work). Mullins and Komisar, on the other hand, have a much more simple principle. Try things. And if they don’t work, try something else.

This simple point flows from what I found a fairly profound observation. Big businesses may be wrestling with “Big Data”, they point out, but entrepreneurs usually have a want of data; they don’t even have enough information to know if their guesses and assumptions are correct. Instead of recognizing their limited data, however, many entrepreneurs leap immediately into business planning, writing up 50 page business proposals. By the time they find out their idea doesn’t work, they’re already mentally committed, and fail to properly adapt to new information.

The best entrepreneurs, however, remain open to Plan B. They test their original assumptions, and use the data they get to modify their plans as necessary, sometimes changing their entire product, as with the founders of Paypal, who started off trying to market a cell phone encryption method, for which they posted a free demo of a payment system online. When the demo proved more popular than the encryption, they adapted, and the rest is history. Experiment, measure, analyze, repeat.

For someone with a business idea in mind, the book is an excellent walkthrough in carefully keeping an eye on your business model while maintaining flexibility. For those not interested in entrepreneurship, the book can feel repetitive, but I think there’s some wisdom there for the rest of us too. In many situations, there’s no need to pick a single best plan and charge forward; we can experiment a little to discover information, whether that means doing a summer internship, trying a new diet, or starting up a small business of our own. It seems to me we too often stress about making the best decision in the first place, rather than trying out an option and learning from it. Life, rather conveniently, has very little to do with Dragon’s Den.