Business
- 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.EMP,
EMP!
Don't you put,
your tag on me! - 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.
- Barnum, Phineas T. Art of Money Getting. Bedford, Massachusetts: Applewood Books, [1880] 1999. ISBN 1-55709-494-2.
- Now available online at this site.
- 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.
- 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. - 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.
- 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).
- 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.
- 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 dot.com 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.
- Brown, Paul. The Rocketbelt Caper. Newcastle upon Tyne: Tonto Press, 2007. ISBN 0-9552183-7-3.
- 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' www.rocketbelt.nl 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.
- 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.
- 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.
- Carreyrou, John. Bad Blood. New York: Alfred A. Knopf, 2018. ISBN 978-1-9848-3363-1.
-
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)
- Cellan-Jones, Rory. Dot.bomb: The Strange Death of Dot.com Britain. London: Aurum Press, [2001] 2003. ISBN 1-85410-952-9.
- The dot.com 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 lastminute.com (a rare survivor). You're probably aware of the much-hyped rise, profligate peak, and ugly demise of boo.com, poster child of the excesses of dot.com 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 Clickmango.com.
- 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.
- 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.
- Erdman, Paul. The Set-Up. New York: St. Martin's, 1998. ISBN 0-312-96805-1.
- 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.
- Gilder, George. Life after Google. Washington: Regnery Publishing, 2018. ISBN 978-1-62157-576-4.
-
In his 1990 book Life after Television,
George Gilder predicted that the personal computer, then mostly boxes
that sat on desktops and worked in isolation from one another,
would become more personal, mobile, and be used more to communicate
than to compute. In the 1994 revised edition of the book, he
wrote. “The most common personal computer of the next decade will be
a digital cellular phone with an IP address … connecting
to thousands of databases of all kinds.” In contemporary
speeches he expanded on the idea, saying, “it will be as
portable as your watch and as personal as your wallet; it will
recognize speech and navigate streets; it will collect your
mail, your news, and your paycheck.” In 2000, he
published Telecosm, where
he forecast that the building out of a fibre optic communication
infrastructure and the development of successive generations of
spread spectrum digital mobile communication technologies would
effectively cause the cost of communication bandwidth (the quantity
of data which can be transmitted in a given time) to asymptotically
approach zero, just as the ability to pack more and more transistors
on microprocessor and memory chips was doing for computing.
Clearly, when George Gilder forecasts the future of computing,
communication, and the industries and social phenomena that
spring from them, it's wise to pay attention. He's not
infallible: in 1990 he predicted that “in the world of
networked computers, no one would have to see an advertisement
he didn't want to see”. Oh, well. The
very difference between that happy vision and the
advertisement-cluttered world we inhabit today, rife with
bots, malware, scams, and serial large-scale security breaches
which compromise the personal data of millions of people and
expose them to identity theft and other forms of fraud is the
subject of this book: how we got here, and how technology is
opening a path to move on to a better place.
The Internet was born with decentralisation as a central
concept. Its U.S. government-funded precursor,
ARPANET,
was intended to research and demonstrate the technology
of packet
switching, in which dedicated communication lines
from point to point (as in the telephone network) were
replaced by switching packets, which can represent all
kinds of data—text, voice, video, mail, cat
pictures—from source to destination over shared high-speed
data links. If the network had multiple paths from source
to destination, failure of one data link would simply cause
the network to reroute traffic onto a working path, and
communication protocols would cause any packets lost in the
failure to be automatically re-sent, preventing loss of
data. The network might degrade and deliver data more slowly
if links or switching hubs went down, but everything
would still get through.
This was very attractive to military planners in the Cold
War, who worried about a nuclear attack decapitating their
command and control network by striking one or a few
locations through which their communications funnelled. A
distributed network, of which ARPANET was the prototype,
would be immune to this kind of top-down attack because
there was no top: it was made up of peers, spread all over
the landscape, all able to switch data among themselves
through a mesh of interconnecting links.
As the ARPANET grew into the Internet and expanded from a small
community of military, government, university, and large
company users into a mass audience in the 1990s, this
fundamental architecture was preserved, but in practice the
network bifurcated into a two tier structure. The top tier
consisted of the original ARPANET-like users, plus
“Internet Service Providers” (ISPs), who had
top-tier (“backbone”) connectivity, and then
resold Internet access to their customers, who mostly
initially connected via dial-up modems. Over time, these customers
obtained higher bandwidth via cable television connections,
satellite dishes, digital subscriber lines (DSL) over
the wired telephone network, and, more recently, mobile
devices such as cellular telephones and tablets.
The architecture of the Internet remained the same, but this
evolution resulted in a weakening of its peer-to-peer
structure. The approaching exhaustion
of 32 bit Internet addresses
(IPv4) and
the slow deployment of its successor
(IPv6)
meant most small-scale Internet users did not have a
permanent address where others could contact them. In an
attempt to shield users from the flawed security model and
implementation of the software they ran, their Internet
connections were increasingly placed behind firewalls and subjected to
Network Address Translation (NAT), which made it impossible
to establish peer to peer connections without a third party
intermediary (which, of course, subverts the design goal of
decentralisation). While on the ARPANET and the original
Internet every site was a peer of every other (subject only
to the speed of their network connections and computer power
available to handle network traffic), the network population
now became increasingly divided into producers or publishers (who
made information available), and consumers (who used the network
to access the publishers' sites but did not publish themselves).
While in the mid-1990s it was easy (or as easy as anything
was in that era) to set up your own Web server and publish
anything you wished, now most small-scale users were forced to employ
hosting services operated by the publishers to make their
content available. Services such as AOL, Myspace, Blogger,
Facebook, and YouTube were widely used by
individuals and companies to host their content, while
those wishing their own apparently independent Web presence
moved to hosting providers who supplied, for a fee, the
servers, storage, and Internet access used by the site.
