Going, Going. Gone

The credibility of the mainstream press establishment is shimmering into nothingness, like the last bit of winter snow after a week of warm spring days; just as our respect and trust for such federal bureaucracies and establishments like the FBI are similarly evaporating. While acknowledging and accepting that such establishments are operated by mere mortals, with all the weaknesses and moral failings that ordinary human beings are heir to, and grudgingly accepting the understanding that the establishment news media trends strongly to the left in political sympathies … look, we can accept all that and a certain degree of human bias, but what’s getting hard to swallow of late is the sheer, mind-numbing, flaming incompetence of them all. Which might be a blessing, for terrifying competence on the part of our current Ruling Class and their minions would make protesting or opposing them that much more difficult. Instead, as Kirk so memorably put it last week,

“What we have is, instead, an aristocracy of dunces, men and women who tell the rest of us how smart they are, and then screw up the entirety of civilization based on fantasies they’ve come up with. The rest of us need to start recognizing that the emperor not only isn’t wearing any clothes, he’s drunk off his ass and waving his wing-wang in our faces. The people who’ve flim-flammed their way into power are all dangerously inept and terminally deluded. If you doubt me, open your eyes and look around yourself: Is there anything, anything at all that these soi-disant “elites” have gotten right in the last century? Anything at all?”

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Worthwhile Reading & Viewing

It is unwise to let your dislike for certain individuals to run away with you to the point that you publish attacks that can be refuted with a few seconds of research.

Speaking of publishing dumb things…

Philosophers and philodoxers

Thoughts on personal productivity from Marc Andreessen

This 19th century French philosopher sounds worth reading.  From Tyler Cowen’s summary:

He explicitly considers the possibility that the rate of scientific innovation may decline, in part because the austere and moral mentality of semi-rural family life, which is most favorable for creativity in his view, may be replaced by the whirlpool of distractions associated with the urban lifestyles of the modern age.

The 10 worst colleges for free expression…the 2020 edition.

Using albatrosses to track down illegal fishing boats.  A little advice for the captains of those boats: do not, under any circumstances, shoot an albatross.

France’s most beautiful stained-glass windows

Are Professional Economists Idiots?

That’s the view of Nassim Nicholas Taleb, Wharton MBA, mathematical finance PhD and author of Skin in the Game and The Black Swan.

Taleb, a libertarian, aims his critique of intellectuals yet idiots (IYI) broadly but particularly at the contemporary economics profession. His targets are those described by the Mises Institute:

“The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”

The economics profession in the U.S. today is mostly involved in research and education that broadly investigates “market failures” or is directly engaged in public action – regulation, tax, expenditure and off budget guarantees – to manage industries and the macro-economy purportedly in the public interest. This is the opposite of laissez faire economics, political advice to a 17th century French minister to “let it be” later developed into an economic theory by the 18th century philosopher Adam Smith and popularized by 20TH century economist Milton Friedman, a libertarian and cofounder of FFE (and my advisor, twice removed). How and to what end did the economics profession evolve from a philosophy of leaving economic decisions to individuals in the marketplace with few exceptions to public economic management of the United States and global economy?

From Individual to Collective Economic Decision-making

Benjamin Franklin, considered the leading intellectual and inventor of the 18th century whose inventions are still in use today, admitted to Harvard at age 12, but instead indentured to his brother’s tannery, advised

“Tell me and I forget, teach me and I may remember, involve me and I learn”

That’s his rendering of a Confucian saying dating back thousands of years. Taleb, a Wall Street trader prior to his writing and academic career, echoes Franklin’s emphasis on direct experience, arguing that capitalism isn’t an ideology or system but a set of mutually agreeable arrangements worked out over the centuries through trial and error by market participants who bear the full consequences of their decisions.

Exiting the Constitutional Convention, Franklin, a great political theorist, when asked whether the Constitution had created a monarchy or republic replied

“a republic, if you can keep it.”

Taleb argues that if given the choice Franklin would have more accurately described the Constitution as a federation with powers over economic activity limited to promoting free trade among states. But these limits were lost more than a century later when progressive President Woodrow Wilson first created the Federal Reserve System then used entry into the war to “make the world safe for democracy” as the means to create the “modern state” managed on scientific economic principles. A half century later, focusing on the “principal –agent” problem of the modern corporation run by managers who had no “skin in the game” John Kenneth Galbraith in The New Industrial State (1967) argued for public management by an intellectual elite, replacing business experience with academic success.

From Competitive to Crony Market Capitalism and Rent-Seeking

Franklin had warned the Convention delegates that

“We must all hang together or most assuredly we will all hang separately.”

