Friday, January 30, 2009

Starbucks vs. Harley Davidson: What you see and what you don't

We live in a consumer-driven economy, liberals often say, and how much more can we produce until we’re too chock-full of gadgets and gizmos? This concern is easily manifested in a company like Starbucks: How can they grow when they’re already located on every street corner in every city? Such concerns, like so many misunderstandings about the economy, come back to Henry Hazlitt’s single lesson about economics: What you don’t see is often more important than what you see. We’ll begin by talking about what we see, which is too many Starbucks stores.

What you See

Starbucks originally hooked me on coffee. I was in 8th grade and a location next to my school was giving out samples of their new Frapuccino with brownie bits. Since around that time, Starbucks expanded to over 16,000 locations worldwide. Its horizons seemed endless, as numerous books popped up about the genius idea behind the business, no doubt perhaps conceived in the cozy intellectual confines of the coffee shop’s atmosphere.

But in 2006, way before our current recession, it was clear that Starbucks had over-expanded itself. Since then, it’s closed over almost 1,000 stores and has plans to close hundreds more. In the meanwhile, Starbucks has certainly lost its edge. The issue seems simple enough, and the conversation almost one-dimensional: They need to open more stores. More stores means more money. But the economy - maybe even the world - isn’t big enough. They can only open so many stores in the same city before there’s no room left to expand. Companies rely on growth. What are they to do? In the meanwhile, they’re worried that the Starbucks brand has become stale and too expensive for a society in recession.

What you Don't

The solution to the path that Starbucks should have taken struck me while I was reading about The Harley Davidson Company in Motley Fool’s recent book, Million Dollar Portfolio. The following quote summarizes a bit of the history of Harley Davidson before getting into their success:
In 1901, a 21-year-old William Harley designed a motor to put onto a bicycle. He was soon joined by his good friend Arthur Davidson, and together they started a company that would eventually build motorcycles. Over the next 70 years, the company was private, surviving the ups and downs of the American economy, with major contributions to the war efforts of both World I and World War II. By the 1950’s and 1960’s, though, the company saw its reputation diminished, as it was associated with the Hell’s Angels and other less savory characters.

In 1967, the company was bought by American Machinery and Foundry (AMF), which produced leisure equipment such as snow skis, golf clubs, and bowling balls. AMF mismanaged the company to the point of near death, and sold it for $80 million in 1981 to a group of private investors, including Willie Davidson, a descendant of the original Davidson family. They rebuilt the company, placing a new emphasis on quality that had gotten away from them for decades. Customers returned. In 1987, Davidson and Friends took the company public.

That was the beginning of a spectacular ride. Shares of Harley at the end of 2007 were worth roughly 110 times what they traded for when the maker of the Fat Boy first went public…(p. 85-6)

What was responsible for this turnaround?
For the better part of two decades, Harley had the opportunity to do the right thing with its profits – sink them back into the business, making new and better products, and reaching out to loyal customers. In fact, the true glory years for Harley’s stock were those when management limited how fast the company made bikes. Rather than make all the hogs it could sell, Harley increased production at a rate of only %10 a year, lower than what the marketplace could bear. The ensuing scarcity of bikes raised the value of those machines that did make it to the market. For the better part of a decade, customers were willing to pay more than the manufacturer’s recommended price. (p. 86)
Something clicked when I read this, as I realized that Starbucks’ problem was not over-expansion, but a lopsided view on the meaning of growth.

Certainly more locations is one way to increase profit, but did it never occur to them to improve their product, similar to Harley Davidson? Starbucks' extra cash placed them in a position to improve their product, or at least to make it more efficiently. Or they could have experimented with real cappuccinos, which are generally thicker and have less foam, rather than switching to automated machines. Or they could have lowered the price of their products, which would have enabled them to compete more effectively with McDonalds and Dunkin Donuts. Instead, they’re stuck with too many stores which need to charge an arm and a leg for a cup of coffee in order to make a profit.

None of these strategies were guaranteed to work, but they get at a very basic aspect of economics: Differentiating between what you see and what you don’t see. Starbucks chose to err on the former by expanding everywhere, rather than the latter. However, the alternative strategies – which err on what you don’t see – were certainly viable, as seen in the success of Dunkin Donuts. In a very real sense, both were strategies behind growth. Yet do you hear liberals decry that Dunkin Donuts is taking over the world with their expansion of quality and lowering of price?

As Harley Davidson’s history shows, companies don’t just grow by getting physically bigger and taking up more space. As Hazlitt proclaimed in 1946, growth in areas that you don’t physically see right in front of you are often the most important types of growth.

The More Important

I want to end on this concept because I’m entranced by it.

Mankind necessarily begins with the concrete and what’s right in front of him, and over generations he forms laws of nature, which get at what Plato called underlying forms. Plato believed that the forms behind the manifestation of reality are inherently more important than physical objects, because the forms govern their existence. In other words, the law of gravitation is more important than the objects which are being gravitated, because the law allows us to understand the objects.

Hazlitt was saying something very similar, only in relation to economics: What we don’t see is often more important than what we see. We visually see Starbucks everywhere, but we don’t visually see the quality of coffee increasing. Hazlitt elaborated with an analogy to a broken shop window: If a shop’s window breaks, we see extra business go to the repair man. Judging just from what we see, broken windows are good because they produce business. What we don’t see, however, is more important. We don't see the foregone opportunities given up by shop owner. Perhaps he now has to make his goods more expensive, or he can’t expand his business. Economist John Maynard Keynes - whose influence has exceeded Marx in determining liberal economic policy - was notorious in his inability to grasp Hazlitt's law. He once famously suggested that we should bury money under ground, so that industries can form by digging holes to get them out.