All of this led to a centralisation of data on the Web,
which was accelerated by the emergence of the high speed
fibre optic links and massive computing power upon which Gilder had
based his 1990 and 2000 forecasts. Both of these
came with great economies of scale: it cost a company
like Google or Amazon much less per unit of computing
power or network bandwidth to build a large, industrial-scale
data centre located where electrical power and cooling
were inexpensive and linked to the Internet backbone
by multiple fibre optic channels, than it cost an individual
Internet user or small company with their own server
on premises and a modest speed link to an ISP. Thus it
became practical for these Goliaths of the Internet to
suck up everybody's data and resell their computing power
and access at attractive prices.
As a example of the magnitude of the economies of scale we're
talking about, when I migrated the hosting of my
Fourmilab.ch site from my own
on-site servers and Internet connection to an Amazon Web
Services data centre, my monthly bill for hosting the site
dropped by a factor of fifty—not fifty percent,
one fiftieth the cost, and you can bet Amazon's
making money on the deal.
This tremendous centralisation is the antithesis of the concept
of ARPANET. Instead of a worldwide grid of redundant data links
and data distributed everywhere, we have a modest number of huge
data centres linked by fibre optic cables carrying traffic for
millions of individuals and enterprises. A couple of submarines
full of
Trident
D5s would probably suffice to reset the world, computer
network-wise, to 1970.
As this concentration was occurring, the same companies who were
building the data centres were offering more and more services
to users of the Internet: search engines; hosting of blogs,
images, audio, and video; E-mail services; social networks of
all kinds; storage and collaborative working tools;
high-resolution maps and imagery of the world; archives of data
and research material; and a host of others. How was all of
this to be paid for? Those giant data centres, after all,
represent a capital investment of tens of billions of
dollars, and their electricity bills are comparable to those of
an aluminium smelter. Due to the architecture of the Internet
or, more precisely, missing pieces of the puzzle, a fateful
choice was made in the early days of the build-out of these
services which now pervade our lives, and we're all
paying the price for it. So far, it has allowed the few
companies in this data oligopoly to join the ranks of the
largest, most profitable, and most highly valued enterprises in
human history, but they may be built on a flawed business model
and foundation vulnerable to disruption by software and
hardware technologies presently emerging.
The basic business model of what we might call the “consumer
Internet” (as opposed to businesses who pay to host their
Web presence, on-line stores, etc.) has, with few exceptions,
evolved to be what the author calls the “Google model”
(although it predates Google): give the product away and make money
by afflicting its users with advertisements (which are increasingly
targeted to them through information collected from the user's
behaviour on the network through intrusive tracking mechanisms).
The fundamental flaws of this are apparent to anybody who uses
the Internet: the constant clutter of advertisements, with
pop-ups, pop-overs, auto-play video and audio, flashing banners,
incessant requests to allow tracking “cookies” or
irritating notifications, and the consequent arms race between
ad blockers and means to circumvent them, with browser developers
(at least those not employed by those paid by the advertisers,
directly or indirectly) caught in the middle.
There are even absurd Web sites which charge a subscription fee
for “membership” and then bombard these paying
customers with advertisements that insult their intelligence.
But there is a fundamental problem with
“free”—it destroys the most important channel
of communication between the vendor of a product or service and
the customer: the price the customer is willing to pay.
Deprived of this information, the vendor is in the same position
as a factory manager in a centrally planned economy who has no
idea how many of each item to make because his orders are handed
down by a planning bureau equally clueless about what is
needed in the absence of a price signal. In the end, you have
freight cars of typewriter ribbons lined up on sidings while
customers wait in line for hours in the hope of buying a
new pair of shoes. Further, when the user is not the customer
(the one who pays), and especially when a “free”
service verges on monopoly status like Google search, Gmail,
Facebook, and Twitter, there is little incentive for providers
to improve the user experience or be responsive to user requests
and needs. Users are subjected to the endless torment of buggy
“beta” releases, capricious change for the sake of
change, and compromises in the user experience on behalf of the
real customers—the advertisers. Once again, this mirrors
the experience of centrally-planned economies where the market
feedback from price is absent: to appreciate this, you need only
compare consumer products from the 1970s and 1980s manufactured
in the Soviet Union with those from Japan.
The fundamental flaw in Karl Marx's economics was his
belief that the industrial revolution of his time would produce
such abundance of goods that the problem would shift from
“production amid scarcity” to “redistribution
of abundance”. In the author's view, the neo-Marxists of
Silicon Valley see the exponentially growing technologies of
computing and communication providing such abundance that they
can give away its fruits in return for collecting and monetising
information collected about their users (note, not
“customers”: customers are those who pay for the
information so collected). Once you grasp this, it's
easier to understand the politics of the barons of Silicon
Valley.
The centralisation of data and information flow in these
vast data silos creates another threat to which a
distributed system is immune: censorship or manipulation of
information flow, whether by a coercive government or
ideologically-motivated management of the companies who
provide these “free” services. We may never
know who first said “The Internet treats censorship as
damage and routes around it” (the quote has been
attributed to numerous people, including two personal
friends, so I'm not going there), but it's profound: the
original decentralised structure of the ARPANET/Internet
is as robust against censorship as it is in the face of
nuclear war. If one or more nodes on the network start to
censor information or refuse to forward it on communication
links it controls, the network routing protocols simply assume
that node is down and send data around it through other nodes
and paths which do not censor it. On a network with a
multitude of nodes and paths among them, owned by a large
and diverse population of operators, it is extraordinarily
difficult to shut down the flow of information from a given
source or viewpoint; there will almost always be an
alternative route that gets it there. (Cryptographic
protocols and secure and verified identities can similarly
avoid the alteration of information in transit or forging
information and attributing it to a different originator;
I'll discuss that later.) As with physical damage,
top-down censorship does not work because there's no top.
But with the current centralised Internet, the owners and
operators of these data silos have enormous power to put their
thumbs on the scale, tilting opinion in their favour and
blocking speech they oppose. Google can push down the page
rank of information sources of which they disapprove, so
few users will find them. YouTube can “demonetise”
videos because they dislike their content,
cutting off their creators' revenue stream overnight
with no means of appeal, or they can outright ban creators
from the platform and remove their existing content. Twitter
routinely “shadow-bans” those with whom they disagree,
causing their tweets to disappear into the void, and outright
banishes those more vocal. Internet payment processors and
crowd funding sites enforce explicit ideological litmus tests
on their users, and revoke long-standing commercial relationships
over legal speech. One might restate the original observation
about the Internet as “The centralised Internet treats
censorship as an opportunity and says,
‘Isn't it great!’ ” Today there's
a top, and those on top control the speech of everything that
flows through their data silos.
