Albrecht, Katherine and Liz McIntyre. Spychips. Nashville: Nelson Current, 2005. ISBN 0-452-28766-9.
Imagine a world in which every manufactured object, and even living creatures such as pets, livestock, and eventually people, had an embedded tag with a unique 96-bit code which uniquely identified it among all macroscopic objects on the planet and beyond. Further, imagine that these tiny, unobtrusive and non-invasive tags could be interrogated remotely, at a distance of up to several metres, by safe radio frequency queries which would provide power for them to transmit their identity. What could you do with this? Well, a heck of a lot. Imagine, for example, a refrigerator which sensed its entire contents, and was able to automatically place an order on the Internet for home delivery of whatever was running short, or warned you that the item you'd just picked up had passed its expiration date. Or think about breezing past the checkout counter at the Mall-Mart with a cart full of stuff without even slowing down—all of the goods would be identified by the portal at the door, and the total charged to the account designated by the tag in your customer fidelity card. When you're shopping, you could be automatically warned when you pick up a product which contains an ingredient to which you or a member of your family is allergic. And if a product is recalled, you'll be able to instantly determine whether you have one of the affected items, if your refrigerator or smart medicine cabinet hasn't already done so. The benefits just go on and on…imagine.

This is the vision of an “Internet of Things”, in which all tangible objects are, in a real sense, on-line in real-time, with their position and status updated by ubiquitous and networked sensors. This is not a utopian vision. In 1994 I sketched Unicard, a unified personal identity document, and explored its consequences; people laughed: “never happen”. But just five years later, the Auto-ID Labs were formed at MIT, dedicated to developing a far more ubiquitous identification technology. With the support of major companies such as Procter & Gamble, Philip Morris, Wal-Mart, Gillette, and IBM, and endorsement by organs of the United States government, technology has been developed and commercialised to implement tagging everything and tracking its every movement.

As I alluded to obliquely in Unicard, this has its downsides. In particular, the utter and irrevocable loss of all forms of privacy and anonymity. From the moment you enter a store, or your workplace, or any public space, you are tracked. When you pick up a product, the amount of time you look at it before placing it in your shopping cart or returning it to the shelf is recorded (and don't even think about leaving the store without paying for it and having it logged to your purchases!). Did you pick the bargain product? Well, you'll soon be getting junk mail and electronic coupons on your mobile phone promoting the premium alternative with a higher profit margin to the retailer. Walk down the street, and any miscreant with a portable tag reader can “frisk” you without your knowledge, determining the contents of your wallet, purse, and shopping bag, and whether you're wearing a watch worth snatching. And even when you discard a product, that's a public event: garbage voyeurs can drive down the street and correlate what you throw out by the tags of items in your trash and the tags on the trashbags they're in.

“But we don't intend to do any of that”, the proponents of radio frequency identification (RFID) protest. And perhaps they don't, but if it is possible and the data are collected, who knows what will be done with it in the future, particularly by governments already installing surveillance cameras everywhere. If they don't have the data, they can't abuse them; if they do, they may; who do you trust with a complete record of everywhere you go, and everything you buy, sell, own, wear, carry, and discard?

This book presents, in a form that non-specialists can understand, the RFID-enabled future which manufacturers, retailers, marketers, academics, and government are co-operating to foist upon their consumers, clients, marks, coerced patrons, and subjects respectively. It is not a pretty picture. Regrettably, this book could be much better than it is. It's written in a kind of breathy muckraking rant style, with numerous paragraphs like (p. 105):

Yes, you read that right, they plan to sell data on our trash. Of course. We should have known that BellSouth was just another megacorporation waiting in the wings to swoop down on the data revealed once its fellow corporate cronies spychip the world.
I mean, I agree entirely with the message of this book, having warned of modest steps in that direction eleven years before its publication, but prose like this makes me feel like I'm driving down the road in a 1964 Vance Packard getting all righteously indignant about things we'd be better advised to coldly and deliberately draw our plans against. This shouldn't be so difficult, in principle: polls show that once people grasp the potential invasion of privacy possible with RFID, between 2/3 and 3/4 oppose it. The problem is that it's being deployed via stealth, starting with bulk pallets in the supply chain and, once proven there, migrated down to the individual product level.

Visibility is a precious thing, and one of the most insidious properties of RFID tags is their very invisibility. Is there a remotely-powered transponder sandwiched into the sole of your shoe, linked to the credit card number and identity you used to buy it, which “phones home” every time you walk near a sensor which activates it? Who knows? See how the paranoia sets in? But it isn't paranoia if they're really out to get you. And they are—for our own good, naturally, and for the children, as always.

In the absence of a policy fix for this (and the extreme unlikelihood of any such being adopted given the natural alliance of business and the state in tracking every move of their customers/subjects), one extremely handy technical fix would be a broadband, perhaps software radio, which listened on the frequency bands used by RFID tag readers and snooped on the transmissions of tags back to them. Passing the data stream to a package like RFDUMP would allow decoding the visible information in the RFID tags which were detected. First of all, this would allow people to know if they were carrying RFID tagged products unbeknownst to them. Second, a portable sniffer connected to a PDA would identify tagged products in stores, which clients could take to customer service desks and ask to be returned to the shelves because they were unacceptable for privacy reasons. After this happens several tens of thousands of times, it may have an impact, given the razor-thin margins in retailing. Finally, there are “active measures”. These RFID tags have large antennas which are connected to a super-cheap and hence fragile chip. Once we know the frequency it's talking on, why we could…. But you can work out the rest, and since these are all unlicensed radio bands, there may be nothing wrong with striking an electromagnetic blow for privacy.

Don't you put,
your tag on me!

November 2007 Permalink

Alinsky, Saul D. Rules for Radicals. New York: Random House, 1971. ISBN 0-679-72113-4.
Ignore the title. Apart from the last two chapters, which are dated, there is remarkably little ideology here and a wealth of wisdom directly applicable to anybody trying to accomplish something in the real world, entrepreneurs and Open Source software project leaders as well as social and political activists. Alinsky's unrelenting pragmatism and opportunism are a healthy antidote to the compulsive quest for purity which so often ensnares the idealistic in such endeavours.

February 2004 Permalink

Barnum, Phineas T. Art of Money Getting. Bedford, Massachusetts: Applewood Books, [1880] 1999. ISBN 1-55709-494-2.
Now available online at this site.

December 2001 Permalink

Bernstein, Peter L. Against the Gods. New York: John Wiley & Sons, [1996] 1998. ISBN 978-0-471-29563-1.
I do not use the work “masterpiece” lightly, but this is what we have here. What distinguishes the modern epoch from all of the centuries during which humans identical to us trod this Earth? The author, a distinguished and erudite analyst and participant in the securities markets over his long career, argues that one essential invention of the modern era, enabling the vast expansion of economic activity and production of wealth in Western civilisation, is the ability to comprehend, quantify, and ultimately mitigate risk, either by commingling independent risks (as does insurance), or by laying risk off from those who would otherwise bear it onto speculators willing to assume it in the interest of financial gains (for example, futures, options, and other financial derivatives). If, as in the classical world, everyone bears the entire risk of any undertaking, then all market players will be risk-averse for fear of ruin. But if risk can be shared, then the society as a whole will be willing to run more risks, and it is risks voluntarily assumed which ultimately lead (after the inevitable losses) to net gain for all.

So curious and counterintuitive are the notions associated with risk that understanding them took centuries. The ancients, who made such progress in geometry and other difficult fields of mathematics, were, while avid players of games of chance, inclined to attribute the outcome to the will of the Gods. It was not until the Enlightenment that thinkers such as Pascal, Cardano, the many Bernoullis, and others worked out the laws of probability, bringing the inherent randomness of games of chance into a framework which predicted the outcome, not of any given event—that was unknowable in principle, but the result of a large number of plays with arbitrary precision as the number of trials increased. Next was the understanding of the importance of uncertainty in decision making. It's one thing not to know whether a coin will come up heads or tails. It's entirely another to invest in a stock and realise that however accurate your estimation of the probabilistic unknowns affecting its future (for example, the cost of raw materials), it's the “unknown unknowns” (say, overnight bankruptcy due to a rogue trader in an office half way around the world) that can really sink your investment. Finally, classical economics always assumed that participants in the market behave rationally, but they don't. Anybody who thinks their fellow humans are rational need only visit a casino or watch them purchasing lottery tickets; they are sure in the long term to lose, and yet they still line up to make the sucker bet.

Somehow, I'd gotten it into my head that this was a “history of insurance”, and as a result this book sat on my shelf quite some time before I read it. It is much, much more than that. If you have any interest at all in investing, risk management in business ventures, or in the history of probability, statistics, game theory, and investigations of human behaviour in decision making, this is an essential book. Chapter 18 is one of the clearest expositions for its length that I've read of financial derivatives and both the benefits they have for prudent investors as well as the risks they pose to the global financial system. The writing is delightful, and sources are well documented in end notes and an extensive bibliography.

August 2008 Permalink

Biggs, Barton. Wealth, War, and Wisdom. Hoboken, NJ: John Wiley & Sons, 2008. ISBN 978-0-470-22307-9.
Many people, myself included, who have followed financial markets for an extended period of time, have come to believe what may seem, to those who have not, a very curious and even mystical thing: that markets, aggregating the individual knowledge and expectations of their multitude of participants, have an uncanny way of “knowing” what the future holds. In retrospect, one can often look at a chart of broad market indices and see that the market “called” grand turning points by putting in a long-term bottom or top, even when those turning points were perceived by few if any people at the time. One of the noisiest buzzwords of the “Web 2.0” hype machine is “crowdsourcing”, yet financial markets have been doing precisely that for centuries, and in an environment in which the individual participants are not just contributing to some ratty, ephemeral Web site, but rather putting their own net worth on the line.

In this book the author, who has spent his long career as a securities analyst and hedge fund manager, and was a pioneer of investing in emerging global markets, looks at the greatest global cataclysm of the twentieth century—World War II—and explores how well financial markets in the countries involved identified the key trends and turning points in the conflict. The results persuasively support the “wisdom of the market” viewpoint and are a convincing argument that “the market knows”, even when its individual participants, media and opinion leaders, and politicians do not. Consider: the British stock market put in an all-time historic bottom in June 1940, just as Hitler toured occupied Paris and, in retrospect, Nazi expansionism in the West reached its peak. Many Britons expected a German invasion in the near future, and the Battle of Britain and the Blitz were still in the future, and yet the market rallied throughout these dark days. Somehow the market seems to have known that with the successful evacuation of the British Expeditionary Force from Dunkerque and the fall of France, the situation, however dire, was as bad as it was going to get.

In the United States, the Dow Jones Industrial Average declined throughout 1941 as war clouds darkened, fell further after Pearl Harbor and the fall of the Philippines, but put in an all-time bottom in 1942 coincident with the battles of the Coral Sea and Midway which, in retrospect, but not at the time, were seen as the key inflection point of the Pacific war. Note that at this time the U.S. was also at war with Germany and Italy but had not engaged either in a land battle, and yet somehow the market “knew” that, whatever the sacrifices to come, the darkest days were behind.

The wisdom of the markets was also apparent in the ultimate losers of the conflict, although government price-fixing and disruption of markets as things got worse obscured the message. The German CDAX index peaked precisely when the Barbarossa invasion of the Soviet Union was turned back within sight of the spires of the Kremlin. At this point the German army was intact, the Soviet breadbasket was occupied, and the Red Army was in disarray, yet somehow the market knew that this was the high point. The great defeat at Stalingrad and the roll-back of the Nazi invaders were all in the future, but despite propaganda, censorship of letters from soldiers at the front, and all the control of information a totalitarian society can employ, once again the market called the turning point. In Italy, where rampant inflation obscured nominal price indices, the inflation-adjusted BCI index put in its high at precisely the moment Mussolini made his alliance with Hitler, and it was all downhill from there, both for Italy and its stock market, despite rampant euphoria at the time. In Japan, the market was heavily manipulated by the Ministry of Finance and tight control of war news denied investors information to independently assess the war situation, but by 1943 the market had peaked in real terms and declined into a collapse thereafter.

In occupied countries, where markets were allowed to function, they provided insight into the sympathies of their participants. The French market is particularly enlightening. Clearly, the investor class was completely on-board with the German occupation and Vichy. In real terms, the market soared after the capitulation of France and peaked with the defeat at Stalingrad, then declined consistently thereafter, with only a little blip with the liberation of Paris. But then the French stock market wouldn't be French if it weren't perverse, would it?

Throughout, the author discusses how individuals living in both the winners and losers of the war could have best preserved their wealth and selves, and this is instructive for folks interested in saving their asses and assets the next time the Four Horsemen sortie from Hell's own stable. Interestingly, according to Biggs's analysis, so-called “defensive” investments such as government and top-rated corporate bonds and short-term government paper (“Treasury Bills”) performed poorly as stores of wealth in the victor countries and disastrously in the vanquished. In those societies where equity markets survived the war (obviously, this excludes those countries in Eastern Europe occupied by the Soviet Union), stocks were the best financial instrument in preserving value, although in many cases they did decline precipitously over the period of the war. How do you ride out a cataclysm like World War II? There are three key ways: diversification, diversification, and diversification. You need to diversify across financial and real assets, including (diversified) portfolios of stocks, bonds, and bills, as well as real assets such as farmland, real estate, and hard assets (gold, jewelry, etc.) for really hard times. You further need to diversify internationally: not just in the assets you own, but where you keep them. Exchange controls can come into existence with the stroke of a pen, and that offshore bank account you keep “just in case” may be all you have if the worst comes to pass. Thinking about it in that way, do you have enough there? Finally, you need to diversify your own options in the world and think about what you'd do if things really start to go South, and you need to think about it now, not then. As the author notes in the penultimate paragraph:

…the rich are almost always too complacent, because they cherish the illusion that when things start to go bad, they will have time to extricate themselves and their wealth. It never works that way. Events move much faster than anyone expects, and the barbarians are on top of you before you can escape. … It is expensive to move early, but it is far better to be early than to be late.
This is a quirky book, and not free of flaws. Biggs is a connoisseur of amusing historical anecdotes and sprinkles them throughout the text. I found them a welcome leavening of a narrative filled with human tragedy, folly, and destruction of wealth, but some may consider them a distraction and out of place. There are far more copy-editing errors in this book (including dismayingly many difficulties with the humble apostrophe) than I would expect in a Wiley main catalogue title. But that said, if you haven't discovered the wisdom of the markets for yourself, and are worried about riding out the uncertainties of what appears to be a bumpy patch ahead, this is an excellent place to start.

June 2008 Permalink

Bolchover, David. The Living Dead. Chichester, England: Capstone Publishing, 2005. ISBN 1-84112-656-X.
If you've ever worked in a large office, you may have occasionally found yourself musing, “Sure, I work hard enough, but what do all those other people do all day?” In this book, David Bolchover, whose personal work experience in two large U.K. insurance companies caused him to ask this question, investigates and comes to the conclusion, “Not very much”. Quoting statistics such as the fact that 70% of Internet pornography site accesses are during the 9 to 5 work day, and that fully one third of mid-week visitors at a large U.K. theme park are employees who called in sick at work, the author discovers that it is remarkably easy to hold down a white collar job in many large organisations while doing essentially no productive work at all—simply showing up every day and collecting paychecks. While the Internet has greatly expanded the scope of goofing off on the job (type “bored at work” into Google and you'll get in excess of sixteen million hits), it is in addition to traditional alternatives to work and, often, easier to measure. The author estimates that as many as 20% of the employees in large offices contribute essentially nothing to their employer's business—these are the “living dead” of the title. Not only are the employers of these people getting nothing for their salaries, even more tragically, the living dead themselves are wasting their entire working careers and a huge portion of their lives in numbing boredom devoid of the satisfaction of doing something worthwhile.

In large office environments, there is often so little direct visibility of productivity that somebody who either cannot do the work or simply prefers not to can fall into the cracks for an extended period of time—perhaps until retirement. The present office work environment can be thought of as a holdover from the factory jobs of the industrial revolution, but while it is immediately apparent if a machine operator or production line worker does nothing, this may not be evident for office work. (One of the reasons outsourcing may work well for companies is that it forces them to quantify the value of the contracted work, and the outsourcing companies are motivated to better measure the productivity of their staff since they represent a profit centre, as opposed to a cost centre for the company which outsources.)

Back during my blessedly brief career in the management of an organisation which grew beyond the experience base of those who founded it, I found that the only way I could get a sense for what was actually going on in the company, as opposed to what one heard in meetings and read in memoranda, was what I called “Lieutenant Columbo” management—walking around with a little notepad, sitting down with people all over the company, and asking them to explain what they really did—not what their job title said or what their department was supposed to accomplish, but how they actually spent the working day, which was often quite different from what you might have guessed. Another enlightening experience for senior management is to spend a day jacked in to the company switchboard, listening (only) to a sample of the calls coming in from the outside world. I guarantee that anybody who does this for a full working day will end up with pages of notes about things they had no idea were going on. (The same goes for product developers, who should regularly eavesdrop on customer support calls.) But as organisations become huge, the distance between management and where the work is actually done becomes so great that expedients like this cannot bridge the gap: hence the legions of living dead.

The insights in this book extend to why so many business books (some seeming like they were generated by the PowerPoint Content Wizard) are awful and what that says about the CEOs who read them, why mumbo-jumbo like “going forward, we need to grow the buy-in for leveraging our core competencies” passes for wisdom in the business world (while somebody who said something like that at the dinner table would, and should, invite a hail of cutlery and vegetables), and why so many middle managers (the indispensable NCOs of the corporate army) are so hideously bad.

I fear the author may be too sanguine about the prospects of devolving the office into a world of home-working contractors, all entrepreneurial and self-motivated. I wish that world could come into being, and I sincerely hope it does, but one worries that the inner-directed people who prosper in such an environment are the ones who are already productive even in the stultifying environment of today's office. Perhaps a “middle way” such as Jack Stack's Great Game of Business (September 2004), combined with the devolving of corporate monoliths into clusters of smaller organisations as suggested in this book may point the way to dezombifying the workplace.

If you follow this list, you know how few “business books” I read—as this book so eloquently explains, most are hideous. This is one which will open your eyes and make you think.

January 2006 Permalink

Bonanos, Christopher. Instant. New York: Princeton Architectural Press, 2012. ISBN 978-1-61689-085-8.
The second half of the twentieth century in the developed world was, in many ways, the age of immediate gratification, and no invention was as iconic of the epoch as the Polaroid instant photograph. No longer did people have to wait until a roll of film was full, take it to the drug store to be sent off to a photo lab, and then, a week or so later, see whether the irreplaceable pictures of their child's first birthday came out or were forever lost. With the introduction of Edwin Land's first Polaroid camera in 1948, only a minute elapsed between the click of the shutter and peeling off a completely developed black and white (well, initially, sepia and white, but that was fixed within two years) print. If the picture wasn't satisfactory, another shot could be taken on the spot, and pictures of special events could be immediately shared with others present—in a way, the Polaroid print was the original visual social medium: Flickr in the Fifties.

This book chronicles the history of Polaroid, which is inseparable from the life of its exceptional founder, CEO, and technological visionary, Edwin Land. Land, like other, more recent founders of technological empires, was a college drop-out (the tedium simply repelled him), whose instinct drove him to create products which other, more sensible, people considered impossible, for markets which did not exist, fulfilling needs which future customers did not remotely perceive they had, and then continuing to dazzle them with ever more amazing achievements. Polaroid in its heyday was the descendent of Thomas Edison's Menlo Park invention factory and the ancestor of Apple under Steve Jobs—a place where crazy, world-transforming ideas bubbled up and were groomed into products with a huge profit margin.

Although his technical knowledge was both broad and deep, and he spent most of his life in the laboratory or supervising research and product development, Edwin Land was anything but a nerd: he was deeply versed in the fine arts and literature, and assembled a large collection of photography (both instant and conventional) along with his 535 patents. He cultivated relationships with artists ranging from Ansel Adams to Andy Warhol and involved them in the design and evolution of Polaroid's products. Land considered basic research part of Polaroid's mission, and viewed his work on human colour perception as his most important achievement: he told a reporter in 1959, “Photography…that is something I do for a living.”

Although Polaroid produced a wide (indeed, almost bewildering) variety of cameras and film which progressed from peel-off monochrome to professional large-format positive/negative sheets to colour to all-in-one colour film packs for the SX-70 and its successors, which miraculously developed in broad daylight after being spit out by the camera, it remained, to a large extent, a one product company—entirely identified with instant photography. And, it was not only a one product company (something with which this scrivener has some acquaintance), but a one genius company, where the entire technical direction and product strategy resided in the braincase of a single individual. This has its risks, and when the stock was flying high there was no shortage of sceptical analysts on Wall Street who pointed them out.

And then slowly, painfully, it all fell back to Earth. In 1977, Land's long-time dream of instant motion pictures was launched on the market as Polavision. The company had expended years and on the order of half a billion dollars in developing a system which produced three minute silent movies which were grainy and murky. This was launched just at the time video cassette recorders were coming onto the market, which could record and replay full television programs with sound, using inexpensive tapes which could be re-recorded. Polavision sales were dismal, and the product was discontinued two years later. In 1976, Kodak launched their own instant camera line, which cut into Polaroid's sales and set off a patent litigation battle which would last more than fourteen years and cause Polaroid to focus on the past and defending its market share rather than innovation.

Now that everybody has instant photography in the form of digital cameras and mobile telephones, all without the need of miracle chemistry, breakthrough optics, or costly film packs, you might conclude that Polaroid, like Kodak, was done in by digital. The reality is somewhat more complicated. What undermined Polaroid's business model was not digital photography, which emerged only after the company was already steep in decline, but the advent of the one hour minilab and inexpensive, highly automated, and small point-and-shoot 35 mm cameras. When the choice was between waiting a week or so for your pictures or seeing them right away, Polaroid had an edge, but when you could shoot a roll of film, drop it at the minilab in the mall when you went to do your shopping, and pick up the prints before you went home, the distinction wasn't so great. Further, the quality of prints from 35 mm film on photographic paper was dramatically better; the prints were larger; and you could order additional copies or enlargements from the negatives. Large, heavy, and clunky cameras that only took 10 pictures from an expensive film pack began to look decreasingly attractive compared to pocketable 35 mm cameras that, at least for the snapshot market, nailed focus and exposure almost every time you pushed the button.

The story of Polaroid is also one of how a company can be trapped by its business model. Polaroid's laboratories produced one of the first prototypes of a digital camera. But management wasn't interested because everybody knew that revenue came from selling film, not cameras, and a digital camera didn't use film. At the same time, Polaroid was working on a pioneering inkjet photo printer, which management disdained because it didn't produce output they considered of photographic quality. Imagine how things might have been different had somebody said, “Look, it's not as good as a photographic print—yet—but it's good enough for most of our snapshot customers, and we can replace our film revenue with sales of ink and branded paper.” But nobody said that. The Polaroid microelectronics laboratory was closed in 1993, with the assets sold to MIT and the inkjet project was terminated—those working on it went off to found the premier large-format inkjet company.

