Great Riches and Low Theft

In early 1998 I walked the open plan floor of what was then one of the largest web development shops. The founder was giving me a tour so I could see the scores of web developers working diligently. They looked the part, the founder looked the part, the place had good energy. I liked it.

The founder was looking for venture capital to expand internationally. He was a much more experienced businessperson than I was and he knew it. At one point he gave me a sly look and said "How do you know that I didn't just hire a bunch of extras to fill an empty office building floor for the day so I could impress you?"

Now I had done my due diligence and some of the people who would have had to be in on that sort of scam were people who had more to lose lying to me than they could possibly gain lying for him. I trusted my due diligence and I knew the company was real. But I no longer trusted him. At the end of the tour I told him we were passing on investing.

He was pissed. He went over my head to the CEO of my company, directly and through common clients. When I was called on the carpet to explain myself I said only that I did not want to work with that founder. I did not say why. The CEO did not give me a soul-searching stare, he did not grill me, or even ask why that would be so. He knew me well enough to let me have my reasons. He just waved me out of his office.

It's an odd fact that our capitalist system--our brutal, unsentimental, Darwinian, sink-or-swim system--relies almost entirely on its protaganists' ethical behavior to function. Our entire economy relies on trust. You probably don't think about this much. Most people don't think about it at all. I think about it a lot. What I do--what all VCs do--would not be possible without the honest behavior of an overwhelming majority of founders. If even 10% of founders decided to start cannily lying the entire startup ecosystem would come tumbling down shockingly quickly.

I hear objections. Let me distinguish between transactions and relationships. Many transactions are entirely caveat emptor: you need to know what you are doing and what questions to ask. Transactions have a simple API and learning how it works is your responsibility. But a business relationship is different: it is too complex, there are too many ways to be dishonest. It is not possible for both parties in a business relationship to verify everything the other side has told them; if they had to the cost of doing so would make it infeasible to have business relationships at all.

There are many gradations and steps between transactions and relationships; navigating through them requires experience. But if you do not trust a person you should not have a business relationship with them.

Some of the oldest business advice in the world: "A good name is better than great riches."* What happens to those of ill-repute? "The sons of men of no name, they were driven out of the land."** In our community a bad reputation results in being driven out of the land. If you're known for not being trustworthy your career amongst the highly interconnected venture capital community is probably at an end***.

The flip-side has always been that our community hesitates to accuse other people of certain types of ethical lapses. I can only think of one time in my fifteen years of venture investing that I have gotten a third-party reference from a venture capitalist that called someone's ethics into question. The closest a VC will come to saying something bad about someone is to refuse to say anything of substance at all. If you don't like someone, you don't have to do business with them. But impugning someone's character can put their life's ambitions at risk. You need to be extremely sure of what you're doing and cognizant of the effect your words might have before you do this. If you don't, you can do a great amount more damage than your dislike of that person deserves.

I won't do business with someone I don't trust. When someone I worked with has turned out to be a liar I have ended my business relationship with them. Luckily I have not had to do that often and not in almost ten years. But likewise I won't have anything to do with someone who puts someone else's life's work in jeopardy by carelessly judging their ethics in public. These offenses--breaching trust and baseless accusations--are two sides of the same coin. The ignominy of the offenders should be likewise the same. If a good name is better than great riches then heedlessly sullying someone's reputation is low theft, and leaves the perpetrator, the victim, and the rest of us equally impoverished.

-----
* Proverbs 22:1
** Job 30:8
*** Every field has different standards for trust. With startups we expect baseless optimism for instance, where in academia this would be frowned on. With startups we expect confident predictions of the future as if it has already come to pass, while in banking this would be looked at askance. People in the community know the norms. And, in our community, are willing to give allowance for the fact that many entrepreneurs were not part of the community before starting their company so may be unfamiliar with our ways. Mistakes made with good intentions are not ethical lapses, they are mistakes.

On failing

Don't confront me with my failures, I have not forgotten them.

- These Days, J. Browne

Six years ago. I was working on a startup with a bunch of friends, a big idea and one that got me out of bed every morning, excited to go to work. We had raised money from a Name and some amazing venture investors. We were going to be the next Google. My other gig, a venture fund, had just had the exit that put it over the top: one of the portfolio companies had gone public. Me and my two partners--one active and one silent--had made the fund back and then some. I was going to make more than living wage from the eight years of work that portfolio represented. At home, we had finished furnishing the house, our third child was on the way, and my roses were finally getting some traction.

I was out with a good friend recently. He told me an old college buddy of ours was having some trouble with his career, with his marriage. I'll call him, I said, I should talk to him. No, my friend said, he doesn't want to talk to you right now. He thinks you wouldn't understand. Everything's always worked for you.

Five years ago. Our Name investor had realized that if we stopped trying to grow the business, it would immediately begin making money. This was not what we wanted, we wanted to be the next Google, not a tiny mortgage lead generator. But he wasn't a venture guy, he wasn't an investor at all, he was a buyer of assets. He scared away the outside money, starved the business of cash, and forced us to accept a buyout. I had been pushed out of the company I had helped start. In the entrepreneurial community, there aren't many marks blacker than that.

Meanwhile, my active partner in the venture fund decided that the silent partner should not be paid their share of the fund, contrary to what our contract seemed to my non-lawyer eyes to say, and certainly contrary to what fairness dictated. When I refused to go along with that, he sued me. He also sued the silent partner. The silent partner fought back, and the whole kit-and-kaboodle got locked down. The vast majority of my assets were frozen, being held hostage to some ridiculous legal squabble for some indeterminate period of time.

Not entirely coincidentally, my marriage fell apart at that exact moment.

I had failed, utterly. I had no job, my net liquid assets were approximately zero, my reputation was in tatters, and the one thing in my life I thought was permanent was over. The struts that supported my sense of self all got knocked out pretty much simultaneously. Everything I had, everything I hoped for. Five years ago, today.

In what way are you the same person today that you were twenty years ago? There is no atom of matter in you that was there twenty years ago, there is no piece of you that is the same as it was. The pieces of you, the functioning of you, the pattern of you are all different. Why are you you? What is you? What is it that continues? When the Buddha told us to meditate on death this is the question he wanted us to ask ourselves: what where you before you were born, what are you after you die? In what way are you still you even twenty minutes from now?

I'll tell you an answer, although me telling you no more gives you wisdom than reading a cookbook gives you nourishment: we are a span of links in a chain of causality. My existence now causes my existence a minute from now, and that a minute from then. There is no me except my self causing my next self every tick of the clock. In consequence, I am subject to the Markov property: how I arrived at the current me is irrelevant, every option available to me is embodied in who I am now, not in how I got here.

I'm no saint and failure did a number on me. Someone told me what intense stress would do to my psyche, the stages of irrationality I would go through. Frustratingly, the knowledge of them did not allow me to avoid them. But failure taught me some humility, and being humble forced me to abandon the personas I had built and my arrogance of idealism. And I finally learned that except in how it hobbled me, my failure made no difference--all that mattered was what I did next.

Five years after everything fell apart I have the best portfolio of startup investments in one of the hottest spaces in tech. People I respect and admire recommend me to entrepreneurs. I am allowed to be productive. And I spent Memorial Day with my loved ones and was happy and relaxed and even looking forward to getting back to work after a long weekend. I appreciate it, all of it, every time. I haven't forgotten I had nothing. I take nothing for granted. But I don't now and never did believe that the past determines the future. The future is determined only by the choices you have now--the ones you can find a way to allow yourself--and what you do with them.

