Daniel Hannan on Welfare

I highly recommend reading Daniel Hannan’s book The New Road to Serfdom: A Letter of Warning to America.  The fluency and adeptness at which he analyzes government and makes international comparisons is well worth it.  I’ve learned a great deal so far.  There will be more to come in that regard in future blog posts.

Hannan can also turn some nice paragraphs on domestic issues like welfare (emphasis mine):

It is a stock phrase of virtually every European politician, regardless of party, that “a society is judged by how it treats the worst off.”  Plainly, then, there must be something selfish — and possibly racist — about a people who keep voting for a system that treats the most needy so pitilessly.

It rarely occurs to critics that there might be better ways to measure the efficacy of welfare state than by size of its budget.  Indeed, in a truly successful social security system, budgets ought to fall over time as former recipients are lifted into better and more productive lives.

This, of course, was the original rationale for welfare.  But it has been almost entirely forgotten in Europe, where dependency has become structural.  Benefits that were intended to have a one-time, transformative effect have instead become permanent, as recipients arrange their affairs around qualifying for subventions.  Millions have become trapped in the squalor of disincentives and low expectations.  In Britain, which is by no means as badly off as many EU members, the annual welfare budget, including the lump sum payments that, as in the United States, are called “tax credits,” comes to more than $200 billion a year.  Yet this huge contribution has little impact on either poverty or inequality.

These are good points.  As we keep chugging ahead with ballooning government deficits “that can’t be cut because they’re someone’s entitlement,” nobody seems concerned with why many of these entitlements have grown so large.  Why these programs that were intended to ‘get people back on their feet’ don’t quite seem to do that.  Why they become permanent fixtures and grow.

Then Hannan goes onto to analyze why the 1996 welfare reform in the U.S. was successful.  He gives several reasons, but one of the most important was localism in the administration of welfare.  Ultimately, the reform pushed welfare administration from a centralized federal level, to a local, in some cases, sub-state level, which has many benefits.  This is probably one of the best:

…localism under-girds the notion of responsibility: our responsibility to support ourselves if we can, and our responsibility to those around us–not an abstract category of the “the underprivileged,” but the visible neighbors–who, for whatever reason, cannot support themselves.  No longer is this obligation discharged when we have paid our taxes.  Localism, in short, makes us better citizens.

I thought this passage was powerful for a couple reasons.

First, there’s the suggestion that we ought to be responsible for our own affairs, if we can.  We seem to have a low standard of this these days.

Second, Hannan points out that we tend to act a bit more compassionate for those around us when we haven’t simply done our part by paying taxes.

In the past, families, friends and neighbors would watch out for each other.  If you needed a place to stay while you got back on your feet, you could count on a family member to provide that for you.  And, you’d probably make yourself useful around the house so that family member would know you appreciated their help.

Or maybe your neighbors would invite you to share some meals.  And you’d do the same when they needed it.

Not that this doesn’t happen now.  But, there seems to be no shortage for the attitude that it’s okay to let these responsibilities slip “because we paid or taxes.”

I’ll cut you some slack if you disagree.  But, I’d just ask that you watch for it.  It’s not always readily apparent.  Furthermore, think about what you’ve done to help a family member, friend or neighbor and why.

“I support it, but it doesn’t apply to me”

On page 154 of his book The Secret Knowledge, David Mamet wrote:

I recognized that though, as a lifelong Liberal, I endorsed and paid lip service to “social justice,” which is to say, to equality of result, I actually based the important decisions of my life–those in which I was personally going to be affected by the outcome–by the principle of equality of opportunity; and, further that so did everyone I knew.  Many, I saw, were prepared to pay more taxes, as a form of Charity, which is to say, to hand off to the Government the choice of programs and recipients of their hard-earned money, but no one was prepared to be on the short end of the failed program, however well-intentioned.  (For example–one might endorse a program giving minorities preference in award of government contracts; but, as a business owner, one would fight to get the best possible job under the best possible terms regardless of such a program, and would, in fact, work all legal, perhaps by semi- or illegal means to subvert the program that enforced upon the proprietor a bad business decision.)*

*No one would say of a firefighter, hired under rules reducing the height requirement, and thus unable to carry one’s child to safety, “Nonetheless, I am glad I voted for that ‘more fair’ law.”

Reading this passage brought to mind a conversation I once had with a friend about minimum wage.  He listened to my arguments.  It reduces opportunities for unskilled workers.  It increases unemployment.  It’s a private transaction between two individuals.  The worker can always opt not to take the low paying job.