This pernicious centralisation and “free” funding
by advertisement (which is fundamentally plundering users'
most precious possessions: their time and attention) were
in large part the consequence of the Internet's lacking three
fundamental architectural layers: security, trust, and transactions.
Let's explore them.
Security. Essential to any useful communication
system, security simply means that communications between
parties on the network cannot be intercepted by third parties,
modified en route, or otherwise manipulated (for example, by
changing the order in which messages are received). The
communication protocols of the Internet, based on the
OSI model,
had no explicit security layer. It was expected to be
implemented outside the model, across the layers of
protocol. On today's Internet, security has been bolted-on,
largely through the
Transport
Layer Security (TLS) protocols (which, due to history, have
a number of other commonly used names, and are most often
encountered in the “https:” URLs by
which users access Web sites). But because it's bolted on, not
designed in from the bottom-up, and because it “just grew”
rather than having been designed in, TLS has been the locus of
numerous security flaws which put software that employs it
at risk. Further, TLS is a tool which must be used by application
designers with extreme care in order to deliver security to their
users. Even if TLS were completely flawless, it is very easy to
misuse it in an application and compromise users' security.
Trust. As indispensable as security is knowing to whom you're
talking. For example, when you connect to your bank's Web site,
how do you know you're actually talking to their server and not
some criminal whose computer has spoofed your computer's domain
name system server to intercept your communications and who, the
moment you enter your password, will be off and running to empty
your bank accounts and make your life a living Hell? Once again,
trust has been bolted on to the existing Internet through a
rickety system of “certificates” issued mostly by
large companies for outrageous fees. And, as with anything
centralised, it's vulnerable: in 2016, one of the
top-line certificate vendors was compromised, requiring myriad
Web sites (including this one) to re-issue their security
certificates.
Transactions. Business is all about
transactions; if you aren't doing transactions, you aren't
in business or, as Gilder puts it, “In business, the
ability to conduct transactions is not optional. It is the
way all economic learning and growth occur. If your product is
‘free,’ it is not a product, and you are not in
business, even if you can extort money from so-called
advertisers to fund it.” The present-day Internet
has no transaction layer, even bolted on. Instead, we have
more silos and bags hanging off the side of the Internet
called PayPal, credit card processing companies, and the
like, which try to put a Band-Aid over the suppurating
wound which is the absence of a way to send money over the
Internet in a secure, trusted, quick, efficient, and
low-overhead manner. The need for this was perceived long
before ARPANET. In
Project
Xanadu, founded by
Ted Nelson
in 1960, rule 9 of the
“original 17 rules” was, “Every document can
contain a royalty mechanism at any desired degree of granularity
to ensure payment on any portion accessed, including virtual
copies (‘transclusions’) of all or part of the
document.” While defined in terms of documents and
quoting, this implied the existence of a
micropayment
system which would allow compensating authors and publishers
for copies and quotations of their work with a granularity as
small as one character, and could easily be extended to cover
payments for products and services. A micropayment system must
be able to handle very small payments without crushing
overhead, extremely quickly, and transparently (without the
Japanese tea ceremony that buying something on-line involves
today). As originally envisioned by Ted Nelson, as you read
documents, their authors and publishers would be automatically
paid for their content, including payments to the originators of
material from others embedded within them. As long as the total
price for the document was less than what I termed the user's
“threshold of paying”, this would be completely
transparent (a user would set the threshold in the browser: if
zero, they'd have to approve all payments). There would be
no need for advertisements to support publication on a public
hypertext network (although publishers would, of course, be free
to adopt that model if they wished). If implemented in a
decentralised way, like the ARPANET, there would be no
central strangle point where censorship could be applied by
cutting off the ability to receive payments.
So, is it possible to remake the Internet, building in
security, trust, and transactions as the foundation, and replace
what the author calls the “Google system of the world”
with one in which the data silos are seen as obsolete,
control of users' personal data and work returns to their
hands, privacy is respected and the panopticon snooping of
today is seen as a dark time we've put behind us, and the
pervasive and growing censorship by plutocrat
ideologues and slaver governments becomes impotent and
obsolete? George Gilder responds “yes”, and
in this book identifies technologies already existing and
being deployed which can bring about this transformation.
At the heart of many of these technologies is the concept
of a blockchain,
an open, distributed ledger which records transactions or any
other form of information in a permanent, public, and verifiable
manner. Originally conceived as the transaction ledger for
the Bitcoin
cryptocurrency,
it provided the first means of solving the
double-spending
problem (how do you keep people from spending a unit of
electronic currency twice) without the need for a central server
or trusted authority, and hence without a potential choke-point
or vulnerability to attack or failure. Since the launch of
Bitcoin in 2009, blockchain technology has become a major area
of research, with banks and other large financial institutions,
companies such as IBM, and major university research groups
exploring applications with the goals of drastically reducing
transaction costs, improving security, and hardening systems
against single-point failure risks.