I don't think saying that everything's always worked for me is wholly accurate. But it may be that it is entirely true.

Kicking Quora

I am now one of the top answerers on Quora in both online advertising and Zen Buddhism. This is a problem.

I read once that Tetris' addictiveness is an unfortunate side-effect of the human brain's built-in desire to learn.  Learning something results in positive stimulus.  This is usually offset by the actual need to work hard to learn something. Tetris short-circuits this by mimicking learning without the work. Gamification is a double-edged sword: it can convince people to do things they should do but don't, but it can also convince people to spend their time in ways that aren't productive for them. It clouds decision making.

I need to create. At times in my life I've done this by writing, at times by coding, at times by designing (hardware, that is, I have no eye.) When I'm not regularly doing one of these I have a nagging feeling of dissatisfaction. When I hit 'publish' I feel a mental weight lifted. Sometimes I write something so close to the edge of my analytical envelope that I feel smarter than I actually am.

That doesn't happen often. But like that freak perfect fairway shot, it keeps me coming back.

I don't write to amuse. I don't write to educate. I don't want to be an entertainer or a teacher. I want to learn, to create. My favorite posts are the ones where I start with a question I don't know the answer to and write an answer. I am forced to think.

Quora, unfortunately, is like Tetris. It feels like thinking, but it's not. By pushing answerers to create a 'definitive' answer Quora discourages conversation and encourages writing things you already know. It's easy to write there, you answer questions you have answers to. And that's good: sharing knowledge is valuable. But it's not creative.

It's harder to blog. It takes me time to think through a problem, and I often run into a dead end. It's a rare occurrence when I think one of my posts is actually insightful, and I don't really know what I'll end up with until I'm done writing. But when it works, it works, and that's what I'm looking for.

I'm kicking the Quora habit and trying to start blogging more regularly again.

Getting Gold When Buying Iron

"The theory of Induction is the despair of philosophy--and yet all our activities are based upon it."

-- Alfred North Whitehead, Science and the Modern World

Jonah Lehrer writes, in the New Yorker,

[A]ll sorts of well-established, multiply confirmed findings have started to look increasingly uncertain. It’s as if our facts were losing their truth: claims that have been enshrined in textbooks are suddenly unprovable. This phenomenon doesn’t yet have an official name, but it’s occurring across a wide range of fields, from psychology to ecology. In the field of medicine, the phenomenon seems extremely widespread, affecting not only antipsychotics but also therapies ranging from cardiac stents to Vitamin E and antidepressants: Davis has a forthcoming analysis demonstrating that the efficacy of antidepressants has gone down as much as threefold in recent decades.

For many scientists, the effect is especially troubling because of what it exposes about the scientific process. If replication is what separates the rigor of science from the squishiness of pseudoscience, where do we put all these rigorously validated findings that can no longer be proved? Which results should we believe?

The answers Lehrer finds for this phenomenon range from regression to the mean to publication bias.  But he shies away from asking the obvious question that rears its ugly head: what rational basis do we have to expect the scientific method to work at all?  Have we have been bred to believe the universe owes us something that we have no logical reason to believe?

*****

Let's step back.  Science has two main stages: discovery and justification.  Scientists come up with hypotheses and then they test them.  The former is a creative act, something that defies description.  The latter is what we think of as the scientific method: the gathering of empirical data to test hypotheses.

In most cases all of the data can not be collected, only a sample.  Einstein postulated as part of his theory of relativity that gravity would bend light rays. The empirical observation during the solar eclipse of May 29, 1919 that light rays were indeed bent by gravity is seen as powerful evidence that his theory is correct.  But not all light rays have been observed, only a few.  Making a few observations and then generalizing these few measurements to cover all the measurements that have not been made is called induction.  Induction is the centerpiece of scientific reasoning.  If the sun rose yesterday, and the day before and the day before that and it also rose today, we have good reason to think it will rise tomorrow.  Induction.

But do we really have good reason?  On what grounds should we believe that induction is a valid way to reason?  Why should we believe that just because something keeps happening, it will continue to happen?  Why should we believe that just because some light rays are bent by gravity, all light rays are bent by gravity?

The answer is, obviously, we should believe this because it works.  This is what has always happened.  Every time we have correctly used induction in the past, it has led to valid conclusions.

But wait, do you see the problem?  We have just proved induction by... using induction.  There is, in fact, no other way we know of to support it.

*****

Frank Ramsey draws the distinction between deductive reasoning--which is supported by formal logic--and inductive reasoning--which is not--in his Truth and Probability (1926, pdf):

The conclusion of a formally valid argument is contained in its premisses; that to deny the conclusion while accepting the premisses would be self-contradictory; that a formal deduction does not increase our knowledge, but only brings out clearly what we already know in another form; and that we are bound to accept its validity on pain of being inconsistent with ourselves. The logical relation which justifies the inference is that the sense or import of the conclusion is contained in that of the premisses.

But in the case of an inductive argument this does not happen in the least; it is impossible to represent it as resembling a deductive argument and merely weaker in degree; it is absurd to say that the sense of the conclusion is partially contained in that of the premisses. We could accept the premisses and utterly reject the conclusion without any sort of inconsistency or contradiction.

This echoes an earlier argument by David Hume, in his Treatise on Human Nature (I.III.VI)*:

[T]here can be no demonstrative arguments to prove, that those instances of which we have had no experience resemble those of which we have had experience. We can at least conceive a change in the course of nature; which sufficiently proves that such a change is not absolutely impossible. To form a clear idea of any thing is an undeniable argument for its possibility, and is alone a refutation of any pretended demonstration against it.

Hume says there can be no proof using induction.  And, if you think about it, there can't even always be belief: probabilistic reasoning, though it seems to support some limited subset of inductions, is not always--or even usually--good enough.  Of the total population of light rays, what would the sample size need to be to give you statistical comfort in the theory of relativity?

Hume goes further.  His rejection of induction as rationally supported is just the inevitable fallout from his rejection of causation altogether (I.III.XIV):

I am sensible that of all the paradoxes which I have had or shall hereafter have occasion to advance in the course of this treatise, the present one is the most violent... any two objects or actions, however related, can never give us any idea of power or of a connexion betwixt them: that this idea arises from the repetition of their union: that the repetition neither discovers nor causes any thing in the objects, but has an influence only on the mind by that customary transition it produces... 

A cause and an effect are two things that we associate simply because the two events always seem to happen together; but there is no way we can discover a connection between the two that guarantees this "causation" to continue.

Our belief in induction and causation come from our belief in the uniformity of nature.  If two events always happen together, or if an event happens the same way over and over, then we believe there must be some unchanging underlying mechanism.  If this light ray does this, then that one does too.  If the earth is turning, it will keep turning.  Why wouldn't it?  Why would anything have changed?

Well, on the contrary, why would it keep turning?  Why would anything stay the same?  The actual unanswerability of these very simple questions makes our entire quest for knowledge seem very fragile.

