Manufacturing Myths in Palo Alto and Pittsburgh

Manufacturing Myths in Palo Alto and Pittsburgh

The transition from fields to factories always mixes agony with hope. Families abandon land and traditions that often go back generations, move to cities and reset their lives from sunlight to time clocks. Mass production industries flourish for a few generations. Life is hardly a bed of roses, but it is nearly always better or people would return to the farm — and nobody returns. Factory work means educated kids, savings, medical care, and consumer goods like refrigerators and cars. Manufacturing jobs may be dangerous or tedious, but they are also deliver opportunity and hope to millions of people.

Eventually, of course, this all changes. Service industries like hospitality, health care, education, or banks grow faster than manufacturing. Consumers buy stuff made elsewhere. In the US at least, income disparity has increased and life experience stratified until many people — including many with low incomes — have no understanding of manufacturing or factory work.  Factories seem somehow dirty, Dickensian, and something to be avoided.

The result in the US is a schizophrenic attitude towards manufacturing. We are divided between those see no future for factories and those who believe that manufacturing is vital to our economy. It’s Palo Alto vs. Pittsburgh. Sunny Silicon Valley typically sees the future in online technologies, clean tech, or biotech and associate manufacturing with an economic time and place that is as far gone as the family farm. Pittsburgh’s workers, managers, policymakers, and professors argue passionately that the decline of the middle class and the decline of manufacturing employment are inexorably linked and urge government action to restore our competitive position. As both a confirmed Silicon Valley technologist and a former machinist, union man, and factory worker, I understand both world views. Perhaps more importantly, I have studied a recent report by my former colleagues at the McKinsey Global Institute that details the role of manufacturing in the US and global economies (click here to download the 170 page report or here for the summary. I highly recommend it and relied on it for most of the data and charts that follow). The punch line: Palo Alto and Pittsburgh both have it wrong, even when their prevailing myths contain elements of past truths. Manufacturing still matters, but for different reasons than either group believes. Lets start with Silicon Valley. Palo Alto sees America through a prism coated in software and web services with an economic future built on service and information businesses. With the quaint and unprofitable exceptions of Tesla, the odd 3D printer, and notwithstanding the atonal musings of Andy Grove, we haven’t made anything in Silicon Valley since we drove out disk drives and semiconductors a generation ago. We view manufacturing as a relic of the industrial age, not as an engine of innovation. This belief is held in place by several myths, including: 1. Companies that make things have a lot in common.  

Manufacturing is not a sector: companies that make things vary enormously in the nature of their products, operations, and economics.

Some, like steel or aluminum plants, are incredibly energy intensive and heavy. Manufacturers need to be near water (for transport), raw materials, and cheap power (Alcoa chairman and former Treasury Secretary Paul O’Neill once described aluminum to me as “congealed electricity”). Labor costs are completely secondary.

Pharmaceuticals, in contrast, live or die on product development. They need access to capital, technology, and skilled researchers. A furniture maker needs semi-skilled workers and access to distribution.

It is hardly useful to talk about manufacturing as a single thing — it really isn’t. The McKinsey report tries to segment manufacturers into five groups and describe the requirements and challenges of each, illustrated on the right. The scheme illustrates fundamental differences between manufacturing sectors, although there remain enormous variation even within segments.

These groups require vastly different skills and have fared quite differently in advanced countries, with the final group, the so-called labor-intensive tradables, not surprisingly accounting for the biggest share of job losses.

2.  Manufacturing is a commodity that contributes little to the US standard of living

Nope: manufacturing matters, just not like it used to. McKinsey found that throughout the developed world, manufacturing is declining in its share of economic activity but contributes disproportionately to a nation’s exports, productivity growth, R&D, and innovation.

As the chart on the right illustrates, manufacturing contributes to productivity growth (the basis for all increases in living standards) at about double the rate that it contributes to employment. It also produces spillover effects that are frequently not captured in data about manufacturing.

Manufacturing adds economic value, much of which is transferred to consumers in the form of lower prices (which are economically indistinguishable from a pay increase). On a value-added basis, manufacturing represents about 16% of global GDP, but accounted for 20% of the growth of global GDP in the first decade of this century.

Finally, manufacturing accounts for 77% of private sector R&D, which drives a huge share of technology innovation. It is far from clear that Silicon Valley would exist without it.

3. Our future is in knowledge-intensive services, not manufacturing.

Once again, our traditional categories are not helpful. Manufacturing frequently is a knowledge intensive business. (It surprises many people to learn, for example, there are more dollars of information than dollars of labor in a ton of US made steel).

Manufacturing is increasingly data intensive. Big Data is revolutionizing manufacturing products and processes, no less than services. Data enables manufacturers to target products to very specific markets. The “Internet of Things” relies on sensors, social data, and intelligent devices to rapidly inform how products are designed, built, and used. Huge data sets have also enabled new ways for manufacturers to gather customer insights, optimize inventory, price accurately, and manage supply chains.

This is not your father’s factory. Most US manufacturing jobs are not even in production. As the accompanying chart shows, they are service jobs linked to manufacturing or inside manufacturing companies.

4. Manufacturing depends on low cost labor, which is why it has fled overseas. 

This particular conceit is endemic in Palo Alto. McKinsey documents one possible reason: no sector, not even textiles, has shifted production overseas as fast as computers and electronics. Indeed, as the chart at the right illustrates, some manufacturing sectors have actuallyadded jobs during the past ten years.

There is a second dimension to this myth however: that manufacturing jobs are factory jobs. As illustrated above, many jobs in manufacturing companies are service like jobs, including R&D, procurement, distribution, sales and marketing, post sales service, back office support, and management. These jobs make up between 30 and 55 percent of manufacturing employment in the US. Much of the work of manufacturing does not involve direct product fabrication, assembly, warehousing, or transportation.

The final misunderstanding is that most factory jobs are unskilled or low paying. In fact, manufacturers world wide are currently experiencing chronic skill shortages. McKinsey projects a potential shortage of more than 40 million high skilled workers around the world by 2020 — especially in China.

In short, the standard Silicon Valley view is much too narrow: manufacturing is and will remain a high value industry that contributes meaningfully to our standard of living. Manufacturing (some of it, anyway), is a competitive asset. Move east to Pittsburgh, and you will quickly discover that a completely different manufacturing mythology prevails, focused mainly on job-creation. In these parts, the loss of manufacturing jobs is understandably considered a crisis for the US. Politicians pay homage to “good-paying manufacturing jobs” and blame the inability of a high school grad to get a factory job that supports a family, a home, and a motorboat on cheatin’ Chinese and union-bustin’ outsourcers. Dig a bit deeper, and you will discover that these beliefs are also grounded in economic myths, such as: 1. Manufacturing jobs pay more than service sector jobs.

This view often reflects the wishes of people with a history in “rust belt” manufacturing. In fact, manufacturing jobs pay very much like service jobs do — except at the very low end, where manufacturing creates far fewer minimum wage service jobs that are common in hospitality and retail.

Part of the reason for this of course, is that manufacturers can have low value work performed overseas — not an option for McDonalds, Walmart, or others who deliver services face-to-face.

As shown on the right, manufacturing creates about the same number of jobs in each pay band as do service sector jobs, except that there are fewer low-paying jobs and a few more high paying ones. An important caveat is that manufacturing company jobs may be more likely to include benefits, which are excluded from this calculation.

That all said, it is no longer given that manufacturing is a source of better paying jobs.