He listened, but he still couldn’t get over what he saw as an imbalance of power between an employer in areas with few other opportunities (still not recognizing that those limited opportunities may be a result of minimum wage) and an employee.

It occurred to me to ask how he pays the individuals that worked for him on his car lot.

He answered: Them?  Well, they are not “my” employees.  They are independent contractors.  They are paid a commission based on how much they sell.

Me: So, if they don’t sell any cars over a several hour period, they make nothing, which is less than minimum wage?

Him: Well, yes. Technically.  But they usually average more than minimum wage.

Me: Usually?  What about when they don’t?  There has to be hours or days that go by when they don’t sell a car.  Why don’t you put your money where your mouth is and ensure that they make at least minimum wage all the time?

Him: Do you know how much that would cost me?  Besides, then they wouldn’t have as much incentive to sell. 

A perfect example of what Mamet wrote about.

Mamet finishes his chapter:

In the waning days of my belief in “Social Justice” I discovered, in short, that I was not living my life according to the principles I professed, that I disbelieved both in the probity and in the mechanical operations of those groups soliciting first my vote and then my money in the name of Justice, and that so did everyone I knew.  Those of us untroubled by this disparity, I saw, called ourselves “Liberals.”  The others were known as Conservatives.

The my-s**t-don’t-stink crisis

In his book, The Secret Knowledge, David Mamet gives a brief and apt explanation of the economic term moral hazard, which played a key role in causing the financial crisis.

This is from a footnote on page 187 (emphasis added):

Is it not evident that any organization believing itself to be “too big to fail,” will more likely, indeed, inevitably make disastrous decisions? Why should it not–it is Too Big to Fail.

We all know people who (and perhaps have experienced this of ourselves), at one time or another, began to believe that their own s**t did not stink.  And we all know how that story ended.  Not well.

Our last financial crises could be called the my-s**t-don’t-stink crisis.

Also, we should remember how those stories end whenever our “experts”, politicians and economists tell us that such-and-such an industry or company is too important and cannot be allowed to fail (though it usually already has, and few people recognize it yet).

Give it a try

Arnold Kling and Nick Schulz write about a common barrier to innovation in big companies  in their book From Poverty to Prosperity (p. 188):

To control intrapreneuring [development of new ideas within a company], corporations set up bureaucratic filters through which new ideas must pass.  The bureaucracy is designed to kill most new ideas, because most new ideas offer poor return on investment.  Corporate decisions are made by committees.  In a typical committee, no individual has the power to say “yes” to a new project.  On the other hand, almost every member of a committee has the power to veto a new project.

Observers of organizational behavior have noted that in committees one is more likely to be regarded as intelligent and a good team player by one’s peers by arguing against a new idea than by arguing in favor of it.  Middle managers who fight for new ideas are regarded as troublemakers, even if they succeed in convincing corporations to undertake the projects they propose.

A corporate middle manager who fits Pinchot’s description of an intrapreneur is likely to be driven to leave a large organization to start a new enterprise as an entrepreneur.

Here’s a different idea for these big companies: Give it a try.

Don’t vet the idea in a conference room.  Vet it in the marketplace.  Go small and cheap.  Give the project to a small group of people and get them out of headquarters and let them adapt it to real world feedback.

Felix Dennis Tidbits

Here are a few final bookmarks from Felix Dennis’s How to Get Rich.  I highly recommend the book, even if you don’t wish to get rich.  It’s easy to read and contains a lot of wisdom that can help you in various parts of your life.

On luck, first-mover myth and tunnel vision (p. 142):

The only truth about luck, good or bad, is that it will change.  The law of averages virtually guarantees it.  And here, I think, is one difference that separates me from my “unlucky” friend, whom I shall call Albert.

By moving so adroitly and so swiftly from one thing to the next, Albert does not place himself in the way of luck.  He is too much in love with the green, green grass just over the hill.

Then again, Albert is more intelligent than I am.  But there is a downside to all this intelligence and imagination.  He thinks a little too much before he acts.  He weighs the options too carefully. He is capable of imagining defeat.

So while he is clever enough to want to minimize his risk by switching to yet another new and uncontested marketplace, he leads himself into uncertainty. And into error.

Uncontested markets are usually uncontested for a reason. Nature abhors a vacuum and if no one else is contesting a market, it may well be that no such market exists.