I’m fond of intellectualizing issues, often to a fault (see this post and every other). For this reason, though, I’m often amazed at how intellectual liberals fail to grasp anything about the economy that's not in plain sight in front of their eyes; because Hazlitt’s law is the bare essence of intellectualization, by moving the discussion to the underlying principles, rather than just what’s out there in front of you. How can you be intellectual and fail to grasp that there’s more to the world than just what you see?

Nonetheless, liberals often chide at attempts to get at the underlying forms of the economy, such as Adam Smith's notion of the invisible hand, under the presumption that it's an oversimplified attempt to avoid reality. On the contrary, however, discussing physical economic things without reference their underlying economic form is like trying to move a rotating object without thinking about gravitational forces. Stated more succintly, its easy to change something's outward physical appearance, like an item's price, but its not easy to alter the form, like the information that a price conveys.

Of course, applied to the economy, this mistake is not specific to intellectual liberals. Many economists and politicians, in the tradition of Keynes, overemphasize consumer goods and end-products, which we see, over investments and savings, which we don't see. One instance of this was when former President Bush urged Americans to go shopping after 9/11 upon the assumption that this would stimulate the economy. Contrary to Bush's intention, buying random things when you don’t need them is pointless, and spending beyond your means is in fact harmful for the economy. When you buy a product that you need and can afford, you’re signaling to the manufacturer – along with anyone involved in its profit – that the product is valuable. You're telling them that you enjoy their product more than you would have enjoyed your extra money somewhere else. You're signaling them to make more of that product, or to keep doing what they were doing. Buying useless products that you can’t afford just adds noise to that signal, and it depletes from your savings. Savings again represent what you don’t see: They don’t just sit in a bank vault. They’re loaned to businesses or people, or are reinvested into the economy. That money is given a purpose, and in line with Hazlitt, that purpose is arguably more important than your consumption, particularly if you don’t need or want that consumption.

This misconception is magnified in the use of GDP – gross domestic product – to measure the macroeconomy. GDP is the total measure of exactly what you see: product. It doesn’t include what you don’t see, particularly savings and investment. When a window breaks, or another Starbucks opens, GDP increases, regardless of any depletion in savings; when a company like Harley Davidson focuses on making better motorcycles (and spends on R&D), GDP suffers.

Economist Mark Skousen, among a few others, hotly debates the usefulness of GDP. Using a statistic called gross output, he estimates that end-product consumer goods account for only a third of the economy. And this makes sense, because changes in the GDP usually lag behind changes in the stock market by a few months. It takes money to make money, and it also takes money in the right hands as well. That's why savings and investments are more important than consumption.

Right now most every company is in trouble, although to varying degrees. Starbucks used one strategy for expansion, though it certainly wasn’t the only strategy, and in hindsight it probably wasn’t the wisest. Harley Davidson management has recently turned south as well, as they’ve somehow managed to pile on a huge amount of debt while being aware of their shrinking baby-boomer customer base. But the important lesson is that these companies had options, as growth doesn’t always occur in areas that you see. Often the best things in life – love, joy, happiness – you can't see directly at all.


Media (in order of appearance):

Photo: (1) Careful, 11/10/2006, by Carlos Aldana; (2) Fuel, 09/30/2006, by Nathan Makan; (3) 1907 Harley Davidson, photo by Rmhermen; (4) Harley Davidson Heritage Model 2004; (5) DUNKIN' DONUTS, 12/03/2006, by Paul Downey; (6) Concave modular origami : collection so far, 11/17/2008, by fdecomite; (7) Shattered Lens, 03/06/2006, by kandyjaxx; (8) Westfield White City, 11/25/2008, by Manuel.
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Friday, January 23, 2009

Obama and the Post-Baby Boomer World

Look at the tears of the cold-hearted Jessie Jackson.

We all know that Obama’s inauguration marks a new age of race relations in the US. I was even tempted to vote for him solely because of his skin color (this coming from a Caucasian). The political race card isn’t superficial: Imagine if every black person in the US felt just a bit more “welcome” here with a black president. Just think about the economic implications.

Obama’s presidency comes at a time when America’s demographics are changing. America is becoming less white. It’s no coincidence that our first black president was elected when he was: The baby boomers are moving on. The passing of the baby boomers, I suspect, will mark Obama’s presidency more than anything else in the US, even more than race relations. The baby boomers are the largest age cohort in the US. It’s not just that they’re more white. They’re also wealthier. And older.

In 1969, Nixon claimed that he appealed to a silent majority of constituents – hard-working older Americans who didn’t protest the war and who had real American values. That silent majority was in fact the baby boomer generation. And they’ve been skewing politics ever since. Young liberal protesters – some even the children of baby boomers – have been dumbfounded by them, ever since protesting the Vietnam War.
How sharper than a serpent's tooth it is
To have a thankless child
(King Lear, Act I, Scene IV)
But you have to hand it to the baby boomers. They were born right after one of the scariest times in history, and America’s post-World War II growth in opulence is mostly attributable to them. In their time our economy has shifted even further from being based on physical labor to skills. This shift allows individuals to have longer careers. It gives women a larger role in the workplace. It puts a premium on education. Most of all, it puts a premium on experiential knowledge. Unlike previous generations, it allows the older to be wealthier. The baby boomers’ passing – both literally and figuratively – will be like the loss of a father or a mother to society.

The economic effects are just being realized, and barring any major changes in immigration policy, it will likely extend far beyond weighing down an inefficient health care system. Competent older workers are the most valuable people in our economy. Think about how their loss will have idiosyncratic effects in every industry in the economy.