Applied to the Internet, blockchain technology can provide
security and trust (through the permanent publication of public
keys which identify actors on the network), and a transaction
layer able to efficiently and quickly execute micropayments
without the overhead, clutter, friction, and security risks of
existing payment systems. By necessity, present-day blockchain
implementations are add-ons to the existing Internet, but as the
technology matures and is verified and tested, it can move into
the foundations of a successor system, based on the same
lower-level protocols (and hence compatible with the installed
base), but eventually supplanting the patched-together
architecture of the
Domain
Name System,
certificate
authorities, and payment processors, all of which
represent vulnerabilities of the present-day Internet and
points at which censorship and control can be imposed. Technologies
to watch in these areas are:
As the bandwidth available to users on the edge of the network
increases through the deployment of fibre to the home and
enterprise and via
5G mobile
technology, the data transfer economy of scale of the great
data silos will begin to erode. Early in the Roaring Twenties,
the aggregate computing power and communication bandwidth on
the edge of the network will equal and eventually dwarf that
of the legacy data smelters of Google, Facebook, Twitter, and
the rest. There will no longer be any need for users to entrust
their data to these overbearing anachronisms and consent to multi-dozen
page “terms of service” or endure advertising
just to see their own content or share it with others. You
will be in possession of your own data, on your own server or
on space for which you freely contract with others, with backup and
other services contracted with any other provider on the
network. If your server has extra capacity, you can turn it
into money by joining the market for computing and storage
capacity, just as you take advantage of these resources when
required. All of this will be built on the new secure foundation,
so you will retain complete control over who can see your
data, no longer trusting weasel-worded promises made by
amorphous entities with whom you have no real contract to
guard your privacy and intellectual property rights. If
you wish, you can be paid for your content, with remittances
made automatically as people access it. More and more, you'll
make tiny payments for content which is no longer obstructed by
advertising and chopped up to accommodate more clutter. And
when outrage mobs of pink hairs and soybeards (each with their
own pronoun) come howling to ban you from the Internet, they'll
find nobody to shriek at and the kill switch rusting away in a
derelict data centre: your data will be in your own hands with
access through myriad routes.
Technologies moving in this direction include:
- Inrupt
- Brave Web browser and Basic Attention Token
- Golem distributed supercomputer
- OTOY RNDR rendering network
- Gladwell, Malcolm. The Tipping Point. Boston: Little, Brown, 2000. ISBN 0-316-31696-2.
- Haig, Matt. Brand Failures. London: Kogan Page, 2003. ISBN 0-7494-3927-0.
- 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.
- Hazlitt, Henry. Economics in One Lesson. New York: Three Rivers Press, [1946, 1962] 1979. ISBN 0-517-54823-2.
- Hester, Elliott. Plane Insanity. New York: St. Martin's Press, 2002. ISBN 0-312-26958-7.
- Kyne, Peter B. The Go-Getter. New York: Henry Holt, 1921. ISBN 0-8050-0548-X.
- Leeson, Nick with Edward Whitley. Rogue Trader. London: Warner Books, 1996. ISBN 0-7515-1708-9.
- 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.
- 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!
- 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.
- 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, investorsexchange.com, 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.
- Lips, Ferdinand. Gold Wars. New York: FAME, 2001. ISBN 0-9710380-0-7.
- 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.
- 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, boo.com, 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.
- 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.
- 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.
- McMath, Robert M. and Thom Forbes. What Were They Thinking?. New York: Three Rivers Press, 1998. ISBN 0-8129-3203-X.
- 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.
- 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.
- Olson, Walter K. The Rule of Lawyers. New York: St. Martin's Press, 2003. ISBN 0-312-28085-8.
- The author operates the valuable Overlawyered.com 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.
- 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. - 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.
- 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.
- 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.
- 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.
- 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.
- 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.”
- Financial collapse: Iceland
- Commercial collapse: The Russian Mafia
- Political collapse: The Pashtun
- Social collapse: The Roma
- Cultural collapse: The Ik
- 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.
- 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.
- 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).
- Prechter, Robert R., Jr. Conquer the Crash. Chichester, England: John Wiley & Sons, 2002. ISBN 0-470-84982-7.
- Reynolds, Glenn. An Army of Davids. Nashville: Nelson Current, 2006. ISBN 1-59555-054-2.
- In this book, law professor and über blogger (InstaPundit.com) 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.
- 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.
WITHIN THIS VALE OF TOIL AND SIN YOUR HEAD GROWS BALD BUT NOT YOUR CHIN—USE
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:
THIRTY DAYS HATH SEPTEMBER APRIL JUNE AND THE SPEED OFFENDER
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?”
- 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. - 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.
- Smith, Greg. Why I Left Goldman Sachs. New York: Grand Central, 2012. ISBN 978-1-4555-2747-2.
- 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.
- 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.
- 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 «Ŕ fin septembre 1972», 2002 is intended, not 1972.
- 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.
- 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.
- 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.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.Spoilers end here.
- 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.
- Taleb, Nassim Nicholas. Skin in the Game. New York: Random House, 2018. ISBN 978-0-425-28462-9.
-
This book is volume four in the author's
Incerto series, following
Fooled by Randomness (February 2011),
The Black Swan (January 2009),
and Antifragile (April 2018).
In it, he continues to explore the topics of uncertainty, risk,
decision making under such circumstances, and how both
individuals and societies winnow out what works from what
doesn't in order to choose wisely among the myriad alternatives
available.
The title, “Skin in the Game”, is an aphorism which
refers to an individual's sharing the risks and rewards of an
undertaking in which they are involved. This is often applied
to business and finance, but it is, as the author demonstrates,
a very general and powerful concept. An airline pilot has skin
in the game along with the passengers. If the plane crashes and
kills everybody on board, the pilot will die along with them.
This insures that the pilot shares the passengers' desire for a
safe, uneventful trip and inspires confidence among them. A
government “expert” putting together a “food
pyramid” to be vigorously promoted among the citizenry and
enforced upon captive populations such as school children or
members of the armed forces, has no skin in the game. If his or
her recommendations create an epidemic of obesity, type 2
diabetes, and cardiovascular disease, that probably won't happen
until after the “expert” has retired and, in any
case, civil servants are not fired or demoted based upon the
consequences of their recommendations.
Ancestral human society was all about skin in the game. In a
small band of hunter/gatherers, everybody can see and is aware
of the actions of everybody else. Slackers who do not
contribute to the food supply are likely to be cut loose to fend
for themselves. When the hunt fails, nobody eats until the next
kill. If a conflict develops with a neighbouring band, those
who decide to fight instead of running away or surrendering are
in the front line of the battle and will be the first to suffer
in case of defeat.
Nowadays we are far more “advanced”. As the author
notes, “Bureaucracy is a construction by which a person is
conveniently separated from the consequences of his or her
actions.” As populations have exploded, layers and layers
of complexity have been erected, removing authority ever farther
from those under its power. We have built mechanisms which have
immunised a ruling class of decision makers from the
consequences of their decisions: they have little or no skin in
the game.