*****

But in the end Hume was a skeptic who realized that skepticism was not a realistic option, nor a productive one.  Even if the idea of causation itself is suspect--and thus induction--their use goes constructively on.  The scientific method, statistics, these things seem to work.  People who deny induction get hit by cars, their children catch diseases other peoples' children have been vaccinated for.  We have been formed by evolution to believe in induction: babies do not reason about cause and effect, they simply recognize it.  We have been bred to believe that the universe is uniform and unchanging.

Back to Lehrer's problem.  The subtitle of his article is "Is there something wrong with the scientific method?"  He may just as well have asked "Is there something wrong with reality?"  Induction is central to all of our thinking; we do not have any alternative way to reason.  Ramsey again:

We are all convinced by inductive arguments, and our conviction is reasonable because the world is so constituted that inductive arguments lead on the whole to true opinions. We are not, therefore, able to help trusting induction, nor if we could help it do we see any reason why we should, because we believe it to be a reliable process. It is true that if any one has not the habit of induction, we cannot prove to him that he is wrong; but there is nothing peculiar in that. If a man doubts his memory or his perception we cannot prove to him that they are trustworthy; to ask for such a thing to be proved is to cry for the moon, and the same is true of induction. It is one of the ultimate sources of knowledge just as memory is: no one regards it as a scandal to philosophy that there is no proof that the world did not begin two minutes ago and that all our memories are not illusory.

We all agree that a man who did not make inductions would be unreasonable: the question is only what this means. In my view it does not mean that the man would in any way sin against formal logic or formal probability; but that he had not got a very useful habit, without which he would be very much worse off, in the sense of being much less likely to have true opinions.

This is a kind of pragmatism: we judge mental habits by whether they work, i.e. whether the opinions they lead to are for the most part true, or more often true than those which alternative habits would lead to.

Just as with Gödel's incompleteness, or the stack of turtles holding up the universe, we continue ignoring the logical problem of relying on the things they show are inconsistent.  We relegate to the back of our minds the question of why the heck anything seems to work at all.  Because how would we exist in a world where that concern was everpresent?

The philosopher Nāgārjuna said something that Hume would have understood:

Not from itself, not from another, not from both, not without cause,
Never in any way is there any existing thing that has arisen.

This, in the inimitable method of Indian philosophers, is not meant negatively, it is meant as an aid to understanding the ineffable. The Roman Skeptic Sextus Empiricus came to the same conclusion, even if it does not seem that way.  He said that without any way to be sure in our knowledge, we need to suspend judgement over the truth or falsity of our beliefs and simply exist in the present evidence of our senses.  He thought the only truly rational way to live was to rely simply on what is, not on what we think will be.

*****

I've always been the kind of person who wants to know.  After learning how to program, I needed to know how the compiler worked, then the operating system.  Then I needed to know how the microprocessor worked, then integrated circuits, then the logic gate, then the transistor.  How transistors were made, then where silicon comes from.  It is hard for me to accept, in trying to understand, that there may be levels below which I can't pass.

In Hui-k'ai's Gateless Gate, Wumen (Mumon) tells this story:

The temple flag was flapping in the wind.  Two monks argued: one said the flag was moving, the other said the wind was moving.  They argued, but could not agree.  The Sixth Patriarch said "It is not the wind that moves, it is not the flag that moves, it is your mind that moves."

Mumon retorts "It is not the wind that moves, it is not the flag that moves, it is not the mind that moves."  For him.  For me, it is the mind that moves.  Perhaps this is the easier problem to solve.

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* I had to take out most of the freakin commas from Hume, they were very distracting.

In which we are the protagonists in the low comedy of our economy

This morning I was rereading Merton and Bodie's "A Conceptual Framework for Analyzing the Financial Environment" in The Global Financial System: a Functional Perspective, published in 1995 but still immensely interesting*. This passage, though, ended the paper:

In the traditional bank arrangement, there is a mismatch between the liquidity of the deposits issued by the bank and the loans backing those deposits. Indeed, it is this mismatch in liquidity that is often cited as the root cause for banking panics...

The current environment of low and secularly declining transactions costs for securitization supports a hierarchical and incremental chaining approach as an efficient means for providing liquidity. Liquidity is enhanced whenever a collection of assets is "repackaged," and the resulting collection of assets created have a smaller bid-ask spread than the original assets. Thus highly illiquid and opaque assets can be financed with short-term debt instruments. Portfolios of the more liquid of those securities, in turn, can be used as assets to back other securities that will have even greater liquidity, and so on.

Thus, at each link in the chain, the differential in liquidity is relatively small. Cumulatively, it is possible to create virtually perfectly liquid securities while minimizing the danger to the system of ever experiencing a "crisis" because of a mismatch between the liquidity of an intermediary's assets and liabilities.

The idea is appealing on the face of it, but we can't, obviously, still believe it. If I was going to criticize, I think I would start with how the authors seem to be confusing instrument-level liquidity with institutional-level and how these could be quite different markets. But this is pretty unsatisfying, if only because these institutions are just collections of individual assets anyway.

I think the better answer may be that it wasn't securitization at all at fault in the recent difficulties. Of course, at the rate we're ruling out causes, we may eventually have to accept the sole remaining explanation for the near-seizing up of our vaunted financial system--no matter how improbable it may be: collectively we're no smarter than a troop of chimpanzees.

OK, maybe it's not that improbable.

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* We're having a contest to see who can have the most boring Saturday. I'm winning.

Musing on luck & Thank You

I was visiting a venture capitalist friend of mine a few months ago, talking about what we thought the future held and what kinds of companies intrigued us. He made a comment regarding a company I liked and he didn't. He said "I only invest in companies I know will be successful." On further questioning he admitted that not all of his investments had been successful: sometimes management had screwed up, sometimes customers did not get the value of the product quickly enough, etc. But in all cases, he felt he had invested in surefire plans; if the company failed, it was due to execution mistakes. And sometimes, even, he had made mistakes. But it was not that the validity of the business plan wasn't knowable, or even that he couldn't know--sometimes it was just that mistakes were made.

This is also how I thought, a few years ago: that I could know. The idea that we can always find answers and act on them and thus change our environment or the world not only underlies our technological and business culture but is explicitly taught in our best schools and finest corporations.

A few years ago, someone I worked with teased me because I never said "I don't know." Ever. I would say "I'll get back to you on that" or I would attempt to answer even though I didn't have the answer, or I would deny that the question had significance. Occasionally I would aggressively change the subject or grow angry with the person who wouldn't agree with what seemed so clear to me but that I couldn't explain. This annoying tendency of mine came from years of feedback in the classrooms and management meetings and boardrooms where "I don't know" was not an acceptable answer. Not even close. People who said "I don't know" did not get the good grades, they did not get the promotions, they did not get the bonuses, they did not get the slaps on the back. Not knowing was weak.

One thing that venture capital teaches you, though, is that you don't know. There is probably no other area of life--aside, perhaps, from going up to bat in professional baseball--where you are constantly and ruthlessly reminded that you are not only not always right but that you are usually wrong. And even, that when you did everything possible--all the due diligence, all the research, all the number-crunching, all the strategic thinking--there was no way, a priori, to know. Many venture capitalists do not accept this. Almost all people do not accept this. But it's an inescapable fact. And, it's not only true in investing but in all parts of life--it's just more obvious in investing. The proper lesson to learn from this is probably humility, but successful people rarely became successful by being humble.

