Bottom up links

In this Freakonomics podcast, Steven Levitt discusses his work with companies whose managers resist experimentation to test their beliefs.

In one example, he couldn’t convince a company to stop running newspaper ads in any market to see if that would have an effect on sales. But, they discovered that an intern neglected to buy ads in Pittsburgh one summer. It had no effect on sales. But, the company still buys ads.

In this EconTalk podcast, Yuval Levin made what I expected to be a dull conversation about Edmund Burke and Thomas Paine, very interesting. On this, especially, I agree:

I think that there’s a way in which the Left takes for granted a thriving economy that just comes in the background and the question is how to distribute the goods. We have to make the argument that that thriving economy–which makes possible the thriving life of this society–has to be sustained. And it’s a function of certain attitudes toward law and order, of certain kinds of rules, certain kinds of liberties that have to be defended, both because they are right and because they are good. Conservatives are nowhere near good enough at making that kind of case.

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Pope II

Here I wrote about the Freakonomics podcast with Jeffrey Sachs which covered the Pope’s anti-capitalism remarks.

Shortly thereafter, in Taleb’s book, Antifragility, I was surprised to read what I think is a more thoughtful response to the Pope’s remarks and one that supports the Pope’s view.

What surprises me even more is that what Taleb writes about isn’t new to me. It’s a frequent topic of conversation, something that I know well. But, I hadn’t taken it to the logical conclusion.

First, Taleb points out that even the patriarch of capitalism, Adam Smith, was

…extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough.

And he detected–sort of–the problem that comes with managing other people’s business, the lack of pilot on the plane:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left of the Triad.

“The Triad” is Taleb’s classification of systems as (from left to right) fragile, robust and antifragile; and what he means by ‘left of the triad’ is people who get the downside, as well as the upside, or they have skin in the game.

Taleb contiues:

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives — something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors.

He provides an example:

…banks have lost more than they ever made in their history, with their managers being paid billions in compensation — taxpayers take the downside, bankers get the upside [Russ Roberts has been saying this for years]. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rose de Provence brand of summer wine on their yachts in St. Tropez.

To bring this all together:

We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price.

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

Now, let’s re-read what the Pope wrote (quoted from the Freakonomics post):

“[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. … One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! … While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

To me, this reads like leftist dribble, where their intuition leads them, perhaps, in the right direction for outcome, but the wrong direction for cause.

Maybe the Pope is right that there are some fundamental problems in the mixed markets that have emerged.

But, they’re wrong about the cause of those problems. They blame things like “trickle down theories” (Thomas Sowell challenges us to name one economist who used “trickle down“).

But, the part of the Pope’s passage that reminds me of Taleb’s point is:

…expresses a crude and naïve trust in the goodness of those wielding economic power…

Perhaps that is true. And Taleb tells us why:

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

They don’t have downside.

This includes politicians, apparatchiks in government agencies, economists and — the one that I am really disappointed that I missed because of my biases — managers of businesses who only have upside and no downside. I’ve even noticed that senior managers often have the same characteristics as politicians, but darn if I haven’t carried that through.

So, as I like to say, all problems can be traced to problems with feedback — I think Taleb exposes a couple of real feedback problems in — not free markets — but our mixed market economy. That feedback problem is that too many people “wielding economic power” don’t have downside. Rather they have incentives to game the system for their upside.

How can this be changed? Taleb gives one example that surprised me:

…in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Think about that. Would bankers act differently if they may have to repay the bonuses they received in what are now apparent as the fraudulently fueled good-times?

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Sachs on Freakonomics

Freakonomics podcast host Stephen Dubner speaks with economist Jeffrey Sachs about the Pope’s recent drubbing of markets.

Several things about this rubbed me the wrong way.

First, the quote from the Pope (in the linked Freakonomics blog post) starts off with “Some people continue to defend…” As I wrote here, readers deserve to know who the Pope is talking about.

Second, Jeffrey Sachs tried too hard to clean up the Pope’s words. Around the 16-17 minute mark, Sachs comes out with ‘getting people into positions where markets work for them, and not against them, is extremely important.’

