Pessimism dematerialized: Four reasons to be hopeful about the future

strategy+business, January 16, 2020

by Theodore Kinni



Photograph by Klaus Vedfelt

If you’re a glass-half-full person, you’re going to love Andrew McAfee’s latest book, More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources―and What Happens Next. Always optimistic, while still expressing minor notes of caution, McAfee, a research scientist at the MIT Sloan School of Management and cofounder and codirector of MIT’s Initiative on the Digital Economy (with frequent collaborator Erik Brynjolfsson), believes that life on this planet is getting better all the time. He also thinks that though humans face some big challenges, we have at our command all the resources needed to meet them.

The principle support upon which McAfee constructs this thesis, which he admits will be hard for more skeptical readers to swallow, is an ongoing process of dematerialization that he finds occurring in mature economies. Building on research by environmental scientist Jesse Ausubel and writer Chris Goodall, McAfee charts resource consumption in the United States. For instance, he uses U.S. Geological Survey data to show that as of 2015, the consumption of the five “most important” manufacturing metals in the U.S. — aluminum, copper, steel, nickel, and gold — are all off their peaks since 2000. Steel consumption is down 15 percent; aluminum is down 32 percent; copper is down 40 percent. The same is true for energy consumption, as well as a variety of farming and construction inputs. Since the first Earth Day in 1970, U.S. consumption of resources has been falling, yet the nation’s economy has continued growing. Simply put, McAfee is arguing that it takes a lot less stuff to produce a dollar of GDP today than it did 50 years ago.

McAfee declares that the data shows “a great reversal of our Industrial Age habits is taking place. The American economy is now experiencing broad and often deep absolute dematerialization.” And the rest of world? Well, the data is incomplete. McAfee finds some evidence that Europe’s industrialized nations are “past peak” resource consumption, but developing countries, such as China and India, that are still in the process of industrializing, “probably are not yet dematerializing.”

Four forces drive the engine of dematerialization, according to McAfee. Read the rest here.

Past performance is no guarantee of future results

strategy+business, October 18, 2019

by Theodore Kinni



Photograph by aeduard

By 1905, when philosopher George Santayana wrote, “Those who cannot remember the past are condemned to repeat it,” humans had already been gleaning lessons from history for several millennia. Around 800 BC, in the Iliad, Homer used the principal players in the Trojan War to explore leadership strategies and styles. Nearly a thousand years later, at the start of the second century AD, Plutarch compared the character traits of historical leaders in Lives of the Noble Greeks and Romans. And of course, we are still at it today. The business bookshelves are sagging with leadership and strategy lessons drawn from the lives of yesterday’s inventors, tycoons, generals, politicians, and other leading lights.

Sometimes these lessons feel like too much of a stretch — not only because they tend to idealize their subjects, but also because they elevate ad hoc responses into generic rules. How much credence, for instance, should a new CEO put in creating a “team of rivals” à la Abraham Lincoln? Or, to hold my own feet to the fire, how much faith should a leader in a battle for market share put in the “hit ’em where they ain’t” military strategy of Douglas MacArthur?

Ben Laker, professor of leadership at Henley Business School and dean of education at the National Centre for Leadership and Management in the U.K., points to current Prime Minister Boris Johnson, who wrote a book about another U.K. prime minister, The Churchill Factor: How One Man Made History, to illustrate the difficulties of applying lessons from the past. “The Prime Minister knows how Winston Churchill created a sense of connection through a ‘backs against the wall’ mentality in 1941. He is basing his rhetoric, decisions, and actions on Churchill’s example. And many people do feel more connected to him because of it,” Laker says. “But as Johnson’s critics observe, Brexit is not a war and a wartime mentality is at odds with a situation that requires openness and collaboration to reach a feasible outcome.”

Clearly, context is a critical factor in applying history. “You can look at the past and ask yourself whether you would do the same thing in the same situation,” Laker told me in recent conversation. “But the problem is you are not in the same situation. So, how relevant is history to your present situation?”  Read the rest here.

Is Capitalism Killing America?

Insights by Stanford Business, September 18, 2017

by Theodore Kinni


On August 2, 2017, the Dow Jones Industrial Average hit a record-breaking 22,000 — its fourth 1,000-point advance in less than a year. That same day, I read the first sentence in Peter Georgescu's new book, Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation (Berrett-Koehler, 2017): “For the past four decades, capitalism has been slowly committing suicide.”

How does Georgescu, the chairman emeritus of Young & Rubicam (Y&R) and a 1963 graduate of Stanford Graduate School of Business, reconcile the Dow’s ascent with his gloomy assertion?

