Things I wish I had time to write about -- the growth fetish

Felix Salmon has an excellent post that uses Bain as a jumping off point to raise points like this:

Private equity is by no means unique in this respect: it happens at pretty much every public company, too. John Gapper, today, has a column about the way it destroys values at struggling technology companies:

Most public companies are run by people who hate folding ’em, and instead keep returning to the shareholders and bondholders for more chips…

Few senior executives, when debating options for a technology company in decline, admit defeat and run it modestly. Instead, they cast around for businesses to buy, or try to hurdle the chasm with what they have got. Sometimes they succeed but often they don’t, wasting a lot of money along the way.

It goes against their instincts to concede that the odds are so stacked against them that it is not worth the gamble. Mr Perez would have faced a hostile audience if he’d admitted it to the citizens of Rochester, Kodak’s company town in New York, but its investors would have benefited.

At many companies, then, both public and private, the optimal course of action is a modest one — run the business so that it makes a reasonable profit, and can continue to operate indefinitely. If you chase after growth, you often end up in bankruptcy: that’s one reason why the oldest companies in the world are all family-run. Families, unlike public companies or private-equity shops, don’t need growth: they’re more interested in looking after their business over the very, very long run.

If I had time, I'd really like to explore the connection between this and an earlier OE post on the growth fetish:

It's obvious that our economy is suffering from a lack of growth but for a while now I've come to suspect that in a more limited but still dangerous sense we also overvalue growth and that this bias has distorted the market and sometimes encouraged executives to pursue suboptimal strategies (such as Border's attempt to expand into the British market).

Think of it this way, if we ignore all those questions about stakeholders and the larger impact of a company, you can boil the value of a business down to a single scalar: just take the profits over the lifetime of a company and apply an appropriate discount function (not trivial but certainly doable). The goal of a company's management is to maximize this number and the goal of the market is to assign a price to the company that accurately reflects that number.

The first part of the hypothesis is that there are different possible growth curves associated with a business and, ignoring the unlikely possibility of a tie, there is a particular curve that optimizes profits for a particular business. In other words, some companies are better off growing rapidly; some are better off with slow or deferred growth; some are better off simply staying at the same level; and some are better off being allowed to slowly contract.

It's not difficult to come up with examples of ill-conceived expansions. Growth almost always entails numerous risks for an established company. Costs increase and generally debt does as well. Scalability is usually a concern. And perhaps most importantly, growth usually entails moving into an area where you probably don't know what the hell you're doing. I recall Peter Lynch (certainly a fan of growth stocks) warning investors to put off buying into chains until the businesses had demonstrated the ability to set up successful operations in other cities.

But the idea of getting in on a fast-growing company is still tremendously attractive, appealing enough to unduly influence people's judgement (and no, I don't see any reason to mangle a sentence just to keep an infinitive in one piece). For reasons that merit a post of their own (GE will be mentioned), that natural bias toward growth companies has metastasised into a pervasive fetish.

This bias does more than inflate the prices of certain stocks; it pressures people running companies to make all sorts of bad decisions from moving into markets where you don't belong (Borders) to pumping up market share with unprofitable customers (Groupon) to overpaying for acquisitions (too many examples to mention).

As mentioned before we need to speed up the growth of our economy, but those pro-growth policies have to start with a realistic vision of how business works and a reasonable expectation of what we can expect growth to do (not, for example, to alleviate the need for more saving and a good social safety net). Fantasies of easy and unlimited wealth are part of what got us into this mess. They certainly aren't going to help us get out of it.

Things I wish I had time to write about -- the future that was

Check out this fascinating series of predictions from the Saturday Evening Post circa 1900:

Photographs will reproduce all of nature’s colors… [They will be transmitted] from any distance. If there be a battle in China a hundred years hence, snapshots of its most striking events will be published in the newspapers an hour later.

Wireless telephone and telegraph circuits will span the world. A husband in the middle of the Atlantic will be able to converse with his wife sitting in her boudoir in Chicago. We will be able to telephone to China quite as readily as we now talk from New York to Brooklyn.

Man will see around the world. Persons and things of all kinds will be brought within focus of cameras connected electrically with screens at opposite ends of circuits, thousands of miles at a span.

Rising early to build the furnace fire will be a task of the olden times. Homes will have no chimneys, because no smoke will be created within their walls.