2. We should look to manufacturing for the jobs we need.

OK, but at least manufacturing creates decent jobs. Why not promote manufacturing to create jobs — even if they pay the same as service sector jobs?

The answer depends on your country’s stage of development, on domestic demand for manufactured goods, and on how robust your service sector is. For the US, the case for public policies favoring manufacturing is weak.

McKinsey documents what many have observed: manufacturing jobs decline once a country reaches about $7-10,000 GDP/person, as illustrated on the right. This pattern holds both across and within countries. As a result, manufacturing jobs are declining everywhere, except in the very poorest countries (even China is losing manufacturing jobs).

But all low cost labor countries do not enjoy equivalent manufacturing sectors. More important even than stage of development is the level of domestic demand for manufactured goods and the robustness of the domestic service sector. The US and the UK have such large service sectors that we derive smaller share of our GDP from manufacturing, even though in absolute terms both countries have robust manufacturing sectors.

3. Low wage nations like China are stealing our manufacturing jobs.

There are typically two parts to the belief that US jobs are flowing overseas. First is the underlying view that jobs are a zero-sum asset to be fought over like territory. This idea has political salience, but is economic nonsense. Jobs are the complex result of many things including the availability of public or private capital, legal and regulatory systems, local demand conditions, and managerial competence. Cheap Chinese labor is typically the least of it.

The other idea however, is that we can somehow return to 1950 when unionized manufacturing jobs dominated the US economy. This is no more likely than a return to small family farming (and like those who romanticize what Marx aptly termed “the isolation of rural life”, those who idealize factory work often have suspiciously clean fingernails).

As the accompanying chart shows, manufacturing as a share of economic activity is in long term secular decline in all high and middle income countries worldwide — including China. It is only growing as a share of the economy in very poor countries. As the UN has pointed out, Haiti is in desperate need of sweatshops. Vietnam and Burma are growing manufacturing’s share of economic output — often at China’s expense.

Manufacturing matters enormously, just like agriculture does. But it is not growing as a share of economic output. (McKinsey highlights one interesting exception to this rule. Sweden has maintained manufacturing as a share of its economy by targeting high growth sectors and especially by investing twice as much in training as other EU countries. Most importantly however, they devalued the krona against the Euro to make exports competitive — effectively taxing imports).

4. Companies build plants overseas in search of cheap labor

There was a time when labor costs were a determining factor in locating production facilities. This is much less true today, when location decisions are driven by many factors other than labor costs, as the chart on the right illustrates.

Depending on how a company competes and whether it is locating research, development, process development, or production facilities it’s location criteria may or may not turn on factor costs such as labor. Proximity to consumers or to talent may matter more. In some cases taxes matter. In other cases access to suppliers matter.

The rising cost of commodity inputs transportation during the past two decades has altered this calculation. Steel, for example, was about 8% iron ore cost and 81% production costs as recently as 1995. Today ore is more than 40% of the cost of a ton of steel and production costs are only 26%. Steel companies care much more about the cost of ore than the cost of labor.

Likewise transportation costs have skyrocketed with energy prices and infrastructure demands (the US grows highway use by about 3%/year and grows highways by about 1%/year. Anyone living here knows the result). Producers from P&G to Ikea and Emerson now are forced to locate plants near customers to minimize transportation costs. As a strategy for plant location decisions, labor arbitrage looks very 1980s.

5. If consumers would only buy local, we could restore our manufacturing base. 

Politicians and union leaders say this all the time and it is sheer idiocy. Most would not be caught dead in my German car, which was designed and made in Tennessee, but beam proudly at the sight of a Buick van imported from China.

High productivity manufacturing benefits consumers, as companies pass on savings to Americans in the form of lower product costs. As illustrated by the chart to the right, most consumer durables cost today about what they did in the 1980s — and quality is much higher. Economists have estimated that Walmart, Target, and Costco reduce retail prices by 1-3% each year because they pass to consumers savings extracted from manufacturers (this, by the way, is a big reason that manufacturing continues to shrink as a share of our economy. We pay less for our stuff  and more for services like education and health care.)

Americans say we believe in “Made in USA” campaigns, but as consumers, we are famously delusional. When surveyed, we profess to favor locally produced merchandize. But our wallets don’t lie: we buy high quality, low cost stuff regardless of where it comes from.

So how do we grow US manufacturing? Same as always: by creating innovative materials, processes, and products. McKinsey sees “a robust pipeline of technological innovations that suggest that this trend will continue to fuel productivity and growth in the coming decades”. Of course most innovations are hard to foresee. One reliable source of innovation turns out to be anything that reduces weight, such as nanomaterials, some biotech, light weight steels, aluminum, and carbon fiber. It turns out although we buy more stuff each year, the total weight of our purchases actually declines because nearly everything we buy, including cars and airplanes, weighs less than it used to. Manufacturers have come to appreciate the power and the necessity of innovation. During the Clinton administration debates over CAFE standards, car company engineers soberly advised us that the theoretical limit of internal combustion engines was a 10-15% improvement over the current average of 17 miles per gallon. Today these companies have already doubled that efficiency and speak openly about doubling it again, even as they invest in non-combustion solutions that are even more efficient. In short, manufacturing matters for different reasons than it used to. It used to be a plentiful source of unskilled jobs; today its value is as driver of innovation, productivity improvement, and consumer value. It’s an exciting part of the economy, even if it cannot solve every problem we face related to job creation and economic growth.

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Are Men Overpaid?

Are Men Overpaid?

More women than men now graduate from college and they earn better grades. But at every level of educational attainment, men still earn more money and the gap grows larger with time. Are we systematically underpaying women? If so, why would labor markets behave that way? To some, the question is laughably simple: greedy male capitalists exploit women. This is true, but greedy capitalists exploit men too. Greed, not fairness, should lead to some rough market price of equivalent skill and experience unless talented women are somehow different from anything else that is bought and sold in quantity. Asserting that bosses are greedy and biased doesn’t explain much. After all, greedy bosses cheerfully bid up the price of copper. At the risk of commodifying half the population, it is useful to ask why are they not bidding up the price of  talented women? There are, it turns out, many reasons that women are paid less than men. Most raise issues worth addressing, whether or not they conform neatly to the “glass ceiling” narrative suggested by the infographic on the right. The reasons for pay inquality include:

  • Deliberate discrimination. Don’t kid yourself — this happens a lot. Goodyear Tire famously paid women less then men who did the same work and took pains to conceal their policy. The Lilly Ledbetter Equal Pay Act resulted when Ledbetter discovered the facts and sued Goodyear. It is interesting to ask how the story would have been different if the fact of discriminatory pay had been known all along. Would women have demanded raises? Or would they have changed jobs and, if they did, would the result have been higher or lower aggregate pay for women?
  • Motherhood-induced time off and reductions in work hours. Part of the reason that women earn less is that they take more time off to raise kids. When women first graduate, pay differences are less than they will ever be, for reasons we will touch on later. By age 30 however, significant differences emerge. Harvard’s Larry Katz and Claudia Goldin joined with Chicago’s Marianne Bertrand to follow nearly 3,000 M.B.A.’s over 15 years. The women started off making 88 percent as much as men, but 10 to 15 years later, they made only 55 cents for every dollar of men’s pay.

The scholars accounted for differences in grades, course choices, and previous experience. Their conclusion: kids kill careers. They found that the women’s pay deficit was almost entirely because women interrupted their careers more often and tended to work fewer hours. The rest was mostly explained by career choices: for instance, more women worked at nonprofits, which pay less. A subsequent study by scholars at CUNY, also published by NBER, largely confirmed this finding.