Granted, I think somewhere Sachs admitted that he switched to his view, not necessarily the Pope’s, but I think the podcast was about making sense of the Pope’s opinion.

This even seemed to annoy Dubner, as he replied:

Of course, that makes sense. But compared to what the Pope has written about capitalism…it was much heavier on the can’t work part and here’s why it doesn’t work. What is the Pope actually calling for?

Third, Sachs complains that the Global Fund to Fight AIDS, TB and Malaria, a fund he helped “architect 12 years ago” (a little self-promotion never hurts), recently fell short of its funding goals. I wasn’t clear on who they were going to for ‘replenishment’, but it sounds like bureaucrats in government.*

Sachs says:

When it [the Fund] came to the replenishment, just now, it couldn’t raise the funds for the minimum package. It was saying that it needed at a minimum to fight these three diseases $5 billion a year, mind you hundreds of million of people and their lives are at stake. $5 billion we know in macroeconomics is nothing in this world, and yet they could not raise $5 billion a year. They raised $4 billion a year.

And that may not sound so consequential [You're right, especially since one sentence ago you said $5 billion is nothing, that would mean $1 billion is even less] when you’re in a village and the rapid diagnostic tests aren’t there or there’s a medical stock out…this is life and death [oh, that's when it become consequential, in micro]. Since I’m living in a neighborhood, if not down the block, then a few blocks away, or a couple miles away [let's keep hedging on terms] are billionaire hedge fund owners taking home personally paychecks of a billion dollars for the year, the fact that we can’t come up with $5 billion for this institution from all worldwide sources (governments?) is the globalization of indifference.


Too easy to pick on unpopular hedge funds, many who put their own skin in the game. Let’s not mention sacred cows like taxpayer funded sports venues, where billions of taxpayer money is tied up so team owners can afford to pay millions, even hundreds of millions, to the best kids game players. Soon the team owners will want to offload the liabilities of sports injuries on taxpayers, too.

I wonder if he also views that as a marker for the ‘globalization of indifference’.

Of course, you can probably also tell by the comments I inserted in the quote that Sachs’ verbal fitness annoyed me in how he framed $5 billion as inconsequential in macro, but a billion very consequential in micro in the span of three sentences.

My BS detector rings off when someone tries to sell me on something because, well, it’s just not that much money. Of course, it’s always enough that they can’t come up with it themselves.

*Sachs said “George Bush said, ‘we won’t let money stand in the way, you show that this works and the money will be there'”. So, I’m assuming it’s folks like Sachs trying to convince bureaucrats how to spend taxpayer money, rather than raising money from individuals. Which is the last thing that I found annoying that I will comment on.

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Consultants and Mass Transit

I recommend listening to these Freakonomics podcasts, I Consult, Therefore I Am and Mass Transit Hysteria.

Over the years, I’ve had the pleasure of working with management consultants from some of the biggest names in the business. Based on those experiences, I agree with much of what was said in this podcast.

I was amused at how a former consultant interviewed on the podcast relayed how the consulting gig was described to him by fellow consultants:

50% of the job is nodding your head at whatever is said. 30% of it is just sort of looking good and the other 20% is raising an objection, but if you meet resistance, then dropping it.

Steven Levitt described some lessons from his young consulting days. One lesson he learned was that the answers can’t always be found in the data and he said:

I [now] have this incredibly deep appreciation that the people in the middle and bottom of the organization absolutely know what’s going on and a lot of time the people at the top have no idea what needs to be done.

The show host, Dubner, explored the key question: Why hire management consultants? Especially when many of them are inexperienced recent grads, their recommendations are often obvious (or dumb) and there’s limited (actually none beyond low-hanging fruit) evidence that consultants actually help.

Why? Executives may want to gain legitimacy for stuff they want to do anyway or they may want to buy plausible deniability.

In my experience, it has been the latter. Being an executive is rough because every decision carries a job-costing risk. Paying McKinsey or Boston Consulting Group a million bucks to tell you what to do gains you a bit of finger-pointing potential when the Board of Directors start hammering about your lackluster performance.  “But these smart guys told me to do it.” The scapegoat doesn’t last long, but it often buys the exec one or two more shots. Of course the Board should point the finger right back at the manager and say, “But this smart guy hired them and followed their advice.”

