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Saturday, November 22, 2008
Gnome-o-gram: “Managing the Economy”
One incessantly hears the legacy media prattle about the
U.S. President or the Federal Government or the Federal Reserve or some
other instrument of coercion "managing the economy". Have any of
the people who write or publish such nonsense, or those to whom
they impute such powers ever managed anything at all of substantial
size? Dunno—but I have. I was founder and CEO of
a company
which went public in 1985 and today has a market capitalisation
greater than that of General Motors. This is not to brag, just to
cite experience relevant to the observations which follow.
Let me tell you what it's like to “manage” an
enterprise vastly smaller and far more easily directed than these
railroad-era continental-scale debt-financed fiat money economies
the politicians pretend to steer. The legacy media and, I
suspect, politicians who haven't been there, assume the economy is
something like a ship.
On the bridge is a steady master, with a
crew responding immediately to helm and engine orders, with
progress plotted continuously on accurate charts.
In reality, it's like this. You, Mr. or Ms. CEO, are sitting in
your office. Your desk has dozens of levers you can adjust and
dials you can twiddle affecting the disposition of financial
resources within your organisation. Half of these do nothing; a
third of the remaining have results opposite to your expectations;
and the balance work in the expected direction, but with disparate
and often nonlinear effect. All of these controls, for better or
for worse, have no immediate effects upon visible results, but
only after a lag which is often unknowable and interacts with the
settings of the other controls. And you have no idea which of the
controls have what kind of effect upon the results.
Your information about the current state of affairs and the
effects of your adjustments to the controls comes as measurements
of financial aggregates which necessarily discard much of the
detail subsumed into them. These aggregates are reported weeks
or months after your changes to the controls are made, and
you can see only the net effect of all your changes, not those
due to each individual control, nor the lag times between adjustments
and results.
You know next to nothing about the inputs; you have a large number
of controls about whose effects you are ignorant; and your
feedback from results is ambiguous, impossible to trace back to
the individual actions which caused them, and delayed by an
unknowable interval from cause to effect.
And you're supposed to manage
that, and be responsible to the shareholders for the results? Now you may begin to
grasp why CEOs get paid so much. Heck, when I was CEO of
Autodesk, I was paid
sixty thousand dollars a year to
purport to do that, and, if I say so myself, I earned every nickel
of it—well, most of 'em, anyway.
Now consider how this scales. When you're running a small
business, as I did from 1978 through 1982, you can keep everything
in your head: cost of goods, inventory, key customers, quality
issues, and development priorities. This is one of the main reasons
small businesses are so efficient and form the backbone of every
genuinely free economy. When you get bigger, there's so much
going on it doesn't fit into the head of a single individual any
more: you need to develop management tools to abstract the
essentials from the raw data and highlight the priorities from
which strategic decisions are made. As you get larger and larger, the
“economy of scale” argument is that this is
logarithmic and hence as the enterprise grows, the relative
overhead due to management and administration decreases, but I
would argue that it becomes
geometrically more difficult:
you are trying to aggregate more and more disparate data into each
single item on a financial report, to be evaluated by somebody who has
little or no knowledge of the detailed components which make up that
number and yet must make decisions based upon it alone.
Keep in mind the geometric growth in distance between reality
and available management information as the size of an
organisation grows. When you scale this up not just from the
operator of a family business to a mid-sized publicly-traded
company, but all the way to a national economy, the exponent kicks
in hard, and it
kills. The would-be “managers of
the economy” stand before a vast control panel with
thousands of unlabeled knobs, none of whose effects are known,
bedizened with a multitude of gauges indicating
nobody-knows-what-precisely, with unknown and unknowable delays
between whatever they measure and what they display.
Okay, go manage that.
Which is why whenever you hear folks talk about “managing
the economy” you should chuckle and place your assets
outside of their reach and as uncoupled as possible from the consequences of
their actions.
Other gnome-o-grams
Posted at
21:42