Category Archives: Web Article Review

William Lazonick vs. Wally

Still thinking about my William Lazonick post from yesterday. One of his arguments is that it is not just stockholders that deserve a part of corporate returns, because they are not the only ones taking risk. As he explains in his working paper, taxpayers and employees also take risk:

Then I show how and why MSV [maximizing shareholder value] is a theory of value extraction that, when applied to corporate resource allocation in the United States, has undermined the social conditions of innovative enterprise and resulted in employment instability and income inequity. I refute the fundamental economic assumption of MSV that of all participants in the business corporation it is only shareholders who bear risk and hence have a claim on profits if and when they occur. Taxpayers in funding government spending on productive resources that are essential to the innovation process and workers in supplying effort to the processes of organizational learning that are the essence of innovation make productive contributions to the enterprise without guaranteed returns. Indeed I argue that public shareholders do not in general invest in the innovation process but just extract value from it, and hence bear little, if any, risk of the failure of that process. I summarize a growing body of empirical research that shows that since the 1980s, backed by MSV ideology, financial interests, including top corporate executives, have been able to extract vast amounts of value from US industrial corporations in excess of value that they may have helped to create.

I contacted Future Yada Yada workplace effort correspondent Wally from Dilbert, who offered the following. (sorry, you have to click – I’m a huge Scott Adams fan but I don’t see an easy, unambiguously 100% legal way to embed his graphic here)

William Lazonick

Recently I did a post or two on the gospel of shareholder value, where I argued that ethical managers need to consider the implications of their decisions on a variety of stakeholders, certainly including employees and customers, but also the larger society and natural environment. William Lazonick, a professor at the University of Massachusetts, argues that the ideology of maximizing shareholder value has also been a big drag on innovation since it came into vogue in the 1980s. In Harvard Business Review:

For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality…

Retained earnings have always been the foundation for investments in innovation. Executives who subscribe to MSV are thus copping out of their responsibility to invest broadly and deeply in the productive capabilities their organizations need to continually innovate. MSV as commonly understood is a theory of value extraction, not value creation.

He goes into much more detail on his theories in this working paper from the “Academic-Industry Research Network“, and with just a little digging I came across this interview with him and this article by him on the “Institute for New Economic Thinking” blog.

When asked for a dissenting view, Gordon Gekko had the following comment:

a 1200-year drought

How bad is the drought in California? So bad that based on historical data, you would only expect it to happen once in 1200 years, on average, according to Geophysical Research Letters.

For the past three years (2012-2014), California has experienced the most severe drought conditions in its last century. But how unusual is this event? Here we use two paleoclimate reconstructions of drought and precipitation for Central and Southern California to place this current event in the context of the last millennium. We demonstrate that while 3-year periods of persistent below-average soil moisture are not uncommon, the current event is the most severe drought in the last 1200 years, with single year (2014) and accumulated moisture deficits worse than any previous continuous span of dry years. Tree-ring chronologies extended through the 2014 growing season reveal that precipitation during the drought has been anomalously low but not outside the range of natural variability. The current California drought is exceptionally severe in the context of at least the last millennium and is driven by reduced though not unprecedented precipitation and record high temperatures.

There are some eye-opening pictures of dry farm fields here.

Die, Cobb-Douglas Production Function, Die!

Here Herman Daly unleashes a savage attack on the innocent Cobb-Douglas production function:

A large residual indicates weak explanatory power of the theory being tested–in this case the Cobb-Douglas theory that production increase is due only to capital and labor increase. But instead of being embarrassed by a large unexplained residual, some economists were eager to “explain” it as an indirect measure of technological progress, as a measure of improvement in total factor productivity. But is technology the only causative factor reflected in the residual? No, there are surely others, most especially the omitted yet rapidly increasing flow of natural resources, of energy and concentrated minerals. The contribution of energy and materials from nature to production is also part of the residual, likely dwarfing technological improvement. Yet the entire residual is attributed to technology, to total factor productivity, or more accurately “two-factor” productivity, in the absence of natural resources, the classical third factor.