I wrote more on the subject of consulting in my posts, …And that resulted in what? and Be leery of big words. I still like this paragraph from the latter:

Can you imagine what the owner of an NFL team would do if his head coach hired a consultant to tell him what strategy his team should use to win games?  That’s right.  And that’s what Boards of Directors should do to managers who do that in business.

Mass Transit

In the other podcast, they discuss something about mass transit that I rarely see mentioned: Actual ridership.

According to the guest on the podcast, when actual ridership is taken into account, cars are more energy-efficient than buses and trains aren’t much better.

That’s mass transit blasphemy, isn’t it?

Mass transit proponents like to present us with idealized scenarios of heavily loaded vehicles. But, it turns out in the real world that a train or bus that moves a lot of people in one direction in the morning and another direction in the evening, make a lot of return trips when they are empty.

Also, they are typically run on schedules throughout the day when ridership is very low.

An efficiency advantage our cars have is that they don’t drive around empty all day while they wait to carry us home.


Pleasure vs. Necessity

Tomato (Tamatar)

(Photo credit: Wikipedia)

This Freakonomics podcast on the Tale of the $15 Tomato reminded me this post of mine about how things must be pretty good because we can afford to grow our own food.

The tale was about how someone bought a hydroponics tomato growing kit that produced about 15 tomatoes. Once they figured the cost of the kit, the electricity for the light to grow the tomatoes and the time they put into to growing the tomatoes, it cost them about $15 per tomato. And these were cherry tomatoes.

We use to grow our own food out of necessity. Now we do it out of novelty.


Because it is expensive (opportunity costs) and we’re not very good at it (comparative advantage) and others are much better (specialization).

Reminds me of a time as a young guy when I tried my hand at brewing my beer. I did it. Folks liked it. It was kind of neat to see the process. But, when we were drinking it one of my friends asked, “Why brew your own beer? Beer is so cheap.” I agreed and stopped brewing.

Be careful of the Pied Piper

I recommend listening to the latest Freakonomics podcast, The Power of the President. In it, Freakonomics economist Steven Levitt admits he was wrong about Obama.

At the 12:30 mark Levitt says:

I’ve probably never been more wrong about anything than I was about my projections for what the Obama administration would look like.

Levitt usually doesn’t pay much attention to politics and usually doesn’t vote. But he did in the last election. He credits Obama for being a great speaker and compares him to the Pied Piper, because:

…even though I disagreed with most of what he said, I immediately wanted to do them. I would have done whatever he would have told me to do.

That’s why I voted for Obama. I never vote, but I thought there was a good chance that Obama would be the greatest president in the history of mankind, and I wanted to be able to tell my grandchildren that I voted for Barack Obama.

One reason Levitt usually doesn’t vote is because he doesn’t think a president “matters all that much,” but he thinks the president can set a tone for the nation, and he thought “Obama would be able to set an incredible tone for our country.” He goes on:

…and what’s strange and surprising to me is that almost exactly the opposite happened. As soon as he got into office, it was just rancor and off-tune, off-pitch.

I’m glad someone can admit he was wrong. I wish he’d give other people, who weren’t wrong, more credit. Maybe we should more carefully consider their position in the future.

I’m reminded of a time where I participated in a mock government exercise as a high school student. In the gubernatorial campaign speeches, one candidate passionately recited some non-sense lyrics from a Prince song.

I remember thinking “what a disaster, this guy is bombing big time.” Much to my surprise, the auditorium erupted in applause and gave him a standing ovation. Myself and the guy sitting next to me were among the few who remained seated and silent with furled eyebrows. I asked him, “What the hell did he just say?” He responded, “I have no idea.”

That’s when it first occurred to me how many people could be swayed by style and emotion and there are very few of us that are more resistant to that.

Even Levitt, an economist, duped himself. He didn’t agree with much of what Obama said, but he would have done whatever Obama told him to do. For some reason, I have a natural tendency to put more weight — nearly all weight — on whether I agree or disagree with what someone is saying, not whether I like the way he or she says it.

