Sunday, September 29, 2013

Why Amateur Economists Matter

Amateur economists matter because they see properties of the economy that professional economists cannot see or do not wish to see. Academic economists have a tunnel vision problem, they avoid economic issues where a mathematical model does not fit - and some of the most important properties of the economy do not obey mathematical equations. The economic incentives in an academic economist's career encourage him to focus excessively on models.
What about journalists who write about economics or corporate governance? Journalists have their own groupthink, in terms of what questions are worth asking and what's worth writing about. There are a few excellent contrarians (Gillian Tett and John Kay) who are not afraid to point out when economists (and financial industry experts and corporate executives) are flat out wrong. That said, the mainstream media has substantial biases (everyone does) - so there are vitally important characteristics of the economy they do not wish to ask questions about.

Amateur economists may not get respect or prestige, but their insights can matter. Here are some properties of the economy where an amateur economist can provide better insight than an academic economist:

* Corporate executives make poor decisions to a greater extent than economists realize. The economy is more ossified and sclerotic as a result. Reasons include socio-economic discrimination, tunnel vision, looking only at quarterly financial numbers and not making the effort to examine the operations behind the numbers, not taking a long-term view, and lack of supervision by institutional shareholders.

* Corporate executives have no idea how to manage technology workers. They cannot be technology experts. But they also make no effort to manage the political/economic incentives that drive technology workers' behaviour. (Technology workers don't want worker productivity growth if they feel it threatens their career.)

* Corporate executives' preference is to lock innovators out of the building, because their socio-economic status is usually low. Corporate executives make decisions based upon socio-economic status, not based upon the merit of an idea or product. (In a nutshell, I'm saying that corporate executives are shallow, and for that reason lack the willingness or intellectual flexibility to tackle long-term cost-efficiency problems.)

* Socio-economic discrimination is very prominent in today's economy. Not only does this damage the economy, the effect on individuals can be demeaning, and it discourages innovation. The higher the rate of socio-economic discrimination, the more sclerotic the economy. The result is less innovation, lower economic potential, lower worker productivity, and lower total factor productivity.

* Nobody cares about worker productivity. (Yes, this includes the CFO.) Hence, impediments to worker productivity growth remain in place for decades - or longer.

* Nobody understands worker productivity. Why will worker productivity spurt up, and then stagnate for decades? Academic economists do not have a clue. Mathematical models can't explain that, you have to watch how people behave. But to understand worker productivity, you first must understand that nobody cares about worker productivity. You also have to understand what happens to people who try to solve such problems (bad things happen to them).

* Nobody cares about the long-term (look at what they do, not what they say). The most obvious examples are corporate executives, institutional shareholders, and taxpayers. A less obvious example are those who control financing of research. This is a huge factor in economies becoming stagnant and sclerotic.

* Everyone has a bias, usually specific to their choice of profession. This is because of economic/political incentives within a career path, and also old established habits of the profession. Everybody. Including me, including you. In general, this over the long term makes the economy more sclerotic.

* People will do what they have an economic incentive to do. Without the incentive, they won't do it. I know that sounds over the top, but the range of exceptions is strikingly narrow. Raising a child obviously falls within the range of exceptions, but not much else does. You think charity workers are an exception? Then read Gillian Tett's utterly appalling essay on anti-poaching efforts. A more important example is ...

* Nobody has an economic incentive to solve cost-efficiency problems in medical care and medical research. So nobody tries to do it. This is true even though the high cost of medical care damages a lot of people's lives. [ And this is precisely the sort of economic problem where academic economists are so useless, why drug prices are high is my own expertise ]. Health care executives are NOT trying to solve long-term cost-efficiency problems.

* Pharmaceutical CFOs are incompetent. If institutional shareholders were not wasting time sleeping under the desk and eating doughnuts, the CFOs would have been fired long ago. My previous blog post went into detail on this.