“The stock market has nothing to do with the economy per se,” he says. “It has everything to do with only one thing: how much profit companies can squeeze out of the current crop of flowers in the garden. Pardon the metaphor. But that’s what corporations do — they squeeze out profits.”

In the latter half of the 1990s, Georgescu shepherded Y&R through a global expansion and an IPO. He has served on the boards of eight public companies, including Levi Strauss, Toys “R” Us, and International Flavors & Fragrances. He also is the author of two previous books, The Constant Choice: An Everyday Journey from Evil Toward Good (Greenleaf, 2013) and The Source of Success (Jossey-Bass, 2005). An Advertising Hall of Fame inductee, the 78-year-old adman is still pitching corporate leaders. Now, however, he is trying to convince them to fundamentally rethink how — and for whom — they run their companies. Read the rest here.

Blockchain is poised to disrupt trade finance

Learned a lot lending an editorial hand here:

PwC Next in Tech blog, August 3, 2017

by Grainne McNamara

Trade finance has enabled the exchange of goods for millennia. Babylonian cuneiform tablets dating back to 3000 BC mention the kind of promissory notes and letters of credit that still underpin international trade. And, aside from incremental improvements in the ways and means of trade finance, not all that much has changed in the fundamental elements of this approximately US$40 billion sector of the financial services industry over the past 5,000 years.

That is, until now. The advent of blockchain technology is on the verge of revolutionizing trade finance—and it threatens to leave behind any financial services company that doesn’t move with the times. Read the rest here.

Cracking the Code of Economic Development

strategy+business, May 24, 2017

by Theodore Kinni

Jobs are the burning issue of the day. But while politicians are busy erecting physical, economic, and rhetorical walls to corral and preserve jobs, a larger and more fundamental question looms. As advances in artificial intelligence and machine learning permeate every industry, will there be any jobs left to protect?

Philip E. Auerswald, associate professor at George Mason University’s Schar School of Policy and Government, calls this question “The Great Man–Machine Debate.” In his engaging and wide-ranging book, The Code Economy: A Forty-Thousand-Year History, he seeks to answer it by reframing how we think about economic dynamics and progress. “The microeconomics you learned in college was generally limited to the ‘what’ of production: what goes in and what comes out,” Auerswald writes. “This book is about the ‘how’: how inputs are combined to yield outputs.”

Auerswald has a more expansive definition of the word code than the typical computer scientist. For him, code encapsulates the how of production — that is, the technology and the instruction sets that guide production. The processes Paleolithic peoples used to create stone tools, the punch cards that Joseph Marie Jacquard used to direct looms in France in the early 1800s, Henry Ford’s assembly lines, and the blockchains first described by the person (or persons) named Satoshi Nakamoto in 2008: All these are, in Auerswald’s view, examples of code. Read the rest here.

John Elkington’s Required Reading

by Theodore Kinni

strategy+business, March 30, 2016

Tracing John Elkington’s career is akin to taking a journey through the evolution of corporate social and environmental responsibility over the past five decades. In 1978, he cofoundedEnvironmental Data Services to provide companies with news and analysis of environmental law and policy. In 1987, he cofounded SustainAbility, a think tank and consultancy that promoted sustainable development at the corporate level. And in 2008, he cofounded Volans, a “change agency” that is focused the challenge of creating a sustainable global economy.

Along the way, Elkington introduced a number of concepts that have defined the leading edge of CSR. The most notable of them is the triple bottom line. First posited in his book,Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Capstone, 1997), the idea that companies measure their financial, social, and environmental results, has recently become the focus of the B corporation movement.

A prolific writer, Elkington has written 18 other books. The most recent includeThe Breakthrough Challenge: 10 Ways to Connect Today’s Profits with Tomorrow’s Bottom Line (with Jochen Zeitz, Jossey-Bass, 2014), The Zeronauts: Breaking the Sustainability Barrier (Routledge, 2012), and The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World (with Pamela Hartigan, Harvard Business School Press, 2008).

In addition, Elkington is a visiting professor at the Doughty Centre for Corporate Responsibility at the Cranfield School of Management, as well as at Imperial College and University College London. In 2013, he was inducted into the Sustainability Hall of Fame by the International Society of Sustainability Professionals. In 2015, he received the Ethical Corporation Lifetime Achievement Award.

Elkington is a voracious reader and serves as a walking, talking annotated bibliography to the literature of corporate social and environmental responsibility. When I asked him to recommend some of the books he has found most influential and aspirational, he called out the following titles. Beyond tracking the evolution of his thinking, they catalog the development of the sustainability movement itself.