This explanation dodges the underlying question of why are the financial penalties to taking time off so high? After all, if between age 30 and 35, I take a year of maternity leave and work 4 days a week for six or seven years, I might sacrifice two years of work experience between age 30 and 40. Meaning that as a 40 year old woman, I have the same experience as a 38 year old man who contributed zero to raising his kids. Is there really something so magical about the fourth decade of life that missing some work justifies a permanent economic penalty?  A Labor Department study completed in 1992 concluded that time off for career interruptions explain only about 12% of the gender gap (not counting part time work and experience effects and, unlike Goldin, et al, they did not focus only at MBAs).

There remains of course, the threshold question of whether women should be the default caretaker and disproportionately bear the professional cost associated with raising children. In many households of course, they do not — but this is still the exception.

  • Experience gaps. People with more experience are paid more if experience translates into superior productivity. Women who leave the workforce to have children pay twice: once because they work fewer hours and a second time because they accumulate less experience. This is reflected in their earnings when they return. This gap should be erased when a woman has been back at work awhile and research indicates that it takes about four years if a woman returns to work full-time, which many do not.
  • Occupational differences. To the extent that some occupations are more heavily male and higher paid while others are more heavily female and lower paid, earnings gaps may indicate a problem of occupational mix. As women enter traditional male occupations, as has occurred very widely during the past 40 years, these effects lessen. Some scholars figure that most of the reduction of the gender gap during the last four decades is due to women entering traditionally male occupations; others determine that only a third of the gap was closed this way.

Most studies do not ask why a profession earned less money to start with. After all, pay in many professions (including teaching) declined as they became more female and pay in some current professions (including law) appears to be going through something similar. Scholars who study these differences often have trouble sorting out historic patterns of gender discrimination from productivity or skill related pay differences.

  • Attraction to less successful industries or firms. Some industries and some companies pay both men and women less than do other industries. If women choose these industries or companies disproportionately, their average earnings will be lower compared to average men’s earnings, even if they are receive equal pay for equal work. Lower productivity industries, notably service intensive retail, education, and some health care, pay both women and men less than do higher productivity industries. The problem, of course, is that pay gaps persist within industries, not simply between them — but it is the averages that make for enticing infographics. A Labor Department study completed in 1992 concluded that 22% of the gap between men and women’s earnings could be explained by variation in industries.

In some cases, women also seem to choose firms within an industry that pay both men and women less (perhaps because they offer more flexible work arrangements). Janice Madden studied women stockbrokers, for example, whose pay is strictly performance-driven. She documented that although women were assigned inferior accounts and performed as well as men when they were not, a relatively small share of the total pay gap was the result of this unequal treatment. Although the industry paid women quite well, women were more likely than men to work in smaller, less successful brokerages.

  • Lower expectations and inferior bargaining. Most women do not bargain for their salaries as aggressively as do most men. I once had to explain to a VP I had hired that I had expected her to counter my initial compensation offer, not simply to accept it. As a result, I was underpaying her relative to her colleagues and industry norms. I was mildly annoyed as I explained that I would pay her more than she agreed to but expected her to take a more aggressive view of her economic value in the future.

There is plenty of evidence that this example was not unusual, even though my response probably was. The problem begins with expectations: women expect to be paid less than men do. A 2012 survey of 5,730 students at 80 universities found that women expected starting salaries that were nearly $11,000 lower than their male classmates. Women veterinarians, who bill their own clients at rates they set, were found to set their prices lower than their male colleagues and to more frequently “relationship price” meaning not charge friends or clients for small amounts of work. A similar effect occurs in law firms, where a lucrative partnership often depends on billed hours. The most prominent scholarly work in this area is by Linda Babcock at Carnegie Mellon, whose book title captured her major finding: Women Don’t Ask. Babcock realized the problem when she noticed that the plum teaching assistant positions at her university had gone to men who had bothered to ask about them, not to women, who expected them to be posted somewhere.

The effect on women of not negotiating is huge. According to Babcock, women are more pessimistic about the how much is available when they do negotiate and so they typically ask for and get less when they do negotiate—on average, 30 percent less than men. She cites evidence from Carnegie Mellon masters degree holders that eight times more men negotiated their starting salaries than women. These men were able to increase their starting salaries by an average of 7.4 percent, or about $4,000. In the same study, men’s starting salaries were about $4,000 higher than the women’s on average, suggesting that the gender gap between men and women’s starting salaries might have been closed had more of the women negotiated. Over a professional lifetime, the cost to women of not negotiating was more than $1 million.

Fortunately, this is pretty easy to fix. Women can learn quickly that everything is negotiable. The Jamkid pointed me to a recent investigation by his teacher John List at the University of Chicago, showing that given an indication that bargaining is appropriate, women are just as willing as men to negotiate for more pay. List finds that men remain more likely than women to ask for more money when there is no explicit statement in a job description that wages are negotiable.

Although legislation and litigation will surely be useful to discourage and penalize employers who systematically discriminate against women at scale, as WalMart is alleged to have done, most of the forces that contribute to inappropriately low pay for women will not be remedied in court. Two policy remedies however, could make a large difference and are politically achievable.

  • Paid parental leave. Paid leave for new parents is essentially a tax on non-parents (we already tax non-parents by allowing parents to deduct children as dependents). This makes sense — we want to reduce the economic penalty associated with having children. Every modern country except for the United States grants mothers and fathers the right to take time off work with pay following the birth or adoption of a child. European countries provide a period of at least 14 to 20 weeks of parental leave, with 70 to 100% of wages replaced. These countries also provide  paid parental leave subsequent to this, although the duration of the job-protection and leave payment differs substantially across nations. The total duration of paid leave exceeds nine months in the majority of advanced countries. Canada, for example, currently provides at least one year of paid leave, with around 55% of wages replaced, up to a ceiling.

California is the only state that currently requires paid parental leave. Initial evidence suggests that the act has doubled maternity leave from three to seven weeks (barbaric by European standards) and raised the wages of new mothers by 6-9%. It’s a start, but we should join the modern world, and perhaps follow Denmark, which last I checked required that husbands take equal time away from work on the birth of a child in order to minimize the long term impact on women’s earnings. To those who worry that by subsidizing overpopulation in a capacity constrained planet, I would point to declining birth rates throughout Europe and the realization, which is slowly beginning to dawn on the world, that we face far more threats from low birth rates at the moment than we do from high ones.

  • Structured Dislosure. The second step we could take is to force employers to disclose wage disparities among people who do the same work. This requirement needs a careful touch and FASB/SEC rulemaking, but if a public company had to disclose the difference in pay between men and women by occupational category, it would quickly become a benchmark that everyone from board members to managers would need to look at and live with. Scholars and consultants would quickly compare businesses. Websites like Glass Door would post comparisons. Companies would feel pressure to either justify disparities with additional data (showing, for example, that men had more experience or more training within the same occupational category) or face demands to explain themselves. Women would be emboldened by data to ask for their due. These metrics would not be susceptible to industry or occupation differences, nor would they disclose salaries – only the percentage difference between men’s pay and women’s.

It might also begin a deeper, more fact-based, discussion about the sources of economic inequality. And such a disclosure would quickly expose the most embarrassing economic fact of all: some men — but relatively few women — are shockingly overpaid.