In addition to the meticulously documented history, there is a tremendous amount of wisdom regarding how companies and technologies succeed and fail. In addition, this is a gorgeous book, with numerous colour illustrations (expandable and scrollable in the Kindle edition). My only quibble is that in the Kindle edition, the index is just a list of terms, not linked to references in the text; everything else is properly linked.

Special thanks to James Lileks for recommending this book (part 2).

October 2012 Permalink

Bonner, William with Addison Wiggin. Financial Reckoning Day. Hoboken, NJ: John Wiley & Sons, 2003. ISBN 0-471-44973-3.
William Bonner's Daily Reckoning newsletter was, along with a few others like Downside, a voice of sanity in the bubble markets of the turn of millennium. I've always found that the best investment analysis looks well beyond the markets to the historical, social, political, moral, technological, and demographic trends which market action ultimately reflects. Bonner and Wiggin provide a global, multi-century tour d'horizon here, and make a convincing case that the boom, bust, and decade-plus “soft depression” which Japan suffered from the 1990s to the present is the prototype of what's in store for the U.S. as the inevitable de-leveraging of the mountain of corporate and consumer debt on which the recent boom was built occurs, with the difference that Japan has the advantage of a high savings rate and large trade surplus, while the U.S. saves nothing and runs enormous trade deficits. The analysis of how Alan Greenspan's evolution from supreme goldbug in Ayn Rand's inner circle to maestro of paper money is completely consistent with his youthful belief in Objectivism is simply delightful. The authors readily admit that markets can do anything, but believe that in the long run, markets generally do what they “ought to”, and suggest an investment strategy for the next decade on that basis.

November 2004 Permalink

Bonner, William and Addison Wiggin. Empire of Debt. Hoboken, NJ: John Wiley & Sons, 2006. ISBN 0-471-73902-2.
To make any sense in the long term, an investment strategy needs to be informed by a “macro macro” view of the global economic landscape and the grand-scale trends which shape it, as well as a fine sense for nonsense: the bubbles, manias, and unsustainable situations which seduce otherwise sane investors into doing crazy things which will inevitably end badly, although nobody can ever be sure precisely when. This is the perspective the authors provide in this wise, entertaining, and often laugh-out-loud funny book. If you're looking for tips on what stocks or funds to buy or sell, look elsewhere; the focus here is on the emergence in the twentieth century of the United States as a global economic and military hegemon, and the bizarre economic foundations of this most curious empire. The analysis of the current scene is grounded in a historical survey of empires and a recounting of how the United States became one.

The business of empire has been conducted more or less the same way all around the globe over millennia. An imperial power provides a more or less peaceful zone to vassal states, a large, reasonably open market in which they can buy and sell their goods, safe transport for goods and people within the imperial limes, and a common currency, system of weights and measures, and other lubricants of efficient commerce. In return, vassal states finance the empire through tribute: either explicit, or indirectly through taxes, tariffs, troop levies, and other imperial exactions. Now, history is littered with the wreckage of empires (more than fifty are listed on p. 49), which have failed in the time-proven ways, but this kind of traditional empire at least has the advantage that it is profitable—the imperial power is compensated for its services (whether welcome or appreciated by the subjects or not) by the tribute it collects from them, which may be invested in further expanding the empire.

The American empire, however, is unique in all of human history for being funded not by tribute but by debt. The emergence of the U.S. dollar as the global reserve currency, severed from the gold standard or any other measure of actual value, has permitted the U.S. to build a global military presence and domestic consumer society by borrowing the funds from other countries (notably, at the present time, China and Japan), who benefit (at least in the commercial sense) from the empire. Unlike tribute, the debt remains on the balance sheet as an exponentially growing liability which must eventually either be repaid or repudiated. In this environment, international trade has become a system in which (p. 221) “One nation buys things that it cannot afford and doesn't need with money it doesn't have. Another sells on credit to people who already cannot pay and then builds more factories to increase output.” Nobody knows how long the game can go on, but when it ends, it is certain to end badly.

An empire which has largely ceased to produce stuff for its citizens, whose principal export has become paper money (to the tune of about two billion dollars per day at this writing), will inevitably succumb to speculative binges. No sooner had the mania of the late 1990s collapsed than the residential real estate bubble began to inflate, with houses bought with interest-only mortgages considered “investments” which are “flipped” in a matter of months, and equity extracted by further assumption of debt used to fund current consumption. This contemporary collective delusion is well documented, with perspectives on how it may end.

The entire book is written in an “always on” ironic style, with a fine sense for the absurdities which are taken for wisdom and the charlatans and nincompoops who peddle them to the general public in the legacy media. Some may consider the authors' approach as insufficiently serious for a discussion of an oncoming global financial train wreck but, as they note on p. 76, “There is nothing quite so amusing as watching another man make a fool of himself. That is what makes history so entertaining.” Once you get your head out of the 24 hour news cycle and the political blogs and take the long view, the economic and geopolitical folly chronicled here is intensely entertaining, and the understanding of it imparted in this book is valuable in developing a strategy to avoid its inevitable tragic consequences.

May 2006 Permalink

Brown, Paul. The Rocketbelt Caper. Newcastle upon Tyne: Tonto Press, 2007. ISBN 0-95521-837-3.
Few things are as iconic of the 21st century imagined by visionaries and science fictioneers of the 20th as the personal rocketbelt: just strap one on and take to the air, without complications such as wings, propellers, pilots, fuselage, or landing gear. Flying belts were a fixture of Buck Rogers comic strips and movie serials, and in 1965 Isaac Asimov predicted that by 1990 office workers would beat the traffic by commuting to work in their personal rocketbelts.

The possibilities of a personal flying machine did not escape the military, which imagined infantry soaring above the battlefield and outflanking antiquated tanks and troops on the ground. In the 1950s, engineers at the Bell Aircraft Corporation, builders of the X-1, the first plane to break the sound barrier, built prototypes of rocketbelts powered by monopropellant hydrogen peroxide, and eventually won a U.S. Army contract to demonstrate such a device. On April 20th, 1961, the first free flight occurred, and a public demonstration was performed the following June 8th. The rocketbelt was an immediate sensation. The Bell rocketbelt appeared in the James Bond film Thunderball, was showcased at the 1964 World's Fair in New York, at Disneyland, and at the first Super Bowl of American football in 1967. Although able to fly only twenty-odd seconds and reach an altitude of about 20 metres, here was Buck Rogers made real—certainly before long engineers would work out the remaining wrinkles and everybody would be taking to the skies.

And then a funny thing happened—nothing. Wendell Moore, creator of the rocketbelt at Bell, died in 1969 at age 51, and with no follow-up interest from the U.S. Army, the project was cancelled and the Bell rocketbelt never flew again. Enter Nelson Tyler, engineer and aerial photographer, who on his own initiative built a copy of the Bell rocketbelt which, under his ownership and subsequent proprietors made numerous promotional appearances around the world, including the opening ceremony of the 1984 Olympics in Los Angeles, before a television audience estimated in excess of two billion.

All of this is prologue to the utterly bizarre story of the RB-2000 rocketbelt, launched by three partners in 1992, motivated both by their individual obsession with flying a rocketbelt and dreams of the fortune they'd make from public appearances: the owners of the Tyler rocketbelt were getting US$25,000 per flight at the time. Obsession is not a good thing to bring to a business venture, and things rapidly went from bad to worse to truly horrid. Even before the RB-2000's first and last public flight in June 1995 (which was a complete success), one of the partners had held a gun to another's head who, in return, assaulted the first with a hammer, inflicting serious wounds. In July of 1998, the third partner was brutally murdered in his home, and to this day no charges have been made in the case. Not long thereafter one of the two surviving partners sued the other and won a judgement in excess of US$10 million and custody of the RB-2000, which had disappeared immediately after its sole public flight. When no rocketbelt or money was forthcoming, the plaintiff kidnapped the defendant and imprisoned him in a wooden box for eight days, when fortuitous circumstances permitted the victim to escape. The kidnapper was quickly apprehended and subsequently sentenced to life plus ten years for the crime (the sentence was later reduced to eight years). The kidnappee later spent more than five months in jail for contempt of court for failing to produce the RB-2000 in a civil suit. To this day, the whereabouts of the RB-2000, if it still exists, are unknown.

Now, you don't need to be a rocket scientist to figure out that flitting through the sky with a contraption powered by highly volatile and corrosive propellant, with total flight time of 21 seconds, and no backup systems of any kind is a perilous undertaking. But who would have guessed that trying to do so would entail the kinds of consequences the RB-2000 venture inflicted upon its principals?

A final chapter covers recent events in rocketbelt land, including the first International Rocketbelt Convention in 2006. The reader is directed to Peter Gijsberts' site for news and additional information on present-day rocketbelt projects, including commercial ventures attempting to bring rocketbelts to market. One of the most remarkable things about the curious history of rocketbelts is that, despite occasional claims and ambitious plans, in the more than 45 years which have elapsed since the first flight of the Bell rocketbelt, nobody has substantially improved upon its performance.

A U.S. Edition was published in 2005, but is now out of print.

December 2007 Permalink

Byrne, Gary J. and Grant M. Schmidt. Crisis of Character. New York: Center Street, 2016. ISBN 978-1-4555-6887-1.
After a four year enlistment in the U.S. Air Force during which he served in the Air Force Security Police in assignments domestic and abroad, then subsequent employment on the production line at a Boeing plant in Pennsylvania, Gary Byrne applied to join the U.S. Secret Service Uniformed Division (SSUD). Unlike the plainclothes agents who protect senior minions of the state and the gumshoes who pursue those who print worthless paper money while not employed by the government, the uniformed division provides police-like security services at the White House, the Naval Observatory (residence of the Vice President), Treasury headquarters, and diplomatic missions in the imperial citadel on the Potomac. After pre-employment screening and a boot camp-like training program, he graduated in June 1991 and received his badge, emblazoned with the words “Worthy of Trust and Confidence”. This is presumably so that people who cross the path of these pistol packing feds can take a close look at the badge to see whether it says “Worthy” or “Unworthy” and respond accordingly.

Immediately after graduation, he was assigned to the White House, where he learned the wisdom in the description of the job by his seniors, “You know what it's like to be in the Service? Go stand in a corner for four hours with a five-minute pee break and then go stand for four more hours.” (p. 22). He was initially assigned to the fence line, where he became acquainted with the rich panoply of humanity who hang out nearby, and occasionally try to jump, the barrier which divides the hoi polloi from their anointed rulers. Eventually he was assigned to positions within the White House and, during the 1992 presidential election campaign, began training for an assignment outside the Oval Office. As the campaign progressed, he was assigned to provide security at various events involving candidates Bush and Clinton.

When the Clinton administration took office in 1992, the duties of the SSUD remained the same: “You elect 'em; we protect 'em”, but it quickly became apparent that the style of the new president and his entourage was nothing like that of their predecessors. Some were thoroughly professional and other were…not. Before long, it was evident one of the greatest “challenges” officers would face was “Evergreen”: the code name for first lady Hillary Clinton. One of the most feared phrases an SSUD officer on duty outside the Oval Office could hear squawked into his ear was “Evergreen moving toward West Wing”. Mrs Clinton would, at the slightest provocation, fly into rages, hurling vitriol at all within earshot, which, with her shrill and penetrating voice, was sniper rifle range. Sometimes it wasn't just invective that took flight. Byrne recounts the story when, in 1995, the first lady beaned the Leader of the Free World with a vase. Byrne wasn't on duty at the time, but the next day he saw the pieces of the vase in a box in the White House curator's office—and the president's impressive black eye. Welcome to Clinton World.

On the job in the West Wing, Officer Byrne saw staffers and interns come and go. One intern who showed up again and again, without good reason and seemingly probing every path of access to the president, was a certain Monica Lewinsky. He perceived her as “serious trouble”. Before long, it was apparent what was going on, and Secret Service personnel approached a Clinton staffer, dancing around the details. Monica was transferred to a position outside the White House. Problem solved—but not for long: Lewinsky reappeared in the West Wing, this time as a paid presidential staffer with the requisite security clearance. Problem solved, from the perspective of the president and his mistress.

Many people on the White House staff, not just the Secret Service, knew what was transpiring, and morale and respect for the office plummeted accordingly. Byrne took a post in the section responsible for tours of the executive mansion, and then transferred to the fresh air and untainted workplace environment of the Secret Service's training centre, where his goal was to become a firearms instructor. After his White House experience, a career of straight shooting had great appeal.

On January 17, 1998, the Drudge Report broke the story of Clinton's dalliances with Lewinsky, and Byrne knew this placid phase of his life was at an end. He describes what followed as the “mud drag”, in which Byrne found himself in a Kafkaesque ordeal which pitted investigators charged with getting to the bottom of the scandal and Clinton's lies regarding it against Byrne's duty to maintain the privacy of those he was charged to protect: they don't call it the Secret Service for nothing. This experience, and the inexorable workings of Pournelle's Iron Law, made employment in the SSUD increasingly intolerable, and in 2003 the author, like hundreds of other disillusioned Secret Service officers, quit and accepted a job as an Air Marshal.

The rest of the book describes Byrne's experiences in that service which, predictably, also manifests the blundering incompetence which is the defining characteristic of the U.S. federal government. He never reveals the central secret of that provider of feel-good security theatre (at an estimated cost of US$ 200 million per arrest): the vanishingly small probability a flight has an air marshal on board.

What to make of all this? Byrne certainly saw things, and heard about many more incidents (indeed, much of the book is second-hand accounts) which reveal the character, or lack thereof, of the Clintons and the toxic environment which was the Clinton White House. While recalling that era may be painful, perhaps it may avoid living through a replay. The author comes across as rather excitable and inclined to repeat stories he's heard without verifying them. For example, while in the Air Force, stationed in Turkey, “Arriving at Murtad, I learned that AFSP [Air Force Security Police] there had caught rogue Turkish officers trying to push an American F-104 Starfighter with a loaded [sic] nuke onto the flight line so they could steal a nuke and bomb Greece.” Is this even remotely plausible? U.S. nuclear weapons stationed on bases abroad have permissive action links which prevent them from being detonated without authorisation from the U.S. command authority. And just what would those “rogue Turkish officers” expect to happen after they nuked the Parthenon? Later he writes “I knew from my Air Force days that no one would even see an AC-130 gunship in the sky—it'd be too high.” An AC-130 is big, and in combat missions it usually operates at 7000 feet or below; you can easily see and hear it. He states that “I knew that a B-17 dual-engine prop plane had once crashed into the Empire State Building on a foggy night.” Well, the B-17 was a four engine bomber, but that doesn't matter because it was actually a two engine B-25 that flew into the Manhattan landmark in 1945.

This is an occasionally interesting but flawed memoir whose take-away message for this reader was the not terribly surprising insight that what U.S. taxpayers get for the trillions they send to the crooked kakistocracy in Washington is mostly blundering, bungling, corruption, and incompetence. The only way to make it worse is to put a Clinton in charge.

November 2016 Permalink

Carr, Nicholas G. Does IT Matter? Boston: Harvard Business School Press, 2004. ISBN 1-59139-444-9.
This is an expanded version of the author's May 2003 Harvard Business Review paper titled “IT Doesn't Matter”, which sparked a vituperous ongoing debate about the rôle of information technology (IT) in modern business and its potential for further increases in productivity and competitive advantage for companies who aggressively adopt and deploy it. In this book, he provides additional historical context, attempts to clear up common misperceptions of readers of the original article, and responds to its critics. The essence of Carr's argument is that information technology (computer hardware, software, and networks) will follow the same trajectory as other technologies which transformed business in the past: railroads, machine tools, electricity, the telegraph and telephone, and air transport. Each of these technologies combined high risk with the potential for great near-term competitive advantage for their early adopters, but eventually became standardised “commodity inputs” which all participants in the market employ in much the same manner. Each saw a furious initial period of innovation, emergence of standards to permit interoperability (which, at the same time, made suppliers interchangeable and the commodity fungible), followed by a rapid “build-out” of the technological infrastructure, usually accompanied by over-optimistic hype from its boosters and an investment bubble and the inevitable crash. Eventually, the infrastructure is in place, standards have been set, and a consensus reached as to how best to use the technology in each industry, at which point it's unlikely any player in the market will be able to gain advantage over another by, say, finding a clever new way to use railroads, electricity, or telephones. At this point the technology becomes a commodity input to all businesses, and largely disappears off the strategic planning agenda. Carr believes that with the emergence of low-cost commodity computers adequate for the overwhelming majority of business needs, and the widespread adoption of standard vendor-supplied software such as office suites, enterprise resource planning (ERP), and customer relationship management (CRM) packages, corporate information technology has reached this level of maturity, where senior management should focus on cost-cutting, security, and maintainability rather than seeking competitive advantage through innovation. Increasingly, companies adapt their own operations to fit the ERP software they run, as opposed to customising the software for their particular needs. While such procrusteanism was decried in the IBM mainframe era, today it's touted as deploying “industry best practices” throughout the economy, tidily packaged as a “company in a box”. (Still, one worries about the consequences for innovation.) My reaction to Carr's argument is, “How can anybody find this remotely controversial?” Not only do we have a dozen or so historical examples of the adoption of new technologies, the evidence for the maturity of corporate information technology is there for anybody to see. In fact, in February 1997, I predicted that Microsoft's ability to grow by adding functionality to its products was about to reach the limit, and looking back, it was with Office 97 that customers started to push back, feeling the added “features” (such as the notorious talking paper clip) and initial lack of downward compatibility with earlier versions was for Microsoft's benefit, not their own. How can one view Microsoft's giving back half its cash hoard to shareholders in a special dividend in 2004 (and doubling its regular dividend, along with massive stock buybacks), as anything other than acknowledgement of this reality. You only give your cash back to the investors (or buy your own stock), when you can't think of anything else to do with it which will generate a better return. So, if there's to be a a “next big thing”, Microsoft do not anticipate it coming from them.

August 2004 Permalink

Carreyrou, John. Bad Blood. New York: Alfred A. Knopf, 2018. ISBN 978-1-984833-63-1.
The drawing of blood for laboratory tests is one of my least favourite parts of a routine visit to the doctor's office. Now, I have no fear of needles and hardly notice the stick, but frequently the doctor's assistant who draws the blood (whom I've nicknamed Vampira) has difficulty finding the vein to get a good flow and has to try several times. On one occasion she made an internal puncture which resulted in a huge, ugly bruise that looked like I'd slammed a car door on my arm. I wondered why they need so much blood, and why draw it into so many different containers? (Eventually, I researched this, having been intrigued by the issue during the O. J. Simpson trial; if you're curious, here is the information.) Then, after the blood is drawn, it has to be sent off to the laboratory, which sends back the results days later. If something pops up in the test results, you have to go back for a second visit with the doctor to discuss it.

Wouldn't it be great if they could just stick a fingertip and draw a drop or two of blood, as is done by diabetics to test blood sugar, then run all the tests on it? Further, imagine if, after taking the drop of blood, it could be put into a desktop machine right in the doctor's office which would, in a matter of minutes, produce test results you could discuss immediately with the doctor. And if such a technology existed and followed the history of decline in price with increase in volume which has characterised other high technology products since the 1970s, it might be possible to deploy the machines into the homes of patients being treated with medications so their effects could be monitored and relayed directly to their physicians in case an anomaly was detected. It wouldn't quite be a Star Trek medical tricorder, but it would be one step closer. With the cost of medical care rising steeply, automating diagnostic blood tests and bringing them to the mass market seemed an excellent candidate as the “next big thing” for Silicon Valley to revolutionise.

This was the vision that came to 19 year old Elizabeth Holmes after completing a summer internship at the Genome Institute of Singapore after her freshman year as a chemical engineering major at Stanford. Holmes had decided on a career in entrepreneurship from an early age and, after her first semester told her father, “No, Dad, I'm, not interested in getting a Ph.D. I want to make money.” And Stanford, in the heart of Silicon Valley, was surrounded by companies started by professors and graduates who had turned inventions into vast fortunes. With only one year of college behind her, she was sure she'd found her opportunity. She showed the patent application she'd drafted for an arm patch that would diagnose medical conditions to Channing Robertson, professor of chemical engineering at Stanford, and Shaunak Roy, the Ph.D. student in whose lab she had worked as an assistant during her freshman year. Robertson was enthusiastic, and when Holmes said she intended to leave Stanford and start a company to commercialise the idea, he encouraged her. When the company was incorporated in 2004, Roy, then a newly-minted Ph.D., became its first employee and Robertson joined the board.

From the outset, the company was funded by other people's money. Holmes persuaded a family friend, Tim Draper, a second-generation venture capitalist who had backed, among other companies, Hotmail, to invest US$ 1 million in first round funding. Draper was soon joined by Victor Palmieri, a corporate turnaround artist and friend of Holmes' father. The company was named Theranos, from “therapy” and “diagnosis”. Elizabeth, unlike this scribbler, had a lifelong aversion to needles, and the invention she described in the business plan pitched to investors was informed by this. A skin patch would draw tiny quantities of blood without pain by means of “micro-needles”, the blood would be analysed by micro-miniaturised sensors in the patch and, if needed, medication could be injected. A wireless data link would send results to the doctor.

This concept, and Elizabeth's enthusiasm and high-energy pitch allowed her to recruit additional investors, raising almost US$ 6 million in 2004. But there were some who failed to be persuaded: MedVentures Associates, a firm that specialised in medical technology, turned her down after discovering she had no answers for the technical questions raised in a meeting with the partners, who had in-depth experience with diagnostic technology. This would be a harbinger of the company's fund-raising in the future: in its entire history, not a single venture fund or investor with experience in medical or diagnostic technology would put money into the company.

Shaunak Roy, who, unlike Holmes, actually knew something about chemistry, quickly realised that Elizabeth's concept, while appealing to the uninformed, was science fiction, not science, and no amount of arm-waving about nanotechnology, microfluidics, or laboratories on a chip would suffice to build something which was far beyond the state of the art. This led to a “de-scoping” of the company's ambition—the first of many which would happen over succeeding years. Instead of Elizabeth's magical patch, a small quantity of blood would be drawn from a finger stick and placed into a cartridge around the size of a credit card. The disposable cartridge would then be placed into a desktop “reader” machine, which would, using the blood and reagents stored in the cartridge, perform a series of analyses and report the results. This was originally called Theranos 1.0, but after a series of painful redesigns, was dubbed the “Edison”. This was the prototype Theranos ultimately showed to potential customers and prospective investors.

This was a far cry from the original ambitious concept. The hundreds of laboratory tests doctors can order are divided into four major categories: immunoassays, general chemistry, hæmatology, and DNA amplification. In immunoassay tests, blood plasma is exposed to an antibody that detects the presence of a substance in the plasma. The antibody contains a marker which can be detected by its effect on light passed through the sample. Immunoassays are used in a number of common blood tests, such the 25(OH)D assay used to test for vitamin D deficiency, but cannot perform other frequently ordered tests such as blood sugar and red and white blood cell counts. Edison could only perform what is called “chemiluminescent immunoassays”, and thus could only perform a fraction of the tests regularly ordered. The rationale for installing an Edison in the doctor's office was dramatically reduced if it could only do some tests but still required a venous blood draw be sent off to the laboratory for the balance.