I’m usually scanning for content and filtering out style. Much to my chagrin, I’m at the mercy of a population that appears to do the opposite.

But, they don’t just do the opposite. They often know they disagree with the person, but rationalize it away. I had friends in ’08 election who tried to convince me that while Obama appeared to be a bit far to the left (judging from what he said and his voting record), but he’d move to the middle when president. One even told me recently that while Obama hadn’t really moved to the middle in his first term, he expects that he will if he gets a second term. I’m sorry, what?

I would appreciate hearing Levitt say something like, “I’m going to make a point to be more careful about being swayed by style, emotion and fallacy in the future, and I encourage all of us to do the same. Listen to what people are saying. Ask yourself if you agree or disagree and then ask yourself why. Then find someone who can represent the disagreeing position well and talk to them.”

Competition and eu-competition is the lifeblood of emergent order

In a recent Freakonomics podcast encore, host Stephen Dubner explores How a Bad Radio Station is like our School System.

About 5 minutes into the podcast, Dubner asks Joel Klein, former chancellor of the New York City Public School System, why the standard model of education — “25 students in a box” — hasn’t changed.

I found Klein’s answer interesting:

How many psychiatrists does it take to change a light bulb?  The answer: Only one, but the light bulb has to really want to change.

And the answer to your [Dubner's] question is that the school system really does not want to change.  It wants more resources.

What I found interesting about Klein’s answer is that it describes organizations in general, not just education.  Businesses, charities, churches, clubs, families, associations and government organizations, once established, do not really want to change and they want more resources.

A common discussion is why private is better than public — why a business or private charity is better than a government program, for example.

For me, it’s not so much the private/public distinction that matters.  It’s the degree to which the organization is subjected to competition or eu-competition.

Aside:  I’m using eu-competition for lack of a better word (there may be a better word that’s just not coming to mind.  Let me know if you can think of one).  I got this idea of using the eu- prefix from this EconTalk podcast with Mike Munger where he talks about eu-voluntary trades.  These are trades that are voluntary, but one side has considerable more leverage than the other.

My term, eu-competition, means organizations that aren’t directly competing head-to-head with one another, but can benefit from discoveries and innovations made by other organizations.

For example, the political left often holds up fire departments as examples of good socialism at work, as if being funded by taxes is the only dimension of socialism.  What folks making this argument fail to consider is that fire departments operate in a eu-competitive environment.  While fire departments don’t compete head-to-head with each other for resources, they don’t answer to one centralized Federal Department of Fire, either.  And there are many fire departments that operate relatively independent of each other.

This means that there is greater natural likelihood for things to be done differently from one fire department to another.  For the most part, one way isn’t necessarily better than another.  But, every once in a while a fire department happens upon something that is better and before long, other fire departments can choose to adopt it if they too find that it can help.

I think what Klein said about education is true about most organizations — they are systems that don’t want to change.

K-12 education hasn’t had to change.  K-12 education is similar to the fire department example in my aside above, there are many school districts.

But, there is an important difference.   How K-12 education is operated is much more nationally centralized than how fire departments operate.

There is a Federal Department of Education that, as Arne Duncan, the current head of this department, admitted in the same Freakonomics podcast, has acted as a “compliance bureaucracy”.   This Department has the power of accountability through purse strings.  And, if it happens to be holding K-12 school district accountable for not changing, then they won’t change.

Further, there is a body of “education experts”, that have implicit power that they exercise through the Federal Department.

Also, people in general, believe in the one-size-fits-all education model.  I often hear people, even though they complained while going through K-12 of being forced into a box that didn’t fit them, say things like “we just need one standard and it needs to be a good one.”

So, education hasn’t really had the competitive and eu-competitive environment in which to change and evolve through natural experimentation, discovery, innovation and voluntary adoption of changing standards.

Almost every other organization — local government organizations, families, libraries, charities, clubs and businesses — operate in competitive and eu-competitive environments that do better counter act the resistance to change inherent in every organization.