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Denial is Bigger than Amazon

Denial is Bigger than Amazon

 

Pile-of-books-006Talk to a book author, publisher, or retailer about the future of their business and the denials begin. “Never before have there been so many good books to read”. “Books are the backbone of civilization”. “Life without books is unimaginable”. As a cultural argument, this may be true, but as an economic one, this is a view only of the supply side. An alleged ancestor of mine once observed that facts are stubborn things”. Forget for a moment about our beloved books. Imagine a product you care little about: chemicals perhaps, motorcycles, or furniture. Imagine the industry that produces this product: the designers, manufacturers, marketers, distributors, and retailers. You can determine the health of this industry with a few key measures. We can apply these same vital signs to the publishing business to determine whether our loved one has long to live.

Sales. Not every industry with declining sales is in trouble, but most are. According to BookScan, adult nonfiction print unit book sales peaked in 2007 and have declined each year since. Retail bookstore sales peaked the same year and have also fallen each year according to the U.S. Census Bureau. I sold an online book business I had started at about that time for a simple reason: I couldn’t figure out how to keep growing it. eBooks are growing fast but do not close the gap. Print sales dropped 17% from 2010-2011, and e-books grow 117% (I have borrowed liberally from a nice fact set gathered here). The result was a 5.8% decline in total book sales according to the Association of American Publishers. Combined print and e-book sales of adult trade books fell by 14 million units in 2010, according to the Book Industry Study Group.

Unit economics. OK, but you can make good money in shrinking industries. You may sell fewer items, but make more on each item you sell. So long as you add more value than cost, customers will happily pay you for your product, even in a shrinking market. So what is happening to the unit economics of books? Start with prices. Book prices have gone up every year for more than ten years  — a good sign, right? Not necessarily, because the number of books sold continues to shrink as noted above. But the number of books published is exploding. Bowker reports that over three million books were published in the U.S. in 2010. 316,480 of these were new traditional titles – meaning that publishers introduce 867 new books every day. But that is the traditional tip of the publishing iceberg: 90%, or more than 2.7 million, books published were “non-traditional” titles in 2010. These are mainly self-published books, reprints of books in the public domain, and resurrected out of print books. They vary enormously. Some become best selling light porn for housewives. Others are spam created by software that pirates an existing title in a few hours (one professor wrote a program that has produced 800,000 specialized “books” for sale on Amazon). Others are highly specialized books not attractive to a publisher. When Baker and Taylor reports that book prices are going up, they are describing traditional, not “non-traditional” publishing.pile-of-books 2What about costs? The cost of bringing a traditional book to market is high and largely fixed, so the declining unit sales of the average book is a huge problem. According to BookScan, the best count we have, Americans only bought 263 million adult nonfiction books 2011, meaning that the average U.S. nonfiction book now sells fewer than 250 copies per year (collectors of first editions take note: it is second editions that turn out to be rare!) Only a few titles become big sellers. In a randomized analysis of 1,000 business books released in 2009, only 62 sold more than 5,000 copies, according to the New York Times. So we have an industry that is shrinking and being divided among many more products and players, few of which can make money. Not a good sign.

Marketing and distribution. Well, maybe better marketing and more rational distribution can target new customers and grow demand while reducing costs. It happens in hard goods and industrial businesses all the time. Can we fix the book market? Investments in marketing are very tough to justify. A publisher needs to acquire the book (pay an advance to the author), then develop (edit) it, design, name, print, launch, distribute, warehouse, sell, and handle returns (about a quarter of all books flow backwards from retailer to distributor or publisher — a huge cost avoided by eBooks). After all of this, the average conventional book generates only $50,000 to $200,000 in sales, which radically limits how much publishers can invest in marketing. Increasingly, publishers operate like venture capitalists, putting small amounts of money to work to see what catches on and justifies additional investment. Only proven (or outrageous) authors attract large marketing budgets. Increasingly, book marketing is done by authors, not publishers. But how does an author market a book? The only way she can: to her friends and community. With too much to read, we read what our friends advise (women especially read with their friends. Publishers are intensely interested in what reading groups choose to read in an era where there is no general audience for nonfiction and fiction is highly segmented). Some products catch on and a few become blockbusters — even some books that begin as unconventional titles without publishers. So marketing is tough to fix — how about distribution? It’s a disaster. Retail is hopeless: your chances of finding any given book in a bookstore are less than 1%. For example, there are about 250,000 business titles in print. A small bookstore can carry 100 of these titles; a superstore perhaps 1,500. Stores are for best-sellers – if there are any. Online can carry every title, but really, who needs 250,000 business books? Online selling solves this problem, but enjoys such massive returns to scale that concentration is unavoidable. In the latest count, Amazon had a 27% share of all book sales (including, I estimate, about two thirds of all eBook sales — meaning that they monopolize the only part of the book business that is growing). pile of books 3Underlying demand. OK, fine — the industry is broken. But music was busted too: retailers evaporated, product proliferated and went digital, the label’s value-added shrank, and piracy was a much bigger issue than in books. And despite it all, music is making a comeback: sales are up if you count concerts and ring tones. A few people make a living at it and a few become stars. Is this the future of books? It doesn’t look that way for reasons articulated by Steve Jobs: although people still listen to music, many people have simply stopped reading books. Speaking about the Amazon Kindle, he argued:

It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore. Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Ouch. Setting aside Jobs known tendency to dismiss technologies that he later pursued, is demand for books actually dropping? Are we even reading the books we buy? The evidence is overwhelming that we read fewer books than we used to. As summarized nicely in the New Yorker, the National Endowment for the Arts has since 1982 teamed with the Census Bureau to survey thousands of Americans about our reading. When they began, 57% of Americans surveyed claimed to have read a work of creative literature  (poems, plays, narrative fiction) in the previous twelve months. The share fell to 54% in 1992, and to 47% 2002. Whether you look at men or women, kids, teenagers, young adults or the middle-aged; we all read less literature, and far fewer books. This is not a small problem, nor is it confined to the book business. The N.E.A. found that active book readers are more likely to play sports, exercise, visit art museums, attend theatre, paint, go to music events, take photographs, volunteer, and vote. Neurologists have demonstrated that the book habit builds a wide range of cognitive abilities. Reading grows powerful and important neural pathways that not only make reading easier as we do more of it, but enable us to analyze, comprehend, and connect information. But for the first time in human history, people all over the world are reading fewer books than they used to. Faced with compelling media alternatives, humans everywhere are abandoning the book. We read, but we are losing the habit of reading deeply. Having conquered illiteracy, we are now threatened by aliteracy. Reviving the book industry is only possible if we can revive the book itself.