Refrigerators will keep great quantities of food fresh for long intervals.

Fast-flying refrigerators on land and sea will bring delicious fruits from the tropics and southern temperate zone within a few days. The farmers of South America… whose seasons are directly opposite to ours, will thus supply us in winter with fresh summer foods which cannot be grown here.

Once again a knowledge of obscure pop culture saves the day

Impressionist Will Jordan used to do a routine built around the idea of a threat, an actor kept under contract because of a resemblance to one of the studio's stars. The point of a threat was two-fold: to give the studios a ready replacement if a star dropped out and to let the stars know that they could be replaced.

I was reminded of threats when I came across this section of Felix Salmon's latest instalment of the adventures of Ben Stein:

But my favorite bit of the complaint is where he complains that the ad which did end up running, featuring Peter Morici, is “an explicit misappropriation of Ben Stein’s likeness and persona, which is an explicit violation of Ben Stein’s rights of privacy and of publicity, barred by California law”.

In other words, this ad, while it might look to all the world as though it features a real economist who’s much more qualified on such matters than Ben Stein, is in fact an illegal violation of Ben Stein’s privacy, which uses the likeness of Ben Stein. Maybe Stein thinks that Morici should wear a long blonde wig, or something, to make him look less Stein-esque?

According to most science fiction shows, androids of the future should have no problem with "seven minutes"

Nice Observation

This post was hoisted from the comments in Megan McArdle's website and it makes a point that we often forget: the eventual chance of death is 100% and the hazard of death is tightly associated with how long you have lived so far.  Once you make it out of childhood, many people live their 20's and 30's free of serious health concerns.  It's not atypical to find such people, at least.  One the other hand, how common is it for 80 year olds to not have at least one health issue that effects either risk of death or quality of life?

With this special offer, you can watch the Super Bowl on your laptop absolutely for free!!

Well, free is a small stretch. You will need an HDTV tuner stick, but those are cheap (you can probably find one for thirty and change) and most come with a small but surprisingly effective antenna. Plug it into your USB port and you're good to go.

I recently heard a technology reporter talking about how big it would be when someone finally figured out a commercially viable way for people to watch the Super Bowl on their computers. It struck me as a perfect ddulite moment, gushing over an anticipated technology while ignoring an existing one that had all the same essential features.

This tendency to prefer next year's toy to this year's tool is one of the ddulites' costliest traits because it leaves good, useful technology under-recognized and under-utilized. Waiting for the next big thing (like hydrogen fuel-cells or geo-engineering) can cause us to put off implementing existing technologies (plug-in hybrids, ground-source heating and cooling, etc.).

What I don't like about this graph

Don't get me wrong. This Wikipedia graph carries a lot of information -- I use it all the time -- but there's a counter-intuitive quality about it that bothers me and I have no idea how to fix it.

The problem is that changes in the x-axis mean more or less the opposite of changes in the y-axis. Smaller intervals between new laws and larger jumps in duration both indicate increased copyright protection.

This wouldn't be a problem if we were plotting these with a line -- with lines we're used to thinking in terms of slope -- but here the natural impulse is to think in terms of area, thus making the 1976 and 1998 laws look like fairly minor changes.

One more complaint, all but one of the states had copyright laws before 1790 so the law passed that year was more of a formalization than an extension. For most of the states, there was a period of almost fifty years without a major extension. The twenty-two year interval before the 1998 act really was exceptionally short.

Intellectual property and business life-cycles

A while back, we had a post arguing that long extensions for copyrights don't seem to produce increased value in properties created after the extension, but what about the costs of an extension? And who pays it?

New/small media companies tend to make extensive use of the public domain (often entailing a rather liberal reading of the 'public' part). The public domain allows a company with limited resources to quickly and cheaply come up with a marketable line of products which can sustain the company until it can generate a sufficient number of original, established properties.

Many major media companies have gotten their start mining the public domain, none more humbly than Fawcett. At its height, the company had magazines that peaked at a combined circulation of ten million a month in newsstand sales, comics that outsold Superman, and the legendary Gold Medal line of paperbacks. All of this started with a cheaply printed joke magazine called Captain Billy's Whiz Bang


Of course, Wilford Fawcett couldn't have reimbursed the unknown authors of those jokes even if he had wanted to. Disney, on the other hand, built its first success on a a title that was arguably still under copyright.