I can’t help but suspect that the world will have a new feel to it. Maybe this is just because I’m in my mid-20’s and I’ll be experiencing that world in the fullest. But I suspect that the election of Obama is merely our first taste of the world after baby boomers. I suspect that there have been cultural shifts and movements that have been stifled because society has disproportionally more older people, who carry much more economic weight. I wonder whether our economic growth in previous decades was fueled by the disproportional size of the baby boomer generation. I wonder whether we’ll still be one of the wealthiest countries in the world. I suspect that the we’ll become even more technology and internet-oriented.

I think part of it might be a little like the shift from Microsoft to Apple. See, a few years ago my mom bought an iPod, and she still can’t figure it out, this following multiple lengthy lessons from myself. But that’s understandable, because iTunes originally made the most sense for people with large CD or digital music collections. Nonetheless, Apple has become one of the world's largest tech companies in spite of all the people like my mom who aren’t attracted to it. Just imagine what the world will look like when everyone can use an iPod.

Maybe we were all so amazed that we elected a black president that we didn’t catch onto this. But in retrospect it’s obvious: Barack Obama is the first president to be elected by primarily non baby-boomers. It’s not just that lots of young people supported him – young people have always leaned liberal – it’s that those people finally outweighed enough other people. Looming large is the question: what will the post-baby boomer world look like?.


Media (in order of appearance)

Photo: (1) Rev. Jesse Jackson in tears, 11/05/2008, by Andrew Mager; (2) Richard Nixon in the Oval Office, 1972; (3) BlackAppleLogo, 07/25/2008, Ken Fager; (4) Crowds on 18th Street - 2009 Presidential Inauguration, 01/20/2009, by Agnostic Preachers Kid; (5) Obama Poster Painted on Brick..., 05/03/2008, by Hattie Page.

Video: (1) Music video, 05/28/2008, Penguuinz, of the song "The Long Day is Over", by Norah Jones, from her 2002 album Come Away with Me.
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Tuesday, January 20, 2009

Lateral Transmissions

Dog-breeding, the colors of pigeons, beaver dams, and beehives. These were culled from the wide array of examples Darwin uses to propose evolution by means of natural selection. Typical of former renaissance writers, Darwin wrote with long sentences and erred on the side verbosity. In order to get into his work, you have to slow your mind and get it into a certain flow. Similar to many great writers, his volumes of work now might seem to the modern reader overbearing and archaic, overweighed by infinite trivial examples. But on the contrary, his examples demonstrate how evolution is all around us, in the everyday and in the mundane. And furthermore, where was Darwin supposed to start?

You see, since reading Robert Pirsig, I’ve become absolutely hung up on this notion of lateral truths. We often try to construct our lives in order to move straight forward, but Pirsig argued that there’s more to be gained from lateral movement. The movement straightforward, he argues, simply produces more and more things – be it facts or products – atop a weak edifice of previous things. Whereas lateral movement seeks to strengthen such edifices before going forward. I think that’s why I’ve been hesitant to write about the same topics both across blog posts and within them. Unfortunately I often stop and stutter in my writing, both in the typing and in my thoughts, going back and forth and checking my ideas in various ways. I apologize for any inconvenience, as it's anything but convenient for myself. But the point is that it’s not about adding on top, it’s about consolidating seemingly disconnected pieces across a wide array of phenomena. That’s where my mind seems to be gravitating so that's where I'll go.

Darwin began his scientific career as a barnacle expert, supposedly based on the advice that in order make any scientific contribution to the world you have to narrow your focus. He was heavily influenced by geologist Charles Lyell, who set forth similar principles as Darwin’s in his study of rock-formations across the world. On Darwin's formative Voyage of the Beagle, he inspected various islands and peninsulas. Supposedly Darwin brought 3 books on the trip: Lyell’s Principles of Geology, Milton’s Paradise Lost, and the bible. In piecing together The Origin of Species, he also met with dog breeders and a London-based pigeon-watching society.

When you look at all the separate pieces of evidence that yielded Darwin’s conception of evolution – of which the above are a small sample – you have to ask yourself where you don’t see evolution. It’s uncannily similar to religious arguments for the existence of God – just look around you, can’t you see that there's evidence of Him everywhere?

Darwin’s theory of evolution – and maybe even people's belief in God – both serve to consolidate seemingly disparate things. It’s atop these edifices that we’re then genuinely able to move forward for some time.

Adam Smith also had an uncanny ability to construct theory atop the seemingly mundane. In a stroke of literary genius, he began his multi-volume work by discussing pin-manufacturing in Europe. This topic would certainly seem pointless to most people, particularly ivory tower theorists, but that was exactly the point - that even in such a small everyday example, you can see the workings of the division of labor. Shakespeare achieved a similar feat of specificity in his line:
How sharper than a serpent's tooth it is
To have a thankless child (King Lear, Act I, Scene IV)

As a professor once told me, consider how that line would've fallen apart if you replaced "teeth" for "tooth". But if Smith's pin-making example was merely a rhetorical gimmick or a literary hook, then he would have dived straight into abstract theory with little or no return to the real world. Instead, Smith constantly goes back to the real world to support and test his developing ideas. And this gets at the heart of the study of economics, which is to pinpoint the wide-ranging and long-term effects of policy decisions on areas as specific as pin-making. (Pun intended, but it's not really a pun due to the shared meanings of 2 words).

Evolution and capitalism are unfortunately often discussed in platitudes as ideologies. But what I love about Darwin and Smith is that in their writings you can see their theories organically growing out of their observations of the world. Not that this makes their theories automatically correct, but it reveals an honesty that’s too often missing in intellectual discussion.

