growing oak trees

2nd Nov 2012

What Sandy tells us about the free market and distributed networks

One thing that is abundantly clear in the wake of Hurricane Sandy on Long Island is that towns with municipal power have fared much better than those served by LIPA. Public services like the post office, trash collecting and recycling were back in service for many on Tuesday, yet private supply of electricity may take 10 days to come back for over 1/2 million residents (as we are getting into sub-freezing nights…). Now, there are many reasons for this, and many free market apologists will argue the value that privatized electricity providers bring outweighs the costs. However, they would be failing to look at the facts clearly.

my pseudo-code philosophy

Well, I haven’t written anything on this blog for a while and I feel like I should mention here what I’m working on in the few spare minutes that I have each day.

I’ve decided (for about the 100th time in my life so far) that I will write my first book, about what I consider my “pseudo-code philosophy” It’s not really a philosophy so much but more or less my observations on economics, business, and politics. My particular viewpoint on the subject has been formed at least in part by spending my formative years teaching myself to write code. In fact, I learned to code on a TI-99 when I was 5 years old (yes, before the internet existed), and I spent countless hours writing programs during my childhood. Since then, I’ve used this skill to program spreadsheets and business processes, but more importantly it has given me a framework for understanding the world.

There is no Invisible Hand

Nice article by Jonathan Schlefer.

… no one ever showed that some invisible hand would actually move markets toward that level [equilibrium]. It is just a situation that might balance supply and demand if by happenstance it occurred.

To quote myself in the comment section (even though it’s bad form):

Would the “invisible hand of the free market” work in a perfect market with 100% transparency?

It’s hard to say without being able to observe in the real world; however, I would say the answer is “yes”

Is a perfect market attainable? Absolutely not.
What if government stepped out of the picture, wouldn’t that help? Nope. People are people — People are imperfect.

I know those who — in order to get around this problem — like to believe that a person’s individual imperfections are unimportant, and that the ideal market state will be reached. To them it isn’t important that people make the “correct” decisions but only the decisions that are correct to them. For instance, some people prefer to buy lesser quality things for less money even if it costs them more in the long term to replace items more frequently. I would say that a trend like this is created by a marketer’s ability to control perception and to obscure the facts about the true value of items. In the mind of a true believer, this is simply personal subjective truth, and if that’s the way the market moves, it’s because people “want it” and it’s the “right” way.

I can almost accept that argument, but let’s take it to the extreme to see if it really holds up. What happens when a human being is addicted to drugs? Very few would argue that they are rational at this point. However, it is human nature to become addicted to drugs or many other (less or more harmful) activities. It is human nature to be irrational. In a truly free market, there is no problem with drug sales increasing because demand increases. Assuming that human imperfections are just subjective choices and are logical as far as the economic model is concerned; therefore, a state of drugged happiness for most of the population, while an elite group controls all wealth is a possible outcome of a perfect market. I can not accept this. If you make an exception to the free market to control the sale of heroin, there is no justifiable reason to stop at this and you must control usury and misleading advertising as well, which we have historically been very week in doing. Even if you only leave it at these three things (while I would argue for more controls) you have already admitted that a market is controlled by people and not by an invisible hand.

Simply put, a perfect market is an impossibility, so the idea of an invisible hand that works only when an impossible scenario is met is just ridiculous. The hand is not invisible. It is the hands of individuals — yes, some government — but more directly entrepreneurs, executives, and board members who make decisions to influence demand by changing perceptions and creating new market imbalances. This leads of course to wealth extraction — or creation if you believe in unlimited growth — but either way it is not the equilibrium which the “invisible hand” is supposedly moving towards.

1st Feb 2012

How do you encourage investment in small business?

In a NYTimes oped today, the House that Romney Built, Louis Hyman argues for a federal program to securitize small business debt as a way to redirect investment from housing to the more productive sector of small business. It’s an interesting theory, and would probably work in the short term, but will only lead to problems in the long term. Small businesses do generate returns, and the profit that they create is more real that the profit created by rising home prices, but the reality is that many small businesses fail and end up being worth less than the underlying assets. Small business investment, without a personal connection and understanding of the specific business risks and the competencies and weaknesses of the management team, is inherently more risky than real estate investment. hiding this risk in a secondary market without doing something to lessen the actual risks and hurdles that entrepreneurs face is just asking for trouble. Plus, there already is a thriving industry focused on generating small business investment. Based on the risk/reward profile, there are VCs, Angel investors, crowdfunding options, grant opportunities, and subsidized loan opportunities for various industries. The tools are there, and there is money to invest. The problem is not that we need to drive billions of speculative money into small business investments, creating multiple bubble industries, but that we need more entrepreneurs to get past the hurdles of starting a business and get out there with their ideas. If financing is available too easily, many entrepreneurs will overfund their projects and build up too much of the wrong infrastructure (just like mortgage backed securities lead to people buying more house than they need). This will severely limit the prime advantage of being a startup, which is flexibility, and lock them into a higher risk path with little room for correction.