This decade I've been too often reminded that a chance meeting or an idle phone call can turn what looks like inevitable failure into wonderful success. Or vice versa. That is, that there is never any way to know for sure what will end in success and what will end in failure. For me luck has not been risk; it is not beta, it is not some fat-tailed distribution. It has been the unexpected and, yes, the unknowable.

*****

I think about luck a lot.

There's an old story, related by Alan Watts, about the farmer whose horse ran away. His neighbors say "Such bad luck!" The farmer says "Maybe." The next day his horse comes back, with two wild horses following him. His neighbors say "Such good luck!" The farmer says "Maybe." The next day the farmer's son falls off the horse while trying to tame him and breaks his leg. His neighbors say "Such bad luck!" Etc.

Good luck and bad luck come and go, and there is no distinguishing them, either before or after the fact. There is no beginning or end of things because there is no way to isolate a single causal event; causes effect widely. We technocrats would explain this by saying, simply, Things are Complicated--we have a Math for that. But this is not enough: this interconnectedness through time and across events could more easily lead to a dampening, an unchanging condition, but it does not. Watts explained this by saying that there is a cycle of remembering and forgetting. Anybody who's been paying attention would have to say that, as is often the case, the zen analysis is more useful than the scientific.

This decade I've had a lot of bad luck end up well and a lot of good luck end up poorly. If I knew then what I knew now, there would have been a lot less Good Luck and Bad Luck and a lot more Maybe.

I've often felt that my comparative advantage in the work world is my willingness to take the risks than the next person would not want to, to weather more sheer unpleasantness, deal with more complexity, and in general gladly volunteer to walk into the knife-storm that my professional life has often felt like over the past ten years. That this sort of thing did not bother me much, while others found it intolerable, is a valuable trait, it seems. It worked for me. But if my neighbors came up and said "What good luck!" I would have to say, Maybe. Because while things worked out at work, they didn't at home. My thinking that I could isolate my home life from my work life was part of the reason. But nothing is isolated.

*****

So, this isn't one of those What a Great Decade posts, although it was a great decade for me, for a lot of reasons, work and even personal. It's just my annual reflection, being realistic about the good and the bad. For me, it's always easy, upon being told "What good luck!", to say Maybe. The hard part is saying the same when told "What bad luck!"

Ten years ago my goal for the decade had something to do with doing well and, perhaps, even doing some good. In retrospect, my major accomplishment was learning how to say "I don't know" and then stopping to listen. (I do not consider my wonderful children accomplishments, I consider them gifts.)

For the next ten years, my goal is to be able to answer Maybe to bad luck with the same equinamity I do to good luck. If I could do this, then everything else would be easy.

*****

But I do want to say a little bit what a great year it's been. I want to appreciate all of you reading here. And thank you for commenting and connecting outside of this forum. I use this space to think out loud, it helps me order my thoughts to know that other people will read them. This is valuable to me, and why I started writing in the first place.

What I didn't expect was that in addition to the benefit of writing, I get the benefit of connecting. I've met a few great people through this blog, I've stayed connected to a few other great people, and I've learned an awful lot from the people who read it. I am thankful. I haven't quite quite found the invisible college, not yet, but it's a start.

So, thank you. And in the new year, may good luck find you and may you transform all bad luck to good.

Not yet Enough

I was reading Skidelsky's critique of Keynes' "Economic Possibilities for Our Grandchildren". In Economic Possibilities, written in 1930, Keynes asked

What can we reasonably expect the level of our economic life to be a hundred years hence? What are the economic possibilities for our grandchildren?

He concluded that by the year 2030,

Assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution.

Because economic growth makes us wealthier, at some point people would have enough--"the absolute needs...satisfied in the sense that we prefer to devote our further energies to non­-economic purposes"--and would cut back on hours worked.

This seems reasonable (if a bit far from the problems we face today) but Skidelsky notes that, despite significant progress in the developed countries towards what Keynes viewed as enough, we are not working less.

...We are two-thirds of the way towards Keynes’s target. We might therefore have expected hours of work to have fallen by about two-thirds. In fact they have fallen by only one-third – and have stopped falling since the 1980’s.

This makes it highly improbable that we will reach the three-hour working day by 2030. It is also unlikely that growth will stop – unless nature itself calls a halt. People will continue to trade leisure for higher incomes.

Skidelsky says the reason is that

The accumulation of wealth, which should be a means to the “good life,” becomes an end in itself because it destroys many of the things that make life worth living.

Now, I think Skidelsky is a genius, both in his biography of Keynes* and his more recent book on Keynes' renewed influence, Keynes: The Return of the Master. But I think his acceptance of Keynes' definition of enough--about eight times the average income of 1930--is the flaw, not human nature.

It must have seemed to Keynes that incomes eight times higher than the then-current incomes would be an enormous amount. Today the average US household income is about $68,000**. Imagine if the average household income were north of $500k. Everyone would certainly then have enough, wouldn't they?

This is probably how Keynes felt. And it's true that we've become wealthy in terms of what people thought they needed in 1930. In 1934--soon after Keynes wrote Economic Possibilities--food, clothing and shelter consumed 76% of household income, on average. In 2002-2003, these expenses were only 50% of household income***. (And, god knows, we are consuming more food, housing and clothing than we were in 1934, so our well being has increased more than these numbers indicate.) Far more households can now afford the basics they need to survive, and far more households have much more money left over after they buy these basics.

What have we done with all this new wealth, this extra income? Why haven't we, as Keynes expected, cut back our working hours, and thus our incomes? Why haven't we realized that we now have enough? Skidelsky thinks it's because of our paucity of imagination.

But maybe instead it's because once we had food, shelter and clothing, we realized that we needed more. We've moved up the hierarchy of needs, from physiological to safety. Now that we can, on average, afford the physiological needs, we are spending on health and education. In this light, the enormous increase in the costs of these services might be the desirable result of our ability to finally afford them.

Or, at least, start to afford them. Our healthcare debate is now dominated by whether we really can pay for everyone to have basic healthcare. Costs have increased at jaw-dropping rates, and many feel that we've lived beyond our means for too long already. Even with incomes that Keynes would think were more than enough, we find that we don't have nearly enough for what we now think we need.

But this also points to the solution. Just as we grew into being able to afford the basic needs, we need to grow into the ability to afford these new needs. On healthcare, for instance, the question is not How can we keep the cost down? but, instead, What policies can we enact to be able to afford it sooner? The answer to Skidelsky's question--How Much is Enough?--is that what we have now isn't enough: it would be inhuman to have the means to make peoples' lives better and then not do it, to be able to save lives and then not save them. Instead, we need to think about what we can do to increase our rate of economic growth. What can we do to be able to afford quality healthcare for all, not 100 years from now, but within our lifetimes?

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* Although not so much a genius that I read the full three volumes. I read the 1056 page "abridged" version.
** Median is about $50k and, while the median is more telling about how the average person lives, I think using the average is a better measure when talking about societal income.
*** Source: "100 Years of of Consumer Spending", US Department of Labor Report 991, May 2006.

Being allowed to make your own decisions, right or wrong

There was a fairly banal column over at the New York Times last Friday, complaining about being condescended to by a bank "customer service" rep.
“Did you want to add him to the account, or open a separate joint account?” she asked.