This didn't deter Elizabeth, who combined her formidable salesmanship with arm-waving about the capabilities of the company's products. She was working on a deal to sell four hundred Edisons to the Mexican government to cope with an outbreak of swine flu, which would generate immediate revenue. Money was much on the minds of Theranos' senior management. By the end of 2009, the company had burned through the US$ 47 million raised in its first three rounds of funding and, without a viable product or prospects for sales, would have difficulty keeping the lights on.

But the real bonanza loomed on the horizon in 2010. Drugstore giant Walgreens was interested in expanding their retail business into the “wellness market”: providing in-store health services to their mass market clientèle. Theranos pitched them on offering in-store blood testing. Doctors could send their patients to the local Walgreens to have their blood tested from a simple finger stick and eliminate the need to draw blood in the office or deal with laboratories. With more than 8,000 locations in the U.S., if each were to be equipped with one Edison, the revenue to Theranos (including the single-use testing cartridges) would put them on the map as another Silicon Valley disruptor that went from zero to hundreds of millions in revenue overnight. But here, as well, the Elizabeth effect was in evidence. Of the 192 tests she told Walgreens Theranos could perform, fewer than half were immunoassays the Edisons could run. The rest could be done only on conventional laboratory equipment, and certainly not on a while-you-wait basis.

Walgreens wasn't the only potential saviour on the horizon. Grocery godzilla Safeway, struggling with sales and earnings which seemed to have reached a peak, saw in-store blood testing with Theranos machines as a high-margin profit centre. They loaned Theranos US$ 30 million and began to plan for installation of blood testing clinics in their stores.

But there was a problem, and as the months wore on, this became increasingly apparent to people at both Walgreens and Safeway, although dismissed by those in senior management under the spell of Elizabeth's reality distortion field. Deadlines were missed. Simple requests, such as A/B comparison tests run on the Theranos hardware and at conventional labs were first refused, then postponed, then run but results not disclosed. The list of tests which could be run, how blood for them would be drawn, and how they would be processed seemed to dissolve into fog whenever specific requests were made for this information, which was essential for planning the in-store clinics.

There was, indeed, a problem, and it was pretty severe, especially for a start-up which had burned through US$ 50 million and sold nothing. The product didn't work. Not only could the Edison only run a fraction of the tests its prospective customers had been led by Theranos to believe it could, for those it did run the results were wildly unreliable. The small quantity of blood used in the test introduced random errors due to dilution of the sample; the small tubes in the cartridge were prone to clogging; and capillary blood collected from a finger stick was prone to errors due to “hemolysis”, the rupture of red blood cells, which is minimal in a venous blood draw but so prevalent in finger stick blood it could lead to some tests producing values which indicated the patient was dead.

Meanwhile, people who came to work at Theranos quickly became aware that it was not a normal company, even by the eccentric standards of Silicon Valley. There was an obsession with security, with doors opened by badge readers; logging of employee movement; information restricted to narrow silos prohibiting collaboration between, say, engineering and marketing which is the norm in technological start-ups; monitoring of employee Internet access, E-mail, and social media presence; a security detail of menacing-looking people in black suits and earpieces (which eventually reached a total of twenty); a propensity of people, even senior executives, to “vanish”, Stalin-era purge-like, overnight; and a climate of fear that anybody, employee or former employee, who spoke about the company or its products to an outsider, especially the media, would be pursued, harassed, and bankrupted by lawsuits. There aren't many start-ups whose senior scientists are summarily demoted and subsequently commit suicide. That happened at Theranos. The company held no memorial for him.

Throughout all of this, a curious presence in the company was Ramesh (“Sunny”) Balwani, a Pakistani-born software engineer who had made a fortune of more than US$ 40 million in the dot-com boom and cashed out before the bust. He joined Theranos in late 2009 as Elizabeth's second in command and rapidly became known as a hatchet man, domineering boss, and clueless when it came to the company's key technologies (on one occasion, an engineer mentioned a robotic arm's “end effector”, after which Sunny would frequently speak of its “endofactor”). Unbeknownst to employees and investors, Elizabeth and Sunny had been living together since 2005. Such an arrangement would be a major scandal in a public company, but even in a private firm, concealing such information from the board and investors is a serious breach of trust.

Let's talk about the board, shall we? Elizabeth was not only persuasive, but well-connected. She would parley one connection into another, and before long had recruited many prominent figures including:

  • George Schultz (former U.S. Secretary of State)
  • Henry Kissinger (former U.S. Secretary of State)
  • Bill Frist (former U.S. Senator and medical doctor)
  • James Mattis (General, U.S. Marine Corps)
  • Riley Bechtel (Chairman and former CEO, Bechtel Group)
  • Sam Nunn (former U.S. Senator)
  • Richard Kobacevich (former Wells Fargo chairman and CEO)

Later, super-lawyer David Boies would join the board, and lead its attacks against the company's detractors. It is notable that, as with its investors, not a single board member had experience in medical or diagnostic technology. Bill Frist was an M.D., but his speciality was heart and lung transplants, not laboratory tests.

By 2014, Elizabeth Holmes had come onto the media radar. Photogenic, articulate, and with a story of high-tech disruption of an industry much in the news, she began to be featured as the “female Steve Jobs”, which must have pleased her, since she affected black turtlenecks, kale shakes, and even a car with no license plates to emulate her role model. She appeared on the cover of Fortune in January 2014, made the Forbes list of 400 most wealthy shortly thereafter, was featured in puff pieces in business and general market media, and was named by Time as one of the hundred most influential people in the world. The year 2014 closed with another glowing profile in the New Yorker. This would be the beginning of the end, as it happened to be read by somebody who actually knew something about blood testing.

Adam Clapper, a pathologist in Missouri, spent his spare time writing Pathology Blawg, with a readership of practising pathologists. Clapper read what Elizabeth was claiming to do with a couple of drops of blood from a finger stick and it didn't pass the sniff test. He wrote a sceptical piece on his blog and, as it passed from hand to hand, he became a lightning rod for others dubious of Theranos' claims, including those with direct or indirect experience with the company. Earlier, he had helped a Wall Street Journal reporter comprehend the tangled web of medical laboratory billing, and he decided to pass on the tip to the author of this book.

Thus began the unravelling of one of the greatest scams and scandals in the history of high technology, Silicon Valley, and venture investing. At the peak, privately-held Theranos was valued at around US$ 9 billion, with Elizabeth Holmes holding around half of its common stock, and with one of those innovative capital structures of which Silicon Valley is so fond, 99.7% of the voting rights. Altogether, over its history, the company raised around US$ 900 million from investors (including US$ 125 million from Rupert Murdoch in the US$ 430 million final round of funding). Most of the investors' money was ultimately spent on legal fees as the whole fairy castle crumbled.

The story of the decline and fall is gripping, involving the grandson of a Secretary of State, gumshoes following whistleblowers and reporters, what amounts to legal terrorism by the ever-slimy David Boies, courageous people who stood their ground in the interest of scientific integrity against enormous personal and financial pressure, and the saga of one of the most cunning and naturally talented confidence women ever, equipped with only two semesters of freshman chemical engineering, who managed to raise and blow through almost a billion dollars of other people's money without checking off the first box on the conventional start-up check list: “Build the product”.

I have, in my career, met three world-class con men. Three times, I (just barely) managed to pick up the warning signs and beg my associates to walk away. Each time I was ignored. After reading this book, I am absolutely sure that had Elizabeth Holmes pitched me on Theranos (about which I never heard before the fraud began to be exposed), I would have been taken in. Walker's law is “Absent evidence to the contrary, assume everything is a scam”. A corollary is “No matter how cautious you are, there's always a confidence man (or woman) who can scam you if you don't do your homework.”

Here is Elizabeth Holmes at Stanford in 2013, when Theranos was riding high and she was doing her “female Steve Jobs” act.

Elizabeth Holmes at Stanford: 2013

This is a CNN piece, filmed after the Theranos scam had begun to collapse, in which you can still glimpse the Elizabeth Holmes reality distortion field at full intensity directed at CNN medical correspondent Sanjay Gupta. There are several curious things about this video. The machine that Gupta is shown is the “miniLab”, a prototype second-generation machine which never worked acceptably, not the Edison, which was actually used in the Walgreens and Safeway tests. Gupta's blood is drawn and tested, but the process used to perform the test is never shown. The result reported is a cholesterol test, but the Edison cannot perform such tests. In the plans for the Walgreens and Safeway roll-outs, such tests were performed on purchased Siemens analysers which had been secretly hacked by Theranos to work with blood diluted well below their regulatory-approved specifications (the dilution was required due to the small volume of blood from the finger stick). Since the miniLab never really worked, the odds are that Gupta's blood was tested on one of the Siemens machines, not a Theranos product at all.

CNN: Inside the Theranos Lab (2016)

In a June 2018 interview, author John Carreyrou recounts the story of Theranos and his part in revealing the truth.

John Carreyrou on investigating Theranos (2018)

If you are a connoisseur of the art of the con, here is a masterpiece. After the Wall Street Journal exposé had broken, after retracting tens of thousands of blood tests, and after Theranos had been banned from running a clinical laboratory by its regulators, Holmes got up before an audience of 2500 people at the meeting of the American Association of Clinical Chemistry and turned up the reality distortion field to eleven. Watch a master at work. She comes on the stage at the six minute mark.

Elizabeth Holmes at the American Association of Clinical Chemistry (2016)

July 2018 Permalink

Cellan-Jones, Rory. Dot.bomb: The Strange Death of Britain. London: Aurum Press, [2001] 2003. ISBN 1-85410-952-9.
The bubble in Britain was shorter and more intense than in the U.S.—the mania didn't really begin until mid-1999 with the public share flotation of Freeserve, then collapsed along with the NASDAQ in the spring of 2000, days after the IPO of evocatively named (a rare survivor). You're probably aware of the much-hyped rise, profligate peak, and ugly demise of, poster child of the excesses of Britain, but how about First Tuesday, which almost succeeded in raising US$15 million from two venture funds, putting a valuation of US$62 million on what amounted to a cocktail party? The babe on the back cover beside the author's biography isn't the author (who is male), but British sitcom celeb Joanna Lumley, erstwhile spokesblonde for ephemeral on-line health food peddler

May 2004 Permalink

Christensen, Mark. Build the Perfect Beast. New York: St. Martin's Press, 2001. ISBN 0-312-26873-4.
Here's the concept: a bunch of Southern California morons set out to reinvent the automobile in the 1990's. This would be far more amusing were it not written by one of them, who remains, after all the misadventures recounted in the text, fully as clueless as at the get-go, and enormously less irritating had his editor at St. Martin's Press—a usually respectable house—construed their mandate to extend beyond running the manuscript through a spelling checker. Three and four letter words are misspelled; technical terms are rendered phonetically (“Nacca-duct”, p. 314; “tinsel strength”, p. 369), factual howlers of all kinds litter the pages, and even the spelling of principal characters varies from page to page—on page 6 one person's name is spelled two different ways within five lines. This may be the only book ever issued by a major publisher which manages to misspell “Popsicle” in two entirely different ways (pp. 234, 350). When you fork out US$26.95 for a book, you deserve something better than a first draft manuscript between hard covers. I've fact-checked many a manuscript with fewer errors than this book.

January 2003 Permalink

Edwards-Jones, Imogen. Fashion Babylon. London: Corgi Books, 2006. ISBN 0-552-15443-1.
This is a hard-to-classify but interesting and enjoyable book. I'm not sure even whether to call it fiction or nonfiction: the author has invented a notional co-author, “Anonymous”, who relates, condensed into a single six-month fashion season, anecdotes from a large collection of sources within the British fashion industry, all of which the author vouches for as authentic. Celebrities appear under their own names, and the stories involving them (often bizarre) are claimed to be genuine.

If you're looking for snark, cynicism, cocaine, cigarettes, champagne, anorexia, and other decadence and dissipation, you'll find it, but you'll also take away a thorough grounding in the economics of a business fully as bizarre as the software industry. The gross margin is almost as high and, except for the brand name and associated logos, there is essentially zero protection of intellectual property (as long as you don't counterfeit the brand, you can knock-off any design, just as you can create a work-alike for almost any non-patent-protected software product and sell it for a tiny fraction of the price of the prototype). The vertiginous plunge from the gross margin to the meagre bottom line is mostly promotional hype: blow-outs to “build the brand”. So it may increasingly become in the software business as increases in functionality in products appeal to a smaller and smaller fraction of the customer base, or even reduce usability (Windows Vista, anybody?).

A U.S. Edition will be published in February 2008.

December 2007 Permalink

Erdman, Paul. The Set-Up. New York: St. Martin's, 1998. ISBN 0-312-96805-1.

July 2001 Permalink

Fingleton, Eamonn. In Praise of Hard Industries. New York: Houghton Mifflin, 1999. ISBN 0-395-89968-0.
On page 39, Autodesk is cited as an example of a non-hard industry undeserving of praise. Dunno—didn't seem all that damned easy to me at the time.

October 2002 Permalink

Gladwell, Malcolm. The Tipping Point. Boston: Little, Brown, 2000. ISBN 0-316-31696-2.

December 2002 Permalink

Haig, Matt. Brand Failures. London: Kogan Page, 2003. ISBN 0-7494-3927-0.

October 2003 Permalink

Haigh, Gideon. Bad Company: The Strange Cult of the CEO. London: Aurum Press, 2004. ISBN 1-85410-969-3.
In this small and quirky book, Haigh puts his finger precisely on the problem with today's celebrity CEOs. It isn't just that they're paid obscenely out of proportion to their contribution to the company, it's that for the most part they don't know all that much about the company's products, customers, and industry. Instead, skilled only in management, they attempt to analyse and operate the company by examining and manipulating financial aggregates. While this may be an effective way to cut costs and improve short-term operating results through consolidation, outsourcing and offshoring, cutting research and development, and reducing the level of customer service, all these things tend to injure the prospects of the company over the long haul. But CEOs are mostly compensated based on current financial results and share price. With length of tenure at the top becoming ever shorter as executives increasingly job hop among companies, the decisions a CEO makes today may have consequences which manifest themselves only after the stock options are cashed in and his successor is left to sort out the mess. Certainly there are exceptions, usually entrepreneurs who remain at the helm of the companies they've founded, but the nature of the CEO rôle in today's publicly traded company tends to drive such people out of the job, a phenomenon with which I have had some experience. I call the book “quirky” because the author draws examples not just from well known corporate calamities, but also films and works of fiction. He is fond of literary allusions and foreign phrases, which readers are expected to figure out on their own. Still, the message gets across, at least to readers with attention spans longer than the 10 to 30 minute time slices which characterise most CEOs. The ISBN on the copyright page is wrong; I've given the correct one here.

June 2004 Permalink

Hazlitt, Henry. Economics in One Lesson. New York: Three Rivers Press, [1946, 1962] 1979. ISBN 0-517-54823-2.

November 2003 Permalink

Hester, Elliott. Plane Insanity. New York: St. Martin's Press, 2002. ISBN 0-312-26958-7.

February 2003 Permalink

Kyne, Peter B. The Go-Getter. New York: Henry Holt, 1921. ISBN 0-8050-0548-X.

September 2002 Permalink

Leeson, Nick with Edward Whitley. Rogue Trader. London: Warner Books, 1996. ISBN 0-7515-1708-9.

January 2003 Permalink

Lefevre, Edwin. Reminiscences of a Stock Operator. New York: John Wiley & Sons, [1923] 1994. ISBN 0-471-05970-6.
This stock market classic is a thinly fictionalised biography of the exploits of the legendary speculator Jesse Livermore, written in the form of an autobiography of “Larry Livingston”. (In 1940, shortly before his death, Livermore claimed that he had actually written the book himself, with writer Edwin Lefevre acting as editor and front-man; I know of no independent confirmation of this claim.) In any case, there are few books you can read which contain so much market wisdom packed into 300 pages of entertaining narrative. The book was published in 1923, and covers Livermore/Livingston's career from his start in the bucket shops of Boston to a millionaire market mover as the great 1920s bull market was just beginning to take off.

Trading was Livermore's life; he ended up making and losing four multi-million dollar fortunes, and was blamed for every major market crash from 1917 through the year of his death, 1940. Here is a picture of the original wild and woolly Wall Street—before the SEC, Glass-Steagall, restrictions on insider trading, and all the other party-pooping innovations of later years. Prior to 1913, there were not even any taxes on stock market profits. Market manipulation was considered (chapter 19) “no more than common merchandising processes”, and if the public gets fleeced, well, that's what they're there for! If you think today's financial futures, options, derivatives, and hedge funds are speculative, check out the description of late 19th century “bucket shops”: off-track betting parlours for stocks, which actually made no transactions in the market at all. Some things never change, however, and anybody who read chapter 23 about media hyping of stocks in the early decades of the last century would have been well cautioned against the “perma-bull” babblers who sucked the public into the dot-com bubble near the top.

July 2005 Permalink

Lewis, Michael. Moneyball. New York: W. W. Norton, [2003] 2004. ISBN 0-393-32481-8.
Everybody knows there's no faster or more reliable way to make a lot of money than to identify an inefficiency in a market and arbitrage it. (If you didn't know that, consider it free advice and worth everything you paid for it!) Modern financial markets are Hellishly efficient. Millions of players armed with real-time transaction data, massive computing and database resources for data mining, and more math, physics, and economics Ph.D.s than a dozen Ivy League campuses are continuously looking for the slightest discrepancy between price and value, which more or less guarantees that even when one is discovered, it won't last for more than a moment, and that by the time you hear about it, it'll be long gone. It's much easier to find opportunities in slower moving, less intensely scrutinised fields where conventional wisdom and lack of imagination can blind those in the market to lucrative inefficiencies. For example, in the 1980s generic personal computers and graphics adaptors became comparable in performance to special purpose computer aided design (CAD) workstations ten times or more as costly. This created a situation where the entire value-added in CAD was software, not hardware—all the hardware development, manufacturing, and support costs of the existing vendors were simply an inefficiency which cost their customers dearly. Folks who recognised this inefficiency and moved to exploit the opportunity it created were well rewarded, even while their products were still being ridiculed or ignored by “serious vendors”. Opportunities like this don't come around very often, and there's a lot of luck involved in being in the right place at the right time with the skills and resources at hand to exploit one when you do spot it.

But just imagine what you could do in a field mired in tradition, superstition, ignorance, meaningless numbers, a self-perpetuating old boy network, and gross disparities between spending and performance…Major League Baseball, say? Starting in the 1970s and 80s, Bill James and a slowly growing group of statistically knowledgeable and scientifically minded baseball fanatics—outsiders all—began to look beyond conventional statistics and box scores and study what really determines how many runs a team will score and how many games it will win. Their results turned conventional wisdom completely on its head and that, combined with the clubbiness of professional baseball, caused their work to be utterly ignored until Billy Beane became general manager of the Oakland A's in 1997. Beane and his statistics wizard Paul DePodesta were faced with the challenge of building a winning team with a budget for player salaries right at the bottom of the league—they had less to spend on the entire roster than some teams spent on three or four superstar free agents. I've always been fond of the phrase “management by lack of alternatives”, and that's the situation Beane faced. He took on board the wisdom of the fan statisticians and built upon it, to numerically estimate the value in runs—the ultimate currency of baseball—of individual players, and compare that to the cost of acquiring them. He quickly discovered the market in professional baseball players was grossly inefficient—teams were paying millions for players with statistics which contributed little or nothing to runs scored and games won, while players with the numbers that really mattered were languishing in the minors, available for a song.

The Oakland A's are short for “Athletics”, but under Beane it might as well have been “Arbitrageurs”—trading overvalued stars for cash, draft picks, and undervalued unknowns spotted by the statistical model. Conventional scouting went out the window; the A's roster was full of people who didn't look like baseball players but fit the mathematical profile. Further, Beane changed the way the game was played—if the numbers said stolen bases and sacrifice bunts were a net loss in runs long-term, then the A's didn't do them. The sportswriters and other teams thought it was crazy, but it won ball games: an amazing 103 in 2002 with a total payroll of less than US$42 million. In most other markets or businesses competitors would be tripping over one another to copy the methods which produced such results, but so hidebound and inbred is baseball that so far only two other teams have adopted the Oakland way of winning. Writing on the opening day of the 2004 World Series, is is interesting to observe than one of those two is the Boston Red Sox. I must observe, however, amongst rooting for the scientific method and high fives for budget discipline and number crunching, that the ultimate product of professional baseball is not runs scored, nor games, pennants, or World Series won, but rather entertainment and the revenue it generates from fans, directly or indirectly. One wonders whether this new style of MBAseball run from the front office will ultimately be as enjoyable as the intuitive, risk-taking, seat of the pants game contested from the dugout by a Leo Durocher, Casey Stengel, or Earl Weaver. This superbly written, fascinating book is by the author of the almost indescribably excellent Liar's Poker. The 2004 paperback edition contains an Afterword recounting the “religious war” the original 2003 hardcover ignited. Again, this is a book recommended by an anonymous visitor with the recommendation form—thanks, Joe!

October 2004 Permalink

Lewis, Michael. The Big Short. New York: W. W. Norton, 2010. ISBN 978-0-393-07223-5.
After concluding his brief career on Wall Street in the 1980s, the author wrote Liar's Poker, a memoir of a period of financial euphoria and insanity which he assumed would come crashing down shortly after his timely escape. Who could have imagined that the game would keep on going for two decades more, in the process raising the stakes from mere billions to trillions of dollars, extending its tendrils into financial institutions around the globe, and fuelling real estate and consumption bubbles in which individuals were motivated to lie to obtain money they couldn't pay back to lenders who were defrauded as to the risk they were taking?

Most descriptions of the financial crisis which erupted in 2007 and continues to play out at this writing gloss over the details, referring to “arcanely complex transactions that nobody could understand” or some such. But, in the hands of a master explainer like the author, what happened isn't at all difficult to comprehend. Irresponsible lenders (in some cases motivated by government policy) made mortgage loans to individuals which they could not afford, with an initial “teaser” rate of interest. The only way the borrower could avoid default when the interest rate “reset” to market rates was to refinance the property, paying off the original loan. But since housing prices were rising rapidly, and everybody knew that real estate prices never fall, by that time the house would have appreciated in value, giving the “homeowner” equity in the house which would justify a higher grade mortgage the borrower could afford to pay. Naturally, this flood of money into the housing market accelerated the bubble in housing prices, and encouraged lenders to create ever more innovative loans in the interest of “affordable housing for all”, including interest-only loans, those with variable payments where the borrower could actually increase the principal amount by underpaying, no-money-down loans, and “liar loans” which simply accepted the borrower's claims of income and net worth without verification.