The Invention of Nature: Alexander von Humboldt's New World, by Andrea Wulf (Knopf, 2015). “I grew up with the environmental movement. In 1961, at age 11, I was raising money for the embryonic World Wildlife Fund. Later, I met and worked with pioneers of nature conservation, including WWF cofounders Max Nicholson and Peter Scott. Yet, I was stunned by Andrea Wulf’s eye-opening account of the life and work of Alexander von Humboldt. Yes, I know about the Humboldt Current and I have lectured at Berlin’s Humboldt University, but I didn’t know that their namesake warned of the risks of climate change 200 years ago! Nor did know I about Humboldt’s influence on people ranging from Charles Darwin to another key influencer of my thinking, James Lovelock, the champion of Gaia Theory.”

The Third Wave, by Alvin Toffler (William Morrow, 1980). “No single book had a bigger impact on me than Thomas Kuhn’s The Structure of Scientific Revolutions. It’s dated now, but it introduced me to the notion of paradigm shifts and it prepared me for Alvin Toffler’s The Third Wave. Toffler’s message: We had entered the Information Age and that was changing everything.

“Toffler, who is best known for his 1970 bestseller on the acceleration of change,Future Shock, renewed my interest in the work of two economists who were often overlooked (and disparaged) in those days, Nikolai Kondratiev andJoseph Schumpeter. Both men saw economic evolution as a series of long waves of investment and disinvestment. (Witness the past investment and, now, the inexorable disinvestment in an economy driven by fossil fuels.) This line of thought spurred my thinking on the societal pressure waves affecting business since 1960. But my biggest debt to Toffler only became clear to me late in 2015, when I reread The Third Waveand stumbled across his reference to ‘multiple bottom lines,’ which no doubt played a part in my conception of the ‘triple bottom line.’”

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, by Ashlee Vance (Ecco Books, 2015). “During the counterculture era, I was enthralled by Stewart Brand’s Whole Earth Catalog series and by R. Buckminster Fuller, with his focus on dematerialization. Fuller’s Dymaxion car never took off and neither did most ‘sustainable’ forms of transportation that I later worked on with automakers including Volvo, Ford, and Toyota. But Elon Musk, whose ventures I’ve been tracking since he was more or less unknown, is actually commercializing ideas like these. Ashlee Vance’s extraordinary book explores what he dubs ‘the unified field theory of Musk.’ It makes clear that if there is one person who symbolizes Toffler’s Third Wave or what the World Economic Forum is now dubbing the Fourth Industrial Revolution, it’s Elon Musk.

Exponential Organizations: Why New Organizations Are Ten Times Better, Faster, and Cheaper Than Yours (And What to Do about It), by Salim Ismail, with Michael S. Malone and Yuri van Geest (Diversion Books, 2014). “If a business leader is looking for a summation of the nature and scale of the challenges that capitalism now faces, I’d recommend Salim Ismail’s Exponential Organizations because its targets are exponential in nature. (Andrew Winston’s The Big Pivot would be another.) Exponential dynamics can drive us toward breakdown, as in runaway climate change, but over the past decade, I have become convinced that they also will be needed to address the negative effects of capitalism. Incremental solutions aren’t enough. To achieve exponential results, Ismail challenges leaders to disrupt and reboot their companies. Those of us in the sustainability industry need to do the same thing.” 

Cass Sunstein’s Required Reading

by Theodore Kinni

strategy+business, Feb 24, 2016

Legal scholars rarely attract much attention in the business world. But Cass R. Sunstein is a notable exception to the rule. That’s because the Robert Walmsley University Professor and director of the Program on Behavioral Economics and Public Policy at Harvard Law School has long explored the intersection of behavioral economics, cognitive psychology, and public policy — three disciplines that have many implications for corporations.

Sunstein is best known among businesspeople as the coauthor, with University of Chicago economist Richard Thaler, of Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008). In it, the duo describe how choice architecture — the way in which options are presented — affects how people make decisions. They advocate for embedding unobtrusive, non-mandatory “nudges” in choice architectures to encourage people to make healthier, more financially sound decisions. Subsequent concerns about the potential misuse of nudges (as a tool for manipulation and marketing) prompted Sunstein to launch new explorations into the ways and means of choice architecture. He presented those findings in two more recent books: Why Nudge? The Politics of Libertarian Paternalism (Yale University Press, 2014) and Choosing Not to Choose: Understanding the Value of Choice (Oxford University Press, 2015).

Concurrently, Sunstein teamed up with University of Chicago psychologistReid Hastie to explore another topic of perennial interest to corporate leaders. In Wiser: Getting Beyond Groupthink to Make Groups Smarter (Harvard Business Review Press, 2015), they delved deep into the various errors that can arise in group-based decision-making and offered techniques and tactics for avoiding them.