“We’ve talked about the options,” I said, giving my husband, James, my secret “not again” look, “but we’d just like to add him to this account.” I smiled pleasantly... “Are you sure?” she pressed on... I assured her that we had considered it and decided to stick to the original plan... She sat back a little in her chair and gave me a half-nurturing, half-scolding tilt of the head. “What would your mother say?”

I went on to read the comments, thinking there would be unanimous annoyance at the bank. Instead, there were an awful lot of people saying that the bank service rep was probably "right" and implying that being right was more important than respecting the customer.

I find this directly comparable to the claims by various boosters that they are doing consumers a service by placing relevant ads in front of them. The idea that someone else is determining what is right for you, based on incomplete knowledge about your situation and your decision process does not seem like an advantage for the consumer. It may sometimes result in a better match between consumers and products, true. But it will always impinge on the consumer's autonomy. I think there needs to be some greater good than slightly better product matching to justify this as a net increase in welfare.

Clearly, if the people advocating the benefits to the consumer of ad targeting believed it, they would instead be advocating better tools to help the consumer choose, not a process that is best adapted to targeting the most persuadable, rather than the best fit.

There are advantages to ad targeting, for the advertiser certainly, and for certain media outlets, but not for the consumer.

Away from witnesses

My favorite thing about this blog is that many of the readers are practitioners. People actually out making money by using marketing to sell products or generate leads.

I spend a lot of time daydreaming about the future, and one of my primary heuristics is a belief in progress, that things will become better, faster, more efficient. Others call it wishful thinking. But when I get out on a limb, the practitioners pull me back in (or, oftentimes, push me off.)

I spend a lot of time talking to very early stage companies, and they have world-changing ideas, but often don't really know what the world looks like in detail right now. And how could they? They aren't in business yet. So without feedback from the people who are actively engaged in actually doing the work, I would lose touch with what is feasible, practical, economical and as-yet-undone; things the "official" numbers and mainstream blogs obfuscate or simply don't understand. This is a trap I think a lot of investors--professional VCs more than angels--fall into.

At about the same time I posted on AdMob/GOOG, so did my friend Niki Scevak. Niki's POV is different than mine about the deal.

I think that for the smartphone ecosystem to succeed, there needs to be advertising to support mobile media. Since there needs to be advertising, somebody will find a way to make it work. But I don't know how--if I knew that, I'd be starting a company right now, not investing in other peoples' companies.

Niki looks at mobile advertising and says it's not going to work. There's no point, he says, because advertising supports commerce. Online advertising supports online commerce; mobile advertising will support mobile commerce. In supporting mobile advertising rather than commerce, GOOG has put the cart before the horse.

The interesting thing to me, in talking to people like Niki, is the tension between what is possible today and what I think the world will look like in three years. Getting from here to there is what makes this business exciting.

The fight is won or lost far away from witnesses--behind the lines, in the gym, and out there on the road, long before I dance under those lights. -- Muhammad Ali

How to rake it in by screwing your customers

A long, long time ago I was at Prodigy when we decided to change from hourly pricing to a flat rate of $19.95 per month. Flat rate pricing was clearly preferred by our customers, and our competitors who were offering it were taking them away from us.

Problem was, when people are accessing the internet by dialing into 28.8k modems, more hours online meant more peak demand meant more modems needed, meant more expense.

As we evaluated the price change, I noticed that some of our formerly best customers would now become our worst customers. For instance, there was a bunch of die-hard group text-based RPG fans who spent 100+ hours online per month*. Paying by the hour they were great customers, but with a flat rate they were our worst. We had to ditch the RPG.

In fact, we had to ditch any content that people spent a lot of time with. It turned out that the people who liked the service the most, who spent the most time on it, were our worst customers. Our best customers were the people who never logged on but never got around to turning off the monthly bill.

I lost interest in this business model and moved on; businesses that do better as their customers do worse should not survive.

I was thinking about this today because of my friend Josh's excellent blog entry on the Google Mortgage thing and on retail banking in general.

Unlike most people's mental model of retail banking operations, banks do not make most of their money on the difference between the rates at which they lend versus the rate they offer for savings. American banks, quite distinctly from banks elsewhere in the world, make the bulk of their money from fees and charges. Invisible and often unavoidable consequences of little clauses in contracts that no one ever reads.

Banks' best customers are the ones who are getting screwed by the banks. Banks' worst customers are the ones who are probably pretty happy with their bank. This perverse incentive shouldn't persist, but it has. What's it going to take to change it?

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* This was a lot back then.

Skidelsky on Scapegoating

Here's something I've been trying to say for a year, poorly. Skidelsky in his new book, Keynes: The Return of the Master, says it succinctly:

Whenever anything goes badly wrong, our first instinct is to blame those in charge--in this case, bankers, credit agencies, regulators, central bankers and governments. We turn to blame the ideas only when it becomes obvious that those in charge were not exceptionally venal, greedy or incompetent, but were acting on what they believed to be sound principles: bankers in relying on risk-management systems they believed to be robust, governments in relying on markets they believed to be stable, investors in believing what the experts told them. In other words, our first reaction to crisis is scapegoating; it is only by delving deeper into the sources of the mistakes that the finger can be pointed to the system of ideas which gave rise to them.

As the crisis fades and everyone turns their attention elsewhere, I don't want to forget the lesson learned: what we know about economics is incomplete. Even more, no serious student of economics can now claim that any of the current "systems of ideas" are more than simplistic, directional models. No one knows nothing, and the people who claim to are fooling themselves.

Communities vs. Networks

My first job, at IBM, I knew nothing about computers. Why they hired me to design mainframe CP logic, I can't figure out. Columbia taught Electrical Engineering as a liberal art, so while I graduated able to talk in detail about semiconductor physics and hold my own in a conversation about Claude Shannon's master's thesis, I could not use the UNIX command line. I asked a lot of annoying questions my first year there, like "so, how do I turn it on?" and "what's the difference between MVS and VM?"

My first week I needed to print some 20 page design document. I sent it to the printer queue. Then I trudged over to the room where the high-speed printer was, lined up at the half-door, told the printer tech my job number and he handed me 500 pages of gobbledygook. Probably tied the printer up for an hour. Whoops.

I asked the guy down the hall, who had been very helpful, what I did wrong. He asked me to email him the file. He then emailed me back the file in a different format and told me to print that. I asked him what he had done and he told me that the original was in a markup langauge that needed to be pre-processed. I asked him how to pre-process the files, since I would undoubtedly have to do this many times. He told me to email them to him and he would do it.

No matter how much I pressed him, he would not tell me how to do this. So I asked someone else and, in 30 seconds, they showed me the program to run.

My only explanation for why he would not show me how to do this simple thing is that he must have felt that knowing something that I didn't know was valuable. That by keeping the knowledge to himself, he made himself indispensable. In reality, he had just made himself a bottleneck. And a freakin annoying one, at that.

This came to mind recently because I've been doing a lot of networking. A friend at a mid-sized ad network asked me to find some really good, smaller ad networks that might want to partner with them. While I narrowed my list of 418 ad networks down to the ones that seem like the best fit, I figured I'd ask around if anyone knows anyone they think would be right for this. I've gotten great responses and a lot of introductions (I'm still looking, BTW, so if you know anyone, drop me a line.)