The high cost of health care is a big problem, and institutional investors and the mainstream media make the problem worse. Here's why:
Health care executives are not motivated to solve long-term cost-efficiency problems. Hence, the high cost of health care. Obviously, this damages people's lives. You would think that gung-ho journalists would be digging deep for the scoop, going into the details. But for the most part, the mainstream media doesn't really care about the politics and economics inside the health care industry. Both the mainstream media and institutional investors play a very quiet and passive role in this area, this encourages health-care executives to continue to not make an effort.

* Technology workers are Luddites. More about this in a later blog post, but examples include: movie special effects, Javascript coders, and of course, pharmaceutical SAS programmers. Technology workers usually have an economic incentive to stop worker productivity growth.

* The economic interest of a technology worker is often aligned with the economic interest of a software vendor and NOT aligned with the economic interest of the shareholders of the company that actually cut's the technology worker's check. This is a problem across the American economy, but later blog posts will mention pharmaceutical SAS programmers: pharmaceutical SAS programmers have an incentive to protect the SAS programming language AT THE EXPENSE OF pharmaceutical shareholders.

* Technology companies do not want worker productivity growth. The more workers have to master the proprietary platform, the more powerful the software vendor is in negotiations with the customer corporation. (For example, in negotiations between SAS Institute and pharmaceutical executives, SAS representatives have total unquestioned power. The reason for this is that pharmaceutical CFOs have been incompetent in managing long-term cost-efficiency issues.)

* Chief Financial Officers are simply not very good at playing the long game. Perhaps the pharmaceutical industry is an extreme example, but this is a problem across the economy. (As you'll see in later blog posts, I generally assume that, regarding management of long-term cost efficiency problems, it's the CFO whose head should be on the chopping block. In any case, it has to be either the CEO or the CFO. If there are many people to blame, then no one is accountable.) For example, watching pharmaceutical CFOs spar with SAS Institute is like watching a chess grand-master spar with someone who couldn't beat a five-year old in checkers. Yes, pharmaceutical CFOs have been that incompetent on this long-term cost-efficiency issue. I do not exaggerate. My next blog post will explain.

* Short-term cost cutting is very different from solving long-term cost-efficiency problems. They are different problems that require different techniques. For example, layoffs do not usually raise long-term worker productivity. But here's a clue: you have to look at incentives. Do workers have an incentive to solve worker productivity problems? Do workers have an incentive to stop worker productivity growth and lock innovators out of the building? Institutional investors and the media do not make the distinction between short-term cost cutting and long-term cost-efficiencies, and if investors and the media do not make the distinction, do not be surprised if corporate executives also don't care.

* Worker productivity is NOT a measure of how hard-working or lazy a worker is. (It is a contributing factor, but there are other factors.) A surprising number of corporate executives don't get that. Measuring time at the water cooler is not a measure of worker productivity.

* Wall Street often does not care if corporations waste a lot of money. Investors do not take the long view, so it's okay to waste a lot of money as long as the company is raking in the cash on the revenue side. It's a bad idea for an institutional shareholder that claims to take the long view to do this, because the longer you wait, the worse it gets.

* Institutional shareholders do a lot of damage to the economy by what they don't do. They are very lazy thinkers, and they are not independent thinkers. Group-think is a big factor: one shareholder will not examine an issue because other shareholders are not. They make the economy much much more sclerotic. And considering the number of employees working at pension funds and the like, that is a huge amount of wasted brainpower. By far, institutional shareholders are the weakest link in the economy.

* The COMPETE/COOPERATE problem : when you have a compete/cooperate problem, you have an issue that can create a mal-functioning economy. You have a group of entities (institutions or individuals) that often need to compete against each other, but in some situations they need to cooperate in order to solve long-term problems. The most important example is institutional shareholders.

* The university sector matters as much as the corporate sector. Aside from actual scientific limits, the economic/political incentives in research careers can cause serious long-term economic problems, and delay innovation for centuries. Scientists often have a deep hostility to new ideas and contrarian researchers.