Mickey had been Disney's biggest hit but he wasn't their first. The studio had established itself with a series of comedies in the early Twenties about a live-action little girl named Alice who found herself in an animated wonderland. In case anyone missed the connection, the debut was actually called "Alice's Wonderland." The Alice Comedies were the series that allowed Disney to leave Kansas and set up his Hollywood studio.

For context, Lewis Carroll published the Alice books, Wonderland and Through the Looking Glass, in 1865 and 1871 and died in 1898. Even under the law that preceded the Mouse Protection Act, Alice would have been the property of Carroll's estate and "Alice's Wonderland" was a far more clear-cut example of infringement than were many of the cases Disney has pursued over the years.

In other words, if present laws and attitudes about intellectual property had been around in the Twenties, the company that lobbied hardest for them might never have existed.

Another company that went from near bankruptcy to media powerhouse was a third tier comics publisher that had finally settled on the name Marvel. The company's turnaround is the stuff of a great case study (though MBA candidates should be warned, Stan Lee's memoirs can be slightly less credible than his comics). Not surprisingly, one element of that turnaround was a loose reading of copyright laws.

Comic book writer and historian Don Markstein has some examples:

Comic book publisher Martin Goodman was no respecter of the property rights of his defunct colleagues. In 1964, he appropriated the name of a superhero published in the '40s by Lev Gleason, and brought out his own version of Daredevil. A couple of years later, he introduced an outright copy of a '50s western character published by Magazine Enterprises, Ghost Rider. It wasn't until late 1967, possibly prompted by a smaller publisher's attempt to do the same, that he finally got around to stealing the name of one of the most prominent comics heroes of all time, Captain Marvel. And this delay was odd, because the name of Goodman's company was (and remains) Marvel Comics."

(That would, by the way, be Fawcett's Captain Marvel so what goes around...)

(Fans of fantasy art should find the covers of the old Ghost Rider familiar)




This is how how media companies start. A small music label fills out a CD with a few folk songs. An independent movie company comes up with a low-budget Poe project. An unaffiliated television station runs a late night horror show with public domain films like Little Shop of Horrors and Night of the Living Dead. Then, with the payroll met and some money in the bank, these companies start getting more ambitious.

Expansion of the public domain is creative destruction at its most productive. Not only does it clear the way for new work; it actually provides the building blocks.

Behavioral Economics for Firms

On Friday I read this piece by Karl Smith on Apple and this piece by Matt Yglesias on Barnes and Noble.  I was struck by how both of these examples showed firms actually in the best interest of the executive (who get perks from working at the firm) and not the shareholders (who want to maximize return on investment).

I wonder if there is a limit to how well firms adhere to economic models>  We already have decent evidence that people don't necessarily respond rationally (or else why would they buy Apple shares?).  But the executives in the company create a principal agent problem, which may also cause issues at the level of the company itself.

This is not to knock economic models.  Epidemiology has many of the same limitations and we have to rely on some pretty challenging assumptions.  Rather it is to be careful, with any model, to recall the limitations and exceptions inherent in modeling a complex process.

Astronauts and aquanauts

I don't want to push this analogy too far (there are important differences) , but this NPR story got me to thinking about the exploration of the oceans and the exploration of space.

To take the pictures, researchers deployed a tethered robot from their research ship. About the size of a four-wheel-drive truck, the robot was outfitted with an array of high-definition video cameras and still cameras. The researchers would watch a bank of screens of pictures that the robot beamed up from the seabed.

Fifty years ago, exploring the oceans meant sending down manned bathyspheres and bathyscaphes and establishing undersea habitats like SEALAB and Tektite. Now exploration is done pretty much entirely by tethered robots and remote-controlled submersibles. For other than military purposes, manned deep water vehicles seem to have almost disappeared. Based on a good fifteen minutes on Wikipedia, it appears that serious bathyscaphe-based research ended with the Sixties. (the record for deepest dive has stood since 1960.)


We've all gotten used to the idea of exploring the oceans through a video screen rather than a portal and it's been ages since I've heard anyone talk about colonizing the seas. The cold, hard economic fact is that in extreme environments, machines can do more, and do it more cheaply than humans. That holds for space exploration as well.