A few people, though (and some I've known for more than ten years and been through some character-defining shit with), won't introduce me to people they know. They are more than happy to have me tell them what I am looking for and pass that on, then get a response and pass that back. Just like Annoying Guy at IBM, they want me to email them the file every time. They want to be the bottleneck. And just like at IBM, the only explanation I can think of is that they think this makes them important.

The Epicurean Dealmaker had an interesting post on Goldman Sachs a few days ago. He is commenting on a Slate article:

Ms Moore points out the fact that, for all its reputation as "a devastating hive mind that can control any institution it touches, including the U.S. government," and as an gathering of the smartest minds, human and machine, on the planet, Goldman Sachs employees have proved singularly inept outside of the hive.

TED's explanation for why this is is the interesting part:

Notwithstanding what they like to tell you, investment bankers... are successful to the very extent they can maintain themselves in the flow of market information. Investment banks derive their market power and importance by maintaining dense and robust information networks across the numerous markets they participate in... Take a banker with excellent network connections out of his or her supporting environment, and he or she becomes dramatically less effective.

A while ago, on the advice of a friend, I stopped thinking about the people I knew as a "network" and started thinking of them as a "community." This made me do two things very differently: I made a lot more introductions, many at my own instigation and just because I thought the two people might find some common interest; and, I consciously tried to stop mediating connections, to stop thinking the point of my relationships is in knowing the person but rather that the point is in communicating with the person, and in helping them communicate with others. Doing this has worked unbelievably well for me.

I think people who try to mediate access to their network fundamentally misunderstand the value of networks. The value is not in the number of edges connected to your node, it's in the information that flows over those edges. I think I was present at the creation of the idea that the metric for the attention economy is the number of people paying attention to you divided by the number of people you pay attention to, and I agree that it's a seductive idea. But it is completely wrong.

The value of your network, to you, is the amount of high-quality information that flows through it, and not necessarily through you. More and better relationships mean that you get more and better-filtered information; this is widely noted. Less noted is that if the people in your network are more interconnected, the information in your network will be of higher quality. This is obvious, once you stop to think about it. (If it's not, then think about the institutions that create high-quality information and how they are organized. And if that doesn't make it obvious, go read Jane Jacobs' The Economy of Cities.)

Creating communities of interconnected people is to your benefit, even if it means that you are no longer included in every communication. In the end, the information that finds its way to you will be much more useful, and there will be more of it. If your goal is to get more Twitter followers, to have your blog more widely read or to have the most LinkedIn connections, then you're not creating value at all*. Instead, create a "dense and robust information network": introduce everyone you know to someone else you know, make sure that when you learn something that you pass it on to the people who will benefit (and not necessarily everyone who follows you), and trust that the community you help build will end up making everyone in it more creative, informed and effective.

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* Although you could argue, and Richard Lanham does argue in his The Economics of Attention, that the competition for attention is the best available filter, a la Hayek. I think this is probably true where cooperation is not available, either because not enough value is being created or for some other reason. These reason don't apply here.

On Regulation and Innovation in the Financial Industry

Yesterday President Obama said

We started taking shortcuts. We started living on credit, instead of building up savings. We saw businesses focus more on rebranding and repackaging than innovating and developing new ideas that improve our lives.

But contrast that with this, from November of last year:

The Securities and Exchange Commission this week issued a formal cease and desist order against peer-to-peer lender Prosper Marketplace Inc.

The San Francisco company said in October that it was no longer accepting new lenders or loans as federal regulators consider the company’s application to establish a secondary market for loans made on its person-to-person lending site. That process is expected to take months.

It's easy to talk the talk about wanting innovation, but government regulation and innovation are inimicable. It's hard enough to start a new company. It's next to impossible for a startup to comply with government regulation that is opaque, one-size-fits-all, slightly different in each of the 50 states and written by lobbyists to benefit incumbents. To comply with the regulations, companies have to hire expensive, well-connected lawyers and go through a several month process. As an early-stage investor, I probably wouldn't invest in working cold fusion if it required the company to be government regulated.

I know everybody and their mother thinks the solution to all our financial system woes is more regulation, but it's worth considering that the US financial services industry is probably the most heavily regulated industry in the world (and if it's not, then it's second only to our incredibly inefficient healthcare industry.) It seems everybody and their mother thinks that if beating your head against a brick wall isn't working, well, just beat harder.

I'm not against regulation, really. I just think that if the regulation we have isn't working, we need to go back and figure out why, rather than layering on a new layer of regs. We should also go back and figure out who wrote our current regulations and burn them in effigy, to better motivate the current regulation writers. Nothing focuses the mind like a hanging.

The first principle in writing new regulations should be an explicit statement of what we are trying to achieve. And if what we are trying to achieve is that no one loses money ever, then perhaps what we want is not a financial system at all. That goal would be best achieved by returning to the gold standard and issuing safes to every home.

But whatever the goals are, one of the primary ones should be to promote innovation. And one of the primary goals of that innovation should be promoting diversity of business models. After increased regulation, the primary prescription in the mass media for the financial system is making sure that no company is too big to fail. This worthy-sounding goal is a non-starter in today's economy. Even if every financial services firm in October of last year had been split into 100 identical sub-firms, we would have had the same problems. Paul Kedrosky has talked about making sure that firms are less tightly coupled as one solution to rolling failures. While I believe this, I wonder if it's possible to implement.

But if you turn the problem 90 degrees on a completely different axis, we can address the tight coupling along functional axes: if we had many types of firms, then even if they are financially intertwined, only a small subset will fail in any given crisis. This idea--that diversity is key to the resilience of an ecosystem--is widely understood by ecologists, biologists and evolutionary scientists. The benefits of biodiversity are inarguable.

We need an appreciation of diversity in our financial services companies. We need to encourage innovative startups that try to provide crucial financial services--like converting savings into investment--in new ways. We need hundreds of them, understanding that most will fail. (Innovation is akin to an evolutionary process in this.) We need to change our regulations to encourage innovation, rather than discourage it. The president needs to stop placing blame and start planting seeds.

And we need to get over the fact that some blameless people will lose some of their money some of the time. Because with the financial services monoculture we have now, every taxpayer loses a lot of money every ten years or so.

Why Bankers Will Continue to Make Just as Much as They Used To

I can understand the brouhaha over banker pay. Bankers make a lot of money. And the seeming unwillingness of the banks to lie low on the compensation front for even a quarter or two makes me wince.

Case in point, this New York Times article: After Off Year, Wall Street Pay Is Bouncing Back

Even as the industry’s compensation has been put in the spotlight for being so high at a time when many banks have received taxpayer help, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees, according to a review of financial statements... If that pace continues all year, the money set aside for compensation suggests that workers at many banks will see their pay — much of it in bonuses — recover from the lows of last year.

Yes, bankers will get paid as much this year as they did before the financial services meltdown.

Another number in the article jumped out at me: "Historically, investment banks have paid workers about 50 cents for every dollar of revenue." This is surprisingly similar to the amount paid to employees of ad agencies and other marketing services firms. It is also surprisingly similar to the amount paid to consultants and lawyers (adjusting for the implied equity-ownership pay in partnerships.)

The headcount-expense/revenue ratio in professional services firms is so universal because the economics of salaries and revenue are linked. We (and the mass media) tend to think of firm revenue being set in one supply and demand market and eexpenses being set in another and firms forming only in that uncommon circumstance where the revenue is enough to support the expenses. This may well be true for companies that make widgets: whether or not the widgets are made is a consequence of whether or not they can be made for less than they sell for.

