The Wall Street Journal has an interesting article, "The New Science of Giving", that focuses on the philanthrophy of Houston couple Laura and John Arnold. John Arnold is a former hedge fund operator who accumulated a fortune estimated at $4 billion and who now devotes himself to philanthropy. The difference is in the approach to philanthropy, which is illustrated with the quotes below. (The Foundation website is at http://www.arnoldfoundation.org/front.
The foundation's approach is to "focus on systemic problems without easy answers ". The Arnold's define this focus as "public-policy problems that led to ... "moral inefficiencies". Their methodology is to "spend a lot of time doing research and evaluating data, and then make a handful of big bets, even if they involve considerable risk" (similar to well run hedge funds). Areas of particular interest are K-12 education and the U.S. justice system.
What I like about the Arnold approach is the following:
Focus on the really big problems (the only one's worth working on)
Use a data driven, analytical approach to develop new solutions (don't follow the philanthropy crowd)
Focus on the project results and their measurement
Set aside the "feel good" part of philanthropy and look at the results produced
In celebration of May Day, Business Insiderreviewed three key economic indicators:
Corporate profit margins are at an all time high of almost 11%, levels not seen in the last 70 years
Wages as a percent of the economy have hit a 60 year low
Only about 58% of workers are working, levels not seen since the 1980s
There is no reason to expect these trends to change in the near future:
Interest rates will remain low, which helps profitability
Lax regulation and Washington gridlock will do little to change the playing field
Continued new applications of IT will disrupt industries and eliminate more jobs (e.g. university education)
Both Karl Marx and Friedrich Hayek, poster boys for the left and right respectively, predicted today's environment. Strange but true, they both predicted a massive concentration of wealth in the hands of fewer and fewer people, aided by a political system that protected them. Hayek's solution to the situation would be individual entrepreneurship as a means to control your economic destiny. Marx perhaps advocated revolution. With all the drones appearing in our skies, I recommend entrepreneurship.
Since the 1960s and the advent of computers, productivity gains have been a major driver in the growth of business profits. However, with little new computer technology on the horizon (see this post), the benefits of computing have probably been optimized by the large corporations that drive the economy. What choices do the large corporations have to drive profitability:
Focus on reducing government regulations, which is a considerable cost of doing business; however, with the growing concern about the morality of capitalism (see this post), this strategy may not be successful.
Commit significant capital to developing markets; this strategy only works if all the major competitors follow the same strategy and products are suitable for the bottom of the pyramid (see this post).
Focus on innovation as opposed to the safer line extension strategies; large corporations have had limited success with developing innovative new products and have some difficulty in recognizing the value of their innovations (Intel divesting their "ARM" chip business might be an example.)
More corporations could become lead investors in venture capital investments, following the example of companies such as Intel and Google; acquisition of the startups could become a source of future growth as Cisco demonstrates (a list of Cisco acquisitions is here).
None of these strategies are easy to execute, although number 4 may appear comparatively easier. A focus on innovation (3) is probably the best strategy, but few companies have a culture of true innovation and even fewer executives who have the risk profile and experience to successfully manage a business built on innovation.
More likely, we will have a 1960s like period of mega-mergers to hide the slowing growth of large corporations. Everybody knows how to do acquisitions :)
President Obama has been focused on short term job creation. While this has positive effects on the lives of the unemployed, it does little to correct structural problems in the system. The President should be focused on leading a national initiative to reform education for the 21st century so that people have the skills required to better manage their own economic well being. There are two powerful reasons for such an initiative:
The country badly needs a stated direction. Since the fall of communism the country has had no core focus, a set of beliefs and aspirations that unite us. The recent plague of congressional bi-partisanship is a symptom of such a lack of direction.
There will be fewer and fewer traditional jobs that were so plentiful after WWII. Outsourcing, offshoring and increasing labor productivity all point to the erosion of the traditional notion of jobs.