Mr. Money Mustache

I always enjoy Mr. Money Mustache‘s advice on living a less consumptive lifestyle. Warning: I will try to keep this blog family friendly and profanity free, but occasionally I may judge that omission of profanity would diminish comedy effect, and we can’t have that.

You have two kids, and yet you drive around in a BRAND NEW GAS GUZZLING LUXURY RACING BUS. The 2006 Honda Odyssey is not a vehicle for an indebted mother to use to drop the kids off and then head downtown. It is something a hopelessly spendy multimillionaire might use to shuttle around six pampered passengers on a cross-country roadtrip while hauling a trailer full of supplies. For two kids, you use a Toyota Yaris or similar. That will cut your gas bill down by 50%.

Your husband appears to be driving alone and not even a multimillionaire himself, and yet he has a TWIN-TURBO SIX PASSENGER RACING FARM TRUCK!!! Holy shit, brother, how many heads of cattle and pigs are you hauling on that roundtrip, while simultaneously carrying international heads of state in the stately cabin? That is a fucking ridiculous vehicle for ANYONE to drive except the rarest breed of Farmer/Diplomat, and I’m betting none of them also hold jobs as Structural Engineers.

So you’ll be selling that, and walking to work. For those rare times you drive, you can ask to borrow the wife’s manual transmission Yaris hatchback. You are also permitted to buy a used mountain bike, and if you’re REALLY getting serious with the carpentry, a 2001 Ford Ranger pickup, 2 wheel drive 4 cylinder manual longbed. You may weld a 12-foot lumber rack to it in order to outperform the your current clown truck.

Jeffrey Sachs

Jeffrey Sachs highlights three international conferences in 2015 that may be important:

In July 2015, world leaders will meet in Addis Ababa, Ethiopia, to chart reforms of the global financial system. In September 2015, they will meet again to approve Sustainable Development Goals (SDGs) to guide national and global policies to 2030. And in December 2015, leaders will assemble in Paris to adopt a global agreement to head off the growing dangers of human-induced climate change.

The fundamental goal of these summits is to put the world on a course toward sustainable development, or inclusive and sustainable growth. This means growth that raises average living standards; benefits society across the income distribution, rather than just the rich; and protects, rather than wrecks, the natural environment.

Growth that protects the natural environment – I think it’s theoretically possible, but we’re a long way from that and it’s easy to be pessimistic. But at least some leaders recognize that there is a problem worth discussing. His vision is essentially one of technological progress allowing decarbonization of the energy supply:

Back in 2009 and 2010, the world’s governments agreed to keep the rise in global temperature to below 2° Celsius relative to the pre-industrial era. Yet warming is currently on course to reach 4-6 degrees by the end of the century – high enough to devastate global food production and dramatically increase the frequency of extreme weather events.

To stay below the two-degree limit, the world’s governments must embrace a core concept: “deep decarbonization” of the world’s energy system. That means a decisive shift from carbon-emitting energy sources like coal, oil, and gas, toward wind, solar, nuclear, and hydroelectric power, as well as the adoption of carbon capture and storage technologies when fossil fuels continue to be used. Dirty high-carbon energy must give way to clean low- and zero-carbon energy, and all energy must be used much more efficiently.

Clean energy would be an enormous breakthrough. But would it end all our problems, allowing us to grow indefinitely from that point without consequences? In their book Limits to Growth: The Thirty Year Update, Donella Meadows et al. explain why that might not necessarily be the case:

in a complex, finite world, if you remove or raise one limit and go on growing, you encounter another limit. Especially if the growth is exponential, the next limit will show up surprisingly soon. There are layers of limits.