But in a professional services firm, this is not how it works. The demand for the firm's product is also the demand for the underlying labor, so these demand curves are linked in a simple fashion. The supply curves, obviously, are also linked. Because of this--and the industry dynamic it creates--professional services salaries are the amount left from firm revenue after rent, technology and returns to equity-providers are paid*. Since these other amounts are generally within a small range of percentage of firm revenue, the amount paid to employees will be as well.

If you think bankers make too much money, focusing on how much they are paid will get you nowhere. If they are not paid 50% of firm revenue, they will go to another bank that will pay them that much. If no bank will pay them that much, they will go start a new bank. If that sort of compensation is outlawed at any bank present or future, they will start a bank where they are the equity owners and get paid that much. The money has to go somewhere, and it's not going to go to the providers of capital because the providers of capital to professional services companies have no negotiating leverage.

Taxes would work. In most of the business world, it seems that the highly compensated are paid on a de facto post-tax basis, so if taxes are raised, compensation is raised to correct for it. But this can't be true under my theory of professional services firms. So that's one way.

But I believe that outsize salaries are the result of a market failure, so why screw around with taxes when we should be addressing the market failure itself? I'm no expert here, so I'm not going to expound in detail my pet theories of why banking services cost so much. But in general I think that financial services regulations are far too oriented around who is allowed to provide certain services and how they are licensed when they should be oriented around actually protecting people who need protection. These two things are supposed to be the same, in principle, but they have not turned out that way.

I know it's easier to get the average person incensed over someone's pay than to get them to think about reforming a market--especially a market the average person could care less about--but I guarantee that no matter what the government does, no amount of bluster over how much bankers make will change their pre-tax compensation a single iota unless they focus on why revenue per employee is so high.

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* Yes, I don't believe payments to owners in professional services firms are the residual profits. And why should they be, when the employees can leave and set up shop across the street with almost no need for equity capital? In the implicit negotiation over distribution of revenue, the employees have all the bargaining power. The equity will be paid a fair return, but will not receive any structural increases in revenue. On the other hand, the equity will continue to bear the majority of the variability in profits. This view, while not the standard economic view, has the advantage of being supported by reality. (It also accounts for why non-partner-owned professional services firms tend to conglomerate, but that's another post.)

There's lots of bad economic news, so much that not much of it breaks through the clutter for me anymore, but this did:

Tufts accepts 26 percent of pool, suspends need-blind admissions:

The admissions office ... stopped practicing a need-blind admissions policy toward the tail end of the process, a decision that affected five percent of applicants, Dean of Undergraduate Admissions Lee Coffin said.

Admissions officers were able to first read every application in a need-blind manner, during which they did not consider an applicant's ability to pay. But with more families requesting larger amounts of aid due to the recession, officers suspended need-blind practices for the final 850 applications -- of 15,038 total -- when potential financial aid ran out.

"We read every application need-blind, conducted committee need-blind, and then we ran the numbers and realized that we just couldn't do it, that we had gone as deeply as we could go," Coffin said.

I bet this is a problem a lot of colleges and universities are facing this year and may face the next few years. This is where the government funding should be going; investing in education for young people is the best possible use of our economy's surplus.

Read Romer in Post-Scarcity Prophet:

When you're thinking about the future, you never really know what we're going to discover, but I think there's a reason to set for ourselves an ambition of trying to raise the rate of growth by half a percent per year.

... If we can make the choices that increase the rate of growth or real income per person to 2.3 percent per year, in 50 years we can get extra income per person equal to what in 1984 it had taken us all of human history to achieve.

One policy innovation, for example, that would boost the growth rate would be to subsidize universities to train more undergraduate and graduate students in science and engineering.

Subsidizing education is as close to free for our society as anything we know of. I haven't run the numbers, but I suspect that the break even on this investment (in a steady state) is shorter than anything else we can think of.

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Two asides.

1. I don't agree with Romer on all of this, especially the idea that only science and engineering should be subsidized. Romer is focused on technological discovery as a driver of growth, but in my observation, ideas are discovered by people from all disciplines. Romer makes this point, although seemingly unintentionally, in his EconTalk podcast:

Research grants to universities are not the best way to develop all different types of ideas. Imagine that all music that we could listen to was produced by academic departments of music on college campuses. If you've ever listened to what music people write when they do research, it's pretty unlistenable stuff. The pure university research path isn't the way I want to get the music I listen to or the books I read. But, on the other hand, if you have the kind of things like open source, there is a kind of democratic element where people in open source have to cater to--or lots of things on the web that are free--they're catering to not just a narrow group of peers, but a wider audience. And that creates incentives for people to create things that are valuable for large numbers not just small elites.

If we want better music, give tuition subsidies to lots of music students rather than grants to a few music professors. This seems rather obvious in the arts, but it's almost certainly more true in other academic departments. The idea that "physics advances funeral by funeral" is a by-product of the current university system.

I also don't think that anyone, government included, know where we should focus our research to create ideas. Romer says "we never really know what we're going to discover..." and this is true not just within science, but within knowledge as a whole.

2. For my friends who conflate economics and finance: growth is not evil. The point of creating more income in a society is not to have more rich folk or to consume more stuff. Growth in income, although measured in dollars, is the ability to create more value, not more money or more things. We create additional value primarily by a better arrangement of materials, not the greater use of materials. So, a laptop today is more valuable than a mainframe computer of thirty years ago even though it uses less resources and costs quite a bit less. (There is a somewhat involved argument about why this creates a more even distribution of income, but that's pretty OT.) That growth often means more use of resources and more inequality is a bad outcome, but--IMHO--is not caused by growth itself but by the inefficient tuning of the institutions that encourage growth.

Growth is society becoming more productive. This additional productivity doesn't just mean that more people have gigantic flat-screen televisions (although certainly many people will use their excess production this way) but that we have better health outcomes, less incentive to fight over resources, more personal freedom and, hopefully, even the ability to increase the percentage of the pie that goes to people who currently have less.

More Capping

Another voice in my crusade (such as it is) to stop paying exorbitant salaries to everyone on the government dole.

In the hubbub surrounding President Obama’s decision to cap salaries of commercial-bank CEOs at $500,000 (if they receive future federal funds), the salaries of college and university presidents have been flying under the radar. Some reconsideration is due, particularly because substantial taxpayer dollars go into their services, with more funds coming via the stimulus package. State and federal taxpayers subsidize public universities substantially, but even private schools benefit from things like tax-subsidized student loans and tax-funded faculty research...

The 184 public research universities [in The Chronicle of Higher Education's survey of college and university presidents’ compensation packages] had 59 presidents whose 2007-2008 compensation packages were worth more than $500,000. The average for this $500,000-plus club was $654,000... Of the 32 research-intensive private universities, 31 had 2006-2007 presidential compensation packages worth more than $500,000, the average being $895,000.

HT: Alex Tabarrok, Marginal Revolution.

If the Neighbor's Grass Always Looks Greener, Rip out Your Lawn and Plant Wildflowers

Everybody complains about the finance industry, but nobody does anything about it. Everybody complains about the advertising business, but nobody does anything about it.