As Thomas Friedman so eloquently states in thisSunday Review NYT's article, there are only:
"high-wage, high-skilled job[s]".. “because knowledge is available on every Internet-connected device, what you know matters far less than what you can do with what you know. The capacity to innovate — the ability to solve problems creatively or bring new possibilities to life — and skills like critical thinking, communication and collaboration are far more important than academic knowledge".
The job opportunities that remain will require the ability to add value rather than perform rote tasks.
No less a commentator than Clayton Christensen, the HBS professor, shares Friedman's view. Christensen believes that the education system is so endangered that even the continued existence of HBS is in doubt. Christensen believes that education must become more practical to meet the requirements of the 21st century.
Another group that shares the Friedman view is Education Futures, who advocates for Knowmads. "A Knowmad is a "creative, imaginative, and innovative person who can work with almost anybody, anytime, and anywhere."
My own views match very closely with Friedman, as shown in this post from January 2012 titled "How to Survive the End of the Industrial Age". For about the last two years in my entrepreneurship classes, I have been advocating that students study entrepreneurship as much for the skills required in a jobless 21st century as for learning how to identify opportunities and build large new companies. The skills required for entrepreneurs are detailed in this post and closely match Friedman's emphasis on critical thinking, collaboration and communication. These skills can, of course, be learned at a very young age. The original research on learning by Jean Piaget demonstrated this fact.
One may wish to point out that a dramatic change to the education system does not require federal government leadership. However, the private sector appears as disinterested as the governemnt in reforming education to produce 21st century skills. The non-profit sector lacks the resources to really take on the challenge. Most likely the U.S. will just muddle through to mediocrity by never vigorously considering the skills that children need for the 21st century. The Bush initiative for "no child left behind" would appear to support my view on the future of U.S. education.
To reform education requires four key parts:
Education must be focused on student centric learning to match the need in the 21st century for individual responsibility for economic well being; self-paced learning as opposed to grade-based classes is probably a natural outcome of such an approach
Education must be managed at the local level rather than by the federal government in order to encourage community support for the initiative; community/parental support greatly improves educational outcomes
Teaching of entrepreneurship needs to be started at the middle school level to reorient the next generation of children to the concept that they must manage their economic well being
Online resources need to be meaningfully integrated into the curriculum to free up resources for the new educational environment, which means that teachers likely will need training to successfully work in the new environment
Do five year olds need to manage their own fate. Probably not, but they need to be raised in an environment that encourages individual initiative and not rote memorization of facts that are better explained by an online lecturer.
Addition: This post from Edudemics advocates four activities for students to foster learning. Number 3 is startups.
I am very fond of asking my students to define the words they use. For example, I have yet to find a student that has a good definition of marketing, despite the popularity of marketing courses in business schools. Suppose I asked you to define capitalism, the intellectual and practical foundation for business. What would you say? Drum roll....
Capitalism is "the free allocation of capital
by individuals in the service of their individual ends (within the framework of a fully competitive
market)". (paraphrase of Milton Friedman)
This definition comes from a new working paper at HBS by Rebecca Henderson and Karthik Ramanna titled "Managers and Market
Capitalism". The paper argues that businesses have a moral responsibility beyond Milton Friedman's dictum to maximize shareholder returns. The authors argue that businesses have a moral obligation to serve society by preserving free markets and capitalism, which is in their self-interest, and not just satisfy the self-interest of shareholders. Essentially without capitalsim and free markets the shareholders would most likely be harmed. Therefore, egregious behavior, such as the 2008 financial crisis, undermines the integrity of free markets and is therefore immoral.
The authors provide a moral framework around the writings of Milton Friedman through a very insightful discussion of the history of the economic principles that underpin his thinking. Friedman's thinking was in large part based on the original liberal thinking of Hobbes and Locke and further advanced by Friedrich Hayek. The economic history lesson alone makes the article worthwhile for anyone who needs a refresher in the fundamentals of capitalism.