A lot of writing these days is reactionary and steeped in hatred – this is particularly the case in Karl Marx, whose writings have succeeded more as a polemic against the upper-class than an applicable economic system. Whenever I detect too much spite in a book or an editorial I get a sense that it has little to teach me. All that Darwin and Smith were reacting to was nature right in front them; Thomas Sowell has a similar honesty in his writings as well.

In a few passages in Zen & the Art of Motorcycle Maintenance, Pirsig will be talking to someone who disagrees with him, and the 1st thought that will come to my mind will be, “Oh that other person is so wrong.” This is because Pirsig builds his case so well in the book. But Pirsig will go on to say, “And in a way they were completely correct.” It’s not just another rhetoric gimmick, because in time you come to see how in that way they were completely correct. When you can see how everyone is correct in their own sense, then you can really get to the bottom of things. It harks back to using Aristotles' law of non-contradiction to your advantage. The law states: "It is impossible for the same thing to belong and not to belong at the same time to the same thing and in the same respect". What you have to realize, however, is that one person's opinion in favor of something is not the opposite as someone else's opinion against it: They're both true in their own sense, what differs is that sense. And it's that sense that you have to drag your mind to.

What I love about all these authors is that they’re not writing with an axe to grind. The benefit of reading such original sources like Darwin and Smith isn’t that they presented the perfect the version of their theories, it's that they truly saw their theory manifested throughout nature over and over and over again. They were thinking in the right sense. And in doing so, they consolidated phenomena, made the world simpler not more complex, and laid the groundwork for others to build upon. They weren’t moving up, they were trying to get to the bottom of things. There's an aesthetic appreciation for this as well; it's why repetition, used correctly, can be so powerful. Consider the role of repetition in learning or in music. Choruses in songs aren't just effective because they're good in and of themselves, they're effective because when you return to them your mind is slightly different from when it last experienced it.

This is what I’ve been trying to do recently. It recently struck me that the solution to most problems in life – be them intellectual or personal – is to stop and think to yourself, “What’s really going on here? What’s underlying the manifestation I’m seeing in front of me?” It’s a sort of analysis, or a division of labor in the mind so to speak. In my day-to-day life, when I face personal problems, I realize that my mind goes off and I forget to analyze, or I’m not analyzing correctly. Maybe I’m just over-thinking things. But it seems like the world's problems are all just due to a lack of clarity.

Ironically I realize that the last sentence may be vague, unclear. Pirsig expresses a similar sentiment when he describes an instructional manual he's saved over the years. The manual begins, "Assembly of Japanese bicycle require great peace of mind." Pirsig describes this instruction as both the best and the worst instruction he's ever seen: It contains nothing specific to putting together the bike, but it's a great, perhaps even essential, piece of advice for piecing together the bike, and in that sense, it has everything to do with putting together the bike. Pirsig goes on:
Peace of mind isn't at all superficial, really...It's the whole thing. That which produces it is good maintenance; that which disturbs it is poor maintenance. What we call workability of the machine is just an objectification of this peace of mind. The ultimate test's always your own serenity. If you don't have this when you start and maintain it while you're working you're likely to build your personal problems right into the machine itself.

So it’s not just analysis in the classical sense. Sometimes you have to ask yourself about general impressions that you get, make deductions based on them, and then follow those paths down to analysis. Like impressionistic art, you’re feeling a feeling, looking at a whole, and then diving down and asking yourself about versions of meaning. Which is why there's little to gain when at the bottom of things is an emotion like hatred, spite, or an attempt to maintain one's opinion rather than to learn about the real world, the latter of which should always be the focus. I’m sure that Darwin thought of evolution before he actively sought many of the examples in his book; it’s just that after he thought of his theory, he still kept his feet firmly planted on the ground.


Media (in order of appearance)

Photo: (1) Dauschund evolution, 01/03/2006, Colin Purrington; (2) Paloma, 06/30/2008, by Jaoa da Luna; (4) Barnacles, 01/27/2007, by Alanna@VanIsle; (5) lateral pass in football; (6) Shark tooth fossil, 08/27/2007, howzey; (7) Impression, soleil levant, 1872, by Claude Monet; (8) water lilly pads, 11/25/2005, Sarah Macmillan.

Video: Music video, 09/18/2007, gatojph4, of the song "Somthing" by The Beatles from the 1969 album
Abbey Road. Sphere: Related Content

Sunday, January 18, 2009

Healthcare: A Diseconomy of Scale

Economic recessions offer the benefit of making inefficiency more costly. During times of plenty, we can tolerate mediocre businesses or bad public policy; but during a recession they come under heavier scrutiny. This appears to be the case for medical care. The Washington Post reports that
For years a booming economy camouflaged the burden of medical debt. Patients borrowed against their homes or whipped out credit cards, including some specially designed to pay medical or dental bills. But falling house prices and tightening credit have eliminated those options for many.

It’s long been recognized that medical care in the US needs improvement, it’s just that when the economy was good we could afford its extra costs. Michael Moore’s documentary Sicko – a polemic rant about our lack of universal healthcare – was released in the summer of 2007, which was one of the decades’ most prosperous economic times. Only now, with money tight, are we forced to do something about it. An estimated 78 million baby boomer retirees are thought to further weigh down the future of medical care. However, I’ve always been baffled about the inability of our medical care system to take advantage of economies of scale.

What are economies of scale?

An economy of scale refers to the advantages a business gains from an enlarging consumer base. It’s a piece of economic jargon, but don’t let that throw you: Knowledge in modern times is heavily fragmented, so fields of study are constantly adopting new idiosyncratic jargon-terms, with the unfortunate result of often alienating outsiders and novices. Economy of scale however is one of the most valuable concepts in modern times – even outside of economics – because, by any scale of measurement, the world’s stage is getting larger. The future of truth and knowledge itself – epistemology – is likely to be interwoven with this principle of economy of scale.