Less than a third of all Roman emperors died in their beds. Even
though they were at the pinnacle of the largest and most
complicated empire in the West, they regularly paid the ultimate
price for their errors either in battle or through palace
intrigue by those dissatisfied with their performance. Today the
geniuses responsible for the 2008 financial crisis, which
destroyed the savings of hundreds of millions of innocent people
and picked the pockets of blameless taxpayers to bail out the
institutions they wrecked, not only suffered no punishment of
any kind, but in many cases walked away with large bonuses or
golden parachute payments and today are listened to when they
pontificate on the current scene, rather than being laughed at
or scorned as they would be in a rational world. We have
developed institutions which shift the consequences of bad
decisions from those who make them to others, breaking the vital
feedback loop by which we converge upon solutions which, if not
perfect, at least work well enough to get the job done without
the repeated catastrophes that result from ivory tower theories
being implemented on a grand scale in the real world.
Learning and Evolution
Being creatures who have evolved large brains, we're inclined to think that learning is something that individuals do, by observing the world, drawing inferences, testing hypotheses, and taking on knowledge accumulated by others. But the overwhelming majority of creatures who have ever lived, and of those alive today, do not have large brains—indeed, many do not have brains at all. How have they learned to survive and proliferate, filling every niche on the planet where environmental conditions are compatible with biochemistry based upon carbon atoms and water? How have they, over the billions of years since life arose on Earth, inexorably increased in complexity, most recently producing a species with a big brain able to ponder such questions? The answer is massive parallelism, exhaustive search, selection for survivors, and skin in the game, or, putting it all together, evolution. Every living creature has skin in the ultimate game of whether it will produce offspring that inherit its characteristics. Every individual is different, and the process of reproduction introduces small variations in progeny. Change the environment, and the characteristics of those best adapted to reproduce in it will shift and, eventually, the population will consist of organisms adapted to the new circumstances. The critical thing to note is that while each organism has skin in the game, many may, and indeed must, lose the game and die before reproducing. The individual organism does not learn, but the species does and, stepping back another level, the ecosystem as a whole learns and adapts as species appear, compete, die out, or succeed and proliferate. This simple process has produced all of the complexity we observe in the natural world, and it works because every organism and species has skin in the game: its adaptation to its environment has immediate consequences for its survival. None of this is controversial or new. What the author has done in this book is to apply this evolutionary epistemology to domains far beyond its origins in biology—in fact, to almost everything in the human experience—and demonstrate that both success and wisdom are generated when this process is allowed to work, but failure and folly result when it is thwarted by institutions which take the skin out of the game. How does this apply in present-day human society? Consider one small example of a free market in action. The restaurant business is notoriously risky. Restaurants come and go all the time, and most innovations in the business fall flat on their face and quickly disappear. And yet most cities have, at any given time, a broad selection of restaurants with a wide variety of menus, price points, ambiance, and service to appeal to almost any taste. Each restaurant has skin in the game: those which do not attract sufficient customers (or, having once been successful, fail to adapt when customers' tastes change) go out of business and are replaced by new entrants. And yet for all the churning and risk to individual restaurants, the restaurant “ecosystem” is remarkably stable, providing customers options closely aligned with their current desires. To a certain kind of “expert” endowed with a big brain (often crammed into a pointy head), found in abundance around élite universities and government agencies, all of this seems messy, chaotic, and (the horror!) inefficient. Consider the money lost when a restaurant fails, the cooks and waiters who lose their jobs, having to find a new restaurant to employ them, the vacant building earning nothing for its owner until a new tenant is found—certainly there must be a better way. Why, suppose instead we design a standardised set of restaurants based upon a careful study of public preferences, then roll out this highly-optimised solution to the problem. They might be called “public feeding centres”. And they would work about as well as the name implies.Survival and Extinction
Evolution ultimately works through extinction. Individuals who are poorly adapted to their environment (or, in a free market, companies which poorly serve their customers) fail to reproduce (or, in the case of a company, survive and expand). This leaves a population better adapted to its environment. When the environment changes, or a new innovation appears (for example, electricity in an age dominated by steam power), a new sorting out occurs which may see the disappearance of long-established companies that failed to adapt to the new circumstances. It is a tautology that the current population consists entirely of survivors, but there is a deep truth within this observation which is at the heart of evolution. As long as there is a direct link between performance in the real world and survival—skin in the game—evolution will work to continually optimise and refine the population as circumstances change. This evolutionary process works just as powerfully in the realm of ideas as in biology and commerce. Ideas have consequences, and for the process of selection to function, those consequences, good or ill, must be borne by those who promulgate the idea. Consider inventions: an inventor who creates something genuinely useful and brings it to market (recognising that there are many possible missteps and opportunities for bad luck or timing to disrupt this process) may reap great rewards which, in turn, will fund elaboration of the original invention and development of related innovations. The new invention may displace existing technologies and cause them, and those who produce them, to become obsolete and disappear (or be relegated to a minor position in the market). Both the winner and loser in this process have skin in the game, and the outcome of the game is decided by the evaluation of the customers expressed in the most tangible way possible: what they choose to buy. Now consider an academic theorist who comes up with some intellectual “innovation” such as “Modern Monetary Theory” (which basically says that a government can print as much paper money as it wishes to pay for what it wants without collecting taxes or issuing debt as long as full employment has not been achieved). The theory and the reputation of those who advocate it are evaluated by their peers: other academics and theorists employed by institutions such as national treasuries and central banks. Such a theory is not launched into a market to fend for itself among competing theories: it is “sold” to those in positions of authority and imposed from the top down upon an economy, regardless of the opinions of those participating in it. Now, suppose the brilliant new idea is implemented and results in, say, total collapse of the economy