In addition to building an impressive academic career and a list of published works that includes more than 40 books, Sunstein also served in the Obama administration as head of the White House Office of Information and Regulatory Affairs from 2009 to 2012. In that position, he oversaw the approval of new federal regulations and was charged with confirming that they would do more good than harm.

When I asked Sunstein to share the books that most influenced his thinking on choice architectures and decision making, he offered the following titles and summaries of their contribution.

Quasi Rational Economics, by Richard H. Thaler (Russell Sage Foundation, 1991). “This collects many of Thaler’s greatest hits, in their original form: People dislike losses more than they like corresponding gains; they use separate mental accounts for money (vacation money, retirement money, spending money, savings); they care about fairness. The book contains the foundations of behavioral economics, along with a clear understanding of how people deviate from economic rationality. It's an eye-opener, and Thaler is a funny, brilliant, and terrific writer.”

Why Wages Don't Fall During a Recession, by Truman F. Bewley (Harvard University Press, 1999). “Bewley went into the field during and after the recession of the early 1990s to get to the bottom of wage rigidity. He discovered through hundreds of interviews with recruiters and leaders in business and labor that wages don’t fall in lockstep with falling demand, because people want to be treated fairly and they’ll punish their bosses and employers if they feel mistreated. That’s a major finding, which bears on economic behavior in general: Fairness matters. This is a thick book, but it is full of wisdom, and humanity to boot.”

Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2d ed.,  by Irving L. Janis (Houghton Mifflin, 1982). “This is the seminal work on group decision making, with one of the best titles ever. It’s all about conformity and deference to leaders, and why such deference is bad for organizations. In some ways it’s more like a set of short stories than social science, but they’re terrific stories — the Bay of Pigs, the escalation of the Vietnam War, and the Watergate coverup among them. The book is a warning to all leaders, along with prescriptions for doing better.”

Thinking, Fast and Slow, by Daniel Kahneman (Farrar, Straus and Giroux, 2011). “Already a classic — I think it’s one of the great books of the past 100 years. Somehow Kahneman manages to make every page a pleasure, and there is at least one ‘wow’ every two pages. If there’s one book to read on decision making, and about human foibles, this is it.”

A Good Barrel for Bad Apples in Business

by Theodore Kinni
strategy+business, November 25, 2015

The business news headlines in the early fall of 2015 read like a scandal sheet. In September, the former owner of Peanut Corporation of America was sentenced to 28 years in prison for knowingly selling contaminated peanut butter that killed nine people and sickened hundreds more. Turing Pharmaceuticals, launched earlier this year by a hedge fund manager, purchased a 62-year-old drug that treats a parasitic infection called toxoplasmosis — the only drug of its kind — and bumped the price from $13.50 per tablet to $750. Volkswagen was coping with the fallout from revelations that engineers may have equipped diesel-powered cars with software aimed at deceiving emissions tests.

We tend to think of the people at companies who engage in such behavior as outliers, the few bad apples that spoil the barrel. But in their new book, Phishing for Phools: The Economics of Manipulation and Deception (Princeton, 2015), George A. Akerlof, Koshland Professor of Economics at University of California, Berkeley, and Robert J. Shiller, Sterling Professor of Economics at Yale University, argue that we should direct our attention to the barrel instead. The barrel is free markets, which, according to tenets that go back to Adam Smith, are guided by an invisible hand that ensures the individual pursuit of profit is transformed into common good. Unfortunately, that’s not the whole story.

“Free markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate and distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body,” Akerlof and Shiller write. “Insofar as we have any weakness in knowing what we really want, and also insofar as such a weakness can be profitably generated and primed, markets will seize the opportunity to take us in on those weaknesses. They will zoom in and take advantage of us. They will phish us for phools.”

Phishing for Phools is an extension of the authors’ work on how psychological forces can warp markets, as described in their previous book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton, 2009). The two Nobel Prize–winning economists — Akerlof in 2001 for his work on the market effects of asymmetric information, Shiller in 2013 for his contributions to economic forecasting — define phishing in a broader way than usual. They say it is any activity that entices us to do something that is not in our own interests, but rather in the interest of the “phisherman” (as opposed to the rational behavior assumed in conventional economic theory). They see two kinds of phishing going on in free markets. The first includes emotional and cognitive glitches. A gambling addict who feeds the paycheck needed to feed his family into a slot machine has been legally phished by a casino. The second includes misleading information that is purposely created by the “phishermen.” Investors who received doctored account statements from Bernie Madoff’s firm were illegally phished in this manner.