But what financial institution would be crazy enough to undertake the risk of carrying these junk loans on its books? Well, that's where the genius of Wall Street comes in. The originators of these loans, immediately after collecting the loan fee, bundled them up into “mortgage-backed securities” and sold them to other investors. The idea was that by aggregating a large number of loans into a pool, the risk of default, estimated from historical rates of foreclosure, would be spread just as insurance spreads the risk of fire and other damages. Further, the mortgage-backed securities were divided into “tranches”: slices which bore the risk of default in serial order. If you assumed, say, a 5% rate of default on the loans making up the security, the top-level tranche would have little or no risk of default, and the rating agencies concurred, giving it the same AAA rating as U.S. Treasury Bonds. Buyers of the lower-rated tranches, all the way down to the lowest investment grade of BBB, were compensated for the risk they were assuming by higher interest rates on the bonds. In a typical deal, if 15% of the mortgages defaulted, the BBB tranche would be completely wiped out.

Now, you may ask, who would be crazy enough to buy the BBB bottom-tier tranches? This indeed posed a problem to Wall Street bond salesmen (who are universally regarded as the sharpest-toothed sharks in the tank). So, they had the back-office “quants” invent a new kind of financial derivative, the “collateralised debt obligation” (CDO), which bundled up a whole bunch of these BBB tranche bonds into a pool, divided it into tranches, et voilà, the rating agencies would rate the lowest risk tranches of the pool of junk as triple A. How to get rid of the riskiest tranches of the CDO? Lather; rinse; repeat.

Investors worried about the risk of default in these securities could insure against them by purchasing a “credit default swap”, which is simply an insurance contract which pays off if the bond it insures is not repaid in full at maturity. Insurance giant AIG sold tens of billions of these swaps, with premiums ranging from a fraction of a percent on the AAA tranches to on the order of two percent on BBB tranches. As long as the bonds did not default, these premiums were a pure revenue stream for AIG, which went right to the bottom line.

As long as the housing bubble continued to inflate, this created an unlimited supply of AAA rated securities, rated as essentially without risk (historical rates of default on AAA bonds are about one in 100,000), ginned up on Wall Street from the flakiest and shakiest of mortgages. Naturally, this caused a huge flow of funds into the housing market, which kept the bubble expanding ever faster.

Until it popped.

Testifying before a hearing by the U.S. House of Representatives on October 22nd, 2008, Deven Sharma, president of Standard & Poor's, said, “Virtually no one—be they homeowners, financial institutions, rating agencies, regulators, or investors—anticipated what is occurring.” Notwithstanding the claim of culpable clueless clown Sharma, there were a small cadre of insightful investors who saw it all coming, had the audacity to take a position against the consensus of the entire financial establishment—in truth a bet against the Western world's financial system, and the courage to hang in there, against gnawing self-doubt (“Can I really be right and everybody else wrong?”) and skittish investors, to finally cash out on the trade of the century. This book is their story. Now, lots of people knew well in advance that the derivatives-fuelled housing bubble was not going to end well: I have been making jokes about “highly-leveraged financial derivatives” since at least 1996. But it's one thing to see an inevitable train wreck coming and entirely another to figure out approximately when it's going to happen, discover (or invent) the financial instruments with which to speculate upon it, put your own capital and reputation on the line making the bet, persist in the face of an overwhelming consensus that you're not only wrong but crazy, and finally cash out in a chaotic environment where there's a risk your bets won't be paid off due to bankruptcy on the other side (counterparty risk) or government intervention.

As the insightful investors profiled here dug into the details of the fairy castle of mortgage-backed securities, they discovered that it wouldn't even take a decline in housing prices to cause defaults sufficient to wipe out the AAA rated derivatives: a mere stagnation in real estate prices would suffice to render them worthless. And yet even after prices in the markets most affected by the bubble had already levelled off, the rating agencies continued to deem the securities based on their mortgages riskless, and insurance against their default could be bought at nominal cost. And those who bought it made vast fortunes as every other market around the world plummeted.

People who make bets like that tend to be way out on the tail of the human bell curve, and their stories, recounted here, are correspondingly fascinating. This book reads like one of Paul Erdman's financial thrillers, with the difference that the events described are simultaneously much less probable and absolutely factual. If this were a novel and not reportage, I doubt many readers would find the characters plausible.

There are many lessons to be learnt here. The first is that the human animal, and therefore the financial markets in which they interact, frequently mis-estimates and incorrectly prices the risk of outcomes with low probability: Black Swan (January 2009) events, and that investors who foresee them and can structure highly leveraged, long-term bets on them can do very well indeed. Second, Wall Street is just as predatory and ruthless as you've heard it to be: Goldman Sachs was simultaneously peddling mortgage-backed securities to its customers while its own proprietary traders were betting on them becoming worthless, and this is just one of a multitude of examples. Third, never assume that “experts”, however intelligent, highly credentialed, or richly compensated, actually have any idea what they're doing: the rating agencies grading these swampgas securities AAA had never even looked at the bonds from which they were composed, no less estimated the probability that an entire collection of mortgages made at the same time, to borrowers in similar circumstances, in the same bubble markets might all default at the same time.

We're still in the early phases of the Great Deleveraging, in which towers of debt which cannot possibly be repaid are liquidated through default, restructuring, and/or inflation of the currencies in which they are denominated. This book is a masterful and exquisitely entertaining exposition of the first chapter of this drama, and reading it is an excellent preparation for those wishing to ride out, and perhaps even profit from the ongoing tragedy. I have just two words to say to you: sovereign debt.

July 2010 Permalink

Lewis, Michael. Flash Boys. New York: W. W. Norton, 2014. ISBN 978-0-393-24466-3.
Back in the bad old days before regulation of financial markets, one of the most common scams perpetrated by stockbrokers against their customers was “front running”. When a customer placed an order to buy a large block of stock, which order would be sufficient to move the market price of the stock higher, the broker would first place a smaller order to buy the same stock for its own account which would be filled without moving the market very much. Then the customer order would be placed, resulting in the market moving higher. The broker would then immediately sell the stock it had bought at the higher market price and pocket the difference. The profit on each individual transaction would be small, but if you add this up over all the volume of a broker's trades it is substantial. (For a sell order, the broker simply inverts the sense of the transactions.) Front running amounts to picking the customer's pocket to line that of the broker: if the customer's order were placed directly, it would execute at a better price had it not been front run. Consequently, front running has long been illegal and market regulators look closely at transaction histories to detect evidence of such criminality.

In the first decade of the 21st century, traders in the U.S. stock market discovered the market was behaving in a distinctly odd fashion. They had been used to seeing the bids (offers to buy) and asks (offers to sell) on their terminals and were accustomed to placing an order and seeing it hit by the offers in the market. But now, when they placed an order, the offers on the other side of the trade would instantly evaporate, only to come back at a price adverse to them. Many people running hundreds of billions of dollars in hedge, mutual, and pension funds had no idea what was going on, but they were certain the markets were rigged against them. Brad Katsuyama, working at the Royal Bank of Canada's Wall Street office, decided to get to the bottom of the mystery, and eventually discovered the financial equivalent of what you see when you lift up a sheet of wet cardboard in your yard. Due to regulations intended to make financial markets more efficient and fair, the monolithic stock exchanges in the U.S. had fractured into dozens of computer-mediated exchanges which traded the same securities. A broker seeking to buy stock on behalf of a customer could route the order to any of these exchanges based upon its own proprietary algorithm, or might match the order with that of another customer within its own “dark pool”, whence the transaction was completely opaque to the outside market.

But there were other players involved. Often co-located in or near the buildings housing the exchanges (most of which are in New Jersey, which has such a sterling reputation for probity) were the servers of “high frequency traders” (HFTs), who placed and cancelled orders in times measured in microseconds. What the HFTs were doing was, in a nutshell, front running. Here's how it works: the HFT places orders of a minimum size (typically 100 shares) for a large number of frequently traded stocks on numerous exchanges. When one of these orders is hit, the HFT immediately blasts in orders to other exchanges, which have not yet reacted to the buy order, and acquires sufficient shares to fill the original order before the price moves higher. This will, in turn, move the market higher and once it does, the original buy order is filled at the higher price. The HFT pockets the difference. A millisecond in advance can, and does, turn into billions of dollars of profit looted from investors. And all of this is not only completely legal, many of the exchanges bend over backward to attract and support HFTs in return for the fees they pay, creating bizarre kinds of orders whose only purpose for existing is to facilitate HFT strategies.

As Brad investigated the secretive world of HFTs, he discovered the curious subculture of Russian programmers who, having spent part of their lives learning how to game the Soviet system, took naturally to discovering how to game the much more lucrative world of Wall Street. Finally, he decides there is a business opportunity in creating an exchange which distinguishes itself from the others by not being crooked. This exchange, IEX, (it was originally to be called “Investors Exchange”, but the founders realised that the obvious Internet domain name,, could be infelicitously parsed into three words as well as two), would include technological constraints (including 38 miles of fibre optic cable in a box to create latency between the point of presence where traders could attach and the servers which matched bids and asks) which rendered the strategies of the HFTs impotent and obsolete.

Was it conceivable one could be successful on Wall Street by being honest? Perhaps one had to be a Canadian to entertain such a notion, but in the event, it was. But it wasn't easy. IEX rapidly discovered that Wall Street firms, given orders by customers to be executed on IEX, sent them elsewhere to venues more profitable to the broker. Confidentiality rules prohibited IEX from identifying the miscreants, but nothing prevented them, with the brokers' permission, from identifying those who weren't crooked. This worked quite well.

I'm usually pretty difficult to shock when it comes to the underside of the financial system. For decades, my working assumption is that anything, until proven otherwise, is a scam aimed at picking the pockets of customers, and sadly I have found this presumption correct in a large majority of cases. Still, this book was startling. It's amazing the creepy crawlers you see when you lift up that piece of cardboard, and to anybody with an engineering background the rickety structure and fantastic instability of what are supposed to be the capital markets of the world's leading economy is nothing less than shocking. It is no wonder such a system is prone to “flash crashes” and other excursions. An operating system designer who built such a system would be considered guilty of malfeasance (unless, I suppose, he worked for Microsoft, in which case he'd be a candidate for employee of the year), and yet it is tolerated at the heart of a financial system which, if it collapses, can bring down the world's economy.

Now, one can argue that it isn't such a big thing if somebody shaves a penny or two off the price of a stock you buy or sell. If you're a medium- or long-term investor, that'll make little difference in the results. But what will make your blood boil is that the stock broker with whom you're doing business may be complicit in this, and pocketing part of the take. Many people in the real world look at Wall Street and conclude “The markets are rigged; the banks and brokers are crooked; and the system is stacked against the investor.” As this book demonstrates, they are, for the most part, absolutely right.

May 2014 Permalink

Lips, Ferdinand. Gold Wars. New York: FAME, 2001. ISBN 0-9710380-0-7.

July 2002 Permalink

Long, Rob. Conversations with My Agent (and Set Up, Joke, Set Up, Joke). London: Bloomsbury Publishing, [1996, 2005] 2014. ISBN 978-1-4088-5583-6.
Hollywood is a strange place, where the normal rules of business, economics, and personal and professional relationships seem to have been suspended. When he arrived in Hollywood in 1930, P. G. Wodehouse found the customs and antics of its denizens so bizarre that he parodied them in a series of hilarious stories. After a year in Hollywood, he'd had enough and never returned. When Rob Long arrived in Hollywood to attend UCLA film school, the television industry was on the threshold of a technology-driven change which would remake it and forever put an end to the domination by three large networks which had existed since its inception. The advent of cable and, later, direct to home satellite broadcasting eliminated the terrestrial bandwidth constraints which had made establishing a television outlet forbiddingly expensive and, at the same time, side-stepped many of the regulatory constraints which forbade “edgy” content on broadcast channels. Long began his television career as a screenwriter for Cheers in 1990, and became an executive producer of the show in 1992. After the end of Cheers, he created and produced other television projects, including Sullivan & Son, which is currently on the air.

Television ratings measure both “rating points”: the absolute number of television sets tuned into the program, and “share points”: the fraction of television sets turned on at the time viewing the program. In the era of Cheers, a typical episode might have a rating equivalent to more than 22 million viewers and a share of 32%, meaning it pulled in around one third of all television viewers in its time slot. The proliferation of channels makes it unlikely any show will achieve numbers like this again. The extremely popular 24 attracted between 9 and 14 million viewers in its eight seasons, and the highly critically regarded Mad Men never topped a mean viewership of 2.7 million in its best season.

It was into this new world of diminishing viewership expectations but voracious thirst for content to fill all the new channels that the author launched his post-Cheers career. The present volume collects two books originally published independently, Conversations with My Agent from 1998, and 2005's Set Up, Joke, Set Up, Joke, written as Hollywood's перестро́йка was well-advanced. The volumes fit together almost seamlessly, and many readers will barely notice the transition.

This is a very funny book, but there is also a great deal of wisdom about the ways of Hollywood, how television projects are created, pitched to a studio, marketed to a network, and the tortuous process leading from concept to script to pilot to series and, all too often, to cancellation. The book is written as a screenplay, complete with scene descriptions, directions, dialogue, transitions, and sound effect call-outs. Most of the scenes are indeed conversations between the author and his agent in various circumstances, but we also get to be a fly on the wall at story pitches, meetings with the network, casting, shooting an episode, focus group testing, and many other milestones in the life cycle of a situation comedy. The circumstances are fictional, but are clearly informed by real-life experience. Anybody contemplating a career in Hollywood, especially as a television screenwriter, would be insane not to read this book. You'll laugh a lot, but also learn something on almost every page.

The reader will also begin to appreciate the curious ways of Hollywood business, what the author calls “HIPE”: the Hollywood Inversion Principle of Economics. “The HIPE, as it will come to be known, postulates that every commonly understood, standard business practice of the outside world has its counterpart in the entertainment industry. Only it's backwards.” And anybody who thinks accounting is not a creative profession has never had experience with a Hollywood project. The culture of the entertainment business is also on display—an intricate pecking order involving writers, producers, actors, agents, studio and network executives, and “below the line” specialists such as camera operators and editors, all of whom have to read the trade papers to know who's up and who's not.

This book provides an insider's perspective on the strange way television programs come to be. In a way, it resembles some aspects of venture capital: most projects come to nothing, and most of those which are funded fail, losing the entire investment. But the few which succeed can generate sufficient money to cover all the losses and still yield a large return. One television show that runs for five years, producing solid ratings and 100+ episodes to go into syndication, can set up its writers and producers for life and cover the studio's losses on all of the dogs and cats.

July 2014 Permalink

Malmsten, Ernst, Erik Portanger, and Charles Drazin. Boo Hoo. London: Arrow Books, 2001. ISBN 0-09-941837-1.
In the last few years of the twentieth century, a collective madness seized the investment community, who stumbled over one another to throw money at companies with no sales, profits, assets, or credible plans, simply because they appended “.com” to their name and identified themselves in some way with the Internet. Here's an insider's story of one of the highest fliers,, which was one of the first to fall when sanity began to return in early 2000. Ernst Malmsten, co-founder and CEO of boo, and his co-authors trace its trajectory from birth to bankruptcy. On page 24, Malmsten describes what was to make boo different: “This was still a pretty new idea. Most of the early American internet companies had sprung from the minds of technologists. All they cared about was functionality and cost.” Well, what happens when you start a technology-based business and don't care about functionality and cost? About what you'd expect: boo managed to burn through about US$135 million of other peoples' money in 18 months, generating total sales of less than US$2 million. A list of subjects about which the founders were clueless includes technology, management, corporate finance, accounting, their target customers, suppliers, and competition. “Market research? That was something Colgate did before it launched a new toothpaste. The internet was something you had to feel in your fingertips.” (page 47). Armed with exquisitely sensitive fingertips and empty heads, they hired the usual “experts” to help them out: J.P. Morgan, Skadden Arps, Leagas Delaney, Hill & Knowlton, Heidrick & Struggles, and the Boston Consulting Group, demonstrating once again that the only way to screw up quicker and more expensively than ignorance alone is to enlist professional help. But they did have style: every ritzy restaurant, exclusive disco, Concorde day-trip to New York, and lavish party for the staff is chronicled in detail, leaving one to wonder if there was a single adult in the company thinking about how quickly the investors' money was going down the drain. They spent more than US$22 million on advertising and PR before their Web site was working which, when it finally did open to the public, took dial-up users four minutes to download the Flash-based home page and didn't accept orders at all from Macintosh users. But these are mere matters of “functionality and cost” which obsess nerdy technologists and green eyeshade entrepreneurs like myself.

July 2004 Permalink

Marasco, Joe. The Software Development Edge. Upper Saddle River, NJ: Addison-Wesley, 2005. ISBN 0-321-32131-6.
I read this book in manuscript form when it was provisionally titled The Psychology of Software Development.

December 2004 Permalink

Markopolos, Harry. No One Would Listen. Hoboken, NJ: John Wiley & Sons, 2010. ISBN 978-0-470-91900-2.
Bernard L. “Bernie” Madoff was a co-founder of NASDAQ, founder and CEO of a Wall Street firm which became one of the top market makers, and operator of a discretionary money management operation which dwarfed hedge funds and provided its investors a reliable return in markets up and down which no other investment vehicle could approach. Madoff was an elder statesman of Wall Street, respected not only for his success in business but also for philanthropic activities.

On December 10th, 2008, Madoff confessed to his two sons that his entire money management operation had been, since inception, a Ponzi scheme, and the next day he was arrested by the FBI for securities fraud. After having pleaded guilty to 11 federal felony charges, he was sentenced to 150 years in federal incarceration, which sentence he will be serving for the foreseeable future. The total amount of money under management in Madoff's bogus investment scheme is estimated as US$65 billion, although estimates of actual losses to investors are all over the map due to Madoff's keeping transactions off the books and offshore investors' disinclination to make claims for funds invested with Madoff which they failed to disclose to their domicile tax authorities.

While this story broke like a bombshell on Wall Street, it was anything but a surprise to the author who had figured out back in the year 2000, “in less than five minutes”, that Madoff was a fraud. The author is a “quant”—a finance nerd who lives and breathes numbers, and when tasked by his employer to analyse Madoff, a competitor for their investors' funds, and devise a financial product which could compete with Madoff's offering, he almost immediately realised that Madoff's results were too good to be true. First of all, Madoff claimed to be using a strategy of buying stocks with a “collar” of call and put options, with stocks picked from the S&P 100 stock index. Yet it was easy to demonstrate, based upon historical data from the period of Madoff's reported results, that any such strategy could not possibly avoid down periods much more serious than Madoff reported. Further, such a strategy, given the amount of money Madoff had under management, would have required him to have placed put and call option hedges on the underlying stocks which greatly exceeded the total open interest in such options. Finally, Madoff's whole operation made no sense from the standpoint of a legitimate investment business: he was effectively paying 16% for capital in order to realise a 1% return on transaction fees while he could, by operating the same strategy as a hedge fund, pocket a 4% management fee and a 20% participation in the profits.

Having figured this out, the author assumed that simply submitting the facts in the case to the regulator in charge, the Securities and Exchange Commission (SEC), would quickly bring the matter to justice. Well, not exactly. He made his first submission to the SEC in May of 2000, and the long saga of regulatory incompetence began. A year later, articles profiling Madoff and skating near the edge of accusing him of fraud were published in a hedge fund trade magazine and Barron's, read by everybody in the financial community, and still nothing happened. Off-the-record conversations with major players on Wall Street indicated that many of them had concluded that Madoff was a fraud, and indeed none of the large firms placed money with him, but ratting him out to The Man was considered infra dig. And so the sheep were sheared to the tune of sixty-five billion dollars, with many investors who had entrusted their entire fortune to Madoff or placed it with “feeder funds”, unaware that they were simply funnelling money to Madoff and skimming a “management and performance fee” off the top without doing any due diligence whatsoever, losing everything.

When grand scale financial cataclysms like this erupt, the inevitable call is for “more regulation”, as if “regulation” ever makes anything more regular. This example gives the lie to this perennial nostrum—all of the operations of Madoff, since the inception of his Ponzi scheme 1992 until its undoing in 2008, were subject to regulation by the SEC, and the author argues persuasively that a snap audit at any time during this period, led by a competent fraud investigator who demanded trade confirmation tickets and compared them with exchange transaction records would have uncovered the fraud in less than an hour. And yet this never happened, demonstrating that the SEC is toothless, clueless, and a poster child for regulatory capture, where a regulator becomes a client of the industry it is charged to regulate and spends its time harassing small operators on the margin while turning a blind eye to gross violations of politically connected players.

An archive of original source documents is available on the book's Web site.

October 2011 Permalink

McMath, Robert M. and Thom Forbes. What Were They Thinking?. New York: Three Rivers Press, 1998. ISBN 0-812-93203-X.

December 2003 Permalink

Mead, Rebecca. One Perfect Day. New York: Penguin Press, 2007. ISBN 1-59420-088-2.
This book does for for the wedding industry what Jessica Mitford's The American Way of Death did for that equally emotion-exploiting industry which preys upon the other end of adult life. According to the American Wedding Study, published annually by the Condé Nast Bridal Group, the average cost of a wedding in the United States in 2006 was US$27,852. Now, as the author points out on p. 25, this number, without any doubt, is overstated—it is compiled by the publisher of three bridal magazines which has every incentive to show the market they reach to be as large as possible, and is based upon a survey of those already in contact in one way or another with the wedding industry; those who skip all of the theatrics and expense and simply go to City Hall or have a quiet ceremony with close family at home or at the local church are “off the radar” in a survey of this kind and would, if included, bring down the average cost. Still, it's the only figure available, and it is representative of what the wedding industry manages to extract from those who engage (if I may use the word) with it.

To folks who have a sense of the time value of money, this is a stunning figure. The average age at which Americans marry has been increasing for decades and now stands at around 26 years for women and 27 years for men. So let's take US$27,000 and, instead of blowing it out on a wedding, assume the couple uses it to open an investment account at age 27, and that they simply leave the money in the account to compound, depositing nothing more until they retire at age 65. If the account has a compounded rate of return of 10% per annum (which is comparable to the long-term return of the U.S. stock market as a whole), then at age 65, that US$27,000 will have grown to just a bit over a million dollars—a pretty nice retirement nest egg as the couple embarks upon their next big change of life, especially since government Ponzi scheme retirement programs are likely to have collapsed by then. (The OpenOffice spreadsheet I used to make this calculation is available for downloading. It also allows you to forecast the alternative of opting for an inexpensive education and depositing the US$19,000 average student loan burden into an account at age 21—that ends up yielding more than 1.2 million at age 65. The idea for this analysis came from Richard Russell's “Rich Man, Poor Man”, which is the single most lucid and important document on lifetime financial planning I have ever read.) The computation assumes the wedding costs are paid in cash by the couple and/or their families. If they're funded by debt, the financial consequences are even more dire, as the couple finds itself servicing a debt in the very years where saving for retirement has the largest ultimate payoff. Ever helpful, in this book we find the Bank of America marketing home equity loans to finance wedding blow-outs.

So how do you manage to spend twenty-seven thousand bucks on a one day party? Well, as the author documents, writing with a wry sense of irony which never descends into snarkiness, the resourceful wedding business makes it downright easy, and is continually inventing new ways to extract even more money from their customers. We learn the ways of the wedding planner, the bridal shop operator, the wedding media, resorts, photographers and videographers, à la carte “multi-faith” ministers, drive-through Las Vegas wedding chapels, and the bridal apparel industry, including a fascinating look inside one of the Chinese factories where “the product” is made. (Most Chinese factory workers are paid on a piecework basis. So how do you pay the person who removes the pins after lace has been sewed in place? By the weight of pins removed—US$2 per kilogram.)