It is possible to argue for manned exploration programs but those arguments invariably have to come down to a question, not of science, but of intangibles like what we want to accomplish as a nation. I'm actually sympathetic to these arguments but they have to be made in these terms. This really is something you do not because it's easy but because it's hard.

Stock Markets and Beta

Regular readers will know that I have a pet interest in personal finance.  One thing that I have thought a lot about is the contrast between structured saving vehicles (like the 401(k)) and government pension plans (like the Canadian Pension Plan).  One worry that I have had about government pension plans is that they seem to be under attack when times are bad (thus bearing political risk).  However, the last 12 years seem to suggest that it has not been a good time to invest in the stock market:

This means that historically, the stock market more than doubles your money in real terms every 12 years, but over the last 12 years, it’s down 20%.

That is a great deal of risk to bear as an individual investor.  Leaving the market in 1999 and purchasing an annuity (leaving the job market 12 years early) would produce a better retirement than saving for an additional 12 years.

Now add in the losses due to management fees and it can be a tough slog to put together a retirement account. Of course, you can't easily avoid the management fees as taxes are worse than these fees (which mostly seem to be a rather substantial subsidy to wall street).  So saving in personal accounts is also hard.

That leaves two possibilities -- a entity that can smooth out risk over decades (e.g. a government) or simply making more income.  Since it is not trivial to generate large pay increases, the former does seem like the only realistic way to mitigate time period risk for retirement.

Or am I missing something?

Doing something for non-traditional students

A few years ago I did a stint as an instructor at a large state school (fun work, terrible pay). Most semesters I taught at least one night course which meant lots of non-traditional students. They always impressed the hell out of me. Most were working full time jobs, many had kids to take care of, but somehow they always were the ones who got all their homework in, showed up for study sessions and managed to maintain the best attitudes.

I always felt that the university was not serving these students well, that we should have been finding ways to work around their schedules to make their lives easier and the path to graduation quicker. With that in mind, I liked a lot of what I heard in this NPR report on Western Governors University, a nonprofit online school designed to help adult students finish college.

Shackleford can also keep her costs down by finishing her coursework early. The average time to get a degree at Western Governors is much shorter than at a typical school, where students have to put in a set amount of "seat time."

But the truly unusual thing about this computer-driven system is that it provides a lot of one-on-one attention. Throughout her time at Western Governors, Shackleford will have her own personal student mentor — a combination guidance counselor, career coach and best buddy.

Shackleford has never met her mentor in the flesh, even though she lives about 90 minutes away, just north of Indianapolis. Her name is Stormi Brake, and she also works out of her home office, in a house filled with kids and pets.

When I show up for a visit, Brake is wearing a headset and talking on the phone with one of her 90 students. She is organized and energetic, jumping from student to student to head off any problems. She tracks their progress on a computer dashboard the school uses. She shows me that students who are completing required tasks on schedule show up in green, while those who are behind show up in red, a sign that the mentor needs to get in touch.

Brake has a strong background in science and teaching, but her job is to make sure her students get their degree. Students with questions about course content can turn to another kind of mentor — a course mentor — who's considered an expert on the subject.

Cash for Citations

Mark sent me this piece entitled Cash for Citations?. The title was a bit misleading when you click though and read the actual offer:

An astronomer at King Abdulaziz University (KAU) in Jeddah, Saudi Arabia, was offering him a contract for an adjunct professorship that would pay $72,000 a year. Kirshner, an astrophysicist at Harvard University, would be expected to supervise a research group at KAU and spend a week or two a year on KAU’s campus, but that requirement was flexible, the person making the offer wrote in the e-mail.

I am actually not sure that this rises to the level of a "scam" by modern standards.  The professor would, after all, work with the students at KAU and be residential for at least part of the year.  Sure, the salary is a bit high for two weeks worth of work but access to a top researcher can be worth a lot if he contributed remotely.  To rise to the level of an actual scam, the flexible requirement would have to be negotiable to no duties.

Now, the concern is that the astronomer would have to list the KAU affiliation on all of their papers.  On the other hand, if they are a salaried adjunct professor then that would actually be pretty normal.  Several of my colleagues have positions cobbled together from multiple places and the requisite need to list multiple affiliations.