The principle is pretty simple. At its heart is an exchange of capital for economic security. For instance, a full-time job that pays $10 an hour is often more valuable than a temp-job with erratic hours that pays $20 an hour. In accepting the full-time position, you’re trading the potential extra earnings of the temp-job for the economic security of knowing your salary for certain. Likewise, when you buy large quantities of goods, you’re guaranteeing a supplier economic security; suppliers often offer discounts in return. That’s why products at stores like Best Buy or Costco are inexpensive.

Ford’s Model T car is the classic example: By marketing the car towards the general population, Ford Motors drew in large quantities of capital, which made it cheaper for them to buy supplies and hire permanent workers. If Ford only bought enough supplies for 1 car and hired a temp to construct it, then the Model T would have been unaffordable for most people; on the other hand, if Ford mass produced the Model T and it turned out to be a flop, they’d have gone bankrupt.

The Model T was of course a hit and the investment payed off over many times. Inventors were playing around with cars long before Ford, but Ford’s ability to tap economies of scale made cars accessible to the population at large. The automobile went on to revolutionize our economy more than any other single invention. Likewise, Microsoft popularized the computer by marketing an operating system accessible to non-geeks.

Economies of scale have fueled such transformations, which would’ve been impossible without enough capital and without enough people. People – in both quantity and quality – are an economy’s best asset.

That’s why international trade sanitations against foreign nations are so harmful: When a nation is left to fend for itself it can’t take advantage of economies of scale. The harms of trade sanctions are escalated as the world population grows: If there are only half a billion people in the world, and a nation is cut off from four-fifths of them, then they’re not missing much; but if a nation is cut off from 5 billion people, then they’re missing much more.

A similar effect occurs when groups of people cut themselves off from the rest of the world in order to become “self-sufficient”. Self-sufficiency will always be difficult regardless of the world’s population, but as the world population expands, the drawbacks of self-sufficiency become more obvious. The Amish for instance weren’t so different from the original American settlers; but today their differences from mainstream America are magnified tremendously.

Self-sufficient groups such as hippie communes lack any economy of scale. In fact, you might even say that their isolation makes them anything but sufficient. It’s not just that they miss out on this or that technology, they also miss out on all the opportunity created by technology: The time saved through efficient transportation, or a PC’s computing power.

Likewise, protectionist international trade policies, or the push to make the US "independent" from foreign oil, isolate us from economies of scale. The costs of such policies often outweigh the benefits. And these costs extend beyond the extra money we're forced to pay; they retard progress as a whole.

Healthcare's "impending crisis"

…all of which is why a predication such as the the following would be a blessing to almost any industry except for medical care:
We face an impending crisis as the growing number of older patients, who are living longer with more complex health needs, increasingly outpaces the number of health care providers with the knowledge and skills to care for them capably. (CBS News, 04/2008, quoting John Rowe)

Say, for instance, we find out that, without a doubt, in 10 years, a quarter of all 18 year-olds will purchase a new MP3 player. As early as possible, Apple would plan to mass-produce more iPods at more competitive prices. As the leader of the industry, Apple’s stock would soar immediately. And as a direct result of the expected economy of scale, the price of iPods and other MP3 players would fall significantly.

But in healthcare an influx of customers is a crisis not a blessing. This maybe because health care is different: It’s a service industry, and it relies on insurance and risk. But at the same time, other service industries – such as IT support - have adapted to increasing demand. Now is in fact the best time in history for your computer to break down, since so many other people own computers. If there were only 500 other computers in the whole world, and yours broke down, you’d be SOL. Likewise for your car. Yet the point remains that health care lacks such a safety in numbers; on the contrary, it has a danger in numbers.

The problem is that advances in healthcare haven’t been applied to economies of scale. It’s like in the early 20th century, after the car was invented, but before it was mass-produced. I suspect that the difficulties in boosting health care through economies of scale are due structural inefficiencies rather than a lack of technological advancement.

Consider for instance the costs involved in becoming a doctor or in producing drugs, which include huge sums of both money and time. These costs are inevitably passed onto society at large. Additionally, anti-competitive practices such as social security and medical care leave no incentives for cost-cutting or increased efficiency. Some liberals might shiver at the prospect of business profiting from elders' health problems. But the costs of our present system are too great. Indeed, the current system benefits much more from high-cost solutions to medical problems than from low-cost solutions. Similar to trade sanctions or hippie communes, the flaws of poor healthcare policy only become more apparent as the world gets bigger.

And herein lies economies of scale’s epistemological import: As populations continue to grow, advancements in cost-effectiveness will become more important than other types of scientific or technological advancements. This is somewhat counterintuitive because we tend to think in categorical terms. Medical science seeks cures, not ways to save money. But with more people in the world, the benefits of less expensive treatments are more pronounced. It’s not just that they save lots of people lots of money, it’s that they free up lots of money for society to pursue other problems.

The debate on healthcare in America is backwards because it’s from the perspective of who should pay the bill, not how we can lower it. From the perspective of society at large, at any given moment, it doesn’t matter who pays off patients' debts – it still costs society the foregone alternatives of applying that capital elsewhere. In other words, the expensive cost of medical care will wreck havoc on society regardless of who foots the bill.

Thomas Sowell points out that modern times are unique because for the first time in history the poor and middle classes combined have more capital than the wealthy class. This is why economies of scale are important. And it’s why – if you measure time by the quantity and impact of significant events each year – time is exponentially speeding up. Unfortunately, sometimes we’re forced to advance by learning from bad policy, which can take years to start reaping rotten fruit. But properly harnessed, economies of scale will propel us into the future. We have the requisite capital, know-how, and gumption. Most importantly we have the people.