I also think the article is the best development of a moral framework for capitalism that I have read. The power of the argument is that the authors derive the requirement for moral behavior from classic economics writings alone with no reliance on another discipline. Putting Friedman in a compelling moral framework is long overdue.
Another perspective on capitalism from another group of HBS professors is here. "Capitalism at Risk", despite the title, presents views consistent with Henderson and Ramanna albeit derived from a totally different approach . Not as rigorous an approach but equally insightful.
L. Pritchett and E. Werker from the Harvard Kennedy School have released a working paper titled "Developing the guts of a GUT (Grand Unified Theory): elite commitment and inclusive growth". The paper deals with why some countries are able to generate periods of high economic growth and why some countries are able to sustain economic growth over long periods of time. Ultimately, the writers hope to provide a theory that explains both the good and bad economic performers.
Interesting points from the paper include:
"Nearly all of the currently rich countries are rich because they grew at a modest pace for more than a hundred years. The GDP per capita in OECD countries typically grew at around 2 percent per annum from 1870 to today.This is roughly the average pace of growth of all countries since 1960." Steady positive growth produces better results than boom-bust sequences of growth.
"Countries with boom and bust have episodes of both rapid growth but also of collapse." Such unsteady growth characterizes many of the poorest countries. "One key fact that differentiates the growth performance of the “developed” countries from the “developing” countries is that developing countries are more likely to have negative shocks to growth and suffer serious reversals in those negative shocks... when developing countries are growing they grow considerably faster than developed countries—about 1.5 ppa faster (5.37 versus 3.88). But during periods of negative growth the growth is much slower—2.3 ppa slower (-4.61 versus -2.33)—and the slowness when slower is slower than fastness when fast".
"Countries may have the same average growth rate but very different dynamics." The UK and Ghana illustrate this point in Exhibit 1 below.
There is by now a large body of empirical literature suggesting that “institutions” are important to long-run economic prosperity. Institutions are both public and private sector organizations. "There is often a very strong connection between levels of prosperity and levels of the quality of “institutions” but the connection between the initial level of the quality of institutions and subsequent growth or between economic growth and changes in institutions is often very weak. What “weak institutions” mainly predict is a high variance of growth rates.
"The main difference in the data in the growth rates of those countries which currently have electoral democracy and “autocracies” is that “autocracies” have a higher variance of growth rates. The highest and lowest economic growth rates tend to be in the “autocratic” category".
There is a tight link between per capita GDP and quality of government, which is defined as a) rule of law, b) quality of bureaucracy and c) control of corruption.
For countries to create steady growth states both the political and economic institutions must be inclusive. When either type of institution is not inclusive growth is unsteady. This conclusion supports my belief that education and social inclusion are the basis of individual empowerment, which leads to the individual taking control of their economic and social well being.
The interesting case is, of course, Taiwan, Korea and Singapore, who have each gone from near poverty to sustainable growth in per capita GDP for a 50+ year period. All three are characterized by economic inclusiveness and perhaps Singapore establishes the minimum condition for political inclusiveness. Establishing the minimum level of political inclusiveness, given that economic inclusiveness appears to have been established, is perhaps the real challenge in China if they wish to establish long term, steady economic growth.
I will be speaking at Barry University on February 27 at noon in room 308 of the library. The speech is on Israel Kirzner, Austrian School economist, NYU professor emeritus and rabbinical scholar. I will not be covering his religious works, which I have not read.
The speech will cover his theory of entrepreneurship and how it relates to poverty eradication. I will throw in a bit from Frederich Hayek to provide some ideas on individual empowerment and the role of government, which is relevant to understanding Kirzner better.
These themes are also the first part of a speech at FIU on Tuesday, February 26.