Whether the phishing is legal or illegal, ethical or unethical, Akerlof and Shiller see it as being driven by the natural operation of free markets: “The free-market equilibrium generates a supply of phishes for any human weakness.” The two authors endeavor to prove this by describing an ongoing epidemic in phishing in a dismayingly wide variety of market contexts: in marketing and advertising; in industries where high-pressure sales tactics are common, such as auto sales, real estate, and credit cards; politics (the market for candidates); food and pharmaceuticals; innovation; tobacco and alcohol; and finance.

You’ll likely be familiar with many of the examples in the book, which are drawn mainly from contemporary inductees into capitalism’s hall of shame: Big Tobacco and its decades-long battle to discredit the link between smoking and cancer, the S&L crisis, the junk bond crisis, the subprime loan crisis. But they are worth rereading in order to understand what they have in common — that is, how and why they are all examples of phishing.

Happily, Akerlof and Shiller identify four obstacles to free-market phishing. There are “standards bearers,” who measure and enforce quality, such as the testing and certification of electronic appliances provided by Underwriters Laboratories. There are “business heroes,” such as Better Business Bureaus (and, presumably, rating sites, like Yelp and TripAdvisor). There are “government heroes” and their legal checks, such as the Uniform Commercial Code, and also “regulator heroes” like the Food and Drug Administration.

Unhappily, however, phishing continues, and the power of those who resist it is constantly being undermined by phishermen in search of larger hauls. As a case in point, the authors offer up the sad tale of the bond ratings agencies, whose cooptation by bond issuers resulted in reckless and inflated estimates that supported and intensified the explosion of subprime mortgages during the housing boom of the 2000s.

Phishing for Phools doesn’t offer much in the way of solutions. “The free market may be humans’ most powerful tool. But, like all very powerful tools, it is also a two-edged sword,” Akerlof and Shiller write. “That means that we need protection against the problems.” However, the only protection they prescribe is a greater recognition among economists of free-market phishing — a recognition that “it is inherent in the workings of competitive markets.” That would be a good a thing, I guess. But economists could debate the merits of this thesis until the end of time, and the rest of us would still be taken for phools.

Roger Martin’s Required Reading

by Theodore Kinni

strategy+business, October 7, 2015

Prosperity is a theme that runs through Roger Martin’s work in a continuous and unwavering line. Ranked third on the Thinkers50 biannual ranking of the most influential global business thinkers, Martin has served as a director and cohead of Monitor Company, dean and Premier’s Research Chair in Productivity and Competitiveness at University of Toronto’s Rotman School of Management, and, starting in 2013, institute director of the Martin Prosperity Institute. Throughout, he has sought to illuminate the ways and means of economic success for individuals, corporations, and nations.

A prolific writer, Martin has authored numerous books and articles detailing his findings. In The Opposable Mind: How Successful Leaders Win through Integrative Thinking,(Harvard Business Review Press, 2007), he explains how the ability to hold two conflicting ideas in constructive tension can enable leaders to make better decisions and produce superior ideas. In The Design of Business: Why Design Thinking Is the Next Competitive Advantage (Harvard Business Review Press, 2009) and Playing to Win: How Strategy Really Works (with A.G. Lafley; Harvard Business Review Press, 2013), Martin explains how to enhance corporate success through innovation and strategic thinking.

Finally, in Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL (Harvard Business Review Press, 2011) and, most recently, Getting Beyond Better: How Social Entrepreneurship Works (with Sally R. Osberg; Harvard Business Review Press, 2015), he examines the flaws that are undermining democratic capitalism and the potential of socially responsible business to heal and reinvigorate the system. 

Curious about the underpinnings of his own success, I asked Martin about the books that most influenced him in his professional journey. He offered up the following three titles... read the rest here.

Why King Charles lost his head

Saumitra Jha: How Financial Innovation Helped Start the English Civil War (and Why That’s Important Today)

 

A Stanford scholar explains why financial mechanisms could be useful to align diverse interests.

April 29, 2015|by Theodore Kinni

 

In the mid-1600s, something revolutionary happened in England: Parliament rose up against King Charles I, leading to a violent civil war that cost upward of 200,000 people their lives and Charles his head. The result was the establishment of what is now one of the world’s most enduring representative governments, a model that the United States and many other nations followed.

 

The question of why Parliament rebelled against Charles has attracted intense interest in the four centuries since. Most historians point to three causes for the revolt in England: overly greedy monarchs, the emergence of a commercial middle class, and the religious struggle accompanying the rise of Protestantism.