Media (in order of appearance)

Photo: (1) Crowds in Hong Kong, 12/22/2008, by LipJin Lee; (2) Costco, 12/16/2004, by Ryan Ozawa; (3) Old but not forgotten, 05/19/2008, chisdonia; (4) Life in Orange County, Indiana, 02/28/2007, by Cindy Seigle; (5) Ginza 銀座, 09/16/2006, by Nathan Duckworth; (6) Medical insignia; (7) faster than the speed of light, 12/28/2007, by Via Bulatao.

Music: Music video, 09/22/2008, from KERAKO's channel, of the song "TNT" by Tortoise from the 1998 album
TNT. Sphere: Related Content

Thursday, January 15, 2009

Keynesian Economics


Media (in order of appearance)

Video: (1) Music video of the song "Got Money" by Lil Wayne from the 2008 album Tha Carter III. Sphere: Related Content

Thursday, January 8, 2009

MW vs. Syms: There are more things to heaven and earth

It’s funny how you can think yourself into a hole. It’s especially common in analysis, which is the breakdown of a whole into its component parts. I recently did this when I was playing the addictive stock market stimulation, TMF Caps, where thousands of players rate stocks that they predict will out- or under-perform the S&P 500. You’re then awarded points based on whether your favored stocks out-perform the S&P and your un-favored ones under-perform the S&P. The next few paragraphs delve into 2 picks I made on Caps with the dual purpose of talking about the companies and then portraying my analytic rut. Then we’ll pop out and look at the nature of the rut itself.

One of my first picks was in favor of The Men’s Wearhouse (MW). MW sells discounted formal men's clothing and rents out tuxedos from hundreds of stores across the country. Here were my thoughts at the time:

Shopping is predominantly a female experience. Men’s sections at department stores are a joke. They’re at best a third the size of women’s sections and they’re always overpriced. My hunch is most men only find themselves in these stores because they’re brought in by their female counterparts. Which is fine, because expensive department stores can sell plenty of $80 ties to absently wandering men who are waiting for their women. But if a young man suddenly needs a bunch of formalwear - say, a whole new job’s worth of clothing – then he’s not going to fumble around at an overpriced department store.

Across the range of brands, prices for men’s formalwear increase exponentially. It’s not like cars, where there are plenty of discount, standard, and luxury items. Rather, the distribution of prices is heavily skewed with large price-jumps as you get just a bit fancier. On the one hand, you might expect this for any luxury good: You won’t find many cheap gold watches, because gold is expensive by nature. But at the same time, for many men, formalwear is an occupational necessity rather than a luxury.

MW is the biggest national company offering discounted men’s clothing, and this niche has a promising future. Consider 2 inescapable trends: Our economy continually shifts away from physical labor, and the baby-boomers – who are the wealthiest and most skilled workers – are retiring. The shift away from physical labor means that more occupations require men to wear suits; while retiring baby-boomers means that the remaining population will be younger and less wealthy, which makes them more likely to seek clothing discounts.

Based on this argument, I went ahead and placed my vote of confidence for MW on Caps. A few weeks and about 10 stock picks later I came across Syms (SYMS) which appealed to me for the same reason: Cheap men’s clothing. Syms is a much smaller company (with 30-some stores), and I’d frequented a local one, where the customer service was stellar. Their stores are physically bigger than MW’s, kind of like a Burlington Coat Factory but with suits instead of coats. And the store by me constantly has many ethnic minorities (both shopping and working there), which is a good sign because America is becoming less white.

But it didn’t take long for me to realize that Syms is a dreadful stock option. The stores make hardly any money and management has remained mostly in-family, to the point of concern. More disturbing were rumors about the company’s desire to go private. They delisted from the market for 4 months due to extra costs from new burdensome accounting laws, and during that time they expressed the desire to go totally private, but shareholder pressure persuaded them to reenlist. Yet just a few months after their return to the NASDAQ, they started touting the value of their real estate, and shareholders suspected that this was a ploy from the management to raise the stock's value just enough to buy it back and go private for good. Again, shareholder pressure prevented this. In response Syms’ PE ratio jumped to over 100, and it's suspiciously remained at that level for months. So in sum you have an extremely overvalued retail company, which is underhandedly more in the real-estate sector, and which is run by family management who’ve had to keep the company public against their will…and all of this is during a recession. The situation was so ugly I was compelled to vote against them on Caps (e.g., that they would under-perform the S&P).

Over the next few weeks I researched different companies and watched my score fluctuate. MW rose a bit, making it look like a nice recession-proof stock, and Syms dipped a bit, convincing me they had it in for them. However the problem was that whenever MW rose, Syms seemed to rise as well, and whenever MW fell, Syms fell as well. So when they both rose, I made points on MW but lost points on Syms; and when they both fell, I made points on Syms, but lost on MW.

Then one morning it hit me like a ton of bricks. Seriously it was a classic doh-moment, you know like an a-ha moment but for a stupid mistake: Both stocks were fluctuating in relation to general market expectations for the discounted men's clothing sector. Or perhaps more generally for the discounted clothing sector. Or just the discount retail companies. Of course. When investors were bullish on clothing retail – or even just on the retail market as a whole – both stocks went up, and when they were bearish on retail, both went down. It was to my disadvantage that both MW and Syms - in spite their differences, which appeared magnified in my analysis - were indeed such similar companies.

I’m admittedly unsure about my reasons for liking MW and disliking Syms, but I’m fairly confident about why, in combination, this was a losing proposition. Maybe it would've been obvious for more seasoned investors, but of course: It’s not a zero-sum game!