Back in January 2011 I wrote one of my New Business Ideas posts on the opportunities in food and water due to the impending shortages of both. Today in Co.Exist there is an article highlighting a map from the World Resources Institute that shows the severity of the water shortage. The map is called Aqueduct and it allows the user to change the factors considered such as ground water and pollution.
Project Syndicate has an interesting article from Mohammed Yunus--"The Social Business Revolution". Yunus is a Nobel Laureate who was responsible for popularizing micro-finance in Bangladesh through Grameen Bank.
Yunus' argument goes as follows:
"The persistence of many of the world’s social problems reflects our collective misinterpretation of the idea of capitalism"
"As a result, businesses are run for the sole purpose of maximizing profit, and humans are conceived as one-dimensional money-making machines"
"There is a missing component in our conception of the economic marketplace: social business"
"A social business is a non-dividend-paying company whose entire purpose is to solve a particular social or environmental problem. Shareholders can recoup their initial investment over time, but nothing beyond that. All profits are plowed back into the company to increase its reach or to improve the product or service that it provides"
My comments on Yunus' argument are as follows:
One financial crisis is perhaps not sufficient evidence that capitalism has gone awry. Secondly, capitalism has a long history of recovering from financial crisises and then producing considerable social benefits
The concept of a social business as defined by Yunus has two shortcomings:
The scale of "social businesses" to solve problems would be greatly increased by access to traditional financial markets (which is not possible in the "no return" model proposed)
The size of the pool of funds for investment with "no return" is very limited which suggests that it would not have much impact in terms of scale to solve the big problems
I think the better question for Yunus to consider would be why profit making companies devote so few resources to solving social problems. Most shareholder owned companies could devote much more money to social issues without any dramatic decline in share value. Despite the clarity of the writing of Milton Friedman and others, maximizing shareholder return is still subject to interpretation.
Forbes released today their list of the most powerful people in the world today--71 people out of a total world population of 7.1 billion or 1 in 100 million. Generally the list highlights politicians (Obama #1, Angela Merkel, Chancellor of Germany, #2) and business people (Bill Gates #4, Carlos Slim #11). One segment of the population notably omitted is academics and intellectuals. Thought leaders apparently are a group that Forbes does not deem sufficiently powerful.
Perhaps the President of Harvard, Drew Gilpin Faust, warrants a position given the number of people on the list who have strong ties to the university. Perhaps the historic and future contribution of the Harvard student body is a better reason. Using this logic, L. Rafael Reif, President of MIT, would deserve to be on the list. He might also deserve to be on the list given the 60 Nobel Prize winners that are either faculty or in some other way affiliated with MIT. Thoughts on public intellectualism are here and here.
Other groups noticeably missing are:
Large hedge fund operators, e.g. George Soros
Scientists, e.g. Stephen Hawkings
Writers, e.g. certain Pulitzer Prize winners
Religious leaders, e.g. Billy Graham (although Pope Benedict XVI ranked #5)
Nobel Prize winners excluding politicians (835 individuals since 1901)
Add other notable groups missing in the comments. The complete list from Forbes is here.
Edudemics has an interesting post on integrating technology in the classroom. They offer a matrix developed at the Northern Arizona University to demonstrate the phases of integration, as shown below.
The matrix has two shortcomings.
The developers of the matrix assume that technology must be phased in. Overlooked is the natural adaptive abilities of children.
The most successful projects using technology in classrooms use a total immersion approach where the laptop or tablet is constantly used by every student from day 1 in all curriculum.
The matrix was developed for teachers and overlooks the objective--children learning. We will never learn the proper way to use technology in the classroom until the approach starts with a focus on the natural abilities of the child and how they learn.
The views expressed herein are my personal views and do not represent the views of any organization, client or university with whom I am affiliated.
Joi Ito, the Director of the MIT Media Lab, did a piece on Google Think about the four trends he sees for 2013, which are listed below:
Hardware as the new software "Supply chain provider companies are making
the cost of manufacturing [hardware] and risk really, really small.." There is much new hardware being developed, much of it open source. I expect that this will produce many appcessories. Appcessories are peripherals attached physically or through wifi to tablets to capture data (sensors) or to create new experiences. Very big opportunity.