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Francis

Francis

 

francisReligion seems to help a lot of people. It reinforces admirable values and provides community, kinship, charity, music, a moral compass, and stories. But to me, religious faith is stone soup: like the soldiers whose boiling rocks induced villagers to donate carrots, potatoes, and meat until there was a plentiful stew after the stones were removed. We could worship an old bicycle chain instead of an almighty deity if it brings us together to do useful work and help the least fortunate among us. Come to think of it, there are plenty of reasons to prefer the greasy chain over dead guys in white robes. My distrust of superstition has always meant that God and I are not on speaking terms. He presumably finds my lack of gratitude amusing. So we leave each other alone. I also think that despite its good works, the cost of religion usually exceeds its benefits. For millennia, religious intolerance has been a global scourge that has led millions to a life of hatred and violent death. Churches exploit the poor more often than they help them, just as they abuse the emotionally vulnerable more often than they comfort them. Religious leaders happily frighten children into believing that they will burn in hell forever if they don’t submit to church authority and doctrine. This is designed to terrify the weak into compliance — it  is nothing like parents fibbing about Santa Claus. Most religions oppress women, perpetuate outrageous sexual myths, and demand sexual conformity, but if hell exists, it surely has an especially warm corner reserved for the modern Catholic church, which abuses children on a horrific scale. That thousands of priests swore an oath to chastity before sodomizing more than ten thousand Catholic boys and (20% of the time anyway) raping Catholic girls is both horrifying and outrageous. As with all great crimes, we will never be able to fully count all of the victims. The governing body of the church admits that more than 3,000 priests have been accused of sex abuse during the past 50 years. In the US, more than 3,000 Catholics decided to speak out, lawyer up, and file lawsuits as they fled the church. The church has paid out between $2-3 billion to victims to settle these claims, depending on who is keeping score. Eight diocese have gone bankrupt due to an inability to pay these settlements. One widely cited count documents 6,115 priests who stand accused of sexually assaulting 16,324 minors. The actual account may be a fraction of this or it may be a multiple. What we know for sure and the Vatican concedes is that child abuse is simply not reported in much of the third world. If it were, one doubts that the church would still be growing there (watch the Philippines, where people are finding their voice and beginning to accuse predatory priests. The spread of Catholicism has been stopped cold). It was thus with a jaded eye that I watched the cardinals assemble this week at the Sistine Chapel. Like everyone else, I was surprised to hear of white smoke on the second day of the conclave. I was moved to see that the man who emerged wore not the traditional large ornate cross of gold, but a simple cross of wood. The cardinals had chosen a man who as Cardinal had refused his palace and limo and who, upon his elevation, refused to ascend the papal throne. Instead, he greeted the cardinals standing up, as brothers. I was stunned to hear that Bergolio chose the name of Francis after Assisi, who renounced his wealth, lived with the poor, founded the Franciscans, and spent a lot of time protesting outside the Vatican. Francis of Assisi was never ordained as a priest, much less a pope and as Robert Francis Kennedy noted, is a name associated with the quest for social justice, not the papacy. In his first talk, Francis spoke simply and generously. He asked that people pray for him, not to him, as most popes do. My antipathy to the church aside, this had to be good news. The world was stunned that an Argentinian had ascended to the papacy. This is not really surprising, since half of all Catholics now live in Latin America. Shocking to me is that the cardinals had chosen a Jesuit, the order that is a century-old pain in the Vatican ass. Jesuits are an intellectual order that values study and critical debate. They are big in the US and founded some of our best high schools and colleges, including Santa Clara, Boston College, and Georgetown. Jesuit priests take vows of poverty, which most gold-bedecked Cardinals think is beneath them. They are famously disrespectful of authority, challenging the Vatican on contraception, abortion, gay marriage, the role of women, the need for political revolution and all manner of causes (to be sure, not all Jesuits dissent on all of these issues. Francis appears to conform to Vatican thinking on all of them). Throughout the ages the Vatican has kept its distance from the Jesuits. Despite their size and influence, no order has been cast out further from the center of Vatican power. The cardinals of Rome are about as likely to name a Jesuit pope as the United Nations is to name a North Korean Secretary General. Indeed, the Vegas oddsmakers did not even have Bergolio on their list. When in his first words, Francis noted that the cardinals had “reached a very long way” to find a new pope, most people assume he was referring to the distance from Rome to Buenos Aires. He could as easily have been describing the reach it took for his fellow cardinals to support a Jesuit pope. I confess to a soft spot in my heart for Jesuits because so many of my best teachers were of that order. In high school and in college, every single teacher who challenged me to think deeply and critically and to live a moral life was either Jewish or a fallen Jesuit. Three were former priests who decided that a vow of chastity was nuts. Will Francis liberate the church? Nope. He is theologically conservative even if he modernized the Argentinian church. He made some dubious compromises with the military junta that will become public knowledge in the coming months. More fundamentally, he faces an unimaginable turnaround challenge rooted in both sex and money. The ongoing financial corruption of the Vatican’s Curia is deep and entrenched. Organized pedophilia and its cover up could kill the church, and arguably should. The average age of priests increases by about 10 months per year. Still, I wish Francis well, even if I would not miss his church if it vanished. I sympathize with those who have trouble kicking the Catholic habit, and for them, and for children who are forced into religious life before they can make a choice, I truly hope that Pope Francis fulfills the promise of his first glorious hours.

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Manhatisco

Manhatisco

 

Blue-Jasmine-offIn Blue Jasmine, Cate Blanchett delivers what may be her strongest performance yet. Her frenetic, scheming, recast Blanche Dubois tops even her jaw-dropping performance in I’m Not There — the 2007 movie where she plays a highly plausible Bob Dylan. Jasmine is married to Hal (Alec Baldwin), a sleaze-ball Wall Streeter who delivers the requisite mansion, Hampton home, and yacht. When Hal is exposed as a Bernie Madoff style crook, he goes to prison and Jasmine goes to live with her working class sister in San Francisco. In a clear homage to Tennessee William’s Street Car Named Desire, nothing goes especially well after that. The movie is in most respects brilliant. Allen is an active director, his camera everywhere, his cuts clean and well-considered. It is hard to argue with the verdict of The New Yorker’s David Denby, who pronounced Blue Jasmine “the strongest, most resonant movie Woody Allen has made in years.” Sally Hawkins and Andrew Dice-Clay deliver solid performances as Jasmine’s adopted sister and her husband who never forgives Hal for costing them the only money they ever had. At one level, Blue Jasmine is another in the latest of Allen’s attempts to get out of Manhattan that started with Midnight in Paris and continued with To Rome, With Love. I hope that Parisians and Romans did not cringe at the complete mess Allen made of their city, the way most Bay Area residents will at Blue Jasmine. Woody Allen appears to have not progressed in his view of California since Annie Hall in 1977 where is he famously puts down Los Angeles by declaring to his best friend Marty that “I don’t want to move to a city where the only cultural advantage is being able to make a right turn on a red light.” The working class heros of Blue Jasmine are not San Franciscans — they are from Jersey. In the Bay Area, car mechanics have foreign accents (Mine is Yemeni, but you can just about pick your country). Nobody here debates where the best clams are — that happens in New York and Boston. Even in New York, State Department officials have not had $10 million homes since the 1930s (Dwight Westlake, played by Peter Sarsgaard, should have been a venture capitalist). Dr. Flicker would have been a Cal grad and second generation Chinese. There is no Post Street entrance to the jeweler Shreve & Co. — Dwight was walking into a wall (or was that the the point?). The produce even in a working class grocery store would have been ostentatiously organic — although having an Indian owner was a nice touch. The custom Karl Lagerfeld designed Chanel clothing would have been made to look even more out of place (in truth, Blanchett wore it magnificently). Allen would not have closed the film in South Park with a shot that could have been Central Park. Or maybe he would have. Maybe a bit of Manhattan has crept into San Francisco and in some places more than a bit. But then why would Jasmine move west? She coulda stayed in Brooklyn. Or better, New Orleans

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On a City Bike, all Traffic Lights are Yellow

On a City Bike, all Traffic Lights are Yellow

 