With a majority of U.S. couples who marry already living together, some having one or more children attending the wedding, the ceremony and celebration, which once marked a major rite of passage and change in status within the community now means…precisely what? Well, not to worry, because the wedding industry has any number of “traditions” for sale to fill the void. The author tracks down the origins of a number of them: the expensive diamond engagement ring (invented by the N. W. Ayer advertising agency in the 1930s for their client, De Beers), the Unity Candle ceremony (apparently owing its popularity to a television soap opera in the 1970s), and the “Apache Indian Prayer”, a favourite of the culturally eclectic, which was actually penned by a Hollywood screenwriter for the 1950 film Broken Arrow.

The bottom line (and this book is very much about that) is that in the eyes of the wedding industry, and in the words of Condé Nast executive Peter K. Hunsinger, the bride is not so much a princess preparing for a magic day and embarking upon the lifetime adventure of matrimony, but (p. 31) “kind of the ultimate consumer, the drunken sailor. Everyone is trying to get to her.” There is an index, but no source citations; you'll have to find the background information on your own.

September 2007 Permalink

Murray, Charles. The Curmudgeon's Guide to Getting Ahead. New York: Crown Business, 2014. ISBN 978-0-8041-4144-4.
Who, after reaching middle age and having learned, through the tedious but persuasive process of trial and error, what works and what doesn't, how to decide who is worthy of trust, and to distinguish passing fads from enduring values, hasn't dreamed of having a conversation with their twenty year old self, downloading this painfully acquired wisdom to give their younger self a leg up on the slippery, knife-edged-rungs of the ladder of life?

This slim book (144 pages) is a concentrated dose of wisdom applicable to young people entering the job market today. Those of my generation and the author's (he is a few years my senior) often worked at summer jobs during high school and part-time jobs while at university. This provided an introduction to the workplace, with its different social interactions than school or family life (in the business world, don't expect to be thanked for doing your job). Today's graduates entering the workforce often have no experience whatsoever in that environment and are bewildered because the incentives are so different from anything they've experienced before. They may have been a star student, but now they find themselves doing tedious work with little intellectual content, under strict deadlines, reporting to superiors who treat them as replaceable minions, not colleagues. Welcome to the real world.

This is an intensely practical book. Based upon a series of postings the author made on an internal site for interns and entry-level personnel at the American Enterprise Institute, he gives guidelines on writing, speaking, manners, appearance, and life strategy. As the author notes (p. 16), “Lots of the senior people who can help or hinder your career are closeted curmudgeons like me, including executives in their forties who have every appearance of being open minded and cool.” Even if you do not wish to become a curmudgeon yourself as you age (good luck with that, dude or dudette!), your advancement in your career will depend upon the approbation of those people you will become if you are fortunate enough to one day advance to their positions.

As a curmudgeon myself (hey, I hadn't yet turned forty when I found myself wandering the corridors of the company I'd founded and silently asking myself, “Who hired that?”), I found nothing in this book with which I disagree, and my only regret is that I couldn't have read it when I was 20. He warns millennials, “You're approaching adulthood with the elastic limit of a Baccarat champagne flute” (p. 96) and counsels them to spend some of those years when their plasticity is greatest and the penalty for errors is minimal in stretching themselves beyond their comfort zone, preparing for the challenges and adversity which will no doubt come later in life. Doug Casey has said that he could parachute naked into a country in sub-saharan Africa and within one week be in the ruler's office pitching a development scheme. That's rather more extreme than what Murray is advocating, but why not go large? Geronimo!

Throughout, Murray argues that what are often disdained as clichés are simply the accumulated wisdom of hundreds of generations of massively parallel trial and error search of the space of solutions of human problems, and that we ignore them at our peril. This is the essence of conservatism—valuing the wisdom of the past. But that does not mean one should be a conservative in the sense of believing that the past provides a unique template for the future. Those who came before did not have the computational power we have, nor the ability to communicate data worldwide almost instantaneously and nearly for free, nor the capacity, given the will, to migrate from Earth and make our species multi-planetary, nor to fix the aging bug and live forever. These innovations will fundamentally change human and post-human society, and yet I believe those who create them, and those who prosper in those new worlds will be exemplars of the timeless virtues which Murray describes here.

And when you get a tattoo or piercing, consider how it will look when you're seventy.

May 2014 Permalink

Olson, Walter K. The Rule of Lawyers. New York: St. Martin's Press, 2003. ISBN 0-312-28085-8.
The author operates the valuable Web site. Those who've observed that individuals with a clue are under-represented on juries in the United States will be delighted to read on page 217 of the Copiah County, Mississippi jury which found for the plaintiff and awarded US$75 billion in damages. When asked why, jurors said they'd intended to award “only” US$75 million, but nobody knew how many zeroes to write down for a million, and they'd guessed nine.

April 2004 Permalink

Orlov, Dmitry. Reinventing Collapse. Gabriola Island, BC, Canada: New Society Publishers, 2008. ISBN 978-0-86571-606-3.
The author was born in Leningrad and emigrated to the United States with his family in the mid-1970s at the age of 12. He experienced the collapse of the Soviet Union and the subsequent events in Russia on a series of extended visits between the late 1980s and mid 1990s. In this book he describes firsthand what happens when a continental scale superpower experiences economic and societal collapse, what it means to those living through it, and how those who survived managed to do so, in some cases prospering amid the rubble.

He then goes on to pose the question of whether the remaining superpower, the United States, is poised to experience a collapse of the same magnitude. This he answers in the affirmative, with only the timing uncertain (these events tend to happen abruptly and with little warning—in 1985 virtually every Western analyst assumed the Soviet Union was a permanent fixture on the world stage; six years later it was gone). He presents a U.S. collapse scenario in the form of the following theorem on p. 3, based upon the axioms of “Peak Oil” and the unsustainability of the debt the U.S. is assuming to finance its oil imports (as well as much of the rest of its consumer economy and public sector).

Oil powers just about everything in the US economy, from food production and distribution to shipping, construction and plastics manufacturing. When less oil becomes available, less is produced, but the amount of money in circulation remains the same, causing the prices for the now scarcer products to be bid up, causing inflation. The US relies on foreign investors to finance its purchases of oil, and foreign investors, seeing high inflation and economic turmoil, flee in droves. Result: less money with which to buy oil and, consequently, less oil with which to produce things. Lather, rinse, repeat; stop when you run out of oil. Now look around: Where did that economy disappear to?
Now if you believe in Peak Oil (as the author most certainly does, along with most of the rest of the catechism of the environmental left), this is pretty persuasive. But even if you don't, you can make the case for a purely economic collapse, especially with the unprecedented deficits and money creation as the present process of deleveraging accelerates into debt liquidation (either through inflation or outright default and bankruptcy). The ultimate trigger doesn't make a great deal of difference to the central argument: the U.S. runs on oil (and has no near-term politically and economically viable substitute) and depends upon borrowed money both to purchase oil and to service its ever-growing debt. At the moment creditors begin to doubt they're every going to be repaid (as happened with the Soviet Union in its final days), it's game over for the economy, even if the supply of oil remains constant.

Drawing upon the Soviet example, the author examines what an economic collapse on a comparable scale would mean for the U.S. Ironically, he concludes that many of the weaknesses which were perceived as hastening the fall of the Soviet system—lack of a viable cash economy, hoarding and self-sufficiency at the enterprise level, failure to produce consumer goods, lack of consumer credit, no private ownership of housing, and a huge and inefficient state agricultural sector which led many Soviet citizens to maintain their own small garden plots— resulted, along with the fact that the collapse was from a much lower level of prosperity, in mitigating the effects of collapse upon individuals. In the United States, which has outsourced much of its manufacturing capability, depends heavily upon immigrants in the technology sector, and has optimised its business models around high-velocity cash transactions and just in time delivery, the consequences post-collapse may be more dire than in the “primitive” Soviet system. If you're going to end up primitive, you may be better starting out primitive.

The author, although a U.S. resident for all of his adult life, did not seem to leave his dark Russian cynicism and pessimism back in the USSR. Indeed, on numerous occasions he mocks the U.S. and finds it falls short of the Soviet standard in areas such as education, health care, public transportation, energy production and distribution, approach to religion, strength of the family, and durability and repairability of capital and the few consumer goods produced. These are indicative of what he terms a “collapse gap”, which will leave the post-collapse U.S. in much worse shape than ex-Soviet Russia: in fact he believes it will never recover and after a die-off and civil strife, may fracture into a number of political entities, all reduced to a largely 19th century agrarian lifestyle. All of this seems a bit much, and is compounded by offhand remarks about the modern lifestyle which seem to indicate that his idea of a “sustainable” world would be one largely depopulated of humans in which the remainder lived in communities much like traditional African villages. That's what it may come to, but I find it difficult to see this as desirable. Sign me up for L. Neil Smith's “freedom, immortality, and the stars” instead.

The final chapter proffers a list of career opportunities which proved rewarding in post-collapse Russia and may be equally attractive elsewhere. Former lawyers, marketing executives, financial derivatives traders, food chemists, bank regulators, university administrators, and all the other towering overhead of drones and dross whose services will no longer be needed in post-collapse America may have a bright future in the fields of asset stripping, private security (or its mirror image, violent racketeering), herbalism and medical quackery, drugs and alcohol, and even employment in what remains of the public sector. Hit those books!

There are some valuable insights here into the Soviet collapse as seen from the perspective of citizens living through it and trying to make the best of the situation, and there are some observations about the U.S. which will make you think and question assumptions about the stability and prospects for survival of the economy and society on its present course. But there are so many extreme statements you come away from the book feeling like you've endured an “end is nigh” rant by a wild-eyed eccentric which dilutes the valuable observations the author makes.

April 2009 Permalink

Orlov, Dmitry. The Five Stages of Collapse. Gabriola Island, BC, Canada: New Society Publishers, 2013. ISBN 978-0-86571-736-7.
The author was born in Leningrad and emigrated to the United States with his family in the mid-1970s at the age of 12. He experienced the collapse of the Soviet Union and the subsequent events in Russia on a series of extended visits between the late 1980s and mid 1990s. In his 2008 book Reinventing Collapse (April 2009) he described the Soviet collapse and assessed the probability of a collapse of the United States, concluding such a collapse was inevitable.

In the present book, he steps back from the specifics of the collapse of overextended superpowers to examine the process of collapse as it has played out in a multitude of human societies since the beginning of civilisation. The author argues that collapse occurs in five stages, with each stage creating the preconditions for the next.

  1. Financial collapse. Faith in “business as usual” is lost. The future is no longer assumed to resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out and access to capital is lost.
  2. Commercial collapse. Faith that “the market shall provide” is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down and widespread shortages of survival necessities become the norm.
  3. Political collapse. Faith that “the government will take care of you” is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.
  4. Social collapse. Faith that “your people will take care of you” is lost, as social institutions, be they charities or other groups that rush in to fill the power vacuum, run out of resources or fail through internal conflict.
  5. Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for “kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity.” Families disband and compete as individuals for scarce resources, The new motto becomes “May you die today so that I can die tomorrow.”

Orlov argues that our current globalised society is the product of innovations at variance with ancestral human society which are not sustainable: in particular the exponentially growing consumption of a finite source of energy from fossil fuels and an economy based upon exponentially growing levels of debt: government, corporate, and individual. Exponential growth with finite resources cannot go on forever, and what cannot go on forever is certain to eventually end. He argues that we are already seeing the first symptoms of the end of the order which began with the industrial revolution.

While each stage of collapse sows the seeds of the next, the progression is not inevitable. In post-Soviet Russia, for example, the collapse progressed into stage 3 (political collapse), but was then arrested by the re-assertion of government authority. While the Putin regime may have many bad aspects, it may produce better outcomes for the Russian people than progression into a stage 4 or 5 collapse.

In each stage of collapse, there are societies and cultures which are resilient against the collapse around them and ride it out. In some cases, it's because they have survived many collapses before and have evolved not to buy into the fragile institutions which are tumbling down and in others it's older human forms of organisation re-asserting themselves as newfangled innovations founder. The author cites these collapse survivors:

  1. Financial collapse: Iceland
  2. Commercial collapse: The Russian Mafia
  3. Political collapse: The Pashtun
  4. Social collapse: The Roma
  5. Cultural collapse: The Ik

This is a simultaneously enlightening and infuriating book. While the author has deep insights into how fragile our societies are and how older forms of society emerge after they collapse, I think he may make the error of assuming that we are living at the end of history and that regression to the mean is the only possible outcome. People at every stage of the development of society which brought us to the present point doubtless argued the same. “When we've cut down all the forests for firewood, what shall we do?” they said, before the discovery of coal. “When the coal seams are mined out, what will happen?” they said, before petroleum was discovered to be a resource, not a nuisance seeping from the ground. I agree with Orlov that our civilisation has been founded on abundant cheap energy and resources, but there are several orders of magnitude more energy and resources available for our taking in the solar system, and we already have the technology, if not the imagination and will, to employ them to enrich all of the people of Earth and beyond.

If collapse be our destiny, I believe our epitaph will read “Lack of imagination and courage”. Sadly, this may be the way to bet. Had we not turned inward in the 1970s and squandered our wealth on a futile military competition and petroleum, Earth would now be receiving most of its energy from solar power satellites and futurists would be projecting the date at which the population off-planet exceeded the mudboots deep down in the gravity well. Collapse is an option—let's hope we do not choose it.

Here is a talk by the author, as rambling as this book, about the issues discussed therein.

December 2013 Permalink

Paul, Pamela. Pornified. New York: Times Books, 2005. ISBN 0-8050-7745-6.
If you've been on the receiving end of Internet junk mail as I've been until I discovered a few technical tricks (here and here) which, along with Annoyance Filter, have essentially eliminated spam from my mailbox, you're probably aware that the popular culture of the Internet is, to a substantial extent, about pornography and that this marvelous global packet switching medium is largely a means for delivering pornography both to those who seek it and those who find it, unsolicited, in their electronic mailboxes or popping up on their screens.

This is an integral part of the explosive growth of pornography along with the emergence of new media. In 1973, there were fewer than a thousand pornographic movie theatres in the U.S. (p 54). Building on the first exponential growth curve driven by home video, the Internet is bringing pornography to everybody connected and reducing the cost asymptotically to zero. On “peer to peer” networks such as Kazaa, 73% of all movie searches are for pornography and 24% of image searches are for child pornography (p. 60).

It's one thing to talk about free speech, but another to ask what the consequences might be of this explosion of consumption of material which is largely directed at men, and which not only objectifies but increasingly, as the standard of “edginess” ratchets upward, degrades women and supplants the complexity of adult human relationships with the fantasy instant gratification of “adult entertainment”.

Mark Schwartz, clinical director of the Masters and Johnson Clinic in St. Louis, hardly a puritanical institution, says (p. 142) “Pornography is having a dramatic effect on relationships at many different levels and in many different ways—and nobody outside the sexual behavior field and the psychiatric community is talking about it.” This book, by Time magazine contributor Pamela Paul, talks about it, interviewing both professionals surveying the landscape and individuals affected in various ways by the wave of pornography sweeping over developed countries connected to the Internet. Paul quotes Judith Coché, a clinical psychologist who teaches at the University of Pennsylvania and has 25 years experience in therapy practice as saying (p. 180), “We have an epidemic on our hands. The growth of pornography and its impact on young people is really, really dangerous. And the most dangerous part is that we don't even realize what's happening.”

Ironically, part of this is due to the overwhelming evidence of the pernicious consequences of excessive consumption of pornography and its tendency to progress into addictive behaviour from the Zillman and Bryant studies and others, which have made academic ethics committees reluctant to approve follow-up studies involving human subjects (p. 90). Would you vote, based on the evidence in hand, for a double blind study of the effects of tobacco or heroin on previously unexposed subjects?

In effect, with the technologically-mediated collapse of the social strictures against pornography, we've embarked upon a huge, entirely unplanned, social and cultural experiment unprecedented in human history. This book will make people on both sides of the debate question their assumptions; the author, while clearly appalled by the effects of pornography on many of the people she interviews, is forthright in her opposition to censorship. Even if you have no interest in pornography nor strong opinions for or against it, there's little doubt that the ever-growing intrusiveness and deviance of pornography on the Internet will be a “wedge issue” in the coming battle over the secure Internet, so the message of this book, unwelcome as it may be, should be something which everybody interested in preserving both our open society and the fragile culture which sustains it ponders at some length.

October 2005 Permalink

Paulos, John Allen. A Mathematician Plays The Stock Market. New York: Basic Books, 2003. ISBN 0-465-05481-1.
Paulos, a mathematics professor and author of several popular books including Innumeracy and A Mathematician Reads the Newspaper, managed to lose a painfully large pile of money (he never says how much) in Worldcom (WCOM) stock in 2000–2002. Other than broadly-based index funds, this was Paulos's first flier in the stock market, and he committed just about every clueless market-newbie blunder in the encyclopedia of Wall Street woe: he bought near the top, on margin, met every margin call and “averaged down” all the way from $47 to below $5 per share, bought out-of-the-money call options on a stock in a multi-year downtrend, never placed stop loss orders or hedged with put options or shorting against the box, based his decisions selectively on positive comments in Internet chat rooms, and utterly failed to diversify (liquidating index funds to further concentrate in a single declining stock). This book came highly recommended, but I found it unsatisfying. Paulos uses his experience in the market as a leitmotif in a wide ranging but rather shallow survey of the mathematics and psychology of markets and investors. Along the way we encounter technical and fundamental analysis, the efficient market hypothesis, compound interest and exponential growth, algorithmic complexity, nonlinear functions and fractals, modern portfolio theory, game theory and the prisoner's dilemma, power laws, financial derivatives, and a variety of card tricks, psychological games, puzzles, and social and economic commentary. Now all of this adds up to only 202 pages, so nothing is treated in much detail—while the explanation of compound interest is almost tedious, many of the deeper mathematical concepts may not be explained sufficiently for readers who don't already understand them. The “leitmotif” becomes pretty heavy after the fiftieth time or so the author whacks himself over the head for his foolishness, and wastes a lot of space which would have been better used discussing the market in greater depth. He dismisses technical analysis purely on the basis of Elliott wave theory, without ever discussing the psychological foundation of many chart patterns as explained in Edwards and Magee; the chapter on fundamental analysis mentions Graham and Dodd only in passing. The author's incessant rambling and short attention span leaves you feeling like you do after a long conversation with Ted Nelson. There is interesting material here, and few if any serious errors, but the result is kind of like English cooking—there's nothing wrong with the ingredients; it's what's done with them that's ultimately bland and distasteful.

September 2004 Permalink

Peters, Eric. Automotive Atrocities. St. Paul, MN: Motorbooks International, 2004. ISBN 0-7603-1787-9.
Oh my, oh my, there really were some awful automobiles on the road in the 1970s and 1980s, weren't there? Those born too late to experience them may not be fully able to grasp the bumper to bumper shoddiness of such rolling excrescences as the diesel Chevette, the exploding Pinto, Le Car, the Maserati Biturbo, the Cadillac V-8-6-4 and even worse diesel; bogus hamster-powered muscle cars (“now with a black stripe and fake hood scoop, for only $5000 more!”); the Yugo, the DeLorean, and the Bricklin—remember that one?

They're all here, along with many more vehicles which, like so many things of that era, can only elicit in those who didn't live through it, the puzzled response, “What were they thinking?” Hey, I lived through it, and that's what I used to think when blowing past multi-ton wheezing early 80s Thunderbirds (by then, barely disguised Ford Fairmonts) in my 1972 VW bus!

Anybody inclined toward automotive Schadenfreude will find this book enormously entertaining, as long as you weren't one of the people who spent your hard-earned, rapidly-inflating greenbacks for one of these regrettable rolling rustbuckets. Unlike many automotive books, this one is well-produced and printed, has few if any typographical errors, and includes many excerpts from the contemporary sales material which recall just how slimy and manipulative were the campaigns used to foist this junk off onto customers who, one suspects, the people selling it referred to in the boardroom as “the rubes”.

It is amazing to recall that almost a generation exists whose entire adult experience has been with products which, with relatively rare exceptions, work as advertised, don't break as soon as you take them home, and rapidly improve from year to year. Those of us who remember the 1970s took a while to twig to the fact that things had really changed once the Asian manufacturers raised the quality bar a couple of orders of magnitude above where the U.S. companies thought they had optimised their return.

In the interest of full disclosure, I will confess that I once drove a 1966 MGB, but I didn't buy it new! To grasp what awaited the seventies denizen after they parked the disco-mobile and boogied into the house, see Interior Desecrations (December 2004).

October 2006 Permalink

Prechter, Robert R., Jr. Conquer the Crash. Chichester, England: John Wiley & Sons, 2002. ISBN 0-470-84982-7.

September 2002 Permalink

Reynolds, Glenn. An Army of Davids. Nashville: Nelson Current, 2006. ISBN 1-5955-5054-2.
In this book, law professor and über blogger ( Glenn Reynolds explores how present and near-future technology is empowering individuals at the comparative expense of large organisations in fields as diverse as retailing, music and motion picture production, national security, news gathering, opinion journalism, and, looking further out, nanotechnology and desktop manufacturing, human longevity and augmentation, and space exploration and development (including Project Orion [pp. 228–233]—now there's a garage start-up I'd love to work on!). Individual empowerment is, like the technology which creates it, morally neutral: good people can do more good, and bad people can wreak more havoc. Reynolds is relentlessly optimistic, and I believe justifiably so; good people outnumber bad people by a large majority, and in a society which encourages them to be “a pack, not a herd” (the title of chapter 5), they will have the means in their hands to act as a societal immune system against hyper-empowered malefactors far more effective than heavy-handed top-down repression and fear-motivated technological relinquishment.

Anybody who's seeking “the next big thing” couldn't find a better place to start than this book. Chapters 2, 3 and 7, taken together, provide a roadmap for the devolution of work from downtown office towers to individual entrepreneurs working at home and in whatever environments attract them, and the emergence of “horizontal knowledge”, supplanting the top-down one-to-many model of the legacy media. There are probably a dozen ideas for start-ups with the potential of eBay and Amazon lurking in these chapters if you read them with the right kind of eyes. If the business and social model of the twenty-first century indeed comes to resemble that of the eighteenth, all of those self-reliant independent people are going to need lots of products and services they will find indispensable just as soon as somebody manages to think of them. Discovering and meeting these needs will pay well.