Gene Printing "Bio-fabricating
genes using something called a 'CMOS' chip, which basically allows him to print
genes using machines instead of people". Biology is not my field but the idea of using CMOS chips is logical. CMOS chips are the special purpose chips that you find in your car for example.
Life Long Learning"It
has always been my [Ito] opinion that 'education' is something people do to you,
whereas 'learning' is something you do for yourself." My thoughts on life long learning are here. Lifelong learning is perhaps the most important lesson to learn from schooling.
Survival of the Quickest "You
want to have your peripherals wide open and adapt as quickly as you can. I
think that will be an important survival trait of people and companies in the
future." The abundance and speed of information has been a recurring theme here at SF.The implications for the management of organizations is an under appreciated point. A post I like on that theme is here.
If I do a post for the future of 2013 I may write about this relationship:
Last week I wrote a post--Corporate Performance Raises Questions-- that discussed the inverse relationship between corporate profits in the U.S. and wages earned. Corporate profits are at an all time high and wages earned as a percentage of the economy appear to be at an all time low.
Paul Krugman, Nobel Laureate and NYT columnist, wrote an op-ed piece on December 9 citing the same statistics and making a point that IT technology is not only replacing low wage jobs but also more value added positions. My post on the disruption by IT of higher value positions appeared in this August 2010 post--The Future of Professional Services. Mr. Krugman's article-Robots and Robber Barons--is here.
I doubt Mr. Krugman reads this blog, but if you want to know what he will be writing about, read Sophisticated Finance :)
Thanks to my friend, Martin, for pointing me to the Krugman article.
Silicon Valley Insider had an interesting article that showed two key statistics for U.S. corporates:
Corporate profit margins are at an all time high
Wages as a percentage of the economy are at an all time low
These two factors are explained in part by the significant improvement in productivity over the last 20+ years, in large part due to the wide ranging benefits of IT adoption, as shown in the chart below.
Image credit: Teachmefinance.com
As productivity improves through the use of IT, workers are eliminated or reduced. With more workers chasing a shrinking number of jobs, salaries offered can be lowered which also benefits profit margins.
However, as SVI points out, passing all the benefits of increased profitability on to shareholders (and senior management) does little to motivate workers. Workers with a lower standard of living are not going to remain productive at historic levels.
In this article from the NYT on digital disruption in industry I found an interesting paper by Robert J. Gordon of the National Bureau of Economic Research on forecasted economic growth in the U.S. In the paper Gordon describes the three industrial revolutions that followed one thousand years without any economic growth. The point to note is perhaps that significant, sustained economic growth requires an industrial revolution.
The three industrial revolutions, according to Gordon, are:
Steam and railroads 1750-1830
Electricity and the combustion engine 1890-1972
Computers, the web, mobile phones 1960-present
The most significant industrial revolution was 2 and the least significant in economic terms was 3, the one we know the best. 3 really only generated a growth revival in the economy from 1996-2004 and will not be able to sustain the economy at satisfactory growth rates going forward. Gordon thinks that growth rates in the U.S. may be sub 1% for the forseeable future given the lack of stimulation from the current industrial revolution.
Why has the current industrial revolution been short lived and not much of an economic impetus? In my opinion, much of the benefit of the new technology manifest itself merely in productivity improvement that allowed lower levels of production to sustain us. Effectively, the major benefit of this industrial revolution in many ways has reduced industrial production..so no growth revival.
The Economist critiqued Gordon in this article. The full Gordon paper is here. Summary link above.
My friends at the Pino Entrepreneurship Center and Knight Foundation are sponsoring a NewMe Accelerator in Miami on November 12-14. An accelerator is an intensive, short period approach to concepting, demoing and pitching a new business idea to prospective investors. TechStars is perhaps the most well-known accelerator.
