Monday, January 18, 2010
American Reinvestment Act appropriated funds to repair NJ roads, but defeated its purpose of boosting economy by creating productivity reducing auto traffic.
Saturday, August 8, 2009
Absolute Value
One of the first lessons in economics 101 in regards to the theory of the firm speaks like a mantra. The professor asks, "What is the purpose of the firm?" The reply without thought is a resounding, "To maximize shareholder value". In reality, however, this service to the shareholder presents many well studied principle agent problems. Managers are tempted to inflate earnings or deflate costs in a myriad of accounting witchcraft. Likewise, shareholders don't necessarily hold the firms best interest in mind as well. They are likewise interested in short term gains to push up their equity returns. So it begs the question, why do we gather in this thing called the firm? To what do we owe our efforts?
We find commonly that the daily humdrum employee thinks nothing of the shareholder and everything about their manager; quite possibly there is too much regard for their manager. Personal performance is self-judged by their manager's reaction. And so there is this chain of performance self-judgement up the chain of the corporate command. There is no effort to maximize shareholder value. The effort typically is to please the boss and nothing more. Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job. Such tendencies are common in cost centers.
To what value, therefore, should we strive? If maximizing shareholder value leads to all the manifold principle agent problems we face, to whom shall we measure value? Some would answer that it is value to the customer toward whom we should strive. But does the customer necessarily know what is valuable? In fact this is the power of many brands that attract such a customer following. The customer covets but doesn't know why. They are drawn to the brand's mystique. There is something about all of the product or service's emergent properties that almost cannot be put into words. All that to say - the customer isn't rationale.
All of these prior attempts of value pursuits strive for what I might humbly submit is relative value. They are coupled by the estimation of an individual or setting. The value of an output is dependent on their existence. Our efforts to maximize shareholder value depends on the existence of the shareholder. Our efforts to maximize customer value, depend on characteristics of a customer that are prone to change.
A value to which we should strive is an absolute value. This value deems the product or service intrinsically valuable. It is valuable no matter who or at what age or time esteems it. It doesn't depend on who consumes or uses it for other production efforts. It is customizable and flexible. Over time consumers find new ways of using it and innovating from it. While such value is almost impossible to achieve, it is something one should strive.
We find commonly that the daily humdrum employee thinks nothing of the shareholder and everything about their manager; quite possibly there is too much regard for their manager. Personal performance is self-judged by their manager's reaction. And so there is this chain of performance self-judgement up the chain of the corporate command. There is no effort to maximize shareholder value. The effort typically is to please the boss and nothing more. Such individuals value the job rather than the product or service. They tend to be less collaborative and less willing to innovate in ways that might fear the security of their job. Such tendencies are common in cost centers.
To what value, therefore, should we strive? If maximizing shareholder value leads to all the manifold principle agent problems we face, to whom shall we measure value? Some would answer that it is value to the customer toward whom we should strive. But does the customer necessarily know what is valuable? In fact this is the power of many brands that attract such a customer following. The customer covets but doesn't know why. They are drawn to the brand's mystique. There is something about all of the product or service's emergent properties that almost cannot be put into words. All that to say - the customer isn't rationale.
All of these prior attempts of value pursuits strive for what I might humbly submit is relative value. They are coupled by the estimation of an individual or setting. The value of an output is dependent on their existence. Our efforts to maximize shareholder value depends on the existence of the shareholder. Our efforts to maximize customer value, depend on characteristics of a customer that are prone to change.
A value to which we should strive is an absolute value. This value deems the product or service intrinsically valuable. It is valuable no matter who or at what age or time esteems it. It doesn't depend on who consumes or uses it for other production efforts. It is customizable and flexible. Over time consumers find new ways of using it and innovating from it. While such value is almost impossible to achieve, it is something one should strive.
Wednesday, December 31, 2008
What Zune's Failure Says About Microsoft's Innovation Management
Today (12/31/2008) Microsoft's Zune froze for its customers owning the 30 GB Ipod knock-off. We have all experienced Microsoft related technology failures, the ever infamous "blue screen of death" not withstanding. Why can't Microsoft seem to innovate well?
An annoying technological glitch reveals something deeper about Microsoft's corporate culture. McShane and Glinow write in their work Organizational Behavior, that the spirit of Microsoft captures "A tremendous work ethic; Bill Gates is always right; an us-versus-them mentality; and Bill Gates is always right.". Does anyone imagine how employees may freely share their ideas and foster an open environment of innovation?
Pascale, Millemann and Gioja's Self-Organization and the Corporation write that corporations that apply principles of self-organization can “exploit opportunities and improvise in highly advantageous ways.”