The “every person an entrepreneur” world sketched here raises the same concerns I expressed in regard to David Bolchover's The Living Dead (January 2006): this will be a wonderful world, indeed, for the intelligent and self-motivated people who will prosper once liberated from corporate cubicle indenture. But not everybody is like that: in particular, those people tend to be found on the right side of the bell curve, and for every one on the right, there's one equally far to the left. We have already made entire categories of employment for individuals with average or below-average intelligence redundant. In the eighteenth century, there were many ways in which such people could lead productive and fulfilling lives; what will they do in the twenty-first? Further, ever since Bismarck, government schools have been manufacturing worker-bees with little initiative, and essentially no concept of personal autonomy. As I write this, the élite of French youth is rioting over a proposal to remove what amounts to a guarantee of lifetime employment in a first job. How will people so thoroughly indoctrinated in collectivism fare in an individualist renaissance? As a law professor, the author spends much of his professional life in the company of high-intelligence, strongly-motivated students, many of whom contemplate an entrepreneurial career and in any case expect to be judged on their merits in a fiercely competitive environment. One wonders if his optimism might be tempered were he to spend comparable time with denizens of, say, the school of education. But the fact that there will be problems in the future shouldn't make us fear it—heaven knows there are problems enough in the present, and the last century was kind of a colossal monument to disaster and tragedy; whatever the future holds, the prescription of more freedom, more information, greater wealth and health, and less coercion presented here is certain to make it a better place to live.

The individualist future envisioned here has much in common with that foreseen in the 1970s by Timothy Leary, who coined the acronym “SMIILE” for “Space Migration, Intelligence Increase, Life Extension”. The “II” is alluded to in chapter 12 as part of the merging of human and machine intelligence in the singularity, but mightn't it make sense, as Leary advocated, to supplement longevity research with investigation of the nature of human intelligence and near-term means to increase it? Realising the promise and avoiding the risks of the demanding technologies of the future are going to require both intelligence and wisdom; shifting the entire bell curve to the right, combined with the wisdom of longer lives may be key in achieving the much to be desired future foreseen here.

InstaPundit visitors will be familiar with the writing style, which consists of relatively brief discussion of a multitude of topics, each with one or more references for those who wish to “read the whole thing” in more depth. One drawback of the print medium is that although many of these citations are Web pages, to get there you have to type in lengthy URLs for each one. An on-line edition of the end notes with all the on-line references as clickable links would be a great service to readers.

March 2006 Permalink

Rowsome, Frank, Jr. The Verse by the Side of the Road. New York: Plume, [1965] 1979. ISBN 0-452-26762-5.
In the years before the Interstate Highway System, long trips on the mostly two-lane roads in the United States could bore the kids in the back seat near unto death, and drive their parents to the brink of homicide by the incessant drone of “Are we there yet?” which began less than half an hour out of the driveway. A blessed respite from counting cows, license plate poker, and counting down the dwindling number of bottles of beer on the wall would be the appearance on the horizon of a series of six red and white signs, which all those in the car would strain their eyes to be the first to read.







In the fall of 1925, the owners of the virtually unknown Burma-Vita company of Minneapolis came up with a new idea to promote the brushless shaving cream they had invented. Since the product would have particular appeal to travellers who didn't want to pack a wet and messy shaving brush and mug in their valise, what better way to pitch it than with signs along the highways frequented by those potential customers? Thus was born, at first only on a few highways in Minnesota, what was to become an American institution for decades and a fondly remembered piece of Americana, the Burma-Shave signs. As the signs proliferated across the landscape, so did sales; so rapid was the growth of the company in the 1930s that a director of sales said (p. 38), “We never knew that there was a depression.” At the peak the company had more than six million regular customers, who were regularly reminded to purchase the product by almost 7000 sets of signs—around 40,000 individual signs, all across the country.

While the first signs were straightforward selling copy, Burma-Shave signs quickly evolved into the characteristic jingles, usually rhyming and full of corny humour and outrageous puns. Rather than hiring an advertising agency, the company ran national contests which paid $100 for the best jingle and regularly received more than 50,000 entries from amateur versifiers.

Almost from the start, the company devoted a substantial number of the messages to highway safety; this was not the result of outside pressure from anti-billboard forces as I remember hearing in the 1950s, but based on a belief that it was the right thing to do—and besides, the sixth sign always mentioned the product! The set of signs above is the jingle that most sticks in my memory: it was a favourite of the Burma-Shave founders as well, having been re-run several times since its first appearance in 1933 and chosen by them to be immortalised in the Smithsonian Institution. Another that comes immediately to my mind is the following, from 1960, on the highway safety theme:







Times change, and with the advent of roaring four-lane freeways, billboard bans or set-back requirements which made sequences of signs unaffordable, the increasing urbanisation of American society, and of course the dominance of television over all other advertising media, by the early 1960s it was clear to the management of Burma-Vita that the road sign campaign was no longer effective. They had already decided to phase it out before they sold the company to Philip Morris in 1963, after which the signs were quickly taken down, depriving the two-lane rural byways of America of some uniquely American wit and wisdom, but who ever drove them any more, since the Interstate went through?

The first half of this delightful book tells the story of the origin, heyday, and demise of the Burma-Shave signs, and the balance lists all of the six hundred jingles preserved in the records of the Burma-Vita Company, by year of introduction. This isn't something you'll probably want to read straight through, but it's great to pick up from time to time when you want a chuckle.

And then the last sign had been read: all the family exclaimed in unison, “Burma-Shave!”. It had been maybe sixty miles since the last set of signs, and so they'd recall that one and remember other great jingles from earlier trips. Then things would quiet down for a while. “Are we there yet?”

October 2006 Permalink

Shute, Nevil. Kindling. New York: Vintage Books, [1938, 1951] 2010. ISBN 978-0-307-47417-9.
It is the depth of the great depression, and yet business is booming at Warren Sons and Mortimer, merchant bankers, in the City of London. Henry Warren, descendant of the founder of the bank in 1750 and managing director, has never been busier. Despite the general contraction in the economy, firms failing, unemployment hitting record after record, and a collapse in international trade, his bank, which specialises in floating securities in London for foreign governments, has more deals pending than he can handle as those governments seek to raise funds to bolster their tottering economies. A typical week might see him in Holland, Sweden, Finland, Estonia, Germany, Holland again, and back to England in time for a Friday entirely on the telephone and in conferences at his office. It is an exhausting routine and, truth be told, he was sufficiently wealthy not to have to work if he didn't wish to, but it was the Warren and Mortimer bank and he was this generation's Warren in charge, and that's what Warrens did.

But in the few moments he had to reflect upon his life, there was little joy in it. He worked so hard he rarely saw others outside work except for his wife Elise's social engagements, which he found tedious and her circle of friends annoying and superficial, but endured out of a sense of duty. He suspected Elise might be cheating on him with the suave but thoroughly distasteful Prince Ali Said, and he wasn't the only one: there were whispers and snickers behind his back in the City. He had no real friends; only business associates, and with no children, no legacy to work for other than the firm. Sleep came only with sleeping pills. He knew his health was declining from stress, sleep deprivation, and lack of exercise.

After confirming his wife's affair, he offers her an ultimatum: move away from London to a quiet life in the country or put an end to the marriage. Independently wealthy, she immediately opts for the latter and leaves him to work out the details. What is he now to do with his life? He informs the servants he is closing the house and offers them generous severance, tells the bank he is taking an indefinite leave to travel and recuperate, and tells his chauffeur to prepare for a long trip, details to come. They depart in the car, northbound. He vows to walk twenty miles a day, every day, until he recovers his health, mental equilibrium, and ability to sleep.

After a few days walking, eating and sleeping at inns and guest houses in the northlands, he collapses in excruciating pain by the side of the road. A passing lorry driver takes him to a small hospital in the town of Sharples. Barely conscious, a surgeon diagnoses him with an intestinal obstruction and says an operation will be necessary. He is wheeled to the operating theatre. The hospital staff speculates on who he might be: he has no wallet or other identification. “Probably one of the men on the road, seeking work in the South”, they guess.

As he begins his recovery in the hospital Warren decides not to complicate matters with regard to his identity: “He had no desire to be a merchant banker in a ward of labourers.” He confirmed their assumption, adding that he was a bank clerk recently returned from America where there was no work at all, in hopes of finding something in the home country. He recalls that Sharples had been known for the Barlow shipyard, once a prosperous enterprise, which closed five years ago, taking down the plate mill and other enterprises it and its workers supported. There was little work in Sharples, and most of the population was on relief. He begins to notice that patients in the ward seem to be dying at an inordinate rate, of maladies not normally thought life-threatening. He asks Miss McMahon, the hospital's Almoner, who tells him it's the poor nutrition affordable on relief, plus the lack of hope and sense of purpose in life due to long unemployment that's responsible. As he recovers and begins to take walks in the vicinity, he sees the boarded up stores, and the derelict shipyard and rolling mill. Curious, he arranges to tour them. When people speak to him of their hope the economy will recover and the yard re-open, he is grimly realistic and candid: with the equipment sold off or in ruins and the skilled workforce dispersed, how would it win an order even if there were any orders to be had?

As he is heading back to London to pick up his old life, feeling better mentally and physically than he had for years, ideas and numbers begin to swim in his mind.

It was impossible. Nobody, in this time of depression, could find an order for a single ship…—let alone a flock of them.

There was the staff. … He could probably get them together again at a twenty per cent rise in salary—if they were any good. But how was he to judge of that?

The whole thing was impossible, sheer madness to attempt. He must be sensible, and put it from his mind.

It would be damn good fun…

Three weeks later, acting through a solicitor to conceal his identity, Mr. Henry Warren, merchant banker of the City, became the owner of Barlows' Yard, purchasing it outright for the sum of £5500. Thus begins one of the most entertaining, realistic, and heartwarming tales of entrepreneurship (or perhaps “rentrepreneurship”) I have ever read. The fact that the author was himself founder and director of an aircraft manufacturing company during the depression, and well aware of the need to make payroll every week, get orders to keep the doors open even if they didn't make much business sense, and do whatever it takes so that the business can survive and meet its obligations to its customers, investors, employees, suppliers, and creditors, contributes to the authenticity of the tale. (See his autobiography, Slide Rule [July 2011], for details of his career.)

Back in his office at the bank, there is the matter of the oil deal in Laevatia. After defaulting on their last loan, the Balkan country is viewed as a laughingstock and pariah in the City, but Warren has an idea. If they are to develop oil in the country, they will need to ship it, and how better to ship it than in their own ships, built in Britain on advantageous terms? Before long, he's off to the Balkans to do a deal in the Balkan manner (involving bejewelled umbrellas, cases of Worcestershire sauce, losing to the Treasury minister in the local card game at a dive in the capital, and working out a deal where the dividends on the joint stock oil company will be secured by profits from the national railway. And, there's the matter of the ships, which will be contracted for by Warren's bank.

Then it's back to London to pitch the deal. Warren's reputation counts for a great deal in the City, and the preference shares are placed. That done, the Hawside Ship and Engineering Company Ltd. is registered with cut-out directors, and the process of awarding the contract for the tankers to it is undertaken. As Warren explains to Miss McMahon, who he has begun to see more frequently, once the order is in hand, it can be used to float shares in the company to fund the equipment and staff to build the ships. At least if the prospectus is sufficiently optimistic—perhaps too optimistic….

Order in hand, life begins to return to Sharples. First a few workers, then dozens, then hundreds. The welcome sound of riveting and welding begins to issue from the yard. A few boarded-up shops re-open, and then more. Then another order for a ship came in, thanks to arm-twisting by one of the yard's directors. With talk of Britain re-arming, there was the prospect of Admiralty business. There was still only one newspaper a week in Sharples, brought in from Newcastle and sold to readers interested in the football news. On one of his more frequent visits to the town, yard, and Miss McMahon, Warren sees the headline: “Revolution in Laevatia”. “This is a very bad one,” Warren says. “I don't know what this is going to mean.”

But, one suspects, he did. As anybody who has been in the senior management of a publicly-traded company is well aware, what happens next is well-scripted: the shareholder suit by a small investor, the press pile-on, the back-turning by the financial community, the securities investigation, the indictment, and, eventually, the slammer. Warren understands this, and works diligently to ensure the Yard survives. There is a deep mine of wisdom here for anybody facing a bad patch.

“You must make this first year's accounts as bad as they ever can be,” he said. “You've got a marvellous opportunity to do so now, one that you'll never have again. You must examine every contract that you've got, with Jennings, and Grierson must tell the auditors that every contract will be carried out at a loss. He'll probably be right, of course—but he must pile it on. You've got to make reserves this year against every possible contingency, probable or improbable.”

“Pile everything into this year's loss, including a lot that really ought not to be there. If you do that, next year you'll be bound to show a profit, and the year after, if you've done it properly this year. Then as soon as you're showing profits and a decent show of orders in hand, get rid of this year's losses by writing down your capital, pay a dividend, and make another issue to replace the capital.”

Sage advice—I've been there. We had cash in the till, so we were able to do a stock buy-back at the bottom, but the principle is the same.

Having been brought back to life by almost dying in small town hospital, Warren is rejuvenated by his time in gaol. In November 1937, he is released and returns to Sharples where, amidst evidence of prosperity everywhere he approaches the Yard, to see a plaque on the wall with his face in profile: “HENRY WARREN — 1934 — HE GAVE US WORK”. Then he was off to see Miss McMahon.

The only print edition currently available new is a very expensive hardcover. Used paperbacks are readily available: check under both Kindling and the original British title, Ruined City. I have linked to the Kindle edition above.

June 2017 Permalink

Sinclair, Upton. The Jungle. Tucson, AZ: See Sharp Press, [1905] 2003. ISBN 1-884365-30-2.
A century ago, in 1905, the socialist weekly The Appeal to Reason began to run Upton Sinclair's novel The Jungle in serial form. The editors of the paper had commissioned the work, giving the author $500 to investigate the Chicago meat packing industry and conditions of its immigrant workers. After lengthy negotiations, Macmillan rejected the novel, and Sinclair took the book to Doubleday, which published it in 1906. The book became an immediate bestseller, has remained in print ever since, spurred the passage of the federal Pure Food and Drug Act in the very year of its publication, and launched Sinclair's career as the foremost American muckraker. The book edition published in 1906 was cut substantially from the original serial in The Appeal to Reason, which remained out of print until 1988 and the 2003 publication of this slightly different version based upon a subsequent serialisation in another socialist periodical.

Five chapters and about one third of the text of the original edition presented here were cut in the 1906 Doubleday version, which is considered the canonical text. This volume contains an introduction written by a professor of American Literature at that august institution of higher learning, the Pittsburg State University of Pittsburg, Kansas, which inarticulately thrashes about trying to gin up a conspiracy theory behind the elisions and changes in the book edition. The only problem with this theory is, as is so often the case with postmodern analyses by Literature professors (even those who are not “anti-corporate, feminist” novelists), the facts. It's hard to make a case for “censorship”, when the changes to the text were made by the author himself, who insisted over the rest of his long and hugely successful career that the changes were not significant to the message of the book. Given that The Appeal to Reason, which had funded the project, stopped running the novel two thirds of the way through due to reader complaints demanding news instead of fiction, one could argue persuasively that cutting one third was responding to reader feedback from an audience highly receptive to the subject matter. Besides, what does it mean to “censor” a work of fiction, anyway?

One often encounters mentions of The Jungle which suggest those making them aren't aware it's a novel as opposed to factual reportage, which probably indicates the writer hasn't read the book, or only encountered excerpts years ago in some college course. While there's no doubt the horrors Sinclair describes are genuine, he uses the story of the protagonist, Jurgis Rudkos, as a Pilgrim's Progress to illustrate them, often with implausible coincidences and other story devices to tell the tale. Chapters 32 through the conclusion are rather jarring. What was up until that point a gritty tale of life on the streets and in the stockyards of Chicago suddenly mutates into a thinly disguised socialist polemic written in highfalutin English which would almost certainly go right past an uneducated immigrant just a few years off the boat; it reminded me of nothing so much as John Galt's speech near the end of Atlas Shrugged. It does, however, provide insight into the utopian socialism of the early 1900s which, notwithstanding many present-day treatments, was directed as much against government corruption as the depredations of big business.

April 2005 Permalink

Smith, Greg. Why I Left Goldman Sachs. New York: Grand Central, 2012. ISBN 1-4555-2747-5.
When Greg Smith graduated from Stanford in 2001, he knew precisely what career he wished to pursue and where—high stakes Wall Street finance at the firm at the tip of the pyramid: Goldman Sachs. His native talent and people skills had landed him first an internship and then an entry-level position at the firm, where he sought to master the often arcane details of the financial products with which he dealt and develop relationships with the clients with whom he interacted on a daily basis.

Goldman Sachs was founded in 1869, and rapidly established itself as one of the leading investment banks, market makers, and money managers, catering to large corporations, institutions, governments, and wealthy individual clients. While most financial companies had transformed themselves from partnerships to publicly-traded corporations, Goldman Sachs did not take this step until 1999. Remaining a partnership was part of the aura of the old Goldman: as with a private Swiss bank, partners bore unlimited personal liability for the actions of the firm, and clients were thereby reassured that the advice they received was in their own best interest.

When the author joined Goldman, the original partnership culture remained strong, and he quickly learned that to advance in the firm it was important to be perceived as a “culture keeper”—one steeped in the culture and transmitting it to new hires. But then the serial financial crises of the first decade of the 21st century began to hammer the firm: the collapse of the technology bubble, the housing boom and bust, and the sovereign debt crisis. These eroded the traditional sources of Goldman's income, and created an incentive for the firm to seek “elephant trades” which would book in excess of US$ 1 million in commissions and fees for the firm from a single transaction. Since the traditional business of buying and selling securities on behalf of a client and pocketing a commission or bid-ask spread was highly competitive (indeed, the kinds of high-roller clients who do business with Goldman could see the bids and offers in the market on their own screen before they placed an order), the elephant hunters were motivated to peddle “structured products”: exotic financial derivatives which the typical client lacked the resources to independently value, and were opaque to valuation by other than the string theorist manqués who invented them. In doing this business, Goldman transformed itself from a broker executing transactions on behalf of a client into a vendor, selling products to counterparties, who took the other side of the transaction. Now, there's nothing wrong with dealing with a counterparty: when you walk onto a used car lot with a wad of money (artfully concealed) in your pocket and the need for a ride, you're aware that the guy who walks up to greet you is your counterparty—the more you pay, the more he benefits, and the less valuable a car he manages to sell you, the better it is for him. But you knew that, going in, and you negotiate accordingly (or if you don't, you end up, as I did, with a 1966 MGB). Many Goldman Sachs customers, with relationships going back decades, had been used to their sales representatives being interested in their clients' investment strategy and recommending products consistent with it and providing excellent execution on trades. I had been a Goldman Sachs customer since 1985, first in San Francisco and then in Zürich, and this had been my experience until the late 2000s: consummate professionalism.

Greg Smith documents the erosion of the Goldman culture in New York, but when he accepted a transfer to the London office, there was a culture shock equivalent to dropping your goldfish into a bowl of Clorox. In London, routine commission (or agency) business generating fees around US$ 50,000 was disdained, and clients interested in such trades were rudely turned away. Clients were routinely referred to as “muppets”, and exploiting their naïveté was a cause for back-slapping and booking revenues to the firm (and bonuses for those who foisted toxic financial trash onto the customers).

Finally, in early 2012, the author said, “enough is enough” and published an op-ed in the New York Times summarising the indictment of the firm and Wall Street which is fully fleshed out here. In the book, the author uses the tired phrase “speaking truth to power”, but in fact power could not be more vulnerable to truth: at the heart of most customer relationships with Goldman Sachs was the assumption that the firm valued the client relationship above all, and would act in the client's interest to further the long-term relationship. Once clients began to perceive that they were mocked as “muppets” who could be looted by selling them opaque derivatives or unloading upon them whatever the proprietary trading desk wanted to dump, this relationship changed forever. Nobody will ever do business with Goldman Sachs again without looking at them as an adversary, not an advisor or advocate. Greg Smith was a witness to the transformation which caused this change, and this book is essential reading for anybody managing funds north of seven digits.

As it happens, I was a customer of Goldman Sachs throughout the period of Mr Smith's employment, and I can completely confirm his reportage of the dysfunction in the London branch. I captured an hour of pure comedy gold in Goldman Sachs Meets a Muppet when two Masters of the Universe who had parachuted into Zürich from London tried to educate me upon the management of my money. I closed my account a few days later.

October 2012 Permalink

Stack, Jack with Bo Burlingham. The Great Game of Business. New York: Doubleday, [1992] 1994. ISBN 0-385-47525-X.
When you take a company public in the United States, there's inevitably a session where senior management sits down with the lawyers for the lecture on how, notwithstanding much vaunted constitutional guarantees of free speech, loose lips may land them in Club Fed for “insider trading”. This is where you learn of such things as the “quiet period”, and realise that by trying to cash out investors who risked their life savings on you before any sane person would, you're holding your arms out to be cuffed and do the perp walk should things end badly. When I first encountered this absurd mind-set, my immediate reaction was, “Well, if ‘insider trading’ is forbidden disclosure of secrets, then why not eliminate all secrets entirely? When you're a public company, you essentially publish your general ledger every quarter anyway—why not make it open to everybody in the company and outside on a daily (or whatever your reporting cycle is) basis?” As with most of my ideas, this was greeted with gales of laughter and dismissed as ridiculous. N'importe…right around when I and the other perpetrators were launching Autodesk, Jack Stack and his management team bought out a refurbishment business shed by International Harvester in its death agonies and turned it around into a people-oriented money machine, Springfield Remanufacturing Corporation. My Three Laws of business have always been: “1) Build the best product. 2) No bullshit. 3) Reward the people who do the work.” Reading this book opened my eyes to how I had fallen short in the third item. Stack's “Open Book” management begins by inserting what I'd call item “2a) Inform the people who do the work”. By opening the general ledger to all employees (and the analysts, and your competitors: get used to it—they know almost every number to within epsilon anyway if you're a serious player in the market), you give your team—hourly and salaried—labour and management—union and professional—the tools they need to know how they're doing, and where the company stands and how secure their jobs are. This is always what I wanted to do, but I was insufficiently bull-headed to override the advice of “experts” that it would lead to disaster or land me in the slammer. Jack Stack went ahead and did it, and the results his company has achieved stand as an existence proof that opening the books is the key to empowering and rewarding the people who do the work. This guy is a hero of free enterprise: go and do likewise; emulate and grow rich.

September 2004 Permalink

Stepczynski, Marian. Dollar: Histoire, actualité et avenir de la monnaie impériale. Lausanne: Éditions Favre, 2003. ISBN 2-8289-0730-9.
In the final paragraph on page 81, in the sentence which begins «À fin septembre 1972», 2002 is intended, not 1972.

November 2003 Permalink

Swanson, Gerald. The Hyperinflation Survival Guide. Lake Oswego, OR: Eric Englund, 1989. ISBN 978-0-9741180-1-7.
In the 1980s, Harry E. Figgie, founder of Figgie International, became concerned that the then-unprecedented deficits, national debt, and trade imbalance might lead to recurrence of inflation, eventual spiralling into catastrophic hyperinflation (defined in 1956 by economist Phillip Cagan as a 50% or more average rise in prices per month, equivalent to an annual inflation rate of 12,875% or above). While there are a number of books on how individuals and investors can best protect themselves during an inflationary episode, Figgie found almost no guidance for business owners and managers for strategies to enable their enterprises to survive and make the best of the chaotic situation which hyperinflation creates.