11949849782053089133traffic_light_yellow_dan_01.svg.hiIn both the US and in Europe, the use of bicycles in cities has shot up. According to the League of American Bicyclists (which endorses none of what follows), bike use has gone up 39 percent nationally since 2001. In the seventy largest US cities, commuter bike use is up 63 percent. Leading the pack is San Francisco, where I bike to work most days; Chicago, New  York, and Washington have also seen huge increases. European cities, which generally had a head start, have also seen an increase in bike commuting. The growing ubiquity of City Bikes (public rental bikes designed for short urban commutes. In London, “Boris Bikes” after the mayor who sponsored them.) has accelerated this trend. Cycling is safe. Mile for mile, your odds of dying while walking or cycling are essentially the same. Surprisingly, even with more cyclists on the road, fewer cyclists are getting killed by cars.  From 1995 to 1997, an average of 804 cyclists in the United States died every year in motor-vehicle crashes. During an equivalent three-year period from 2008 to 2010, that average fell to 655. (The number rose again in 2011; not clear why). Credit does not appear to be because of bike helmets, which continue to generate serious debates. On balance, they seem to prevent death from skull fractures but do little to prevent brain injury from concussion. Traffic laws that slow cars down make a big difference. According to the Economist, dying while cycling is three to five times more likely in America than in Denmark, Germany or the Netherlands mainly due to cars traveling more than 30 mph. Europe frequently has traffic “calming” laws to slow cars down when bikes are nearby. It also helps pedestrians: A pedestrian hit by a car moving at 30mph has a 45% chance of dying; at 40mph, the chance of death is 85%, according to Britain’s Department of Transport. The British seem to gather better national data on cycling accidents than anyone else, although they appear to be far worse statisticians (they unhelpfully conclude that most bike accidents occur during those times when people ride bikes, for example). Nonetheless, they document a finding that will surprise no experienced urban cyclist: “Almost two thirds of cyclists killed or seriously injured were involved in collisions at, or near, a road junction…” In other words, cars kill cyclists at intersections. Knowing this, the single largest safety priority of every urban cyclist must be to avoid cars where possible; yield to them where not. Making this your number one safety priority  brings with it some surprising implications.

  • Distrust green lights. More cyclists die at green lights than red ones because more cyclists enter intersections on green lights. Too often they believe they are safe, but at a green light, a car motoring beside you will suddenly turn right or an oncoming care will turn left without signal or notice. Pedestrians will jaywalk your green light. Green lights are dangerous, partly because they appear safe. A smart cyclist treats a green light like a yellow one: slow down and prepare to stop.
  • Proceed on red if the intersection is empty. Remember, your top priority is to avoid cars, which at red lights are politely standing still. If it is a normal city intersection that is empty and you can see nobody is approaching from any direction, then go. Ride through the intersection and enjoy 100-200 yards of traffic-free riding. You are very unlikely to die at an empty intersection. Note that this rule emphatically does not apply to high speed intersections, which cyclists should simply avoid altogether. Nor is this is a strategy for speeding up your trip: like drivers, cyclists in a hurry are a menace.

In short, when biking in a city, all traffic lights are yellow. Avoiding cars means stopping on green when you must and going on red when you can.

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Top Ten Books of 2014

Top Ten Books of 2014

 