and civil society? What price do those who promulgated the theory and implemented it pay? Little or nothing, compared to the misery of those who lost their savings, jobs, houses, and assets in the calamity. Many of the academics will have tenure and suffer no consequences whatsoever: they will refine the theory, or else publish erudite analyses of how the implementation was flawed and argue that the theory “has never been tried”. Some senior officials may be replaced, but will doubtless land on their feet and continue to pull down large salaries as lobbyists, consultants, or pundits. The bureaucrats who patiently implemented the disastrous policies are civil servants: their jobs and pensions are as eternal as anything in this mortal sphere. And, before long, another bright, new idea will bubble forth from the groves of academe. (If you think this hypothetical example is unrealistic, see the career of one Robert Rubin. “Bob”, during his association with Citigroup between 1999 and 2009, received total compensation of US$126 million for his “services” as a director, advisor, and temporary chairman of the bank, during which time he advocated the policies which eventually brought it to the brink of collapse in 2008 and vigorously fought attempts to regulate the financial derivatives which eventually triggered the global catastrophe. During his tenure at Citigroup, shareholders of its stock lost 70% of their investment, and eventually the bank was bailed out by the federal government using money taken by coercive taxation from cab drivers and hairdressers who had no culpability in creating the problems. Rubin walked away with his “winnings” and paid no price, financial, civil, or criminal, for his actions. He is one of the many poster boys and girls for the “no skin in the game club”. And lest you think that, chastened, the academics and pointy-heads in government would regain their grounding in reality, I have just one phrase for you, “trillion dollar coin”, which “Nobel Prize” winner Paul Krugman declared to be “the most important fiscal policy debate of our lifetimes”.)Intellectual Yet Idiot
A cornerstone of civilised society, dating from at least the Code of Hammurabi (c. 1754 B.C.), is that those who create risks must bear those risks: an architect whose building collapses and kills its owner is put to death. This is the fundamental feedback loop which enables learning. When it is broken, when those who create risks (academics, government policy makers, managers of large corporations, etc.) are able to transfer those risks to others (taxpayers, those subject to laws and regulations, customers, or the public at large), the system does not learn; evolution breaks down; and folly runs rampant. This phenomenon is manifested most obviously in the modern proliferation of the affliction the author calls the “intellectual yet idiot” (IYI). These are people who are evaluated by their peers (other IYIs), not tested against the real world. They are the equivalent of a list of movies chosen based upon the opinions of high-falutin' snobbish critics as opposed to box office receipts. They strive for the approval of others like themselves and, inevitably, spiral into ever more abstract theories disconnected from ground truth, ascending ever higher into the sky. Many IYIs achieve distinction in one narrow field and then assume that qualifies them to pronounce authoritatively on any topic whatsoever. As was said by biographer Roy Harrod of John Maynard Keynes,He held forth on a great range of topics, on some of which he was thoroughly expert, but on others of which he may have derived his views from the few pages of a book at which he happened to glance. The air of authority was the same in both cases.
Still other IYIs have no authentic credentials whatsoever, but derive their purported authority from the approbation of other IYIs in completely bogus fields such as gender and ethnic studies, critical anything studies, and nutrition science. As the author notes, riding some of his favourite hobby horses,Typically, the IYI get first-order logic right, but not second-order (or higher) effects, making him totally incompetent in complex domains. The IYI has been wrong, historically, about Stalinism, Maoism, Iraq, Libya, Syria, lobotomies, urban planning, low-carbohydrate diets, gym machines, behaviorism, trans-fats, Freudianism, portfolio theory, linear regression, HFCS (High-Fructose Corn Syrup), Gaussianism, Salafism, dynamic stochastic equilibrium modeling, housing projects, marathon running, selfish genes, election-forecasting models, Bernie Madoff (pre-blowup), and p values. But he is still convinced his current position is right.
Doubtless, IYIs have always been with us (at least since societies developed to such a degree that they could afford some fraction of the population who devoted themselves entirely to words and ideas)—Nietzsche called them “Bildungsphilisters”—but since the middle of the twentieth century they have been proliferating like pond scum, and now hold much of the high ground in universities, the media, think tanks, and senior positions in the administrative state. They believe their models (almost always linear and first-order) accurately describe the behaviour of complex dynamic systems, and that they can “nudge” the less-intellectually-exalted and credentialed masses into virtuous behaviour, as defined by them. When the masses dare to push back, having a limited tolerance for fatuous nonsense, or being scolded by those who have been consistently wrong about, well, everything, and dare vote for candidates and causes which make sense to them and seem better-aligned with the reality they see on the ground, they are accused of—gasp—populism, and must be guided in the proper direction by their betters, their uncouth speech silenced in favour of the cultured “consensus” of the few. One of the reasons we seem to have many more IYIs around than we used to, and that they have more influence over our lives is related to scaling. As the author notes, “it is easier to macrobull***t than microbull***t”. A grand theory which purports to explain the behaviour of billions of people in a global economy over a period of decades is impossible to test or verify analytically or by simulation. An equally silly theory that describes things within people's direct experience is likely to be immediately rejected out of hand as the absurdity it is. This is one reason decentralisation works so well: when you push decision making down as close as possible to individuals, their common sense asserts itself and immunises them from the blandishments of IYIs.The Lindy Effect
How can you sift the good and the enduring from the mass of ephemeral fads and bad ideas that swirl around us every day? The Lindy effect is a powerful tool. Lindy's delicatessen in New York City was a favoured hangout for actors who observed that the amount of time a show had been running on Broadway was the best predictor of how long it would continue to run. A show that has run for three months will probably last for at least three months more. A show that has made it to the one year mark probably has another year or more to go. In other words, the best test for whether something will stand the test of time is whether it has already withstood the test of time. This may, at first, seem counterintuitive: a sixty year old person has a shorter expected lifespan remaining than a twenty year old. The Lindy effect applies only to nonperishable things such as “ideas, books, technologies, procedures, institutions, and political systems”. Thus, a book which has been in print continuously for a hundred years is likely to be in print a hundred years from now, while this season's hot best-seller may be forgotten a few years hence. The latest political or economic theory filling up pages in the academic journals