* I call this problem the "TWO OUTFIELDER PROBLEM": problems that fall at the fuzzy boundary between the public sector and the private sector can remain unsolved for decades. Like in baseball, a pop ball goes straight up the middle, you see the ball on the ground and two outfielders pointing the finger of blame at each other. A lot of applied computer science problems are like that.

* "THE OPAQUE/TRANSPARENT PROBLEM": If you are a small vested interest, and you want to protect your economic status, then secrecy is great. If you are in charge of an operation or department that outsiders struggle to understand, then you have that secrecy, and secrecy is power. Many vested interests scattered throughout the health-care industry use secrecy to stop cost-efficiency problems from being solved. And corporate executives also use opaqueness to justify their salaries, but a lot of people who play this game are upper-middle-class workers.

* Regulations have many reasons for existing. Some are there for good reasons, others are there to protect vested interests, or by accident. But if you are a full-time employee looking after your own career, never criticize a regulation. Talk as if all regulations are good and not to be questioned. A later post will cover this.

* Thomas Malthus was right. Now maybe some brilliant researcher will make some great discovery at the intersection of psychology and quantum mechanics ( you cannot collapse the Schrodinger wave without a life form, something that physicists really really don't want to talk about ), and economic potential will surge. But the implications may also not be good economic news, and in any case, physicists will do everything in their power to make sure that contrarian researchers are denied financing. At the moment, it does look like Thomas Malthus was right, and academic economists are not comfortable recognizing that reality. North America will do OK for this century, but expect per-capita GDP in western Europe to stagnate and then begin to decline sometime this century. And the next century? Buy a gun and lock the door.

* "Crack-The-Whip" worker productivity growth and structural worker productivity growth are not the same. I suspect most of the worker productivity growth over the past several years is ctw-worker productivity growth ("ctw" stands for "crack-the-whip"). This involves, for example, dismissing lazy workers, a necessary task. It can also involve making hard-working workers work harder (via fear, for example). It's a result of the shift in the balance of power between capital and labour. But this is a cyclical effect, it's not where rising living standards come from in the long run. Rising living standards come from long-term structural worker productivity growth. This is from careful implementation of technology, or changes in business processes. In my experience (certainly in the pharmaceutical industry), corporate executives deserve no credit at all for structural worker productivity growth. They have great respect for people with high social status and the right political connections, and no respect at all for people of a lower economic class who solve structural worker productivity problems. Executives deserve no credit for structural worker productivity growth because they are shallow and lack imagination.

* There are large parts of the American economy where the "FREE-MARKET CAPITALISM MODEL" is not at all accurate. A later post will elaborate, but examples include: the pharmaceutical industry, the entire health-care industry, the market for corporate executives' salaries, government(of course), university research, sports, education. The higher the rate of socio-economic discrimination, the more likely that the free-market model does not explain that part of the economy. To make the problem worse, some people treat the free-market model as a theory as explaining how the economy works, but others treat the free-market model as an ideology.

* My last bullet-point is both tongue-in-cheek and dead serious. You can gain deep insights into economics by insulting everybody. Of course, taking the most cynical view of human nature will not give a 100% accurate understanding of the economy. But it comes surprisingly close, certainly more accurate than all the mathematical toys that academic economists play with. To be a good economist, don't go out of your way to insult people, but don't be afraid to insult people. Again, Tett's article on anti-poaching is a useful example showing how ugly human nature can be (we're talking about charity workers here!). In order to deal effectively with the high cost of healthcare, you have to reveal truths that people in the healthcare industry do not want under the sunlight. Someone who tackles the root causes of the high cost of healthcare will have few friends and many enemies.

OK, that's a pretty big list of insights on how the economy REALLY works. But each bullet-point above shows a dimension of the economy where an insightful amateur economist can provide valuable insights that an academic economist cannot or will not provide.

No comments:

Post a Comment