To remedy this lacuna, Figgie assembled a three person team headed by the author, an economist at the University of Arizona, and dispatched them to South America, where on four visits over two years, they interviewed eighty business leaders and managers, bankers, and accounting professionals in Argentina, Bolivia, and Brazil, all of which were in the grip of calamitous inflation at the time, to discover how they managed to survive and cope with the challenge of prices which changed on a daily or even more frequent basis. This short book (or long pamphlet—it's less than 100 pages all-up) is the result.

The inflation which Figgie feared for the 1990s did not come to pass, but the wisdom Swanson and his colleagues collect here is applicable to any epoch of runaway inflation, wherever in the world and whenever it may eventuate. With money creation and debt today surpassing anything in the human experience, and the world's reserve currency being supported only by the willingness of other nations to lend to the United States, one certainly cannot rule out hyperinflation as a possible consequence when all of this paper money works its way through the economy and starts to bid up prices. Consequently, any business owner would be well advised to invest the modest time it takes to read this book and ponder how the advice herein, not based upon academic theorising but rather the actual experience of managers in countries suffering hyperinflation and whose enterprises managed to survive it, could be applied to the circumstances of their own business.

If you didn't live through, or have forgotten, the relatively mild (by these standards) inflation of the 1970s, this book drives home how fundamentally corrupting inflation is. Inflation is, after all, nothing other than the corruption by a national government of the currency it issues, and this corruption sullies everybody who transacts in that currency. Long term business planning goes out the window: “long term” comes to mean a week or two and “short term” today. Sound business practices such as minimising inventory and just in time manufacturing become suicidal when inventory appreciates more rapidly than money placed at interest. Management controls and the chain of command evaporate as purchasing managers must be delegated the authority to make verbal deals on the spot, paid in cash, to obtain the supplies the company needs at prices that won't bankrupt it. If wage and price controls are imposed by the government (as they always are, despite forty centuries of evidence they never work), more and more management resources must be diverted to gaming the system to retain workforce and sell products at a profitable price. Previously mundane areas of the business: purchasing and treasury, become central to the firm's survival, and speculation in raw materials and financial assets may become more profitable than the actual operations of the company. Finally (and the book dances around this a bit without ever saying it quite so baldly as I shall here), there's the flat-out corruption when the only option a business has to keep its doors open and its workers employed may be to buy or sell on the black market, evade wage and price controls by off-the-books transactions, and greasing the skids of government agencies with bulging envelopes of rapidly depreciating currency passed under the table to their functionaries.

Any senior manager, from the owner of a small business to the CEO of a multinational, who deems hyperinflation a possible outcome of the current financial turbulence, would be well advised to read this book. Although published twenty years ago, the pathology of inflation is perennial, and none of the advice is dated in any way. Indeed, as businesses have downsized, outsourced, and become more dependent upon suppliers around the globe, they are increasingly vulnerable to inflation of their home country currency. I'll wager almost every CEO who spends the time to read this book will spend the money to buy copies for all of his direct reports.

When this book was originally published by Figgie International, permission to republish any part or the entire book was granted to anybody as long as the original attribution was retained. If you look around on the Web, you'll find several copies of this book in various formats, none of which I'd consider ideal, but which at least permit you to sample the contents before ordering a print edition.

July 2009 Permalink

Taleb, Nassim Nicholas. The Black Swan. New York: Random House, 2007. ISBN 978-1-4000-6351-2.
If you are interested in financial markets, investing, the philosophy of science, modelling of socioeconomic systems, theories of history and historicism, or the rôle of randomness and contingency in the unfolding of events, this is a must-read book. The author largely avoids mathematics (except in the end notes) and makes his case in quirky and often acerbic prose (there's something about the French that really gets his goat) which works effectively.

The essential message of the book, explained by example in a wide variety of contexts is (and I'll be rather more mathematical here in the interest of concision) is that while many (but certainly not all) natural phenomena can be well modelled by a Gaussian (“bell curve”) distribution, phenomena in human society (for example, the distribution of wealth, population of cities, book sales by authors, casualties in wars, performance of stocks, profitability of companies, frequency of words in language, etc.) are best described by scale-invariant power law distributions. While Gaussian processes converge rapidly upon a mean and standard deviation and rare outliers have little impact upon these measures, in a power law distribution the outliers dominate.

Consider this example. Suppose you wish to determine the mean height of adult males in the United States. If you go out and pick 1000 men at random and measure their height, then compute the average, absent sampling bias (for example, picking them from among college basketball players), you'll obtain a figure which is very close to that you'd get if you included the entire male population of the country. If you replaced one of your sample of 1000 with the tallest man in the country, or with the shortest, his inclusion would have a negligible effect upon the average, as the difference from the mean of the other 999 would be divided by 1000 when computing the average. Now repeat the experiment, but try instead to compute mean net worth. Once again, pick 1000 men at random, compute the net worth of each, and average the numbers. Then, replace one of the 1000 by Bill Gates. Suddenly Bill Gates's net worth dwarfs that of the other 999 (unless one of them randomly happened to be Warren Buffett, say)—the one single outlier dominates the result of the entire sample.

Power laws are everywhere in the human experience (heck, I even found one in AOL search queries), and yet so-called “social scientists” (Thomas Sowell once observed that almost any word is devalued by preceding it with “social”) blithely assume that the Gaussian distribution can be used to model the variability of the things they measure, and that extrapolations from past experience are predictive of the future. The entry of many people trained in physics and mathematics into the field of financial analysis has swelled the ranks of those who naïvely assume human action behaves like inanimate physical systems.

The problem with a power law is that as long as you haven't yet seen the very rare yet stupendously significant outlier, it looks pretty much like a Gaussian, and so your model based upon that (false) assumption works pretty well—until it doesn't. The author calls these unimagined and unmodelled rare events “Black Swans”—you can see a hundred, a thousand, a million white swans and consider each as confirmation of your model that “all swans are white”, but it only takes a single black swan to falsify your model, regardless of how much data you've amassed and how long it has correctly predicted things before it utterly failed.

Moving from ornithology to finance, one of the most common causes of financial calamities in the last few decades has been the appearance of Black Swans, wrecking finely crafted systems built on the assumption of Gaussian behaviour and extrapolation from the past. Much of the current calamity in hedge funds and financial derivatives comes directly from strategies for “making pennies by risking dollars” which never took into account the possibility of the outlier which would wipe out the capital at risk (not to mention that of the lenders to these highly leveraged players who thought they'd quantified and thus tamed the dire risks they were taking).

The Black Swan need not be a destructive bird: for those who truly understand it, it can point the way to investment success. The original business concept of Autodesk was a bet on a Black Swan: I didn't have any confidence in our ability to predict which product would be a success in the early PC market, but I was pretty sure that if we fielded five products or so, one of them would be a hit on which we could concentrate after the market told us which was the winner. A venture capital fund does the same thing: because the upside of a success can be vastly larger than what you lose on a dud, you can win, and win big, while writing off 90% of all of the ventures you back. Investors can fashion a similar strategy using options and option-equivalent investments (for example, resource stocks with a high cost of production), diversifying a small part of their portfolio across a number of extremely high risk investments with unbounded upside while keeping the bulk in instruments (for example sovereign debt) as immune as possible to Black Swans.

There is much more to this book than the matters upon which I have chosen to expound here. What you need to do is lay your hands on this book, read it cover to cover, think it over for a while, then read it again—it is so well written and entertaining that this will be a joy, not a chore. I find it beyond charming that this book was published by Random House.

January 2009 Permalink

Taleb, Nassim Nicholas. Fooled by Randomness. 2nd. ed. New York: Random House, [2004] 2005. ISBN 978-0-8129-7521-5.
This book, which preceded the author's bestselling The Black Swan (January 2009), explores a more general topic: randomness and, in particular, how humans perceive and often misperceive its influence in their lives. As with all of Taleb's work, it is simultaneously quirky, immensely entertaining, and so rich in wisdom and insights that you can't possible absorb them all in a single reading.

The author's central thesis, illustrated from real-world examples, tests you perform on yourself, and scholarship in fields ranging from philosophy to neurobiology, is that the human brain evolved in an environment in which assessment of probabilities (and especially conditional probabilities) and nonlinear outcomes was unimportant to reproductive success, and consequently our brains adapted to make decisions according to a set of modular rules called “heuristics”, which researchers have begun to tease out by experimentation. While our brains are capable of abstract thinking and, with the investment of time required to master it, mathematical reasoning about probabilities, the parts of the brain we use to make many of the important decisions in our lives are the much older and more instinctual parts from which our emotions spring. This means that otherwise apparently rational people may do things which, if looked at dispassionately, appear completely insane and against their rational self-interest. This is particularly apparent in the world of finance, in which the author has spent much of his career, and which offers abundant examples of individual and collective delusional behaviour both before and after the publication of this work.

But let's step back from the arcane world of financial derivatives and consider a much simpler and easier to comprehend investment proposition: Russian roulette. A diabolical billionaire makes the following proposition: play a round of Russian roulette (put one cartridge in a six shot revolver, spin the cylinder to randomise its position, put the gun to your temple and pull the trigger). If the gun goes off, you don't receive any payoff and besides, you're dead. If there's just the click of the hammer falling on an empty chamber, you receive one million dollars. Further, as a winner, you're invited to play again on the same date next year, when the payout if you win will be increased by 25%, and so on in subsequent years as long as you wish to keep on playing. You can quit at any time and keep your winnings.

Now suppose a hundred people sign up for this proposition, begin to play the game year after year, and none chooses to take their winnings and walk away from the table. (For connoisseurs of Russian roulette, this is the variety of the game in which the cylinder is spun before each shot, not where the live round continues to advance each time the hammer drops on an empty chamber: in that case there would be no survivors beyond the sixth round.) For each round, on average, 1/6 of the players are killed and out of the game, reducing the number who play next year. Out of the original 100 players in the first round, one would expect, on average, around 83 survivors to participate in the second round, where the payoff will be 1.25 million.

What do we have, then, after ten years of this game? Again, on average, we expect around 16 survivors, each of whom will be paid more than seven million dollars for the tenth round alone, and who will have collected a total of more than 33 million dollars over the ten year period. If the game were to go on for twenty years, we would expect around 3 survivors from the original hundred, each of whom would have “earned” more than a third of a billion dollars each.

Would you expect these people to be regular guests on cable business channels, sought out by reporters from financial publications for their “hot hand insights on Russian roulette”, or lionised for their consistent and rapidly rising financial results? No—they would be immediately recognised as precisely what they were: lucky (and consequently very wealthy) fools who, each year they continue to play the game, run the same 1 in 6 risk of blowing their brains out.

Keep this Russian roulette analogy in mind the next time you see an interview with the “sizzling hot” hedge fund manager who has managed to obtain 25% annual return for his investors over the last five years, or when your broker pitches a mutual fund with a “great track record”, or you read the biography of a businessman or investor who always seems to have made the “right call” at the right time. All of these are circumstances in which randomness, and hence luck, plays an important part. Just as with Russian roulette, there will inevitably be big winners with a great “track record”, and they're the only ones you'll see because the losers have dropped out of the game (and even if they haven't yet they aren't newsworthy). So the question you have to ask yourself is not how great the track record of a given individual is, but rather the size of the original cohort from which the individual was selected at the start of the period of the track record. The rate hedge fund managers “blow up” and lose all of their investors' money in one disastrous market excursion is less than that of the players blown away in Russian roulette, but not all that much. There are a lot of trading strategies which will yield high and consistent returns until they don't, at which time they suffer sudden and disastrous losses which are always reported as “unexpected”. Unexpected by the geniuses who devised the strategy, the fools who put up the money to back it, and the clueless journalists who report the debacle, but entirely predictable to anybody who modelled the risks being run in the light of actual behaviour of markets, not some egghead's ideas of how they “should” behave.

Shall we try another? You go to your doctor for a routine physical, and as part of the laboratory work on your blood, she orders a screening test for a rare but serious disease which afflicts only one person in a thousand but which can be treated if detected early. The screening test has a 5% false positive rate (in 5% of the people tested who do not actually have the disease, it erroneously says that they do) and a 0% false negative rate (if you have the disease, the test will always report that you do). You return to the doctor's office for the follow-up visit and she tells you that you tested positive for the disease. What is the probability you actually have it?

Spoiler warning: Plot and/or ending details follow.  
Did you answer 95%? If you did, you're among the large majority of people, not just among the general population but also practising clinicians, who come to the same conclusion. And you'd be just as wrong as them. In fact, the odds you have the disease are a little less than 2%. Here's how it works. Let's assume an ensemble of 10,000 randomly selected people are tested. On average, ten of these people will have the disease, and all of them will test positive for it (no false negatives). But among that population, 500 people who do not have the disease will also test positive due to the 5% false positive rate of the test. That means that, on average (it gets tedious repeating this, but the natterers will be all over me if I don't do so in every instance), there will be, of 10,000 people tested, a total of 510 positive results, of which 10 actually have the disease. Hence, if you're the recipient of a positive test result, the probability you have the disease is 10/510, or a tad less than 2%. So, before embarking upon a demanding and potentially dangerous treatment regime, you're well advised to get some other independent tests to confirm that you are actually afflicted.
Spoilers end here.  
In making important decisions in life, we often rely upon information from past performance and reputation without taking into account how much those results may be affected by randomness, luck, and the “survivor effect” (the Russian roulette players who brag of their success in the game are necessarily those who aren't yet dead). When choosing a dentist, you can be pretty sure that a practitioner who is recommended by a variety of his patients whom you respect will do an excellent job drilling your teeth. But this is not the case when choosing an oncologist, since all of the people who give him glowing endorsements are necessarily those who did not die under his care, even if their survival is due to spontaneous remission instead of the treatment they received. In such a situation, you need to, as it were, interview the dead alongside the survivors, or, that being difficult, compare the actual rate of survival among comparable patients with the same condition.

Even when we make decisions with our higher cognitive facilities rather than animal instincts, it's still easy to get it wrong. While the mathematics of probability and statistics have been put into a completely rigorous form, there are assumptions in how they are applied to real world situations which can lead to the kinds of calamities one reads about regularly in the financial press. One of the reasons physical scientists transmogrify so easily into Wall Street “quants” is that they are trained and entirely comfortable with statistical tools and probabilistic analysis. The reason they so frequently run off the cliff, taking their clients' fortunes in the trailer behind them, is that nature doesn't change the rules, nor does she cheat. Most physical processes will exhibit well behaved Gaussian or Poisson distributions, with outliers making a vanishingly small contribution to mean and median values. In financial markets and other human systems none of these conditions obtain: the rules change all the time, and often change profoundly before more than a few participants even perceive they have; any action in the market will provoke a reaction by other actors, often nonlinear and with unpredictable delays; and in human systems the Pareto and other wildly non-Gaussian power law distributions are often the norm.

We live in a world in which randomness reigns in many domains, and where we are bombarded with “news and information” which is probably in excess of 99% noise to 1% signal, with no obvious way to extract the signal except with the benefit of hindsight, which doesn't help in making decisions on what to do today. This book will dramatically deepen your appreciation of this dilemma in our everyday lives, and provide a philosophical foundation for accepting the rôle randomness and luck plays in the world, and how, looked at with the right kind of eyes (and investment strategy) randomness can be your friend.

February 2011 Permalink

Taleb, Nassim Nicholas. Antifragile. New York: Random House, 2012. ISBN 978-0-8129-7968-8.
This book is volume three in the author's Incerto series, following Fooled by Randomness (February 2011) and The Black Swan (January 2009). It continues to explore the themes of randomness, risk, and the design of systems: physical, economic, financial, and social, which perform well in the face of uncertainty and infrequent events with large consequences. He begins by posing the deceptively simple question, “What is the antonym of ‘fragile’?”

After thinking for a few moments, most people will answer with “robust” or one of its synonyms such as “sturdy”, “tough”, or “rugged”. But think about it a bit more: does a robust object or system actually behave in the opposite way to a fragile one? Consider a teacup made of fine china. It is fragile—if subjected to more than a very limited amount of force or acceleration, it will smash into bits. It is fragile because application of such an external stimulus, for example by dropping it on the floor, will dramatically degrade its value for the purposes for which it was created (you can't drink tea from a handful of sherds, and they don't look good sitting on the shelf). Now consider a teacup made of stainless steel. It is far more robust: you can drop it from ten kilometres onto a concrete slab and, while it may be slightly dented, it will still work fine and look OK, maybe even acquiring a little character from the adventure. But is this really the opposite of fragility? The china teacup was degraded by the impact, while the stainless steel one was not. But are there objects and systems which improve as a result of random events: uncertainty, risk, stressors, volatility, adventure, and the slings and arrows of existence in the real world? Such a system would not be robust, but would be genuinely “anti-fragile” (which I will subsequently write without the hyphen, as does the author): it welcomes these perturbations, and may even require them in order to function well or at all.

Antifragility seems an odd concept at first. Our experience is that unexpected events usually make things worse, and that the inexorable increase in entropy causes things to degrade with time: plants and animals age and eventually die; machines wear out and break; cultures and societies become decadent, corrupt, and eventually collapse. And yet if you look at nature, antifragility is everywhere—it is the mechanism which drives biological evolution, technological progress, the unreasonable effectiveness of free market systems in efficiently meeting the needs of their participants, and just about everything else that changes over time, from trends in art, literature, and music, to political systems, and human cultures. In fact, antifragility is a property of most natural, organic systems, while fragility (or at best, some degree of robustness) tends to characterise those which were designed from the top down by humans. And one of the paradoxical characteristics of antifragile systems is that they tend to be made up of fragile components.

How does this work? We'll get to physical systems and finance in a while, but let's start out with restaurants. Any reasonably large city in the developed world will have a wide variety of restaurants serving food from numerous cultures, at different price points, and with ambience catering to the preferences of their individual clientèles. The restaurant business is notoriously fragile: the culinary preferences of people are fickle and unpredictable, and restaurants who are behind the times frequently go under. And yet, among the population of restaurants in a given area at a given time, customers can usually find what they're looking for. The restaurant population or industry is antifragile, even though it is composed of fragile individual restaurants which come and go with the whims of diners, which will be catered to by one or more among the current, but ever-changing population of restaurants.

Now, suppose instead that some Food Commissar in the All-Union Ministry of Nutrition carefully studied the preferences of people and established a highly-optimised and uniform menu for the monopoly State Feeding Centres, then set up a central purchasing, processing, and distribution infrastructure to optimise the efficient delivery of these items to patrons. This system would be highly fragile, since while it would deliver food, there would no feedback based upon customer preferences, and no competition to respond to shifts in taste. The result would be a mediocre product which, over time, was less and less aligned with what people wanted, and hence would have a declining number of customers. The messy and chaotic market of independent restaurants, constantly popping into existence and disappearing like virtual particles, exploring the culinary state space almost at random, does, at any given moment, satisfy the needs of its customers, and it responds to unexpected changes by adapting to them: it is antifragile.

Now let's consider an example from metallurgy. If you pour molten metal from a furnace into a cold mould, its molecules, which were originally jostling around at random at the high temperature of the liquid metal, will rapidly freeze into a structure with small crystals randomly oriented. The solidified metal will contain dislocations wherever two crystals meet, with each forming a weak spot where the metal can potentially fracture under stress. The metal is hard, but brittle: if you try to bend it, it's likely to snap. It is fragile.

To render it more flexible, it can be subjected to the process of annealing, where it is heated to a high temperature (but below melting), which allows the molecules to migrate within the bulk of the material. Existing grains will tend to grow, align, and merge, resulting in a ductile, workable metal. But critically, once heated, the metal must be cooled on a schedule which provides sufficient randomness (molecular motion from heat) to allow the process of alignment to continue, but not to disrupt already-aligned crystals. Here is a video from Cellular Automata Laboratory which demonstrates annealing. Note how sustained randomness is necessary to keep the process from quickly “freezing up” into a disordered state.

In another document at this site, I discuss solving the travelling salesman problem through the technique of simulated annealing, which is analogous to annealing metal, and like it, is a manifestation of antifragility—it doesn't work without randomness.

When you observe a system which adapts and prospers in the face of unpredictable changes, it will almost always do so because it is antifragile. This is a large part of how nature works: evolution isn't able to predict the future and it doesn't even try. Instead, it performs a massively parallel, planetary-scale search, where organisms, species, and entire categories of life appear and disappear continuously, but with the ecosystem as a whole constantly adapting itself to whatever inputs may perturb it, be they a wholesale change in the composition of the atmosphere (the oxygen catastrophe at the beginning of the Proterozoic eon around 2.45 billion years ago), asteroid and comet impacts, and ice ages.

Most human-designed systems, whether machines, buildings, political institutions, or financial instruments, are the antithesis of those found in nature. They tend to be highly-optimised to accomplish their goals with the minimum resources, and to be sufficiently robust to cope with any stresses they may be expected to encounter over their design life. These systems are not antifragile: while they may be designed not to break in the face of unexpected events, they will, at best, survive, but not, like nature, often benefit from them.

The devil's in the details, and if you reread the last paragraph carefully, you may be able to see the horns and pointed tail peeking out from behind the phrase “be expected to”. The problem with the future is that it is full of all kinds of events, some of which are un-expected, and whose consequences cannot be calculated in advance and aren't known until they happen. Further, there's usually no way to estimate their probability. It doesn't even make any sense to talk about the probability of something you haven't imagined could happen. And yet such things happen all the time.

Today, we are plagued, in many parts of society, with “experts” the author dubs fragilistas. Often equipped with impeccable academic credentials and with powerful mathematical methods at their fingertips, afflicted by the “Soviet-Harvard delusion” (overestimating the scope of scientific knowledge and the applicability of their modelling tools to the real world), they are blind to the unknown and unpredictable, and they design and build systems which are highly fragile in the face of such events. A characteristic of fragilista-designed systems is that they produce small, visible, and apparently predictable benefits, while incurring invisible risks which may be catastrophic and occur at any time.

Let's consider an example from finance. Suppose you're a conservative investor interested in generating income from your lifetime's savings, while preserving capital to pass on to your children. You might choose to invest, say, in a diversified portfolio of stocks of long-established companies in stable industries which have paid dividends for 50 years or more, never skipping or reducing a dividend payment. Since you've split your investment across multiple companies, industry sectors, and geographical regions, your risk from an event affecting one of them is reduced. For years, this strategy produces a reliable and slowly growing income stream, while appreciation of the stock portfolio (albeit less than high flyers and growth stocks, which have greater risk and pay small dividends or none at all) keeps you ahead of inflation. You sleep well at night.

Then 2008 rolls around. You didn't do anything wrong. The companies in which you invested didn't do anything wrong. But the fragilistas had been quietly building enormous cross-coupled risk into the foundations of the financial system (while pocketing huge salaries and bonuses, while bearing none of the risk themselves), and when it all blows up, in one sickening swoon, you find the value of your portfolio has been cut by 50%. In a couple of months, you have lost half of what you worked for all of your life. Your “safe, conservative, and boring” stock portfolio happened to be correlated with all of the other assets, and when the foundation of the system started to crumble, suffered along with them. The black swan landed on your placid little pond.