and coming onto the radar of the IYIs in the think tanks, media punditry, and (shudder) government agencies, is likely to be forgotten and/or discredited in a few years while those with a pedigree of centuries or millennia continue to work for those more interested in results than trendiness. Religion is Lindy. If you disregard all of the spiritual components to religion, long-established religions are powerful mechanisms to transmit accumulated wisdom, gained through trial-and-error experimentation and experience over many generations, in a ready-to-use package for people today. One disregards or scorns this distilled experience at one's own great risk. Conversely, one should be as sceptical about “innovation” in ancient religious traditions and brand-new religions as one is of shiny new ideas in any other field. (A few more technical notes…. As I keep saying, “Once Pareto gets into your head, you'll never get him out.” It's no surprise to find that the Lindy effect is deeply related to the power-law distribution of many things in human experience. It's simply another way to say that the lifetime of nonperishable goods is distributed according to a power law just like incomes, sales of books, music, and movie tickets, use of health care services, and commission of crimes. Further, the Lindy effect is similar to J. Richard Gott's Copernican statement of the Doomsday argument, with the difference that Gott provides lower and upper bounds on survival time for a given confidence level predicted solely from a random observation that something has existed for a known time.)Uncertainty, Risk, and Decision Making
All of these observations inform dealing with risk and making decisions based upon uncertain information. The key insight is that in order to succeed, you must first survive. This may seem so obvious as to not be worth stating, but many investors, including those responsible for blow-ups which make the headlines and take many others down with them, forget this simple maxim. It is deceptively easy to craft an investment strategy which will yield modest, reliable returns year in and year out—until it doesn't. Such strategies tend to be vulnerable to “tail risks”, in which an infrequently-occurring event (such as 2008) can bring down the whole house of cards and wipe out the investor and the fund. Once you're wiped out, you're out of the game: you're like the loser in a Russian roulette tournament who, after the gun goes off, has no further worries about the probability of that event. Once you accept that you will never have complete information about a situation, you can begin to build a strategy which will prevent your blowing up under any set of circumstances, and may even be able to profit from volatility. This is discussed in more detail in the author's earlier Antifragile.The Silver Rule
People and institutions who have skin in the game are likely to act according to the Silver Rule: “Do not do to others what you would not like them to do to you.” This rule, combined with putting the skin of those “defence intellectuals” sitting in air-conditioned offices into the games they launch in far-off lands around the world, would do much to save the lives and suffering of the young men and women they send to do their bidding. - 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 Amazon.com.
- 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”.
- 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. - 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.
- Williams, Jonathan, Joe Cribb, and Elizabeth Errington, eds. Money: A History. London: British Museum Press, 1997. ISBN 0-312-21212-7.
- Wright, Tom and Bradley Hope. Billion Dollar Whale. New York: Hachette Books, 2018. ISBN 978-0-316-43650-2.
- Low Taek Jho, who westernised his name to “Jho Low”, which I will use henceforth, was the son of a wealthy family in Penang, Malaysia. The family's fortune had been founded by Low's grandfather who had immigrated to the then British colony of Malaya from China and founded a garment manufacturing company which Low's father had continued to build and recently sold for a sum of around US$ 15 million. The Low family were among the wealthiest in Malaysia and wanted the best for their son. For the last two years of his high school education, Jho was sent to the Harrow School, a prestigious private British boarding school whose alumni include seven British Prime Ministers including Winston Churchill and Robert Peel, and “foreign students” including Jawaharlal Nehru and King Hussein of Jordan. At Harrow, he would meet classmates whose families' wealth was in the billions, and his ambition to join their ranks was fired. After graduating from Harrow, Low decided the career he wished to pursue would be better served by a U.S. business education than the traditional Cambridge or Oxford path chosen by many Harrovians and enrolled in the University of Pennsylvania's Wharton School undergraduate program. Previous Wharton graduates include Warren Buffett, Walter Annenberg, Elon Musk, and Donald Trump. Low majored in finance, but mostly saw Wharton as a way to make connections. Wharton was a school of choice for the sons of Gulf princes and billionaires, and Low leveraged his connections, while still an undergraduate, into meetings in the Gulf with figures such as Yousef Al Otaiba, foreign policy adviser to the sheikhs running the United Arab Emirates. Otaiba, in turn, introduced him to Khaldoon Khalifa Al Mubarak, who ran a fund called Mubadala Development, which was on the cutting edge of the sovereign wealth fund business. Since the 1950s resource-rich countries, in particular the petro-states of the Gulf, had set up sovereign wealth funds to invest the surplus earnings from sales of their oil. The idea was to replace the natural wealth which was being extracted and sold with financial assets that would generate income, appreciate over time, and serve as the basis of their economies when the oil finally ran out. By the early 2000s, the total funds under management by sovereign wealth funds were US$3.5 trillion, comparable to the annual gross domestic product of Germany. Sovereign wealth funds were originally run in a very conservative manner, taking few risks—“gentlemen prefer bonds”—but since the inflation and currency crises of the 1970s had turned to more aggressive strategies to protect their assets from the ravages of Western money printing and financial shenanigans. While some sovereign wealth funds, for example Norway's (with around US$1 trillion in assets the largest in the world) are models of transparency and prudent (albeit often politically correct) investing, others, including some in the Gulf states, are accountable only to autocratic ruler(s) and have been suspected as acting as personal slush funds. On the other hand, managers of Gulf funds must be aware that bad investment decisions may not only cost them their jobs but their heads. Mubadala was a new kind of sovereign wealth fund. Rather than a conservative steward of assets for future generations, it was run more like a leveraged Wall Street hedge fund: borrowing on global markets, investing in complex transactions, and aiming to develop the industries which would sustain the local economy when the oil inevitably ran out. Jho Low saw Al Mubarak, not yet thirty years old, making billion dollar deals on almost his sole discretion, playing a role on the global stage, driving the development of Abu Dhabi's economy, and being handsomely compensated for his efforts. That's the game Low wanted to be in, and he started working toward it. Before graduating from Wharton, he set up a British Virgin Islands company he named the “Wynton Group”, which stood for his goal to “win tons” of money. After graduation in 2005 he began to pitch the contacts he'd made through students at Harrow and Wharton on