Best wishes to those of you in the path of Hurricane Sandy. Stay safe and, assuming you still have power, below are a few things to think about while you wait out the storm.

Some people are trying to find the silver lining in light of Hurricane Sandy by making some claims that we may see GDP increase or at least stay the same. Here are some resources that examine this so-called “silver lining” mentality when it comes to both man-made and natural disasters:

• The Broken Window Fallacy (video)
• “That Which is Seen, and That Which is Unseen” by F. Bastiat
• “Destroying Property Does Not ?Promote Economic Prosperity“

On a lighter note, have you ever wondered if fantasy football and economic freedom are connected somehow? Here’s a light-hearted and informative article called “Touchdown for Freedom.”

Have you found any interesting articles or video clips that can help us better understand economic freedom or MBM? Leave us some links in the comments.

“Learning More about MBM Principles from the News” posts use specific news stories to try and prompt readers to identify consistency (or lack there of) with MBM principles. 

Read through “Why Companies Should Force Employees to Unplug.” What comes to mind in terms of MBM when you read this article? What questions might you as a discussion group to think about while reading this article? What mental models would be useful in the discussion?

news

“Learning More about MBM Principles from the News” posts use specific news stories to try and prompt readers to identify consistency (or lack there of) with MBM principles. 

Take a look at this article describing some of the decisions about the Kindle Fire sales strategy and the international response. What comes to mind in terms of MBM when you read this article? What questions might you as a discussion group to think about while reading this article? What mental models would be useful in the discussion?

news, principles

Scott submitted an interesting article for us to discuss (see previous post here). The title of the article is “Jobs made Apple great by ignoring profit.”  Below are a few quotes to help focus analysis:

As paradoxical as it is that the pursuit of profit is what causes the long-term failure of companies, I believe that Apple’s lack of focus on profitability has actually made it one of the most successful companies in the history of capitalism.

Andy and David both left comments on last week’s post that questioned what exactly the authors mean by profit. This is a great place to start. From the tone of the article, references to Wall Street and the typical mental model most people have about profit, I suspect this author means accounting profit: Total Revenue – Total Costs =Profit. With the reference to Wall Street earlier in the article, it may be they are thinking of quarterly profits. David and Andy both suspected Apple’s focus was on value creation.

Apple’s focus is on making truly great products — products so great that its own employees want to use them. That philosophy has made Apple one of the most innovative companies in the world. Steve Jobs’ legacy isn’t the Mac. It’s not the iPhone. Or the iPad. His legacy is in the creation of Apple itself, reminding us that profit is not the ultimate goal, but rather a consequence of something greater.

This quote makes me think Apple was/is focused on value creation and their profit was/is an indicator of that value. The “something greater” might be value creation (I don’t think people on the outside can know for sure). For analysts who are focused on quarterly profit, it seems outrageous to release a product (iPad) that cuts into one of your most recognized businesses (laptops and computers). However, for a company focused on long run value creation, it seems much less worrisome.

As I read the article, I wondered what other aspects of the organization were in place to allow this attitude (which I believe is a focus on value creation) to emerge.  Clearly there were some values and beliefs in play supporting the strategy.  This quote hints that folks at Apple may have a point of view on creative destruction:

Despite being perceived as a premium, high-end player, Apple under Job’s leadership has not simply managed to avoid being disrupted by others, it has disrupted entire industries — many of them. Even more impressive, it’s disrupting itself.

It seems to me people working at Apple have a shared value around innovation and believe the cool-factor is important. If the company is solidly focused on value creation, then a clear understanding of their customers, when and how the value is created and other aspects of vision must be in place. Imagine having a company full of people who do not understand value creation AND are ignoring profit.

As David pointed out in his comment, maybe the authors are using a bit of exaggeration. At one point the author says Jobs was “eschewing” profit. Putting aside the specifics of Apple, let’s focus on some big picture ideas. With all these ideas about value creation versus profit, can any for-profit company truly ignore accounting profit? Does MBM suggest we ignore or eschew profit?

Apple, Creative Destruction, profit, Steve Jobs, Value Creation

Many are extolling the unfortunate-but-welcome silver lining to the recent events in Japan–namely, that damage caused by earthquakes, tsunami’s and nuclear accidents will cause economic growth as people invest in rebuilding.

Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC that the disaster “may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”  And an editorial in the Huffington Post reads, “By taking Japan’s mature economy down a notch, Mother Nature has accomplished what fiscal policy and the central bank could not….  Entire cities and regions need to be reconstructed in toto, from housing and commercial buildings to roads, rail lines, information networks, the energy grid and even the tsunami warning system that must be digitally revamped….  The result of all the new wealth creation will be money in the pockets of Japanese to buy global goods and services.”

Does this make sense to you?  Here’s the basic argument: over many years, a country builds up useful resources  >>  a disaster happens  >>  economic activity flourishes to fix the destruction  >>  people are paid for that economic activity  >>  we’re back to normal  >>  so, we’re back to normal plus all of that economic activity, hence we’re better off on net.  And if you look at GDP, is does actually go up.  What’s wrong with that?

This doesn’t pass the common sense test to me.  Yes, GDP does go up, but does it really make sense that a country (or an individual in that country) is better off after the destruction of resources (not to mention the loss of life)?  Something must be wrong here.

If we look at GDP, it’s calculated by taking the total consumption (C) for a country at a given time plus the total government spending (G) plus the net exports (X) plus the total investment (I).  C+G+X+I = GDP.   A building is destroyed and individuals have to pay to rebuild it–C goes up.  The government expends resources on sending supplies to victims–G goes up.  On net, GDP increases and that’s considered a good thing.

However, this does not take into account what those resources could have been used for.  The scarce resources used to rebuild buildings and to send supplies normally would have been used for other things.  Besides the obvious statement that the individuals affected would have been better off without the disaster on a human level, they would have also been better off economically–now, huge amounts of resources will have to be spent just to get back to normal.

Many others have discussed what can be summed up as the “broken-window fallacy,” including our very own Ann Zerkle.   Check it out!

Broken-Window Fallacy, Japan, Tsunami

Last night I watched the “Freakonomics” movie (see the trailer below). It’s a lot like the book but animated and includes author commentary. Each chapter is directed by a different documentary film maker, which gives each section a little different look and feel. It’s worth a watch on a rainy Sunday (especially since you can stream it through Netflix).

Freakonomics the book was released while I was in grad school. There was quite a buzz. On one hand, I was glad my friends and family got a glimpse of what economists might study. On the other hand, I had many professors who didn’t quite buy in (much like John DiNardo, Ariel Rubinstein, and Arnold Kling). What do you think of Freakonomics? How might we evaluate such studies before we try to implement changes based on them?

economics, Freakonomics

Hang with me on this post: I’m going to be writing about a fictional zombie war. I first read World War Z by Max Brooks while I was in grad school, and it was chilling. This isn’t your run-of-the-mill zombie book. It’s written as if the zombie war has been mostly over for 10 years and a journalist is going around interviewing the survivors (sort of like the Veterans History Project).

These fictional interviews span the globe and the fictional survivors have differing viewpoints. (I’m looking forward to the movie.) The insights of the survivors lead to a commentary on culture, government and individualism, which is the whole reason I like zombie books and movies. They let you examine human nature by contrasting it with anti-human nature. The humans in zombie fiction are usually more terrifying than the zombies.

In the past week, I’ve been listening to the abridged audio-book (which is read by fantastic talents like Alan Alda and Mark Hamil). The book chilled me twice over this time. Once for the zombies. Once for the realistic foreshadowing of how a debt-ridden US would handle a widespread disaster. In this fictional war, by the time we realize the zombies are a real threat, it’s too late. If I recall, the book says “the coffers were empty,” and other countries, equally plagued by the outbreak, can’t help us.

Maybe I’m just obsessed with prosperity (there’s a good chance of that), but this book got me thinking. So, I leave you with two questions. First, what works of fiction have you read/seen recently have put you on edge or given you hope about liberty and prosperity in the world? Second, if you’ve read World War Z, what did you think of the way Brooks portrays entrepreneurs?

fiction, liberty, zombies

This is a guest post by Skyler Treat. Skyler is an MBM training program alumna who is passionate about making those who advances economic freedom more efficient. She is always looking for new assessment, evaluation, and measurement resources. Feel free to recommend resources she should check out in the comments.

I think it’s safe to say that Julian Assange (founder of Wikileaks) and Leon Panetta (Director of the CIA) would not be friends. Assange thinks that government and other large institutions should be far more transparent than they currently are. Panetta is rather more in favor of the opaque. Currently, the appropriate level of transparency is still being debated in the legislature and media.