The real issue is the ability of universities to purchase reputations.  It has long been true that extremely gifted and creative researchers have better employment options at least partially because of the prestige they bring to the hiring institution.  In a world with flexible work locations (consider MITx), these issues are likely to become larger over time.

But the idea of "cash for citations" is really a salary for research productivity.  The real question is how residential does a professor need to be to count as affiliated.

The sum of all fears = 183

Seeing the world from other perspectives is a good way to start the new year. With that in mind you should pony up the dollar for a download of this episode of This American Life. All its segments were strong, but for me the most affecting was the second act. It revolves around a reading from a book by a developmentally disabled man named Michael Bernard Loggins (published with the help of a remarkable arts program called Creativity Explored).

The book consists of a list of fears, in no apparent order, ranging from the trivial (needles) to the profound (a mother dying). The fears are specific and provide distinct glimpses into Michael's life, but they're universal at the same time; though the details may be different, Michael's fears are our fears.

This really is a powerful piece of writing, beautifully presented by This American Life and actor Tom Wright. You should definitely take the time to check it out and perhaps make a small contribution to TAL or Creativity Explored.

That's also a good way to start the new year.

Yes, another talking baby video, now with informed commentary

This is actually the first half of the conversation. They both come from a blog called Twin Mama Rama and they've generated quite a bit of discussion. I found these two particularly interesting:

Hope Dickinson, MS, CCC-SLP, coordinator of the Speech-Language Pathology Services at Children’s Hospital Boston at Waltham.

These two are babbling, specifically they’re demonstrating a behavior known as “reduplicated babbling,” because the sounds used are repeated, which you can hear in their use of “da-da-da.” In a more informal way, I guess I would describe it as turn-taking with babbling, or conversational babbling.

Play talk is a healthy way for kids to develop language skills

...

It really demonstrates how very young children communicate and know how a conversation works, even before they have the words to use. They will eventually begin to replace the babbling strings with words. If you listen closely, you’ll even hear a couple of words: One says “mama” when looking at the camera, and one or both say “up” more than once when picking up a foot.

One thing they are using wonderfully is turn taking, as in first one “talks” and then pauses and the other responds. They are also imitating the various intonations we use in conversation and speaking. There is fantastic rise and fall to their pitch and tones. Sentences or exclamations end loudly and emphatically, and there is also some questioning (rising) intonation. They are using gestures to supplement their talking, much like adults do. Their body distance is even very appropriate for most Americans; not too close, but not too far either.

And from the New York Times:

“Some people believe twins have the ability to generate their own detailed language, a twin language, but it doesn’t seem to be true in terms of a fully developed language system,’’ said Stephen Camarata, professor of hearing and speech sciences at Vanderbilt University School of Medicine. “They are going back and forth and enjoying each other’s company, but they aren’t saying anything specific like ‘Hey, Mom’s videotaping us. Look at her hair.’ “

...

Dr. Camarata says the video is rich with examples of how children develop language. It’s filled with canonical babbling that sounds like speech because it uses vowels, consonants and syllables to mimic words. Although most healthy babies go through the same phase of language development, most of the time the conversation is one-sided because they are interacting primarily with parents or older siblings. What’s special about the twins’ exchange, he notes, is that each baby has a peer with whom to practice language.

“The thing that is remarkable is that they both have this intonation pattern,’’ he said. “It sounds like they are speaking, making a statement, asking a question. They are using those broader markers we use in language.”

He says it’s possible that the twins are re-enacting conversations they’ve witnessed in the family kitchen.

“Children are very clever at watching and learning from adults,’’ said Dr. Camarata. “You wonder if there hasn’t been a conversation between the husband and wife or other people in the kitchen that they are mimicking. The intonation patterns were almost certainly learned from the parents.”

Dr. Camarata said he finds the video particularly delightful given that he often works with children who have delayed speech as a result of autism or another disability. He said he hopes parents who see the video will be reminded to celebrate the amazing developmental milestones of their own children.

“Here are these children interacting with each other in a very spontaneous and unguided way, and there are a lot of rich things going on that are really cool,’’ he said. “You wonder in this day and age of people programming their child’s activities if we’re losing a little bit of that. I worry that we’re not looking for and celebrating these kinds of spontaneous things that our toddlers do that are really exciting and fun.”