There are other differences between Albert and me.  He is a great believer in partnering and share options and employee profit participation.  …in Albert’s case, this division of the spoils is undertaken in the minutest detail, long before there are any profits whatever to share.  Albert believes they encourage his coworkers. But such arrangements are immensely time-consuming and a distraction from the tunnel vision necessary to become rich in the first place.

On negotiation and politics (p. 149):

If you are overly fond of haggling, my advice is that you quit thinking about making money the old-fashioned way and consider becoming a politician instead.  That way you can rob and plunder your fellow citizens year after year without risking your own financial security or capital–you bastard. (By the way, please get used to people thinking of you as a bastard.  After all, it’s what nearly everyone thinks of politicians, except themselves).

On management (p. 150):

All great companies, all well-run organizations, need great managers and great staff.  That much, at least, is pretty obvious.  You forget it at your peril.

But the acquisition of of managers who can bring a sense of mission to even mundane tasks, who can identify potential candidates, nurture late bloomers, fire dullards and whiners and adapt to changing circumstances–that searching, identifying and nurturing is not about negotiating.  It’s about setting an example of true meritocracy in a company where nepotism hasn’t a chance and where those who wish to succeed are given every opportunity and encouragement to do so.

The Dennis Principle

Cover of "How to Get Rich: One of the Wor...

Cover via Amazon

In 1969, Laurence Peter and Raymond Hull wrote the book, The Peter Principle and since then the observation that every employee tends to rise to his or her level incompetence has been synonymous with the title of their book.

The idea is that folks tend to perform competently at some levels and then are rewarded with promotion until they eventually reach a level where they are no longer competent.

If only that were true.  In my experience, competence is not what is rewarded with promotion.

I think Felix Dennis describes the scene more accurately in How to Get Rich, when he discusses delegation (p. 186):

It used to be surprising to me why so many people appeared to have a problem with delegating.  But I finally figured it out, and the answer isn’t a pretty one.  It concerns our old bugaboo, ownership.

If you own a company and that company’s purpose is to make you wealthy, you will be content, delighted even, for any amount of glory to go to anyone who works there, providing you get the money.  It is in your best interests to delegate whenever it makes sense in such circumstances.

If you do not own the company, or any part of it, then it is possible you are only a senior manager because you like power. It is not true of everyone, of course. But often enough. You like bossing people about.  You enjoy telling them what to do.  If that is the case, then you might be understandably reluctant to delegate real power or opportunity, in case the person you delegate to proceeds to excel. This, in turn, may well demonstrate to the rest of the company what a ho-hum manager you really are.

This is a warped way of thinking. But I am convinced it lies behind much of the reluctance to delegate I have encountered in my business life.  I used to be surprised at this reluctance of others, both in and out of my own companies.  Now I’m not surprised at all.

Bossy people and glory hounds are mostly interested in building a power base so they can have yet more people to boss about. It’s pitiful and a little sad, but we have all seen it.  We saw it in school. We saw it in the playground.  We saw it in college. And we saw it in our first job. If you are observant, you have been seeing it nearly all your life.

This type of managerial toad will often talk about training and delegation in sepulchral tones, but then, as the old proverb tells us, “the Devil can quote scripture for his own purpose.”

You can’t deal with bossy, puffed-up sods who won’t train you and won’t delegate.  You can only move departments or change your place of work.  It isn’t worth the time to do anything else.

Based on my experience, such folks tend to reward inputs (did you do it the way I said to do it?) instead of outputs (was it successful ?).  They somehow manage to assume credit for successes (which they then don’t easily share) and masterfully distance themselves from failures. They are expert horn tooters.

I’ve often scratched my head at the behavior.  It seems counterproductive.  But silly me, I viewed it from the owners perspective for some reason.  As Dennis lays it out, it makes perfect sense.

What’s really sad to me is that this is the type of leadership that has been taught to us since we were young.  I often struggled when myself or my friends attended leadership development camps or training.

My intuition told me that even the leaders of the camps didn’t really have a grasp on true leadership.  What they discussed was more of the bossy/glory hound leadership — how to stand tall and speak with authority and how to make yourself look busy, even when you don’t know what you’re doing.  It’s about managing up and improving your image.

I’ll add my own observation to Dennis’.  These types of leaders tend to gravitate to organizations that are already successful.  They say things like, “we are professional managers that will take over where the founders left off” and “we can take the business to the next level”.

In reality, it’s the organization’s prior success that allows it entertain such leadership for awhile.

I prefer Dennis’ style of leadership.