Whatever your feelings about Wikileaks, the secrecy vs. transparency debate is one that profoundly effects organizations. Everyone, from organizational leaders to interns, has ideas about who should know what. Nancy Lublin, CEO of Do Something and founder of Dress for Success, argues that organizations should be “shockingly transparent” (page 151 of Zilch). She thinks it is motivating and exciting to tell employees about innovations the organization plans to undertake and why their co-workers get promotions. This is counter to conventional business where promotions and succession plans are guarded with incredible secrecy. For example, it was considered a huge accomplish that the Jack Welch’s successor as CEO of GE was not known before it was officially announced.

Some of the benefits of more transparency might include employees are better able to help one another because they know where their strengths or ideas could be best used. Employees might be happier because what is expected of them is clearer and there are fewer rumors flying around the office. Being more open could create more trust in leadership because it is clear what is changing and why. Lastly, being very transparent could be beneficial in the hiring process because prospective hires know what they are signing up for.

There are some risks as well, competitors may find out about your latest initiative or your organization could lose talented employees because they disagree with the reasons decisions are made. Another risk might be if the communication is done poorly it could backfire and generate more rumors. It is hard for that type of communication to be done well in large organizations, so if it’s not going to be done well should it be attempted at all?

How important is transparency? Is there an “MBM” way of thinking about transparency? How have you seen transparency work?

Thanks to Skyler for the post. If you’d like to submit a potential guest post, please email Ann (ann.zerkle (at) cgkfoundation.org). 

communication, openness, risks, Transparency

For those of you who have been (or are) in KAP, you’ve heard the jokes people make about having more children to grow the liberty-minded population. Well, Brian Caplan at EconLog has a post making the case for “The Weird Reason to Have More Kids.” This is my favorite bit:

“There are two ways to surround yourself with people like you.  One is to meet them; the other is to make them.  If you’re average, meeting people like yourself is easy; people like you are everywhere.  If you’re weird, though, meeting people like yourself is hard; people like you are few and far between.  But fortunately, as the parent-child correlation rises, weirdos’ odds of making people like themselves get better and better.”

On another note, I found some government spending educational resources. One of the infographic sites I enjoy links to a tool where you can “Balance the US Budget.” It’s supposed to show you how a budget cut would change things. I don’t know enough about the budget to know if it is accurate, but it looks like it could be entertaining. Also, Economix features a “Stimulus Map.” It’s a neat way to conceptualize where the stimulus funds go.  

Seth Godin asks, “Who Owns Wikipedia?” His argument isn’t satisfying to me. However, I do like this kind of mental puzzling.

The Entrepreneurial Mind has an interesting post on “Entrepreneurial Bullies.” It focuses on consequences of unprincipled behavior. The author writes:

“When looking for the reasons that socialism has gained so much favor of late, business leaders and entrepreneurs must look in the mirror.  When we abuse the power we have that comes from the positions we hold or the resources we own, we contribute to the social backlash that is most certainly to follow.”

Please share interesting links you’ve found this week in the comments. Also, don’t forget to read “A Republic of Science” for our 12/20 Theory to Practice Discussion. Have a great weekend!

I love stories. I don’t care if it’s a movie, magazine article, TV show or novel. I don’t care if it’s fiction or non-fiction. When a story is entertaining and can serve as an illustration, I can’t get enough of it. (Andy and Chris can attest to my insistent explanations of the “amazing” book/movie/whatever they need to check out).

Over Thanksgiving, I watched “The Art of the Steal” (trailer below). This fantastic documentary is well done and shows a modern day example of what Frederic Bastiat would call “legal plunder.” “But how is this legal plunder to be identified?” Bastiat writes on page 13 of The Law (Foundations of Freedom version). “Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to who it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”

The trailer gives you a better synopsis of the legal plunder than I can write:

On page 17 of The Law Bastiat writes, “Legal plunder has two roots: One of them, as I have said before, is in human greed; the other is in false philanthropy.” This film outlines both those motivations for the key players.

At the heart of this documentary is a story of people using government forces to capture a resource. This is not value creation. I encourage you to watch this if you can (it’s available for streaming on Netflix) and take a critical eye to the forces at work. Beyond the art example, it’s scary how re-writing a legal document seems like a viable option for those determined enough. It’s a good reminder of the value principled behavior creates (and/or protects).

Do you think I’m making too much of this film? How do you view this situation? Do you know of any other good stories that illustrate a Science of Liberty or MBM concept?

art, economic freedom, Rule of Law, Science of Liberty, Value Creation