 

But a new paper by Stanford Graduate School of Business professor Saumitra Jha posits a different cause — one that is fraught with import, not only in the context of history but also in the modern context of how representative governments can be established and nurtured. Jha makes the case that financial innovation was a driving force in the rise of England’s representative government. In the following interview, edited for length and clarity, he explains why.

 

What got you interested in the ascendency of England’s Parliament?

I’m interested in strategies that societies can use to resolve conflicts of interest and adopt policies that benefit a lot of people without resorting to political violence. Financial innovations can be used to align the incentives of different groups in favor of broader policy objectives.

 

Specifically, I noticed that the period of the Civil War was a period during which there was a lot of innovation happening in England’s financial sectors, particularly around the new opportunities that emerged with the discovery of the New World and the expansion of overseas trade. The first English joint stock companies were formed to fund these overseas ventures, and for the first time, non-merchants gained ownership in trade activities....read the rest here

Ode on a Grecian Urn

I did a Q&A with an interesting guy for Stanford Business Magazine:

What We Can Learn from Ancient Athens’ Manufacturing Industry

 

A former vice president at Boston Consulting Group analyzes an ancient sector and how it parallels changes in today’s economy.

 

March 10, 2015|by Theodore Kinni

 

Consultants often analyze industries, but Peter Acton has taken a much bigger step back in time than most. When the former vice president at the Boston Consulting Group decided to pursue a PhD in ancient history at the University of Melbourne, he chose the manufacturing sector in Athens in the fourth and fifth centuries B.C. as the subject of his thesis and, now, his new book, Poiesis: Manufacturing in Classical Athens (Oxford University Press, 2014).

 

Poiesis portrays classical Athens as a vibrant society of makers. Moreover, Acton’s application of modern theories of competitive advantage to an ancient economy offers a promising new analytical framework for historians. Acton received his MBA from Stanford in 1980. Here are excerpts of a conversation with him about his new book.

 

Classical Athens is commonly associated with a flowering of the arts, philosophical thought, and democracy. How did manufacturing fit into the picture?

When you look at the high standard of living in Athens and think about all the things Athenians needed — housing, furniture, pottery, clothing, shoes, armor, ships, and public buildings — you realize it had to be a busy manufacturing city. Oddly, however, that reality wasn’t reflected in the scholarly literature, which has never paid much attention to how Athenians made a living ... read the rest here.

Of invisible hands and impartial spectators

My new book post is up on strategy+business:

Adam Smith’s Other Book

Adam Smith’s use of the metaphor “an invisible hand” to suggest that the individual pursuit of self-interest could also benefit society as a whole has been embraced as a rationale for unfettered capitalism. But the theory has come under fire in recent years. For one thing, it’s hard to find the societal silver lining in cases like the abuse of subprime mortgage–backed derivatives, which led to the Great Recession.

Before we ride the father of modern economics out of town on a rail, however, we should acknowledge that our current interpretation of his metaphor is an exaggerated one. Smith briefly mentioned an invisible hand only three times in his published works and only once in his 1776 economics classic An Inquiry into the Nature and Causes of the Wealth of Nations—and never did he imbue it with the economic heft it has taken on in the past century or so. We’ve also separated the invisible hand from another essential Smithian metaphor: “the impartial spectator.”

If, like me, you haven’t heard of the impartial spectator, you might find Russ Roberts’s How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness (Portfolio, 2014) enlightening. In it, Roberts, an economist at Stanford University’s Hoover Institution, explores Adam Smith’s other big book, The Theory of Moral Sentiments, which Smith published in 1759 (17 years before The Wealth of Nations) and then substantially revised in 1790, the year he died.

The Theory of Moral Sentiments isn’t about economics. It is, Roberts says, a “road map to happiness, goodness, and self-knowledge.” He explains that while Smith acknowledges that we humans are essentially self-interested, he also says there’s more to us than that. Consider the first sentence in Smith’s book:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

Further, Roberts explains, Smith argued that there are internal governors of our natural self-interest that stop us from doing harm to others: “Smith’s answer is that our behavior is driven by an imaginary interaction with what he calls the impartial spectator—a figure we imagine whom we converse with in some virtual sense, an impartial, objective figure who sees the morality of our actions clearly. It is this figure we answer to when we consider what is moral or right.”

Roberts goes on to tell us that Smith saw the impartial spectator as neither god nor government. In the fashion of the Enlightenment, Smith believed the impartial spectator to be an internalized representative of our collective humanity—“reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct.” Smith continues:

It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the slightest injury to another, in order to the obtain the greatest benefit to ourselves.