Felix Dennis on Talent

As I wrote about in this post, successful people have the resilience to recover from failure and try again.  I think they also have superior talent management capabilities.  Felix Dennis, who speaks much more from experience than I, agrees.

In his book, How to Get Rich, Felix Dennis describes five business start-up errors.  The fifth error is skimping on talent.  I like what Dennis has to say here (p. 105):

If you are determined to be rich, there is only one talent you require.  Can you think of it before your eyes skim down to the next paragraph?

Right.  You need the talent to identify, hire and nurture others with talent.

Sometimes, to ensure that a talented individual will work for you, or will stay working for you, you need to be flexible.  Money is not always the great motivator here.  Talented people want a good salary, of course, but surprisingly often they are more attracted to new opportunities and challenges.

When you come across real talent, it is sometimes worth allowing them to create the structure in which they choose to labor.

You must identify talent.  Then you must move heaven and earth to hire it.  You must nurture it, reward it properly and protect it from being poached.  If necessary, dream up a new project.  Better sill, get the talent to dream it up.

I’ve noticed that some leaders see themselves as the talent.  They do their best to outshine others and sometimes they reach good levels of success.  For awhile. Until the next beacon outshines them.  Then these guys are taken out.

Other leaders see their job more like what Dennis describes.  Jack Welch, former CEO of GE, was classic example of this.  These types of leaders seem to have better odds at superior, long-lasting success.  These guys tend to go out on their own terms.

Who controls the capital?

As I wrote here, this isn’t a blog about Ronald Reagan.  It’s a blog inspired by a quote from Reagan.

But, chapter seven in F.A. Hayek’s The Fatal Conceit, entitled Our Poisoned Language, reminded me of my second favorite quote from Reagan (my first favorite is at the top of this page).

All systems are capitalist.  It’s just a matter of who owns and controls the capital – ancient king, dictator or private individual.

I try to avoid discussion about whether society is socialist, capitalist, communist, fascist or some other common label.  I find those discussions to be unproductive red herrings that avoid getting to the root of the matter.  Each word has textbook definitions and also has much baggage attached.  I find that most discussions about these terms equivocate between the text book definitions and the baggage and rarely apply exactly to any specific group of people.

In his quote, Reagan drops the textbook definition of capitalism and all its baggage to get to the heart of what truly differentiates large groups of people that form political economies — who owns and controls the capital.

In chapter seven of The Fatal Conceit, Hayek explains that the words we use to describe the actions of individuals interacting with each other, words like markets or society, give the impression that these groups of individuals are something they are not — a single unit with a centralized mind or central goal.  And this gives rise to some people using that image to convince others that this single unit should have their overall goals.

Steven Landsburg expressed this idea well in his book The Big Questions, which I quoted here, by explaining that folks  imagine that organizing an economy is like organizing a birthday party, which it is not.

Here’s Hayek’s words to explain the phenomenon (p. 113):

Thus the word ‘society’ has become a convenient label denoting almost any group of people, a group about whose structure or reason for coherence nothing need be known — a makeshift phrase people resort to when they do not quite know what they are talking about.  Apparently a people, a nation, a population, a company, an association, a group, a horde, a band, a tribe, the members of a race, of a religion, sport, entertainment, and inhabitants of any particular place, all are, or constitute societies.

To call by the same name such completely different formations as the companionship of individuals in constant personal contact and the structure formed by millions who are connected only by signals resulting from long and infinitely ramified chains of trade is not only factually misleading but also almost always to model this extended order on the intimate fellowship for which our emotions long.

The crucial difference overlooked in this confusion is that the small group can be led in its activities by agreed aims or the will of its members, while the extended order that is also a ‘society’ is formed into a concordant structure by its members’ observance of similar rules of conduct is the pursuit of different individual perspectives.

Bottom Up

Chapter 8 is my favorite from Ridley’s The Rational Optimist.  In it, he builds the case that even though many people imagine progress comes from a top-down world, it really emerges from the bottoms up.

This is not a new epiphany.   I discovered it myself early in my career as I witnesses a variety of top-down and bottom-up organizations, and experienced some bottom-up organizations become top-down and vice versa.

Before I go further, I think some definition is in order.

In a top-down organization, decision-making is centralized and driven from the leaders (top) down to the lower level associates.  In a bottoms-up organization, decision-making is decentralized.  Front line associates are given latitude to make decisions that make sense for them and leaders hold them accountable for achieving results.