I spend a lot of my time talking to people, meeting them, listening to their ideas and what they need to achieve them, making introduction, sharing information and etc. This week's conversations caused something that has always bothered me to start to bother me: everybody wants to radically change some industry, but never their own. Bankers want to change healthcare. Academics want to change information management. Marketers want to change media. Media people want to change consumer packaged goods. Philanthropists want to change finance. And these are just the conversations I've had this month.

We need change. I look at the industries I am in and see that we need change. Not improvement, but fundamental change, a real rebuilding from the foundations change. But to change things we need to change the things we know. Any of us can look at another's industry and see where it is failing. But the real work is knowing how to get from where we are to where we think things should be. Doing that requires a deep knowledge of industry relationships and interrelationships, of its microstructures and systems. That knowledge only comes from having worked in the industry for years.

Certainly I understand the draw of coming at an old problem with an outsider's insights and another discipline's techniques; trying something that has not been tried, the new tool. But if you've not been in an industry, you probably don't understand how it and its ecosystem work and why past efforts to change it have failed. How can you address fundamentally complex issues that you don't even know about?

Last night I was ranting on the phone to a friend about people not being able to see the systems they are part of, and she asked me "well, how would you change what you do?" I told her, essentially, that what I do is done really rather poorly, but as well as can be expected. I was more guilty of lack of imagination than the people I was ranting about. So, to be honest, I'm not writing this to change your mind, I'm writing it to change my own.

The finance industry has failed us again and again. In the past four or five hundred years we've probably averaged finance-system led contractions at least a dozen and probably a score of times. In that time, we've incrementally improved the system, regulated it, computerized it and completely changed it and we still have failures. But, in fact, we haven't changed it at all. Anybody in today's finance industry can read an account of the Medicis, the 16th century English goldsmiths or the 11th century trade associations and see that those protean systems are the same systems we have today. Finance plays an absolutely key role in society's progress. Imagine how much better off we would be today if we had a more stable financial system for the past five centuries.

Similarly, the advertising industry has not had a notable success story since the mass roll-out of Grey Poupon in the '70s. Since the sixties--at least, and excepting 1999-2000--the industry's chatter about its own future has been focused on its dysfunction. Meanwhile, its entrepreneurs spend their time improving measurement, making transactions more efficient, collecting ever more personal data, and making in-your-face promotion even more in-your-face. As a result, while advertising expertise and spend becomes more and more crucial for companies trying to compete, advertising as a whole has become more and more a societal dead weight. Imagine how much better off we as a society would be if we could match consumers with the products and services that are right for them, spending more money on making the products and services better and less on targeting the gullible and wheedling the skeptics.

This economic disruption is an ideal opportunity to make fundamental changes, to change things for the better for the long term. But I think the window is short. In two years people will be making money again and see no reason to change. Now is the time to focus on real change, in our own industries. So, for me, no more incremental improvement, I want to talk about going back to basics and doing things differently, better.

John Bell, In the Accelerator, With the Polarizer

Last night I had a dream I was playing a card game with my son. It was an interesting game: each card had a piece of Dirac notation on it. He was winning.

It could be a real game, I thought, when I woke up. Perhaps there are a few cards on the table that represent some state of entangled particles (not to imply any belief in hidden variables, natch... it's just a game.) Each player has a hand of bras, kets and operators and they take turns trying to put down a valid expression. If they do, they get to measure the observable in question. The other players then need to play cards to make their own measurements and try to guess the state of the entangled particle. Sort of like Clue crossed with Wff n' Proof. Or something.

Anyway, I figured it would at least prepare my kids for the bizarre blackboard scrawlings they would face in their graduate quantum mechanics course. But then I decided I'd rather not encourage them into such an ontologically dodgy enterprise anyway.

After-Dinner Ruminations in the Highest Bobcat-Land

[This entry is somewhat general (uncharacteristically so, I hope.) I have more specific things to say, but I'm thinking out loud. Also, I usually think reductio ad absurdum, which necessitates the making of positive statements. Judge accordingly.]

I was talking with a friend about the right way to make a living. Somehow I got sucked into discussing corporate responsibility. I hate discussing corporate responsibility: it's a concept I've discarded. The idea of corporate responsibility seems to me a way to feel good about getting nothing done.

I believe there are systems and there are persons. People create the systems and people live within them. Sometimes the system suggests a person do the right thing and sometimes the system suggests a person do the wrong thing. In our time and our society each person almost always has the luxury of choosing to do the right thing.

But the system is like an anthill and people acting in the system are like ants. When a person chooses to buck the system, he or she is pushed aside and another ant takes his or her place. If the system presents me with a morally wrong but otherwise attractive choice, I hope to be aware enough to not choose it. But I never expect that my abstention means that path is not taken by someone else.

We can talk about corporate responsibility but that is just a way of distancing ourselves from talking about who is really responsible. We can ad-hoc hold each person responsible for their actions but no positive change can result from this: in a moral sense each person is already the inheritor of the results of their own actions; and, from the point of view of someone who is not the person making the choice, the action prescribed by the system gets made despite the choice of any particular person.

We can work for the day when every person has the understanding to make the right choice, but pretending that we live in that world today seems like another way of avoiding our own responsibility. We all act within the system, but we all also help create the system. Our responsibility for others' bad actions is to create a better system. We can blame specific corporations or specific people for bad actions or the lack of good actions, but because blame often replaces our conscious effort to understand and change the system, it is worse than sterile.

Gary Snyder once speculated on the bobcat's responsibility for doing no harm, exploring the morality of those who needed to live within a system. But the bobcat does not create his or her own system. As individuals we can attend to our own responsibilities, but for others we can only constructively understand how to create a better system.

Reconciling Living with Strangers

I've been re-reading David Foster Wallace, both as a way of grieving him and as an escape from other, more pressing, grief. Wallace was the complicated inhabitant of his own writing, the uncertain outsider unable to accept the loving embrace of his community. He was an odd jester, exposing shibboleths but also using the mundane to uncover things much deeper.

In footnote 38 to the title essay of A Supposedly Fun Thing I'll Never Do Again, he says

This is the reason why even a really beautiful, ingenious ad (of which there are a lot) can never be any kind of real art: an ad has no status as gift, i.e. it's never really for the person it's directed at.

In The Gift--a book that deeply influenced Wallace--Lewis Hyde says "unless the work is the realization of the artist's gift and unless we, the audience, can feel the gift it carries, there is no art." It is a difficult truth, I suppose, having spent a career in the industry. But it is a wonderful thing to realize that the art that surrounds us is more than words and images. It's more than ideas and meaning. In his introduction to Art of Colonial Latin America, Gauvin Alexander Bailey warns not to use art as anthropology: attempting to see art as a product of a time, a culture or even an idea obscures the fact that art is the product of an individual and that as individuals we all transcend our times, our culture and even our ideas.

The Mario Cravo Neto at the top of this post hangs in my living room. My brother told me a couple of weeks ago that he thought the image was "not me." Perhaps. But it is also, in a way, not Cravo Neto: I look at it and wonder what of him is in it, different than what he has given to his other work. Re-reading Wallace, I am sensitive to what he has left of himself in the work, of the gifts he has left, unique to him as an individual and far apart from the story that he sold and the book that I bought.

And then I look around at the other books, at the poems, at the pictures, and especially at the drawings my children have made me and I think about how I am surrounded by gifts, freely and lovingly given, not just in this season and not just in this too-trying year, but always.

Happy new year.