The NewME program focuses on helping women and minorities to start their own technology-based businesses. Registration is at NewMEMia.eventbrite.com (scroll down the link for more details).
Executives from Andreessen Horowitz and Base Ventures, two leading venture capital firms, will lead the event.
I recently read an interesting article in Reason.com entitled "Half of the Facts You Know Are Probably Wrong". The article provides two interesting facts about science:
Scientific data grows at 4.7% per year
Scientific data has been doubling every 15 years since the 17th century (a mathematical derivative from annual growth of 4.7%)
Obviously back in the 17th century the addition to scientific data every 15 years was quite small, but today the additions are considerable and much information previously developed is being proven wrong every 15 years.
A 15 year period closely approximates the time a child is in school in the U.S. prior to university. This child is learning scientific facts and scientific reasoning. Scientific reasoning is probably less affected by the growth in information although new methods are constantly evolving with the increased use of technology. However, the facts the child learns are outdated in large part by the doubling of scientific information and many facts learned will turn out to be wrong. The question is why we put so much emphasis in science education on memorizing facts. Perhaps we should be emphasizing scientific reasoning and leave the facts to Google or Wolfram Alpha. Of course, teaching scientific reasoning and critical thinking would probably be much more challenging and difficult to test in examinations, but it would be more valuable than examinations of facts that are outdated or wrong.
The Economist has an interesting article on foreign direct investment in the 1H of 2012. Investment this year trails last year. Foreign inflows declined by 8%. As shown in the Economist chart below, China is the largest recipient of foreign investment, and when combined with Hong Kong, China surpassed the U.S. in both 2011 and 2012. However, investment in China in 2012 trails 2011. Brazil is noteworthy in showing an increase year-on-year.
Last week U.N. Secretary General Ban Ki-Moon announced a personal initiative, "Education First", to draw attention to the need to improve education standards worldwide. A full description of Education First is here.
Andres Oppenheimer, writing in the Miami Herald, summarized the initiative in this article, "U.N. picks wrong education partners". The iniative follows several prominent UN themes:
"My opinion: The problem with Education First is that it believes that governments will make it their priority to improve education standards.
They won’t, for the simple reason that political leaders think in electoral time frames — three or four years — whereas investments in teacher training and other key tasks to raise education standards pay off in fifteen or twenty years."
The examples where one government has started an initiative in education and the next administration has discontinued it are many. The way to avoid such problems is to establish non-ministerial, independent organizations that are funded over 10-20 year time frames to improve education. This is a similar approach to what Uruguay's Plan Ceibal has done and what Paraguay is considering. This approach also gives the initiating President a real legacy for their administration, an objective that sometimes even overcomes the importance of electoral politics.
As is the case in many U.S. universities, especially at the graduate level, a significant number of the students are from foreign countries. The amount paid by these students or their governments is a very significant amount, as discussed in this article in Forbes "Stop Wasting Foreign Aid: Let's Import Millions Of New College Students Instead", by my friend Iqbal Quadir--founder and director of the Legatum Center for Development and Entrepreneurship at MIT.
Some eye opening facts about higher education:
Higher education in the U.S. has annual revenues of $400 billion
700,000 foreign students attend U.S. universities
Foreign students pay $21 billion annually in tuition and living expenses
If foreign students increased from the current 3.5% to 15% of total students, the economic benefit would reach $100 billion annually and foreign students would total 3 million
Expanding the number of foreign students, Iqbal argues, would have three benefits beyond increased revenue:
"Expertise and resource development in educational institutions;
Enrichment of the knowledge ecology from foreign graduates who remain in the US; and
Connections between this augmented American knowledge base and foreign graduates who return to their countries"
I like the idea of expanding the number of foreign students in U.S. universities. It might facilitate greater understanding between countries and would be a significant economic benefit.