MW and Syms, although competitors in one sense, are allies in the general fight for opulence. This harks back to one of the best reasons for capitalism: It’s not a question of who gets what slice of the pie, it’s a question of the growth of the whole pie. Clearly there were larger forces at work than these 2 companies.

Sometimes it’s so easy to get bogged down in details that you forget about these overarching forces. The myth that life is a zero-sum game is commonly seen in economics, especially in arguments to redistribute wealth and in equilibrium models, but it extends beyond economics as well.

One analogous situation, which bugs the hell out of me, is the practice of awarding grades relative to students' standings in relation to each other, such that a class’ grades are based on percentiles (i.e., with a certain number of students receiving, A’s, B’s, C’s, etc). This practice automatically assumes that there is a limited amount of knowledge to be delved out among a group of students, and one student's insight into a concept is another's failure to grasp it. It further frees the professor from any responsibility to teach the subject matter, because all he’s responsible for doing is rating students relative to each other. Theoretically, the whole class can come out of a semester without any new knowledge and everything would look fine and dandy. In this system learning of true knowledge is mistaken for competition between students.

A natural extension of this system could be seen in Enron’s old semi-annual performance-review committees, where they ranked all the employees and laid off the bottom 15%. After years of doing this, the long-term result wasn’t better business but nasty cut-throat employees who tried to make their peers look bad, and who ultimately were part of taking down the company.

Competition, likewise in the free-market, occurs not so much between similar companies as it does against general market forces. Each company is fighting for the most efficient use of its necessary resources. It's telling, for instance, that Ford, GM, and Chrysler all announced that they were in trouble at the same time. Clearly these companies were hit harder from general market forces than from each other or from foreign companies.

I see people make this mistake as well in my day-to-day personal life. Like that guy with a nasty type-A personality who's always vying to get ahead or look better than his peers while he proclaims that it’s a dog-eat-dog world. Or on the highway the person who swerves right by you only to soon be stuck in traffic 3 cars ahead.

Or did you ever undertake an endeavor where no matter how hard you tried to succeed you still failed? And it’s like you come out of such an experience, and you’re running the same tape over and over your mind, trying to break it apart into smaller pieces, when perhaps it was really something bigger, or something out of view completely.

It seems like these days it’s easy to get into that sort of analytic rut in all sorts of contexts. Invariably the human mind has always been between 2 relative extremes - it’s small in relation to some things, large in relation to others – but modern science is constantly allowing us to zoom further in and to gaze further out, while more and more the hidden enigma for some things in life falls not so much at the edge of either extreme but in the ever-widening gap between them.


Media (in order of appearance)

Photo: (1)Men's Wearhouse, 02/15/2008, by AnotherSunshine; (2) reflecting (upon) empty parking lot, 07/30/2007, by Lori Greig; (3) 曼哈頓最讚的折扣店, 02/25/2007, by Tommy Ian; (4) Hemming and Hawwing, 12/01/2007, by Andy I.; (5) Times Square, 06/14/2007, by barabeke; (6) Project365 - 250, 09/09/2007, by Mike Nielson; (7) N2008-06-19_06_cesta-do-prahy, 06/25/2008, by Ma a Ra.

Video: (1) Music video of the song "Do you Realize??" by The Flaming Lips from their 2002 album Yoshimi Battles the Pink Robots.

Upcoming ideas:

  • Progress isn't linear
  • Intel vs. AMD, Apple
  • Advances in tech outstripping modes of thinking, ideas
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Sunday, January 4, 2009

Top 15 of 2008

I thought about doing one of those year-end lists (like best CDs of the year) but I'm never very in touch with what's been released any given year. And furthermore half the time I find myself amazed by old things as if they were new (like a few years ago when I discovered Marvin Gayes' 1971 R&B classic, What's Goinig On). Society has a strong preference for the new, but sometimes old ideas can seem all the more relevant. So I decided to make a list of just top stuff in my life this year. Some are ideas and areas of study while others are new media and entertainment. Think of them as influencers in my life this year. In that sense, they're all things that proved to be novel to me in 2008 (that's why you won't find the sun rising) like little surprises or discoveries for the year. And in that sense as well I hope some of them you might find novel in your life.


15. Dogs

Previously I never understood why people become so attached to them, though I never gave it much thought. But with new roommates I'm now living with a bunch of dogs and they’re a whole lot of fun like good buds. Dogs definitely make life just a bit richer.

14. The Washington Redskins

Being fully away from any form of school I’ve been able to get back into football. I enjoyed following the Skins throughout high school, but now that my mind’s a bit more matured I suddenly see there’s so much more to the game. This has become my new religion insofar as I set aside time each Sunday and think about it all week...and insofar as it’s not really a religion.

13. The Stock Market

Stock prices fluctuate in relation to demand for them not in relation to how good a company is. On a very intuitive level, this has never made sense to me, and it still doesn’t. But this year I’ve become intrigued with finding good intro books, reading about the market, researching companies, and even buying my first couple of shares. It’s essentially a mind-puzzle, a very tempered and controlled form of gambling. But boy is it intriguing. Sometimes I’ll just go to and watch the numbers change.