What would an antifragile investment portfolio look like, and how would it behave in such circumstances? First, let's briefly consider a financial option. An option is a financial derivative contract which gives the purchaser the right, but not the obligation, to buy (“call option”) or sell (”put option”) an underlying security (stock, bond, market index, etc.) at a specified price, called the “strike price” (or just “strike”). If the a call option has a strike above, or a put option a strike below, the current price of the security, it is called “out of the money”, otherwise it is “in the money”. The option has an expiration date, after which, if not “exercised” (the buyer asserts his right to buy or sell), the contract expires and the option becomes worthless.

Let's consider a simple case. Suppose Consolidated Engine Sludge (SLUJ) is trading for US$10 per share on June 1, and I buy a call option to buy 100 shares at US$15/share at any time until August 31. For this right, I might pay a premium of, say, US$7. (The premium depends upon sellers' perception of the volatility of the stock, the term of the option, and the difference between the current price and the strike price.) Now, suppose that sometime in August, SLUJ announces a breakthrough that allows them to convert engine sludge into fructose sweetener, and their stock price soars on the news to US$19/share. I might then decide to sell on the news, exercise the option, paying US$1500 for the 100 shares, and then immediately sell them at US$19, realising a profit of US$400 on the shares or, subtracting the cost of the option, US$393 on the trade. Since my original investment was just US$7, this represents a return of 5614% on the original investment, or 22457% annualised. If SLUJ never touches US$15/share, come August 31, the option will expire unexercised, and I'm out the seven bucks. (Since options can be bought and sold at any time and prices are set by the market, it's actually a bit more complicated than that, but this will do for understanding what follows.)

You might ask yourself what would motivate somebody to sell such an option. In many cases, it's an attractive proposition. If I'm a long-term shareholder of SLUJ and have found it to be a solid but non-volatile stock that pays a reasonable dividend of, say, two cents per share every quarter, by selling the call option with a strike of 15, I pocket an immediate premium of seven cents per share, increasing my income from owning the stock by a factor of 4.5. For this, I give up the right to any appreciation should the stock rise above 15, but that seems to be a worthwhile trade-off for a stock as boring as SLUJ (at least prior to the news flash).

A put option is the mirror image: if I bought a put on SLUJ with a strike of 5, I'll only make money if the stock falls below 5 before the option expires.

Now we're ready to construct a genuinely antifragile investment. Suppose I simultaneously buy out of the money put and call options on the same security, a so-called “long straddle”. Now, as long as the price remains within the strike prices of the put and call, both options will expire worthless, but if the price either rises above the call strike or falls below the put strike, that option will be in the money and pay off the further the underlying price veers from the band defined by the two strikes. This is, then, a pure bet on volatility: it loses a small amount of money as long as nothing unexpected happens, but when a shock occurs, it pays off handsomely.

Now, the premiums on deep out of the money options are usually very modest, so an investor with a portfolio like the one I described who was clobbered in 2008 could have, for a small sum every quarter, purchased put and call options on, say, the Standard & Poor's 500 stock index, expecting to usually have them expire worthless, but under the circumstance which halved the value of his portfolio, would pay off enough to compensate for the shock. (If worried only about a plunge he could, of course, have bought just the put option and saved money on premiums, but here I'm describing a pure example of antifragility being used to cancel fragility.)

I have only described a small fraction of the many topics covered in this masterpiece, and described none of the mathematical foundations it presents (which can be skipped by readers intimidated by equations and graphs). Fragility and antifragility is one of those concepts, simple once understood, which profoundly change the way you look at a multitude of things in the world. When a politician, economist, business leader, cultural critic, or any other supposed thinker or expert advocates a policy, you'll learn to ask yourself, “Does this increase fragility?” and have the tools to answer the question. Further, it provides an intellectual framework to support many of the ideas and policies which libertarians and advocates of individual liberty and free markets instinctively endorse, founded in the way natural systems work. It is particularly useful in demolishing “green” schemes which aim at replacing the organic, distributed, adaptive, and antifragile mechanisms of the market with coercive, top-down, and highly fragile central planning which cannot possibly have sufficient information to work even in the absence of unknowns in the future.

There is much to digest here, and the ramifications of some of the clearly-stated principles take some time to work out and fully appreciate. Indeed, I spent more than five years reading this book, a little bit at a time. It's worth taking the time and making the effort to let the message sink in and figure out how what you've learned applies to your own life and act accordingly. As Fat Tony says, “Suckers try to win arguments; nonsuckers try to win.”

April 2018 Permalink

Veeck, Bill and Ed Lynn. Thirty Tons a Day. New York: Viking, 1972. ISBN 0-670-70157-2.
This book is out of print. Used copies are generally available at

September 2002 Permalink

Weightman, Gavin. The Frozen-Water Trade. New York: Hyperion, 2003. ISBN 0-7868-8640-4.
Those who scoff at the prospect of mining lunar Helium-3 as fuel for Earth-based fusion power plants might ponder the fact that, starting in 1833, British colonists in India beat the sweltering heat of the subcontinent with a steady, year-round supply of ice cut in the winter from ponds and rivers in Massachusetts and Maine and shipped in the holds of wooden sailing ships—a voyage of some 25,000 kilometres and 130 days. In 1870 alone, 17,000 tons of ice were imported by India in ships sailing from Boston. Frederic Tudor, who first conceived the idea of shipping winter ice, previously considered worthless, to the tropics, was essentially single-handedly responsible for ice and refrigeration becoming a fixture of daily life in Western communities around the world. Tudor found fortune and fame in creating an industry based on commodity which beforehand simply melted away every spring. No technological breakthrough was required or responsible—this is a classic case of creating a market by filling a need of which customers were previously unaware. In the process, Tudor suffered just about every adversity one can imagine and never gave up, an excellent illustration that the one essential ingredient of entrepreneurial success is the ability to “take a whacking and keep on hacking”.

April 2004 Permalink

Weightman, Gavin. The Frozen Water Trade. New York: Hyperion, [2003] 2004. ISBN 978-0-7868-8640-1.
In the summer of 1805, two brothers, Frederic and William Tudor, both living in the Boston area, came up with an idea for a new business which would surely make their fortune. Every winter, fresh water ponds in Massachusetts froze solid, often to a depth of a foot or more. Come spring, the ice would melt.

This cycle had repeated endlessly since before humans came to North America, unremarked upon by anybody. But the Tudor brothers, in the best spirit of Yankee ingenuity, looked upon the ice as an untapped and endlessly renewable natural resource. What if this commodity, considered worthless, could be cut from the ponds and rivers, stored in a way that would preserve it over the summer, and shipped to southern states and the West Indies, where plantation owners and prosperous city dwellers would pay a premium for this luxury in times of sweltering heat?

In an age when artificial refrigeration did not exist, that “what if” would have seemed so daunting as to deter most people from entertaining the notion for more than a moment. Indeed, the principles of thermodynamics, which underlie both the preservation of ice in warm climates and artificial refrigeration, would not be worked out until decades later. In 1805, Frederic Tudor started his “Ice House Diary” to record the progress of the venture, inscribing it on the cover, “He who gives back at the first repulse and without striking the second blow, despairs of success, has never been, is not, and never will be, a hero in love, war or business.” It was in this spirit that he carried on in the years to come, confronting a multitude of challenges unimagined at the outset.

First was the question of preserving the ice through the summer, while in transit, and upon arrival in the tropics until it was sold. Some farmers in New England already harvested ice from their ponds and stored it in ice houses, often built of stone and underground. This was sufficient to preserve a modest quantity of ice through the summer, but Frederic would need something on a much larger scale and less expensive for the trade he envisioned, and then there was the problem of keeping the ice from melting in transit. Whenever ice is kept in an environment with an ambient temperature above freezing, it will melt, but the rate at which it melts depends upon how it is stored. It is essential that the meltwater be drained away, since if the ice is allowed to stand in it, the rate of melting will be accelerated, since water conducts heat more readily than air. Melting ice releases its latent heat of fusion, and a sealed ice house will actually heat up as the ice melts. It is imperative the ice house be well ventilated to allow this heat to escape. Insulation which slows the flow of heat from the outside helps to reduce the rate of melting, but care must be taken to prevent the insulation from becoming damp from the meltwater, as that would destroy its insulating properties.

Based upon what was understood about the preservation of ice at the time and his own experiments, Tudor designed an ice house for Havana, Cuba, one of the primary markets he was targeting, which would become the prototype for ice houses around the world. The structure was built of timber, with double walls, the cavity between the walls filled with insulation of sawdust and peat. The walls and roof kept the insulation dry, and the entire structure was elevated to allow meltwater to drain away. The roof was ventilated to allow the hot air from the melting ice to dissipate. Tightly packing blocks of uniform size and shape allowed the outer blocks of ice to cool those inside, and melting would be primarily confined to blocks on the surface of the ice stored.

During shipping, ice was packed in the hold of ships, insulated by sawdust, and crews were charged with regularly pumping out meltwater, which could be used as an on-board source of fresh water or disposed of overboard. Sawdust was produced in great abundance by the sawmills of Maine, and was considered a waste product, often disposed of by dumping it in rivers. Frederic Tudor had invented a luxury trade whose product was available for the price of harvesting it, and protected in shipping by a material considered to be waste.

The economics of the ice business exploited an imbalance in Boston's shipping business. Massachusetts produced few products for export, so ships trading with the West Indies would often leave port with nearly empty holds, requiring rock ballast to keep the ship stable at sea. Carrying ice to the islands served as ballast, and was a cargo which could be sold upon arrival. After initial scepticism was overcome (would the ice all melt and sink the ship?), the ice trade outbound from Boston was an attractive proposition to ship owners.

In February 1806, the first cargo of ice sailed for the island of Martinique. The Boston Gazette reported the event as follows.

No joke. A vessel with a cargo of 80 tons of Ice has cleared out from this port for Martinique. We hope this will not prove to be a slippery speculation.

The ice survived the voyage, but there was no place to store it, so ice had to be sold directly from the ship. Few islanders had any idea what to do with the ice. A restaurant owner bought ice and used it to make ice cream, which was a sensation noted in the local newspaper.

The next decade was to prove difficult for Tudor. He struggled with trade embargoes, wound up in debtor's prison, contracted yellow fever on a visit to Havana trying to arrange the ice trade there, and in 1815 left again for Cuba just ahead of the sheriff, pursuing him for unpaid debts.

On board with Frederic were the materials to build a proper ice house in Havana, along with Boston carpenters to erect it (earlier experiences in Cuba had soured him on local labour). By mid-March, the first shipment of ice arrived at the still unfinished ice house. Losses were originally high, but as the design was refined, dropped to just 18 pounds per hour. At that rate of melting, a cargo of 100 tons of ice would last more than 15 months undisturbed in the ice house. The problem of storage in the tropics was solved.

Regular shipments of ice to Cuba and Martinique began and finally the business started to turn a profit, allowing Tudor to pay down his debts. The cities of the American south were the next potential markets, and soon Charleston, Savannah, and New Orleans had ice houses kept filled with ice from Boston.

With the business established and demand increasing, Tudor turned to the question of supply. He began to work with Nathaniel Wyeth, who invented a horse-drawn “ice plow,” which cut ice more rapidly than hand labour and produced uniform blocks which could be stacked more densely in ice houses and suffered less loss to melting. Wyeth went on to devise machinery for lifting and stacking ice in ice houses, initially powered by horses and later by steam. What had initially been seen as an eccentric speculation had become an industry.

Always on the lookout for new markets, in 1833 Tudor embarked upon the most breathtaking expansion of his business: shipping ice from Boston to the ports of Calcutta, Bombay, and Madras in India—a voyage of more than 15,000 miles and 130 days in wooden sailing ships. The first shipment of 180 tons bound for Calcutta left Boston on May 12 and arrived in Calcutta on September 13 with much of its ice intact. The ice was an immediate sensation, and a public subscription raised funds to build a grand ice house to receive future cargoes. Ice was an attractive cargo to shippers in the East India trade, since Boston had few other products in demand in India to carry on outbound voyages. The trade prospered and by 1870, 17,000 tons of ice were imported by India in that year alone.

While Frederic Tudor originally saw the ice trade as a luxury for those in the tropics, domestic demand in American cities grew rapidly as residents became accustomed to having ice in their drinks year-round and more households had “iceboxes” that kept food cold and fresh with blocks of ice delivered daily by a multitude of ice men in horse-drawn wagons. By 1890, it was estimated that domestic ice consumption was more than 5 million tons a year, all cut in the winter, stored, and delivered without artificial refrigeration. Meat packers in Chicago shipped their products nationwide in refrigerated rail cars cooled by natural ice replenished by depots along the rail lines.

In the 1880s the first steam-powered ice making machines came into use. In India, they rapidly supplanted the imported American ice, and by 1882 the trade was essentially dead. In the early years of the 20th century, artificial ice production rapidly progressed in the US, and by 1915 the natural ice industry, which was at the mercy of the weather and beset by growing worries about the quality of its product as pollution increased in the waters where it was harvested, was in rapid decline. In the 1920s, electric refrigerators came on the market, and in the 1930s millions were sold every year. By 1950, 90 percent of Americans living in cities and towns had electric refrigerators, and the ice business, ice men, ice houses, and iceboxes were receding into memory.

Many industries are based upon a technological innovation which enabled them. The ice trade is very different, and has lessons for entrepreneurs. It had no novel technological content whatsoever: it was based on manual labour, horses, steel tools, and wooden sailing ships. The product was available in abundance for free in the north, and the means to insulate it, sawdust, was considered waste before this new use for it was found. The ice trade could have been created a century or more before Frederic Tudor made it a reality.

Tudor did not discover a market and serve it. He created a market where none existed before. Potential customers never realised they wanted or needed ice until ships bearing it began to arrive at ports in torrid climes. A few years later, when a warm winter in New England reduced supply or ships were delayed, people spoke of an “ice famine” when the local ice house ran out.

When people speak of humans expanding from their home planet into the solar system and technologies such as solar power satellites beaming electricity to the Earth, mining Helium-3 on the Moon as a fuel for fusion power reactors, or exploiting the abundant resources of the asteroid belt, and those with less vision scoff at such ambitious notions, it's worth keeping in mind that wherever the economic rationale exists for a product or service, somebody will eventually profit by providing it. In 1833, people in Calcutta were beating the heat with ice shipped half way around the world by sail. Suddenly, what we may accomplish in the near future doesn't seem so unrealistic.

I originally read this book in April 2004. I enjoyed it just as much this time as when I first read it.

July 2016 Permalink

Weil, Elizabeth. They All Laughed at Christopher Columbus. New York: Bantam Books, 2002. ISBN 978-0-553-38236-5.
For technologists and entrepreneurs, the latter half of the 1990s was a magical time. The explosive growth in computing power available to individuals, the global interconnectivity afforded by the Internet, and the emergence of broadband service with the potential to make the marginal cost of entry as a radio or video broadcaster next to zero created a vista of boundless technological optimism. Companies with market valuations in the billions sprang up like mushrooms despite having never turned a profit (and in some cases, before delivering a product), and stock-option paper millionaires were everywhere, some sporting job titles which didn't exist three years before.

In this atmosphere enthusiasms of all kinds were difficult to restrain, even those more venerable than Internet start-ups, and among people who had previously been frustrated upon multiple occasions. So it was that as the end of the decade approached, Gary Hudson, veteran of three earlier unsuccessful commercial space projects, founded Rotary Rocket, Inc. with the goal of building a reusable single-stage-to-orbit manned spacecraft which would reduce the cost of launching payloads into low Earth orbit by a factor of ten compared to contemporary expendable rockets (which, in turn, were less expensive than NASA's Space Shuttle). Such a dramatic cost reduction was expected to immediately generate substantial business from customers such as Teledesic, which originally planned to launch 840 satellites to provide global broadband Internet service. Further, at one tenth the launch cost, space applications which were not economically feasible before would become so, expanding the space market just as the comparable collapse in the price of computing and communications had done in their sectors.

Hudson assembled a team, a mix of veterans of his earlier ventures, space enthusiasts hoping to make their dreams a reality at last, hard-nosed engineers, and seasoned test pilots hoping to go to space, and set to work. His vision became known as Roton, and evolved to be an all-composite structure including tanks for the liquid oxygen and kerosene propellants, and a unique rotary engine at the base of the conical structure which would spin to create the pressure to inject propellants into 96 combustors arrayed around the periphery, eliminating the need for heavy, complicated, and prone-to-disintegrate turbopumps. The crew of two would fly the Roton to orbit and release the payload into space, then make a de-orbit burn. During re-entry, a water-cooled heat shield on the base of the cone would protect the structure from heating, and when atmospheric density was sufficient, helicopter-like rotor blades would deploy from the top of the cone. These blades would be spun up by autorotation and then, shortly before touchdown, tip jets powered by hydrogen peroxide would fire to allow a controlled powered approach and precision landing. After a mission, one need only load the next payload, refill the propellant tanks, and brief the crew for the next flight. It was estimated one flight per day was achievable with a total ground staff of fewer than twenty people.

This would have been revolutionary, and there were many, some with forbidding credentials and practical experience, who argued that it couldn't possibly work, and certainly not on Hudson's schedule and budget of US$ 150 million (which is closer to the sum NASA or one of its contractors would require to study such a concept, not to actually build and fly it). There were many things to worry about. Nothing like the rotary engine had ever been built, and its fluid mechanical and thermal complexities were largely unknown. The heat shield was entirely novel, and there was no experience as to how it would perform in a real world environment in which pores and channels might clog. Just getting to orbit in a single stage vehicle powered by LOX and kerosene was considered impossible by many, requiring a structure which was 95% propellant at launch. Even with composite construction, nobody had achieved anything close to this mass fraction in a flight vehicle.

Gary Hudson is not just a great visionary; he is nothing if not persuasive. For example, here is a promotional video from 1998. He was able, over the history of the project, to raise a total of US$ 30 million for the project from private investors (disclosure: myself included), and built an initial atmospheric test vehicle intended to validate the helicopter landing system. In 1999, this vehicle made three successful test flights, including a hop up and down and a flight down the runway.

By this point in 1999, the technology bubble was nearing the bursting point and perspicacious investors were already backing away from risky ventures. When it became clear there was no prospect to raise sufficient funds to continue, even toward the next milestone, Hudson had no option but to lay off staff and eventually entirely shutter the company, selling off its remaining assets (but the Roton ATV can be seen on display at the Mojave Spaceport).

There are any number of “business books” written about successful ventures, often ghostwritten for founders to show how they had a unique vision and marched from success to success to achieve their dream. (These so irritated me that I strove, in my own business book, to demonstrate from contemporary documents, the extent to which those in a technological start-up grope in the dark with insufficient information and little idea of where it's going.) Much rarer are accounts of big dreams which evoked indefatigable efforts from talented people and, despite all, ended badly. This book is a superb exemplar of that rare genre. There are a few errors of fact, and from time to time the author's description of herself among the strange world of the rocket nerds is a bit precious, but you get an excellent sense of what it was like to dream big, how a visionary can inspire people to accomplish extraordinary things, and how an entrepreneur must not only have a sound technical foundation, a vision of the future, but also have kissed the Barnum stone to get the job done.

Oddly, the book contains no photographs of this unique and stunning vehicle or the people who built it.

October 2013 Permalink

Williams, Jonathan, Joe Cribb, and Elizabeth Errington, eds. Money: A History. London: British Museum Press, 1997. ISBN 0-312-21212-7.

April 2003 Permalink

Zubrin, Robert Energy Victory. Amherst, NY: Prometheus Books, 2007. ISBN 1-59102-591-5.
This is a tremendous book—jam-packed with nerdy data of every kind. The author presents a strategy aiming for the total replacement of petroleum as a liquid fuel and chemical feedstock with an explicit goal of breaking the back of OPEC and, as he says, rendering the Middle East's near-monopoly on oil as significant on the world economic stage as its near-monopoly on camel milk.

The central policy recommendation is a U.S. mandate that all new vehicles sold in the U.S. be “flex-fuel” capable: able to run on gasoline, ethanol, or methanol in any mix whatsoever. This is a proven technology; there are more than 6 million gasoline/ethanol vehicles on the road at present, more than five times the number of gasoline/electric hybrids (p. 27), and the added cost over a gas-only vehicle is negligible. Gasoline/ethanol flex-fuel vehicles are approaching 100% of all new sales in Brazil (pp. 165–167), and that without a government mandate. Present flex vehicles are either gasoline/ethanol or gasoline/methanol, not tri-fuel, but according to Zubrin that's just a matter of tweaking the exhaust gas sensor and reprogramming the electronic fuel injection computer.

Zubrin argues that methanol capability in addition to ethanol is essential because methanol can be made from coal or natural gas, which the U.S. has in abundance, and it enables utilisation of natural gas which is presently flared due to being uneconomical to bring to market in gaseous form. This means that it isn't necessary to wait for a biomass ethanol economy to come on line. Besides, even if you do produce ethanol from, say, maize, you can still convert the cellulose “waste” into methanol economically. You can also react methanol into dimethyl ether, an excellent diesel fuel that burns cleaner than petroleum-based diesel. Coal-based methanol production produces greenhouse gases, but less than burning the coal to make electricity, then distributing it and using it in plug-in hybrids, given the efficiencies along the generation and transmission chain.

With full-flex, the driver becomes a genuine market player: you simply fill up from whatever pump has the cheapest fuel among those available wherever you happen to be: the car will run fine on any mix you end up with in the tank. People in Brazil have been doing this for the last several years, and have been profiting from their flex-fuel vehicles now that domestic ethanol is cheaper than gasoline. Brazil, in fact, reduced its net petroleum imports to zero in 2005 (from 80% in 1974), and is now a net exporter of energy (p. 168), rendering the Brazilian economy entirely immune to the direct effects of OPEC price shocks.

Zubrin also demolishes the argument that ethanol is energy neutral or a sink: recent research indicates that corn ethanol multiplies the energy input by a factor between 6 and 20. Did you know that of the two authors of an oft-cited 2005 “ethanol energy sink” paper, one (David Pimentel) is a radical Malthusian who wants to reduce the world population by a factor of three and the other (Tadeusz Patzek) comes out of the “all bidness” (pp. 126–135)?

The geopolitical implications of energy dependence and independence are illustrated with examples from both world wars and the present era, and a hopeful picture sketched in which the world transitions from looting developed countries to fill the coffers of terror masters and kleptocrats to a future where the funds for the world's liquid fuel energy needs flow instead to farmers in the developing world who create sustainable, greenhouse-neutral fuel by their own labour and intellect, rather than pumping expendable resources from underground.

Here we have an optimistic, pragmatic, and open-ended view of the human prospect. The post-petroleum era could be launched on a global scale by a single act of the U.S. Congress which would cost U.S. taxpayers nothing and have negligible drag on the domestic or world economy. The technologies required date mostly from the 19th century and are entirely mature today, and the global future advocated has already been prototyped in a large, economically and socially diverse country, with stunning success. Perhaps people in the second half of the 21st century will regard present-day prophets of “peak oil” and “global warming” as quaint as the doomsayers who foresaw the end of civilisation when firewood supplies were exhausted, just years before coal mines began to fuel the industrial revolution.

December 2007 Permalink