My reading for 2014 was more focused for the same reason my blogging has been reduced — I have a day job. Also, two of the books were real projects, entailing runs to the sources, blogosphere, and Wikipedia for background, context, and understanding. These books were demanding (long and in places technical) and singular — representing a new peak for their genre. I enjoyed both Thomas Piketty’s 696 page Capital and the 21st Century and Andrew Robert’s 976 page Napoleon: A Life enough to work through them both. Piketty is of course the French economist who appears to be famous everywhere except France (a problem he corrected this morning by refusing the Legion d’Honeur, declaring that “it is not the job of government to determine who has honor”.  Spoken like a French historian). Piketty has wrestled more deeply and seriously with the problem of inequality than any previous economic historian. He actually has produced three books: an amazing history of inequality based on European census data rarely deployed for these purposes, an economic analysis of the causes of inequality. He argues that if r, the rate of return on assets, exceeds g, the overall rate of economic growth, family wealth will grow faster than the economy, and can become gigantic. It is a widely derided formulation, but well argued and defended. His third book consists of recommendations for taxing wealth that are largely laughable — as he all but concedes. NapoleonRobert’s book doubles as a history of 19th century France and, for that matter, Europe. Napoleon led not only a remarkable and consequential life, but one that shaped a great deal of modern Europe. He wrote some 30,000 letters during his lifetime, and Roberts is the first scholar to have access to the full pile, lucky guy. The book is compelling and very well-written. If anything, it needed to be longer. Both books are worthwhile investments, even if both will occasionally leave you screaming — Piketty for what he fails to understand about business and technology, Roberts because his subject can be so simultaneously brilliant and boneheaded. (Moscow? Really?) I read from several other categories: books on startups, business and economic history, math and science books, and pulp detective fiction, especially noir. Here are the winners: Startups Running_leanEntrepreneurship is in the air — often comically. Books that fanned the startup flames this year included Brad Feld’s, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, the remarkable Ben Horowitz’s The Hard Thing About Hard Things: Building a Business When There are No Easy Answers, and Sean Ellis’ Startup Growth Engines: Case Studies of How Today’s Most Successful Startups Unlock Extraordinary Growth. All three of these writers are deeply experienced at the trials of early stage companies and all have useful lessons to teach. Feld offers a field guide to the legal aspects of starting a company, to which I would say simply, read his book, then hire a competent lawyer. Horowitz writes excellent columns, which are less compelling when assembled into a book. Sean Ellis has put together a useful set of lessons around specific startups he has worked with. thiel_6_4_frontTop startup books of 2014 were Ash Maurya’s Running Lean: Iterate from Plan A to a Plan That Works. This, finally, is the book that Steve Blank would have written in his groundbreaking The Four Steps to the Epiphany — which instead emerged as one of the worst expressions of great thinking ever put to print. In most cases bad writing is the soft underbelly of bad thinking — but Blank proves that sometimes you just need an editor. Eric Riess, who has built a franchise around “Lean Startups” by rewriting Blank and adding ideas like LAMP, does not come close to producing the how to manual for a startup team that Ash Maurya has written. This really is the go to book for early stage technology entrepreneurs. You won’t get much practical advice from Zero to One: Notes on Startups or How to Build the Future by the estimable Peter Thiel. Parts of this book will delight you, and some of it should outrage you. This book derives from Thiel’s widely followed Stanford course, which was capably blogged by his coauthor, Blake Masters. The book has moments of brilliance however — notably his description of how companies actually compete and his relentless search for companies that go from zero to one (bringing something altogether new into the world) as opposed to from 1 to many (scaling up derivative businesses). Marc Andreesen, who needs to write a book and is smart enough to write a very good one, likes to say that Peter Thiel is always half right. Seems correct — and the half that is right is also highly (Zero to One) original. Business History How_We_Got_to_NowNominations include the aforementioned Dr. Piketty, Anita Raghavan’s The Billionaire’s Apprentice: The Rise of The Indian American Elite and the Fall of the Galleon Hedge Fund, Bryce Hoffman’s well-told American Icon: Alan Mulally and the Fight to Save Ford Motor, John Brooks’, Business Adventures: Twelve Classic Tales from the World of Wall Street, Martin Wolf’s The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn from the Financial Crisis, Robert Litan’s Trillion Dollar Economists: How Economists and Their Ideas Have Tranformed Business, William Rosen’s The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, and Vaclav Smil’s Making the Modern World: Materials and DematerializationeverythingstoreRaghavan, Hoffman, and Brooks give us well-told tales. The disgusting and criminal behavior of my former McKinsey colleagues, the turnaround of Ford Motor, and the Bill Gates-endorsed collection of New Yorker business essays all make for great and educational reading. Martin Wolf and Robert Litan wrote exceptional books for those interested in financial economics and another post mortem on recent financial crises — although I had quite my fill of those in 2012-13. And I have an obvious soft spot for the sort of well-researched, highly readable economic and technology histories that Rosen and Smil have written. In a competitive year, I pick Marc Levinson’s The Great A&P and the Struggle for Small Business in America, Brad Stone’s The Everything Store: Jeff Bezos and the Age of Amazon, and Steve Johnson’s How We Got to Now: Six Innovations That Made the Modern World as the year’s best books of business history. Levinson’s book does not quite rise to the level of The Box, but is nonetheless a really wellgreatapcoverfinal told tale of retail innovation — a story that Brad Stone picks up with the history of Amazon. Based on my own front row seat at some of the events he describes, Stone gets a lot of things right about Amazon’s culture and history. It is an amazing company, even if not always an attractive one. Steve Johnson exceeded my low expectations for a book made into a PBS show and structured around seemingly random innovations. But the book works and brings with it more delightful insights per page than any in recent memory. You cannot know in advance how the sack of Constantinople will lead directly to telescopes but Johnson traces the path with confidence without inferring causality where none exists. Great read. Math and Science This year’s contenders are Alan Lightman’s The Accidental Universe: The World You Thought You Knew, John Brockman’s Thinking: The New Science of Decision-Making, Jordan Ellenberg’s How Not to Be Wrong: The Power of Mathematical Thinking, and Joshua D. Angrist’s Mastering ‘Metrics: The Path from Cause to Effect.SilvermanLightman is an unusual writer, as the first professor to receive appointments from MIT in both the sciences (he is a physicist) and the humanities. He offers looks at the universe from several perspectives — not all equally successful. His opening chapter, entitled the Accidental Universe, is the strongest and by itself a remarkable read. Brockman is closely associated with the Edge, a foundation that brings together thinkers from a wide range of disciplines. His book touches on developmental in neuroscience, decision theory, linguistics, problem solving, and more, but consists mainly of unedited transcripts of informal discussions or presentations, presumably at Edge conferences he has hosted. This gives the book a stream of consciousness feel, and leaves it vulnerable to rambling, repetition, and superficiality. Ellenberg writes well and not especially technically. Fine book overall but, like Lightman, the first chapter (on lessons by Abraham Wald on the value of constantly looking for reasons why you could be wrong) has the strongest material. Angrist’s book on econometrics was wonderfully organized and well written — but the higher math got away from me. I liked it even if I did not understand it all. Best book in this category goes to Nate Silver for The Signal and the Noise: Why So Many Predictions Fail-but Some Don’t. The book is not good because Silver famously called the Presidential election correctly — it is a genuinely good summary of the science of prediction, which is a vital part of science and business, not just politics. But prediction is difficult, “especially concerning the future” as Niels Bohr famously noted. We fall prey to cognitive biases and often mistake noise for signal. Silver does an excellent job of walking a general reader through the swamp. Social Criticism china_airborneI am a sucker for books on causes or those written to expound a strong point of view. This year’s pile included Adam Minter’s Junkyard Planet: Travels in the Billion-Dollar Trash Trade, two books on the economics of higher education — Elizabeth Armstrong’s Paying for the Party and Joel Best’s The Student Loan Mess: How Good Intentions Created a Trillion Dollar Problem, Megan McArdle’s The Up Side of Down: Why Failing Well Is the Key to Success, Michael Pollan’s Second Nature: A Gardener’s Education, Jonathan Safron Foer’s Eating Animals, and Steve Levitt’s Think Like a Freak: The Authors of Freakonomics Offer to Retrain Your Brain. Minter is a great writer, as any New Yorker reader knows. Trash matters — but ultimately not enough to keep me interested. The higher ed books both fail to segment the problem. Some higher education is really valuable and essentially self-financing and much is not. Average data tells you little, except that the debt problem is unsustainably large. McArdle knows her Dylan: “she knows there is no success like failure, but that failure is no success at all”. She fails to deliver a book’s worth of insights — although she is a fine writer and terrific blogger. Pollan’s book is great, period. Safron Foer somewhat crudely attempts to moralize factory farming — a topic that others, notably Pollan, have addressed far more more effectively as an omnivore’s dilemma instead of a vegetarian manifesto. Levitt’s book is Freakonomics II — good, clean behaviorist fun, just like the first one. CowenThe winners in this category are James Fallow’s China Airborne and Tyler Cowan’s Average Is Over: Powering America Beyond the Age of the Great Stagnation. Fallows is a great essayist and social thinker — you can learn from almost anything he writes and when he combines his love of China with his love of airplanes, run, don’t walk to read this book. Tyler Cowan, whose Marginal Revolution blog is indispensable to economic thinkers, has exposed the forces that underlie as much of the inequality problem as r>g — that in many fields, a huge share of the income goes to the top talent and that technology appears to make this problem worse, not better. Pulp Fiction eisler-novels-keanu-740x400Now to the fun stuff. I binge read police procedural and detective fiction, especially noir. In earlier years, I pigged out on the complete Raymond Chandler, Lee Child, and Michael Connelly. This year I happily read the complete Barry Eisler, whose ten or so John Rain novels, mostly set in Tokyo, are terrific escapism and helpfully move noir fiction out of Los Angeles. Rain is an attractive character (evidently to be played by Kenau Reeves in forthcoming movies) who combines the mandatory brooding nature, love of scotch, jazz and beautiful women with a wonderful introspection and deftness at the killer’s craft. Eisler is, of all things, an accomplished Silicon Valley attorney with an obvious love of Japan and the genre. Highly recommended. (Note that Eisler decided unhelpfully to rename all of his novels, so they all have new pub dates and you will need to search a bit to figure out the sequence, which matters. Pro tip to Barry: next time, number the titles).

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Subsidize Motherhood, not Apple Pie

Subsidize Motherhood, not Apple Pie

 

bernie hillary

Last night’s Democratic candidate debate was more elevated but less entertaining than the GOP debates. Everyone loves a clown and, although he gave it his best shot, Lincoln Chafee is just not in Donald Trump’s league as a buffoon. 

The question of paid family leave got a moment in the sun, with Bernie Sanders citing Denmark as his model and Hillary, ever the smart kid who does her debate prep, insisting that “we are not Denmark” before proceeding to recall her trials as the working mother of a sick infant and endorse everything Denmark does. With apple pie no longer debatable due to its high sugar content, this raises the question as to whether motherhood should be a political issue for 2016.

FT 13 12 11 parentalLeave

It should — because we need more mothers and raising babies ain’t ping pong as anyone who has tried knows. Since babies are pure positive externality, and apple pie promotes diabetes, let’s cut the sugar lobby out and subsidize mothers, not apple pie.

In 1993, during the reign of Clinton I, I worked in the Labor Department as we fought for and eventually passed the Family and Medical Leave Act (FMLA). The FMLA guarantees at least 12 weeks maternity leave to new mothers in companies with 50 or more employees. Half of all states have supplemented the FMLA by lowering the firm-size threshold to as few as 10 employees (14 states) or allowing longer absences (7 states).

This is protected leave — time that an employer must accommodate unpaid absence. California, New Jersey and Washington have enacted paid leaveprograms. Three other states and the District of Columbia guarantee mothers paid maternity leave through disability Insurance provisions.

Compared with other modern countries,the US is pretty hostile to mothers, as Bernie Sanders pointed out. The rest of the world welcomes new babies by giving their mothers some paid time away from work. Only the US doesn’t.