It is not surprising then that much of Microsoft's products capture the personality of its boss, Bill Gates, rather than the aggregate self-organized open environment of innovation that captures the spirit of Apple and Google.
An annoying technological glitch reveals something deeper about Microsoft's corporate culture. McShane and Glinow write in their work Organizational Behavior, that the spirit of Microsoft captures "A tremendous work ethic; Bill Gates is always right; an us-versus-them mentality; and Bill Gates is always right.". Does anyone imagine how employees may freely share their ideas and foster an open environment of innovation?
Pascale, Millemann and Gioja's Self-Organization and the Corporation write that corporations that apply principles of self-organization can “exploit opportunities and improvise in highly advantageous ways.”
It is not surprising then that much of Microsoft's products capture the personality of its boss, Bill Gates, rather than the aggregate self-organized open environment of innovation that captures the spirit of Apple and Google.
Wednesday, April 9, 2008
Healthcare's Fatal Decoupling
Most innovative markets employ the following system of invention and devlopment. A would-be entrepreneur derives an idea by which existing resources might be newly combined to create an innovative product or service. Alternatively, they may innovate to discover errors in how resources are currently utilized for existing production. Kirzner writes in Discovery of Error, "entrepreneurship is evoked by the presence of as yet unexploited opportunities for pure profit".
This would-be entrepreneur takes this discovery to market. They set out to argue that their new combination of society's resources is better than existing combinations, i.e. existing products and services. Society then casts its ballot through a voluntary transfer of wealth if they believe that this entrepreneur did better than existing candidates.
Thus, there is a coupling of entrepreneur to the beneficiary of their efforts. Those whom derive their benefit of the entrepreneur's efforts anonymously and voluntarily cast their vote through the ballot of cash communicated through prices. Prices thus serve as that measurable entity by which society communicates to the entrepreneur that they agree with their stewardship of society's resources. This entrepreneur and other would-be entrepreneurs thus continue to bear the incentive to continue in their innovation efforts.
Most important in this coupling is that the prices of society's basket of products and services reflect the benefit society derives through this coupling. As Hayek writes in Use of Knowledge, "prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan". Without this coupling, prices can only reflect the costs of production inputs and not the value of the final product.
Health care lacks this coupling. A would-be entrepreneur in health care discovers a new procedure, service or product that might have a benefit to society. However, those whom may benefit do not make that coupled transfer of cash for benefit. Albeit the cost of health care prohibits such, as is pedantically argued. This cost of care is not due to the nature of health care itself, but the original decoupling of benefit to cash transfer that continued its exasperation to higher and higher costs.
To understand this, we have to consider how prices in such a decoupled economy operate. Without this voluntary transfer of wealth, prices must reflect the costs of production. In the absence of coupling, a separate entity must decide on behalf of another the benefit of that resource to the beneficiary. They then decide through some cost-effectiveness analysis those combination of resources that provide the greatest benefit at the lowest cost.
Without this coupling, this separate decision maker is not punished nor rewarded for this process. They neither receive a benefit, aside from some merit, nor are they punished for this process. It is not their funds of which they allocate to acquire those resources. Nor is it their benefit they are estimating. Therefore, the prices they attribute to those resources only reflect their costs, and the benefit is simply a metric subject to bias, confounding, and error in measurement.
This is health care's fatal decoupling. Health care's resources of input reflect their cost, not their value. The entrepreneur is not rewarded for their actions. Thus, we have a never ending cycle of rising costs and slowing innovation.
This would-be entrepreneur takes this discovery to market. They set out to argue that their new combination of society's resources is better than existing combinations, i.e. existing products and services. Society then casts its ballot through a voluntary transfer of wealth if they believe that this entrepreneur did better than existing candidates.
Thus, there is a coupling of entrepreneur to the beneficiary of their efforts. Those whom derive their benefit of the entrepreneur's efforts anonymously and voluntarily cast their vote through the ballot of cash communicated through prices. Prices thus serve as that measurable entity by which society communicates to the entrepreneur that they agree with their stewardship of society's resources. This entrepreneur and other would-be entrepreneurs thus continue to bear the incentive to continue in their innovation efforts.
Most important in this coupling is that the prices of society's basket of products and services reflect the benefit society derives through this coupling. As Hayek writes in Use of Knowledge, "prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan". Without this coupling, prices can only reflect the costs of production inputs and not the value of the final product.