The libertarian U.S. Constitution never mentioned democracy, and principal-agent conflicts are orders of magnitude worse in the public sector. As public choice theorists have since noted, we neither hang deep state managers nor otherwise hold them accountable. Democracy may depend on the deep state as political theorist Francis Fukuyama argued in a recent Wall Street Journal article (12/20/2019), but it can’t hold it accountable, as Michael Lind argued in a subsequent Journal article. Accountability erodes with each additional layer of government as decisions are elevated from “at risk” individuals in the marketplace to private, local, state, and federal governing bodies and is virtually eliminated at international entities (e.g., the IMF and World Bank). In no case is democracy a substitute for markets because the most intolerant minority with the most to gain or lose inevitably dominates.

Market capitalism is the source of all human economic progress. Is there a sufficiently good reason for collective economic management? Adam Smith never argued in his Theory of Moral Sentiments (1759) that the invisible hand was perfect: the actual full quote favored nationalism over globalism. In The Wealth of Nations (1776) he did say:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”

same paragraph
but in the same paragraph admonished government from any attempt to do anything about it. Britain had long been what we now call a crony capitalist economy that heavily favored the political elite, which in Smith’s view further government intervention would only exacerbate.

Taleb’s “idiots” are Galbraith’s inexperienced intellectual elite economic managers and advisors who have no skin in the game. Professional economists are generally smart, rational (many ideologically dedicated ”virtue merchants”) exploiting a one sided trade, in economic jargon crony “rent seekers” – redistributing income (rents) from the generally lower income non-politically connected. (I would argue there is a minority in resistance, primarily in business schools and conservative think tanks.) It’s their statistical analysis and reasoning to justify rent seeking opportunities he often finds idiotic, faux science or scientism.

Public intervention to mitigate downside risk (as do e.g., public pension and retirement systems, housing, school and other entitlements, loan and deposit guarantees and other forms of insurance (e.g., flood) that can supposedly be financed without pain by taxing the idle rich or unlimited debt financed by money printing (Modern Monetary Theory) is a religion promising heaven without the threat of hell. Come Judgment Day when the system fails systemically, well insulated politicians and bureaucrats will subsequently label it “an extremely rare and random “Black Swan” event that nobody could have seen coming” and professional economists will join the chorus. The general public gets fleeced and market capitalism gets blamed.

Name any of sixty economic issues and presidential candidate Elizabeth Warren has a plan. The lyrics to the Beatles swan song album of a half century ago concludes “whisper words of wisdom, let it be.

Kevin Villani

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Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

The New Versailles

My daughter actually suggested this line of thought; that the current ruling class (or those who think themselves to be so) in the United States are perilously akin to the French nobility – those who were termed the ancient regime, of pre-revolutionary France. The ruling class were gathered together deliberately at Versailles, where all was all as far as the nobles and ruling class were concerned for at least a hundred years.

There, amid the squalid splendors of Versailles, they were gathered together, under the eye of the King, to frivol their lives away, distracted by spectacles and the vicious grasp for and fall from power within a very small realm. Only instead of a vast palace, outbuildings, gardens and minor palaces, our ruling class disports in a slightly larger venue, that of Washington, DC and the surrounding suburbs.

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Book Review: The Good Jobs Strategy, by Zeynep Ton

Retail businesses are associated with low pay and high employee turnover–especially in the case of those retailers who offer low prices–and the same is largely true of customer-service call centers.  It has been generally assumed that low wages in these operations are a necessary concomitant of low prices for consumers, and that only businesses serving a premium-price customer base can afford to pay high wages.

Comes now Zeynep Ton, arguing that the low-wage strategy is not the only one available to retailers and other customer-service businesses that need to offer low prices, and that indeed often–usually–it is not the best strategy.  She draws connections between the pay and hiring strategy of a business and the operational basis on which it is managed.  To wit:

Low pay and high turnover implies minimal employee training, because you can’t afford extensive training for employees who are going to leave in a matter of months.  Minimal training implies less operational flexibility, because employees will not be cross-trained for other functions.  An environment of high turnover and not-well-trained employees implies that employee functions must be strictly proceduralized, often to the point of excessive rigidity.  And the lack of flexibility driven by minimal training and experience makes it harder to build in appropriate staffing “slack” to handle peak demand situations.  The lack of slack and flexibility leads to endless emergency rescheduling of personnel, reducing morale and further increasing turnover.  (She provides some vivid examples of what this endless and short-notice rescheduling can mean to the personal lives of employees.)

On the opposite site, higher pay can contribute to lower turnover, making more-extensive training economically viable.  Better-trained employees can more easily perform multiple functions, so that absences or staffing imbalances have a less-harmful effect.  Better-trained and more highly-motivated employees don’t need micromanagement, either by human managers or by systems and procedures.