Good stuff, but perhaps it’s a bit too easy to dismiss as classical claptrap. Maybe that’s why so many of us know about Smith’s invisible hand and so few of us know about his impartial spectator. But I know about both now, and I wonder if the former can operate properly without the latter. In other words, is it possible that the benefits of the invisible hand can be realized only in conjunction with the guiding hand of the impartial spectator?

Perhaps the abuse of mortgage-backed collateralized debt obligations (CDOs), as just one of many examples of market failures, was a direct result of the mechanism of the invisible hand operating without regard for the impartial spectator. If mortgage officers had been listening to their impartial spectators, would they have encouraged home buyers to sign for loans they clearly could not service? Would market makers have flogged CDOs that they knew were fatally flawed? Thanks to Russ Roberts, I’m pretty sure how Adam Smith would have answered these questions.

s+b's Best Business Books 2014

It’s striking how quickly and directly the seven reviewers in our 14th annual best business books special section get down to brass tacks. In the opening essay, Strategy& senior partner Ken Favaro picks the three books that offer new thinking about strategy that is practical and compelling. Marketing expert Catharine Taylor peels away the hype and spin of her discipline to identify books that get to the essence of the brand experience. Veteran business editor and author Karen Dillon reviews the books that will help you hone your decision-making chops—with or without an assist from big data. James O’Toole continues his unbroken run of best business books appearances by taking on a perennially relevant topic whose parameters he helped define: organizational culture. Longtime s+b book reviewer and contributing editor David Hurst identifies three books that explore not only the how-to of technological innovation, but also how technology is driving innovation in every sphere of our lives. Triple-bottom-line pioneer and first-time contributor John Elkington reviews books that provide actionable means for dealing with the seemingly intractable challenge of sustainability. And in the final essay, another notable first-timer, economic columnist Daniel Gross, reviews three books that cut through the hot-button issue of global income inequality to get down to hard facts—the Cockney twist on which is sometimes pegged as the origin of the phrase get down to brass tacks. Enjoy the reading—then, put it to work.  --Theodore Kinni

 

INTERACTIVE FEATURE

Best Business Books 2014 – In Pictures

Click here for a slideshow of our picks for the Best Business Books of 2014 in seven categories.

Contents:

s b’s Top Shelf   

Strategy To the Nimble Go the Spoils by Ken Favaro Marketing Brand Diving by Catharine P. Taylor Executive Self-Improvement The Human Factor by Karen Dillon Organizational Culture The Nothing That’s Everything by James O’Toole Innovation Greasing the Skids of Invention by David K. Hurst Sustainability Tomorrow’s Bottom Line by John Elkington Economics All Things Being Unequal by Daniel Gross

Gregory Clark on how we get ahead

My weekly book post on s+b:

Does Capitalism Create Social Mobility?

 The storyline of capitalism—and the technological innovation that simultaneously supports and drives it forward—is almost always one of ever-greater personal freedom and opportunity. Slaves and serfs, whose families had been chained to the plows of noble-born landowners generation after generation, are transformed into wage earners who sell their services in demand-driven labor markets. Wage owners pull themselves up by their bootstraps and educate their children, who then enter the professional ranks. With the liberal application of hard work, inventiveness, or entrepreneurial chutzpah, anyone can rise through the ranks of society. The sky is the limit. Or is it?

This is the question that Gregory Clark, economics professor at the University of California, Davis, seeks to answer in his new book, The Son Also Rises: Surnames and the History of Social Mobility (Princeton University Press, 2014). Clark has a predilection for investigating interesting questions, as well as for literary puns. His last book, A Farewell to Alms: A Brief Economic History of the World (Princeton University Press, 2007), sought to explain why the Industrial Revolution sparked and caught fire in England, and not in other parts of the world. His Darwinian answer was that England was peopled by descendants of the upper classes, who over hundreds of years had survived at higher rates than people in the lower classes. As a result, English upper class values, such as hard work, rationality, and education, which were conducive to an industrialized society, also survived.

Clark figured this out by collecting and analyzing data on the English economy from 1200 to 1870. In The Son Also Rises, he uses a similarly data-driven approach. This time, he uses uncommon surnames, such as Pepys, “to track the rich and poor through many generations in various societies—England, the United States, Sweden, India, Japan, Korea, China, Taiwan, and Chile.” Specifically, he matches up the wealth of parents and that of their offspring. The more correlation, the less social mobility.