What might the next limit be? maybe depletion of the phosphorus supply, loss of fertile soil, collapse of the oceans, a catastrophic plague affecting crops or people, etc. The point is just not to think that solving the carbon emissions problem would end all the problems caused by our enormous footprint on the natural world.

the power of the playbook

Here’s some engineer bashing from Strong Towns, this time accusing us of being serial killers of children:

  • The engineering profession is so worried about liability if they vary from any highway design guideline, regardless of how ridiculous they are. Someone needs to sue these engineers for gross negligence and turn that entire liability equation around. It’s way past time.
  • Professional engineers here and elsewhere use “forgiving design” principles in urban areas where they do not apply. They systematically forgive the mistakes of drivers who stray from their lane or go off the roadway by designing systems where these common mistakes are anticipated and compensated for. They systematically show indifference to the easily anticipated mistakes of non-drivers. A kid playing in their yard chases a stray ball out into the street and gets run down. To the engineer, this is a non-foreseeable, non-preventable accident. For everyone else, we understand that cities are more than cars – they include people doing all kinds of complex things – and forgiving the common mistakes of ALL people is what a humane, decent professional does.
  • Professional engineers claim that they cannot alter human behavior with their street designs. A highway lane width is 13 feet just the same as your local street lane width. There is often no appreciable difference in the cross section of a highway and a local street except for the posted speed limit, which is up to the police to enforce. (I wrote about this years ago.) Despite this, the engineers in this situation – knowing there was an obvious problem – as well as many others in similar situations, put their brains to work to come up with all kinds of ways to attempt to alter human behavior, but only for those humans outside of their automobiles.

This language is a little dramatic but the argument is justified. The field of engineering, and the education of engineers, is not supposed to be just about following design guidelines unquestioningly. It is supposed to be about understanding systems well enough to modify them and solve problems. But civil engineers are under a lot of economic pressure – we tend to be paid either by cash-strapped public agencies or by private land development interests engaged in ruthless competition. Under these conditions, following an established playbook is often the lowest stress, lowest risk, and most efficient way to get a job done.

There is a flip side to this though – the keepers of those playbooks have enormous power. Curating a collection of standard details and technical specifications doesn’t sound like a very glamorous job, but actually it is a very important one. If people are blindly following your playbook, you have a lot of responsibility – to use overly dramatic terms, you can either be the savior or the mass murderer of the children. You have the power to mainstream best practices and innovations from elsewhere. Then if there are some engineers downstream who choose not to think or are simply under too much pressure to think, they will blindly implement the right practices. So these are very important jobs, and they need to be filled with people who are very well educated in system thinking, are ethical, and are intellectually curious about what is going on outside their little corner of the world. A certain amount of experimentation needs to be done outside the playbook, and the playbook itself needs to be constantly challenged and revised as new and better approaches become available.

robots robots robots!

Yes, there’s a robot bartender now.

No word on whether this is a bar where everybody knows your name. I suspect not. Here’s a much longer academic study on which occupations are likely to be most affected by computerization/automation in coming decades.

According to our estimates around 47 percent of total US employment is in the high risk category. We refer to these as jobs at risk – i.e. jobs we expect could be automated relatively soon, perhaps over the next decade or two. Our model predicts that most workers in transportation and logistics occupations, together with the bulk of office and administrative support workers, and labour in production occupations, are at risk. These findings are consistent with recent technological developments documented in the literature. More surprisingly, we find that a substantial share of employment in service occupations,where most US job growth has occurred over the past decades (Autor and Dorn, 2013), are highly susceptible to computerisation. Additional support for this finding is provided by the recent growth in the market for service robots (MGI, 2013) and the gradually diminishment of the comparative advantage of human labour in tasks involving mobility and dexterity (Robotics-VO, 2013).

The paper has a detailed appendix where you can look up your specific occupation if you are so inclined. In also has a detailed lesson on the history of technology and labor markets, if you are inclined to read that.

Finally, the Pentagon is also worried about falling behind the curve on automation:

Hagel and DOD officials have been discussing the so-called third offset strategy for months without giving up any specifics as to how they intend to achieve offset innovation. In his speech, Hagel provided a small glimpse into the fields that will attract special Defense Department attention as part of the strategy: “robotics, autonomous systems, miniaturization, big data, and advanced manufacturing, including 3-D printing.”