The easiest way I’ve come to recognize the top-down from a bottom-up organization is by determining what the lower level associates are held accountable to.

In centralized organizations, they’re held accountable to inputs, or doing what the leaders tell them to do Did you follow my instructions? Did you follow this process? Did you make X number of sales calls?

In decentralized organizations,  lower level associates are held accountable for results, or outputsDid you achieve sales growth? Did you make a new product that customers wanted to buy?  Did you do better than your competitors? Was it good?

Several times in my career I’ve asked some managers who were prone to top-down leadership about their thoughts on centralization.  Some couldn’t trust people to make the right decisions or they thought decentralization had its place, but they believed they were a good judge for what couldn’t be decentralized.

In truth, these were micro managers and bureaucrats.  They envision their role as making procedural decisions and issuing orders. Perhaps that’s the conventional image of a leader society has imprinted on us.

More subtly, these  folks are more comfortable issuing orders and determining whether their charges did as they were told than they are at evaluating results and confronting folks about those.   Most bureaucrats obtained their roles by pleasing other bureaucrats.  They don’t have much experience with output success, so they aren’t good judges in that respect.  They cannot articulate what success looks like, beyond executing whatever personal to-do list they have imagined.

Back to Ridley.  Many economists (mainly of the Austrian flavor) have written about the knowledge problems that restrain the top-down formation from being as effective as bottom-up.  Ridley does a good job of shedding light on this in practice (p. 255):

They [politicians] believe that the recipe for making new ideas is easy: pour public money into science, which is a public good, because nobody will pay for the generation of ideas if the taxpayer does not, and watch new technologies emerge from the downstream end of the pipe.  Trouble is, there are two false premises here: first, science is much more like the daughter than the mother of technology; and second, it does not follow that only the taxpayer will pay for ideas in science.

…England had a scientific revolution in the late 1600s…but their influence on what happened in the manufacturing industry in the following century was negligible.  The industry that was transformed first and most, cotton spinning and weaving, was of little interest to scientists and vice versa.  The jennies, gins, frames, mules and looms that revolutionized the working of cotton were invented by tinkering businessmen, not thinking boffins…

Likewise, of the four men who made the biggest advances in the steam engine…three were utterly ignorant of scientific theories and historians disagree about whether the fourth…derived any influence from theory at all.

Throughout the industrial revolution, scientists were the beneficiaries of new technology, much more than they were the benefactors.   Even at the famous Lunar Society, where the industrial entrepreneur Josiah Wedgwood like to rub shoulders with natural philosophers like Erasmus Darwin and Joseph Priestly, he got his best idea — the ‘rose-turning’ lathe — from a fellow factory owner, Matthew Boulton.

Ditto for advances in the the twentieth century.

The inescapable fact is that most technological change comes from attempts to improve existing technology.  It happens on the shop floor among apprentices and mechanicals, or in the workplace among users of computer programs, and only rarely as a result of the application and transfer of knowledge from the ivory towers of the intelligentsia.

After making the case for bottom-ups, Ridley describes how the world has gone top-down with the conventional wisdom that government can do all or, as quoted in this post, how bureaucrats come to control organizations and R&D, stifling innovation.  But, on page 274, Ridley observes with the advent of open source software, social networking, Wikipedia, etc that…

The world is turning bottom-up again; the top-down years are coming to an end.

I hope he’s right.

Bureaucrats vs. Innovation

I’m enjoying Chapter 8 of Matt Ridley’s The Rational Optimist.  The following two passages remind me of this post of mine on business experimentation and also this previous post about Ridley’s book, on how countries generate and accumulate wealth and then successive generations spend it.  It’s essentially the same concept, applied to businesses.  This is from page 260:

Far from being able to spend their way into novelty and growth, companies are perpetually discovering that their R&D budgets get captured by increasingly defensive and complacent corporate bureaucrats, who spend them on low-risk, dull projects and fail to notice gigantic new opportunities, which thereby turn into threats.

The bureaucrats or politicians that take over a successful company, use the wealth created by that previous success to pad their power fiefdoms.  In this sense, they act much like trust fund kids.

The only quibble with this passage is that companies rarely discover this.  More typically, they die a slow death as outside innovators make them obsolete.  But, I think Ridley was perhaps writing colorfully.

Ridley continues:

Though they may start with entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism.  The pioneer venture capitalist Georges Doriot said that the most dangerous moment in the life of a company was when it had succeeded, for then it stopped innovating.