Just as Thomas Piketty’s Capital in the 21st Century (Belknap Press, 2014), calls into question the role of capitalism in wealth creation, Clark calls into question the role of capitalism in social mobility. But both conservatives and liberals will find justification for their views in the facts uncovered in The Son Also Rises. Clark, who rightfully opens his preface with the words, “This book will be controversial,” found to his surprise that intergenerational social mobility cannot be taken for granted. Industrialization did not move wealth to the wider population, at least not as freely as the prevailing free enterprise storyline would suggest. (Clark basically says that “a hundred years of research by psychologists, sociologists, and economists” into social mobility has all been incorrect.)

Instead, Clark’s research reveals that the global level of social mobility is basically unchanged over the past 800 years. In England, for instance, he finds that the level of social mobility was the same after the Industrial Revolution as it was before it. “The rich beget the rich, the poor beget the poor,” Clark concludes. “Social status is inherited as strongly as any biological trait, such as height.”

But Clark does not say that mobility doesn’t exist, or that social positions never change. Indeed, his research reveals that upward and downward mobility are both continuously at play in human society. One critical factor is the intermarriage between rich and poor, which over time creates a constant regression to the mean. “In the end, the descendants of today’s rich and poor will achieve complete equality in their expected social position,” explains Clark. “This equality may require three hundred years to come about,” but it will inevitably come, unless a family takes dramatic steps (for example, through its choice of marriage partners) to maintain its position in society.

For me, the salient point is that social mobility is being driven by “innate inherited abilities,” not by the ascendancy of capitalism or democracy or any other economic or political ideology. People born rich may go on to be successful, but wealth is not the most important thing they inherit. Far more important are nature and nurture: the genetic abilities they get from their parents (which they will only pass on if they marry people as capable as themselves), and the confidence, education, and connections their families provide.

This is a difficult message for the unlucky people born to less capable parents; they have high barriers to social mobility, as they have throughout history. Capitalism may make it easier for some individuals to realize their potential, but it does not create that potential in the first place. That’s an insight worth remembering when you hear claims to the contrary.

The ROI on mega sporting events isn't Olympian

My weekly book post on the s+b blogs wonders how Russia will benefit from hosting the Winter Olympics.

A Sucker’s Bet in Sochi

Truth be told, Olympic medal counts aren’t all that interesting anymore. Before the Cold War ended, medals were a leading indicator of global might: If one country’s hockey team beat another one’s hockey team, that meant the winner’s political and economic ideologies were righteous. But these days, it’s less about how many gold medals a nation wins and more about how many gold bars it spends. And hey, by that measure, Russia is back on top! The Winter Olympics in Sochi are the most expensive in history, reportedly costing US$51 billion—more than every other Winter Olympics Games combined.

That’s impressive, and so are some of the stories that have dug into the breathtaking scale of “waste and corruption” at Sochi, like Joshua Yaffa’s cover story in Businessweek. But countries and cities have been going on Olympic-sized spending sprees to land mega sporting events for a long time. The perennial question remains: Is it worth it? For the answer, I turned to the International Handbook on the Economics of Mega Sporting Events (Edward Elgar Publishing, 2012), edited by professors Wolfgang Maennig (an Olympic rowing champion himself) and Andrew Zimbalist, and reissued in paperback in December 2013.

I can’t follow all the economic analysis in this book, mainly because the use of letters and other non-numeric symbols in the equations marks the border of my mathematical nether regions. But the conclusions of the impressively credentialed group of academicians and researchers who contributed to the thick—and rather daunting—collection are clear: “Most studies have found no statistically significant economic effect from hosting [the Olympics and other mega sporting events] and a few have found a negative effect”...read the rest here

Capitalism's dotage

My weekly book post on s+b's blog covers a book that suggests that business as usual wont be an option much longer:

Fiddling at Davos, as Capitalism Burns

At the annual World Economic Forum (WEF) in Davos this week, approximately 2,500 politicians, business leaders, and assorted experts are considering many of the issues raised by five sociologists in

Does Capitalism Have a Future? (Oxford University Press, 2013). It’s likely that the WEF attendees will end up in a place similar to the sociologists—with a general consensus that the global economy is facing huge challenges, conflicting views about their causes and consequences, and only speculative guesses about possible solutions.

Leading the batting order of solo essays (which are sandwiched between an introduction and conclusion written by the entire author team), Yale senior research scientist and former International Sociological Association president Immanuel Wallerstein asserts that capitalism is approaching a “structural crisis much bigger than the recent Great Recession.” This crisis, he says, will come from a profit squeeze caused by an inexorable rise in the prices of labor and raw materials, and tax rates, combined with political instability. Randall Collins, a professor at the University of Pennsylvania, thinks that the primary driving force behind this instability will be the gutting of the middle class as up to two-thirds of the jobs that support it disappear... read the rest here