Health care lacks this coupling. A would-be entrepreneur in health care discovers a new procedure, service or product that might have a benefit to society. However, those whom may benefit do not make that coupled transfer of cash for benefit. Albeit the cost of health care prohibits such, as is pedantically argued. This cost of care is not due to the nature of health care itself, but the original decoupling of benefit to cash transfer that continued its exasperation to higher and higher costs.
To understand this, we have to consider how prices in such a decoupled economy operate. Without this voluntary transfer of wealth, prices must reflect the costs of production. In the absence of coupling, a separate entity must decide on behalf of another the benefit of that resource to the beneficiary. They then decide through some cost-effectiveness analysis those combination of resources that provide the greatest benefit at the lowest cost.
Without this coupling, this separate decision maker is not punished nor rewarded for this process. They neither receive a benefit, aside from some merit, nor are they punished for this process. It is not their funds of which they allocate to acquire those resources. Nor is it their benefit they are estimating. Therefore, the prices they attribute to those resources only reflect their costs, and the benefit is simply a metric subject to bias, confounding, and error in measurement.
This is health care's fatal decoupling. Health care's resources of input reflect their cost, not their value. The entrepreneur is not rewarded for their actions. Thus, we have a never ending cycle of rising costs and slowing innovation.
Tuesday, April 8, 2008
Thursday, April 3, 2008
Cost Benefit Analysis - A Tool In The Hands of A Planned Economy
It should seem common sense that something is wrong with an economic order when it is plagued with inflation and blunts in innovation. Hayek writes in Use of Knowledge,
prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his planWhat is chiefly wrong with health care? To what shall we owe its sickening inflation and its frailty of innovation. When we perform cost benefit analysis we take macrostatistical values that may or may not apply to our population of interest. We then assess their impact on a subjective score of quality of life determine through surveys. Then we crunch those numbers through a simulator through which we input prices. Mind you we assume these prices will not fluctuate through our 10 year horizon. Then we finally discover that magical incremental cost effectiveness ratio. This number tells us that introduction of a medication, procedure or diagnostic test is worthy of its cost. We use these methods to allocate resources on behalf of the whole. We decide what medications are right for others given our estimation of their quality of life. This is none other than a planned economy.
Saturday, February 23, 2008
Econometrics and Its Zero-Sum Game
Hayek writes in Cosmos and Taxis,"There exist orderly structures which are the product of the action of many men but are not the result of human design". Econometrics concerns itself with the measurement and relationship of these components to derive an economic order either a priori or a posteriori.
In order for an econometricist to subscribe to a Cosmos order, they must conceive its reality in a measurable and deducible manner. By stroke of habit in constructing their economic and social worldview through its components, they begin to see the world in Taxis. To the econometricist, they seek to measure the components in order to manipulate and achieve in their mind a desirable economic order.
In the measurement of population behavior, an investigator cannot measure with simultaneous certainty, the movement of a population and its position. By measuring any component's movement, you by nature fix its position. By measuring its position, you by nature fix it's movement. By fixing, one component's movement or position, you by nature fix another component. A Taxis construct contains less dimensions of reality than its larger Cosmos reality. The Taxis reality is true and reasonable, but merely a snapshot of a fixed component measurement of the larger Cosmos reality.
In fixing the economic order, there is a constant in its total value. When one component variable gains, another must lessen. The net sum of the movement or position of its components converges to zero. Therefore, a Taxis reality is by nature a zero-sum economic game.
Implications? Econometricists are slaves to limits. By advising policy makers, they map for government a world that cannot exist larger than what is measured. Thus by nature, society converges to a Taxis order and a zero-sum game.
In order for an econometricist to subscribe to a Cosmos order, they must conceive its reality in a measurable and deducible manner. By stroke of habit in constructing their economic and social worldview through its components, they begin to see the world in Taxis. To the econometricist, they seek to measure the components in order to manipulate and achieve in their mind a desirable economic order.
In the measurement of population behavior, an investigator cannot measure with simultaneous certainty, the movement of a population and its position. By measuring any component's movement, you by nature fix its position. By measuring its position, you by nature fix it's movement. By fixing, one component's movement or position, you by nature fix another component. A Taxis construct contains less dimensions of reality than its larger Cosmos reality. The Taxis reality is true and reasonable, but merely a snapshot of a fixed component measurement of the larger Cosmos reality.
In fixing the economic order, there is a constant in its total value. When one component variable gains, another must lessen. The net sum of the movement or position of its components converges to zero. Therefore, a Taxis reality is by nature a zero-sum economic game.
Implications? Econometricists are slaves to limits. By advising policy makers, they map for government a world that cannot exist larger than what is measured. Thus by nature, society converges to a Taxis order and a zero-sum game.
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