So, a better way to encourage investment is to make the Angel investment option a little less risky and thus encourage more people of all income brackets to invest using the existing methods. As I have said before, I’m a strong believer in removing all bureaucracy for small businesses while not watering down consumer protections and regulations for corporations. I think that altering the SEC laws to clearly allow direct investment in small businesses by “non-sophisticated” investors would have a positive impact at the micro scale as long as enforcement against scam artists and pyramid schemes remain strong. Additionally, LLC status should be free of charge. Whatever processing costs the states incur would be paid back quickly by more legal businesses registering (and paying taxes). The high cost and byzantine nature of small business regulations prevent a lot of would-be entrepreneurs from trying and directly impact the risk of starting a business by adding complications to the business model, costs to the P&L, and restricting access to certain markets (with regulations lobbied for by corporate industry groups?)

It’s simple, really. People want to work for themselves. Make it easy for them and they will. Corporate legal protections should be free for all and not be exclusive to those who can afford it, when it’s the low income entrepreneur who needs them more to protect what assets they truly need to live. While the saying “Ignorance of the law is no excuse” may be a valid rational for maintaining a civil society, enforcement of business regulations should take the complicated and convoluted nature into account and should always issue a warning for a first offence.

If we enacted these changes, I am positive that we would see much more activity at the local entrepreneurship level.

11th Jan 2012 | 33 notes

The Atlantic: The State of US Manufacturing

The Atlantic recently ran a feature on my previous employer - a lot of people have written off manufacturing in the US, but it’s not a simple black & white picture. The real story is much more complex and interesting.

theatlantic:

kschumacher writes:

I just wanted to acknowledge that “Making it in America” by Adam Davidson is a very accurate representation of Standard Motor Products and the state of manufacturing in the US. I managed the pricing at SMP from 2004-2009 and was very intimately involved in dealing with the…

29th Dec 2011 | 103 notes

Though I am loath to admit it these days,

I self-identify as libertarian in a lot of different ways. Not in the ways of those who have co-opted the name in recent years and are pushing for corporate freedoms as if it’s the same thing as individual freedoms, but in that I feel a person should strive to be self-reliant and detach from ‘the grid’ if they can.

The one thing I never understood, however, was why libertarians insist that the gold standard is better, and they talk about stockpiling gold as if it would be useful to you if the economy went bust. While I understand the fear of a reliance on the Fed to regulate a currency not backed by something of real value, I’m sorry, but gold is not inherently that valuable. Gold only has value because we chose to give it value. In an economic collapse, gold will have very little value, since people won’t be buying necklaces, and the use in high tech products will be limited as well. Even though there is a finite amount of gold, if it’s just used as currency, it’s value is just as baseless as a piece of paper, except you have to spend the time (and money) to physically lug it around and guard it.

Food, shelter, water, security; these are valuable. If you want to truly prepare for an economic collapse, stockpile seeds and farming equipment, or buy a share in a seed producer. Maybe we could create paper money which is backed by a quantity of pure water or a set number of months rent in a hotel somewhere.

It just always makes me laugh to think of someone with a basement full of gold bars finding out that no one in the post-apocalyptic future really wants to trade anything for them.

15th Dec 2011 | 11 notes

Capitalism is not the problem

(and neither is socialism)

Chris Hedges, the influential progressive thought leader, argues here that “Capitalism is not in crisis, Capitalism is the crisis.” While there is a lot of merit to what he says, this is misleading and quite frankly divisive. Not that conservatives are any better, except that at least we can say they are more transparent about their divisiveness - The favorite historical quote thrown around all the time these days is by Winston Churchill; “Socialism is the philosophy of failure, the creed of ignorance, the gospel of envy, its inherent virtue is the equal sharing of misery.” This philosophical belief has been fully embodied by many on the right and is summed up very eloquently here by the somehow famous Adam Corrolla