Ho, hum, you say, what’s new?…people, especially consultants and professors, have been writing for years about why employees should be treated well and how it pays off to do so.  How is this book different from a million of others?

The Good Jobs Strategy is, in my view, something quite different from the typical “just treat ’em right” sort of soft, warm, and cuddly advice often found in books and LinkedIn posts.  The author ties the feasibility of the high-pay / high-expectations strategy to effective operational management, with the right systems, procedures, and incentives to enable such operational excellence.

An interesting example the author mentions is that of Home Depot. She credits much of the chain’s early success to its high-quality associates–“knowledgeable and helpful and willing to do whatever it took to help you, even if that meant explaining to you that you didn’t actually need what you came to buy.”  The associates tended to be former plumbers, electricians, etc–and they were employed full-time.  HD grew very rapidly–“customers were driving two hours to go to its stores and, once they experienced the service and great prices, they kept coming back”

But, with the growth came problems.  There was a lack of discipline in the stores, in how the stores communicated with headquarters, how the company selected its products, and how it communicated with suppliers.  “In 2000, bills and invoices were still processed by hand, and headquarters communicated to 1134 stores via fax because there was no companywide email.”  In 2008, two senior IT executives (newly hired from Walmart) concluded that Home Depot’s IT systems were about where Walmart’s had been in 1991.  In summary, HD had become “a classic example of a service company that did not fully appreciate the role of operations in making customers and investors happy…Operations are all those factory-like activities that a business has to carry out in order to provide whatever it is that it sells. ..In a retail store, for example, operations involves things like having the right product in the right place, having a fast checkout, and having a clean store.” Zeynep Ton says that internal measurement systems often don’t focus on such matters–at one retailer she worked with, “Twenty percent of the (store manager’s) score had to do with the store’s customer interactions.” In this chain, “mystery shoppers” would score the store on things like how the employees greeted customers and made eye contact.  But, she notes, “kindness or friendliness won’t make up for operational incompetence. ..It is hard for your dry cleaner to make you happy if you can’t wear your favorite suit to an important interview because they didn’t get it cleaned on time.”

When Robert Nardelli became HD’s CEO in 2000, the systems and procedures problems were rapidly addressed.  Gross margins and net profit margins increased substantially.

BUT, “the culture of cost-cutting was soon felt at the local level, where store employees, who were once at the center of Home Depot’s success and at the top of Home Depot’s inverted pyramid, became a cost to be minimized.”  The company started hiring part-timers, in the name of both staffing flexibility and cost…the knowledge level of the typical employee encountered by a customer fell noticeably.  By 2005, HD was ranked lower in customer satisfaction than was K-mart.  Same-store sales growth fell and even became negative.  Nardelli left the company in 2007.

Zeynep Ton summarizes:  Operational designs don’t execute themselves.  They depend on having the right people, and having those people motivated to do the right things.

The book discusses the actual complexity that exists in many seemingly-simple businesses, and the fact that individual employee decisions do make a difference. “If you are a supermarket employee shelving a case of toothpaste and all but two of the tubes fit on the shelf, should you take the two extras back to storage or would it be better to squeeze them onto the the shelf, even if it doesn’t look so good?  If a tomato looks just a little soft, should you take it to the back room now or wait until it looks worse?  Maybe it will be just fine for a customer who wants to make tomato sauce…it is hard, if not impossible, to make such work so simple and simple and standardized that anyone can do it without exercising judgment.  Things happen in real time at retail stores, and employees have to learn to react.”

(It is incredibly refreshing to see a B-school professor thinking and writing at this level of detail and specificity)

One interesting company discussed in the book is QuikTrip, a large chain of convenience stores combined with gas stations.  The company is very selective in its hiring….the author compares getting hired there with the difficulty of getting into an Ivy League college.  In the Atlanta area, 90% of applicants don’t even quality for an interview, and of those who do, only one out of five is selected.  Turnover rate among QuikTrip employees is only 13%, far lower than the industry as a whole.  The chain emphasizes speed and flexibility…”QuikTrip’s fast checkout is a site to behold.  One thing that makes it so fast is that any employee can use any register at any time without making the customer wait.  If you regularly shop at a supermarket, you know it’s no fun waiting for the cashier do a changeover.  The other thing that makes QuikTrip so fast is that employees have been trained to ring up three customer per minute.”  She says that the employees can even calculate change in their heads!

Other examples discussed include Costco, Trader Joe’s, In-N-Out Burger, and the Spanish supermarket chain Mercadona.

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