12. iTunes Genius

iTunes Genius is like an automated DJ who works with your digital music collection. You “play a song, click the Genius button, and iTunes creates a playlist of other songs from your library that go great together. Genius playlists help you discover songs in your library you never knew you had — and rediscover forgotten favorites.” Each song transition is tasteful and perhaps even artistic. It’s not perfect as it doesn’t recognize every song, and you can only use it for one song at a time. But its playlists really rival my own, some of which I've spent some time on. Even if you prefer to make your own mixes, you can use Genius to generate new ideas when you're stuck.
11. Motley Fool Caps

Motley Fool CAPS is an addictive stock market stimulator in which you vote on which stock picks will out- or under-perform the S&P. It’s as close as you’ll get to a true social networking community focusing on the stock market. And it’s taught me a good bit the market, both through making picks and reading others’ commentary. Tons of people use it and many stocks have thousands of predictions. For instance, Apple is currently the most frequently rated stock with 19,512 members for it and 1,593 members against it. TMF collects the data to generate all sorts of stats on players and stocks. It's only been around since 2006, and they're constantly tweaking it for the better. No one is even sure yet how it’ll turn out: Will it provide accurate real-world predictions? Will the highest rated stocks win out in the long run? In the meanwhile though who cares because it’s more fun than real investing.

10. Good cappuccinos

I’m not one to make elite aesthetic distinctions – they're often just puffs of ego and semantics. But this year a friend introduced me to a coffee shop that makes “real” cappuccinos and boy what a difference. Ones that look like this:

Cappuccinos are supposed to be thick and made with whole milk. The whole point in adding milk is so the dairy fat can bring out the flavor of the coffee. I'm hooked, and Starbucks' – who recently made skim milk their default for cappuccinos – now taste pretty empty to me.

9. combines critics' reviews on any given movie, music album, video game, or TV show. Each item gets a combined score across all critics, similar to rottentomatoes but with more media and a more user-friendly layout. I’ll often check it out before – and sometimes after – seeing or purchasing related media. The service is topnotch, since being bought by CBS, who've supplied it with more than adequate bandwidth, better quality control, and new features.

8. Coldplay’s album Viva la Vida

Like a revelation unfolded in sound. The collaboration between Coldplay and producer(/ambient maestro) Brian Eno worked perfectly. Coldplay and Eno are each intellectual aurally-aware introverts – sometimes to a fault – but here they build off each other quite well.

7. Improv acting classes

A few months ago I capriciously decided to give improv acting classes a try, as inspired through this article at CNN. It's taught me some unique life lessons, which I wrote about previously, but moreso it’s just a great release.

6. Slumdog Millionaire

The world is getting more connected, and we could only go on for so long before some artsy director pondered "why not make an American version of a Bollywood film?", and Slumdog Millionaire is the glorified result. An intense journey through the deepest reaches of poverty and fantasy, it’s the sort of film that could only have been released – or made money – this decade. Americans are truly getting smarter with each passing generation. Movies like Slumdog Millionaire or the Dark Knight are too complex and edgy to have been widely accepted a couple of decades ago. I loved them. We’re demanding more from pop-culture Mecca’s like Hollywood, and they’re giving us the goods. For more see Steven Johnson’s book Everything Bad Is Good for You: How Today's Popular Culture Is Actually Making Us Smarter. Check out Slumdog's soundtrack as well.

5. iTunes audio-books

I enjoy music and my iPod gives me freedom to listen to it anywhere. But I’ve recently begun digging iTunes’ audio-books as much as its music. At first I thought that I’d rather just listen to my favorite tunes everywhere and get into a groove. But audio-books have slipped into my daily iPod use with surprising ease. Just be sure to pick ones that aren’t too complex to listen to on the go. For example, an audio version of Newton’s Principia Mathematica won't work.

4. New Balance motion control sneakers

A few months ago I decided to give these shoes a go. They're called motion control shoes, because they have extra support around the arch in order to force your foot into correct pronation. They’ve completely corrected my posture, solved a running injury that I’ve had for years, and allowed me to run again. Who would’ve thought? The New Balance store by me has exceptional customer service as well, far exceeding similar high-end running shoe stores that I tried.

"Graphite Rollbar® is a boomeranging positioned piece of graphite in the midsole which maximizes rearfoot stability. Rollbar can be combined with a TPU medial and/or lateral post for motion control."
3. Economics

Economics suddenly intrigues me to no end. I don’t know what it is, but this topic seems to pervade everything. This year I’ve spent some time trying to finding the right books to teach myself about economics, and so far my picks have exceeded my expectations. Among the top is Thomas Sowell’s Basic Economics.

2. Sleep

This year I’ve reached new plateaus in how good my sleep feels. Wrote Vladimir Nabokov, “Sleep is a rose the Persians say.” (For more see a previous post).

1. Robert Pirsig's Zen & the art of Motorcycle Maintenance

I've returned to this book for the first time since a teen and it hits the spot like a popsicle on a hot day. I first read it a decade ago but it seems so much more relevant now. You can feel yourself learning with each page. And I even see how its lessons – which I’d forgotten explicitly came from the book – left their mark on my thinking since I was teenager, such as: the importance of analysis, both regarding its benefits and limits; the notion of honest work; quality and gumption; the limits of ego, opinion, and rigid-thinking. Other lessons are particularly relevant to my life now: the notion of moving laterally in life instead of forward; that roadblocks in life or in the mind are equally or more important than success; the severe limits of the empirical sciences. His discussion on lateral movement is exactly what I find so fascinating about free markets and alternative uses of scarce resources. But the book's reach extends far beyond.

Media (in order of appearance):

Photo: (1) Jason Taylor, 08/16/2008, jf; (2) iTunes Genius logo; (3) CAPPUCCINO, 07/22/2007, by kina3; (4) Movie poster from the 2008 film Slumdog Millionaire, fair use rationale to provide commentary on film; (5) 365/365: Audiobooks, 01/09/2008, by David D Muir; (6) New Balance motion control technology; (7) Cover from Pirsig's Zen and the Art of Motorcycle Maintenance.

Video: (1) Music video from caleismachinegun of the song "Lost" by Coldplay from the 2008 album Viva La Vida.
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