Too often, people get emotionally attached to economic or political concepts, which throws off the whole discussion and leads to nothing but division. As a society we too easily fall for the idea that these economic concepts are somehow a measure of our moral fiber and that there is a sliding scale from left to right and all economic and political concepts can be placed somewhere along this scale. To be truly free thinking, we need to reject the idea that economic philosophy is a left-right or red-blue issue, and look at the realities of what an economic system should do for society, and how we can get there. Capitalism is not the problem, but clearly many would agree that there is something wrong with the implementation of capitalism in our society if macro economic adjustments continuously squeeze wealth from the lower half and cause undue suffering for millions of people. In fact, socialism and capitalism are not in opposition, and it’s somewhat nonsensical that those arguing are all talking past each other and trying to completely invalidate the other concept. The reality is that most of what we consider “socialism” is indeed “socio-capitalism” which by definition shows that the two don’t cancel each other out.

a reflection on habit

While I normally stick to broad concepts on this blog, I decided to write something a bit more personal today, as something has occurred to me which may be of value. We are all creatures of habit and this plays a huge roll in our ability to affect change in society and in consumer markets. That being said, it is worthwhile to understand what it really takes to influence a change in habit. Recently, I believe that I have achieved some insights into this topic. While it may not be anything new in the world of psychology, it has highlighted to me the importance of understanding the psychology of your audience in marketing and communication.

Like many Americans, I’ve been trying to eat healthier for years. I had read all about the benefits of a healthy diet and lifestyle, and I wanted to make sure that I kept myself in good health for the sake of my family. I would periodically begin various attempts to increase healthy food and decrease my intake of refined sugars, fats, and preservatives. These initiatives would typically last about a week or two and then I would fall victim to habit. Tiredness or stress would lead to sugary snacks or fast food, and then my gains would be reversed. It appeared to me to require an impossible feat of will that only those obsessed health nuts could master for a sustained period. And then, three months ago, I made the switch to a healthy diet permanently.

small is inevitable

I’m figgering on biggering, and biggering, and biggering

-the Once-ler (from The Lorax by Dr. Seuss)

“Bigger is Better” has been the mantra of the business world for so long, that it’s difficult for those of us who have been indoctrinated to imagine anything else. If you look at the direction that the world is headed, however, it is clear that this can not continue forever. I’m not talking about the depletion of resources leading to a forced steady-state economy. This is not unlikely, but not necessarily inevitable as it would depend on the rate of population increase along with how quickly we can achieve efficiency gains and harvest extraterrestrial resources. What I believe is that the economic value of scale is being reduced and we are starting to see the results of this right now as the ideal business model becomes smaller and transactions and interactions become more personal.

my business philosophy

Nature is inherently sustainable, but sustainability is about more than the environment. By creating a model which is not at odds with natural forces, businesses too can be made to be sustainable and self-adjusting. At Nextdoorganics, it is our opinion that the sustainability of nature stems from two basic facts;

1) Energy can be changed but not destroyed

2) The natural world is composed of open sourced, cellular systems.

Honest marketing

I humbly submit that the one thing which can indirectly solve a large number of society’s problems, and is desperately needed, is absolute and brutal honesty - especially in the worlds of business and politics. ”Impossible”, many will argue, “how can we implement honesty in business when people aren’t honest in their own lives? At least in business and politics we have clear motivations (profit and power) which are untainted by the subjective grey world of ethics.” OK, I agree that it will not be an easy task, but let me at least examine the need for this change, and then we can talk about how we can get there.

the value of sustainability

Sustainability has been one of the biggest buzz words of the past decade or so, but do we really know what it means? The basic concept is very clear - something that is sustainable is something that is in balance and can be continued indefinitely. The general perception of this is of environmentally sound practices that use natural resources at a rate no faster than they can be replenished. This is a good interpretation, but it’s not the only one, and it does little to illustrate the value of sustainability to the consumer. If anything, it appears to be a sacrifice that the consuming public must make for the greater good. ”We need to safeguard the planet for future generations” is a good argument, true … but it only reinforces the idea of sacrifice and of accepting lower immediate value. Many environmentalists believe that we should be sacrificing and that it is selfish and greedy to do anything else. Perhaps the world might be a better place if we gave up some of the modern luxuries that we have and went back to a simpler time where we were responsible for more of our own production instead of relying on industrial factories. This idea is not a bad idea … actually it’s a very noble idea. The reality of course is that this idea will never take hold over enough of society long enough to change it’s course. What is needed to get our civilization on track for sustainability is a re-learning of what sustainability means and why you should want it.