deals he'd identified in Malaysia, acting as an independent development agency. He put together a series of real estate deals, bringing money from his Gulf contacts and persuading other investors that large sovereign funds were on-board by making token investments from offshore companies he'd created whose names mimicked those of well-known funds. This is a trick he would continue to use in the years to come. Still, he kept his eye on the goal: a sovereign wealth fund, based in Malaysia, that he could use for his own ends. In April 2009 Najib Razak became Malaysia's prime minister. Low had been cultivating a relationship with Najib since he met him through his stepson years before in London. Now it was time to cash in. Najib needed money to shore up his fragile political position and Low was ready to pitch him how to get it. Shortly after taking office, Najib announced the formation of the 1Malaysia Development Berhad, or 1MDB, a sovereign wealth fund aimed at promoting foreign direct investment in projects to develop the economy of Malaysia and benefit all of its ethnic communities: those of Malay, Chinese, and Indian ancestry (hence “1Malaysia”). Although Jho Low had no official position with the fund, he was the one who promoted it, sold Najib on it, and took the lead in raising its capital, both from his contacts in the Gulf and, leveraging that money, in the international debt markets with the assistance of the flexible ethics and unquenchable greed of Goldman Sachs and its ambitious go-getters in Asia. Low's pitch to the prime minister, either explicit or nod-nod, wink-wink, went well beyond high-minded goals such as developing the economy, bringing all ethnic groups together, and creating opportunity. In short, what “corporate social responsibility” really meant was using the fund as Najib's personal piggy bank, funded by naïve foreign investors, to reward his political allies and buy votes, shutting out the opposition. Low told Najib that at the price of aligning his policies with those of his benefactors in the Gulf, he could keep the gravy train running and ensure his tenure in office for the foreseeable future. But what was in it for Low, apart from commissions, finder's fees, and the satisfaction of benefitting his native land? Well, rather more, actually. No sooner did the money hit the accounts of 1MDB than Low set up a series of sham transactions with deceptively-named companies to spirit the money out of the fund and put it into his own pockets. And now it gets a little bit weird for this scribbler. At the centre of all of this skulduggery was a private Swiss bank named BSI. This was my bank. I mean, I didn't own the bank (thank Bob!), but I'd been doing business there (or with its predecessors, before various mergers and acquisitions) since before Jho Low was born. In my dealings with them there were the soul of probity and beyond reproach, but you never know what's going on in the other side of the office, or especially in its branch office in the Wild East of Singapore. Part of the continuo to this financial farce is the battles between BSI's compliance people who kept saying, “Wait, this doesn't make any sense.” and the transaction side people looking at the commissions to be earned for moving the money from who-knows-where to who-knows-whom. But, back to the main story. Ultimately, Low's looting pipeline worked, and he spirited away most of the proceeds of the initial funding of 1MDB into his own accounts or those he controlled. There is a powerful lesson here, as applicable to security of computer systems or access to physical infrastructure as financial assets. Try to chisel a few pennies from your credit card company and you'll be nailed. Fudge a little on your tax return, and it's hard time, serf. But when you play at the billion dollar level, the system was almost completely undefended against an amoral grifter who was bent not on a subtle and creative form of looting in the Bernie Madoff or Enron mold, but simply brazenly picking the pockets of a massive fund through childishly obvious means such as deceptively named offshore shell corporations, shuffling money among accounts in a modern-day version of check kiting, and appealing to banks' hunger for transaction fees over their ethical obligations to their owners and other customers. Nobody knows how much Jho Low looted from 1MBD in this and subsequent transactions. Estimates of the total money spirited out of 1MDB range as high as US$4.5 billion, and Low's profligate spending alone as he was riding high may account for a substantial fraction of that. Much of the book is an account of Low's lifestyle when he was riding high. He was not only utterly amoral when it came to bilking investors, leaving the poor of Malaysia on the hook, but seemingly incapable of looking beyond the next party, gambling spree, or debt repayment. It's like he always thought there'd be a greater fool to fleece, and that there was no degree of wretched excess in his spending which would invite the question “How did he earn this money?” I'm not going to dwell upon this. It's boring. Stylish criminals whose lifestyles are as suave as their crimes are elegant. Grifters who blow money on down-market parties with gutter rappers and supermarket tabloid celebrities aren't. In a marvelous example of meta-irony, Low funded a Hollywood movie production company which made the film The Wolf of Wall Street, about a cynical grifter like Low himself. And now comes the part where I tell you how it all came undone, everybody got their just deserts, and the egregious perpetrators are languishing behind bars. Sorry, not this time, or at least not yet. Jho Low escaped pursuit on his luxury super-yacht and now is reputed to be living in China, travelling freely and living off his ill-gotten gains. The “People's Republic” seems quite hospitable to those who loot the people of its neighbours (assuming they adequately grease the palms of its rulers). Goldman Sachs suffered no sanctions as a result of its complicity in the 1MDB funding and the appropriation of funds. BSI lost its Swiss banking licence, but was acquired by another bank and most of its employees, except for a few involved in dealing with Low, kept their jobs. (My account was transferred to the successor bank with no problems. They never disclosed the reason for the acquisition.) This book, by the two Wall Street Journal reporters who untangled what may be the largest one-man financial heist in human history, provides a look inside the deeply corrupt world of paper money finance at its highest levels, and is an illustration of the extent to which people are disinclined to ask obvious questions like “Where is the money coming from?” while the good times are rolling. What is striking is how banal the whole affair is. Jho Low's talents would have made him a great success in legitimate development finance, but instead he managed to steal billions, ultimately from mostly poor people in his native land, and blow the money on wild parties, shallow celebrities, ostentatious real estate, cars, and yachts, and binges of high-stakes gambling in skeevy casinos. The collapse of the whole tawdry business reflects poorly on institutions like multinational investment banks, large accounting and auditing firms, financial regulators, Swiss banks, and the whole “sustainable development” racket in the third world. Jho Low, a crook through and through, looked at these supposedly august institutions and recognised them as kindred spirits and then figured out transparently simple ways to use them to steal billions. He got away with it, and they are still telling governments, corporations, and investors how to manage their affairs and, inexplicably, being taken seriously and handsomely compensated for their “expertise”.
- 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.