Conservative economists have two worries about family leave programs — and one looks valid. Notice that the graph segments into countries that allow about a year off and those at allow two or more years. Most of the countries allowing more than 150 weeks leavesuffer from very low female labor participation rates. Women, like anyone else, will choose not to work if you pay them enough.

Some conservatives also worry that paid leave somehow undermines family formation. It’s an odd argument, since most conservative economists think that incentives matter and it is not clear how a public incentive to form a family would end up wrecking families — as our marriage tax deduction recognizes. Academic research into welfare support for mothers concludes pretty forcefully that it improves family formation by increasing both marriage and fertility, which are both declining in the US. Parental leave is also associated with increased divorce, although one can question whether public policy should attempt to hold a marriage together so weak that it dissolves in the face of maternal leave.

Bottom line: Americans can and should do more to support mothers. Where should our policy fit on the above chart? I’d say right around Denmark. 

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Will Technology and Tuition Increases Burst Higher Education's Bubble?


Will Technology Burst Higher Education’s Bubble?

Imagine a market with incumbents whose core processes are unchanged since medieval times that is held together by huge federal subsidies and protected by a system of self-accreditation designed to exclude rivals. Imagine that the resulting enterprises exploited their monopoly power by overcharging customers and wasting the revenue that resulted on guaranteeing senior employees lifetime employment and discretionary funds, on massively expensive professional sports teams, and on protecting an overstaffed and comically inefficient bureaucracy worthy of the Indian railroads. Who would put up with such a mess? Welcome to American colleges and universities, which are both the envy of the world and ripe for disruption. It’s a big business (about $350 billion in the US alone) and a really soft target. It is, after all, run by tenured scholars whose idea of competition is a snarky jibe in the faculty lounge. The dons have allowed their costs to not only rise faster than family incomes, but faster than health care costs, which ain’t easy. That they have lasted this long is due to the monopoly they enjoy on certifying talent. As Kevin Carey noted in a recent New Republic article,

The historic stability of higher education is remarkable. As former University of California President Clark Kerr once observed, the 85 human institutions that have survived in recognizable form for the last 500 years include the Catholic Church, a few Swiss cantons, the Parliaments of Iceland and the Isle of Man, and about 70 universities. The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever.

Small wonder that thousands of startups are now focusing on the market for higher education. Even the guy who discovered disruption, Clayton Christensen, has declared that online technologies will thoroughly disrupt education at all levels, predicting that half of all K-12 classes will be taught online by 2019. During the past five years, online higher education has gone mainstream. The Sloan Foundation estimates that more 30% of all enrolled college students, some six million people, participated in on-line learning at accredited U.S. colleges and universities in 2011 and that the U.S. market for online higher education grew 12-14 percent annually between 2004-2009. Many educators are realizing that the explosion of online education not simply due to its lower cost; it is often higher quality as well. Sometimes this is because of dramatically higher investment in course and instructor development. Christensen notes that the largely online University of Phoenix spends about $200 million each year developing online teachers and highlights a key difference with traditional universities: “..Harvard defines research as creating new knowledge, while The University of Phoenix defines it as finding new ways to provide knowledge. It blows the socks off of us in their ability to teach so well.” Online education is quickly killing the in-class lecture, since recorded lectures have obvious advantages. Students can watch them when they are ready — after they are off work or when the kids are asleep. They can replay the confusing bits or skip the obvious parts. Most important however, is that the lectures themselves are more likely to delivered by world class teachers like Norman Nemrow, whose online accounting course has been taken by several hundred thousand students or by Walter Lewin, the MIT physicist whose lectures are shown on television. Supposedly over five million people have taken his intro to physics course (watch his promo reel below to see why. What? Your professor did not have a promo reel?) It is not only lectures that fare better online. Instructors in online classes can measure outcomes and tailor the course to the needs of each student. Modern learning management systems provide live seminars with multi-location live video, backchat, social media, and many other capabilities not available in a classroom. Quizzes can be graded instantly so that both faculty and students get feedback fast enough to change course. Algorithms distill questions from thousands of students so that they can be answered either live or off-line. Students can undertake projects online with “classmates” who have never been on the same campus — or even the same country. This is a time of vast experimentation with online education technologies. Two years ago, the Kahn Academy began to attract huge notice as a self-tutoring tool based on the brief lectures of one talented teacher. A year ago, 2Tor closed a large Series C and got very serious about providing major universities with technology, marketing, and course development assistance. A month ago, Google’s self-driving car maven Sebastian Thrun gave the talk at BLD in Munich that launched Udacity after 160,000 students from around the world completed his Stanford-based online computer science course (268 students achieved perfect scores on all the quizzes). In October, Knewton, an education technology startup, raised $33 million in its 4th round of funding to roll out its adaptive online learning platform. Earlier this year, Apple launched a suite of authoring and course scheduling tools to allow universities to move content to iTunes University. Only yesterday ShowMe launched its 2.0 platform that takes the Kahn Academy model and makes it social — anyone can use the platform to teach anything. Universities are developing their own online education initiatives, often plagued by a terrifying thought: what if online education is just another form of digital media? They know full well that that as books, movies, and music, moved online, few incumbents survived. In each case:

  • Content was disaggregated and mashed. Just as record albums were broken into songs, ringtones, and clips, educational content is unlikely to remain entirely within current disciplines or courses. Literature will not remain separated from history, nor calculus from chemistry. As technology makes it easier to recombine and repurpose courseware, it may become possible for two students to complete the same course without confronting the same content in the same sequence or manner. New forms of learning will produce certifications not limited to degrees, concentrations, or even courses.
  • Engagement became social.  Digital movies benefitted Hollywood much less than YouTube and Netflix. It should not surprise us to see more learning become self-paced, socially certified, and delivered outside of colleges and universities. Startups may increase the demand for formal education, but they could also substitute for it just as many of the needs once filled by campus fraternities or alumni associations are now met by online social networks.
  • Value shifted from content creators to aggregators. Book publishers and music labels learned that aggregators of content (Amazon and iTunes) hold a lot of cards. Will universities aggregate and distribute high quality educational content regardless of its origin? Or will universities, like film studios, attempt to remain relevant by offering exclusive, premium-priced, high-quality, proprietary content protected through careful online distribution and syndication? Top universities are betting on the Hollywood model, which is not only under sustained attack, but presumes producers who control their IP. Universities, in contrast, rarely limit the ability of their faculty to sell lectures and other courseware to the highest bidder, even though the university paid the professor to produce the content. In no other industry is such theft conceivable — a fact that Udacity will not be the last to exploit.
  • The product went global. Books, movies, and music are licensed or sold in tightly controlled, nationally bounded markets, but digital media is naturally global because there are far fewer natural distribution barriers. This means more customers, which is why universities are now lusting after talented and wealthy Indian and Chinese students who are (at the moment anyway) willing to pay US-type tuition for a degree from a globally prestigious institution.
  • Prices fell as comparison shopping became easier. It appears that the revenue optimal price for eBooks is between $2 and $5, depending on the author and in some cases the publisher. For songs it is between $1-$2, forcing record labels and publishers to seek entirely different business models to monetize their content. As a result, many of media markets actually shrank as they went online (if you only measure product sales. In music, for example, the market is about the same size, because concerts and merchandise make up for losses in record sales). Once

The response of universities to the rise of online education is like the response of Barnes and Noble to online bookselling. Faced with the rise of Amazon.com in the 1990s, the chain store simply created barnesandnoble.com. When Amazon launched the Kindle, they launched the Nook and merchandised it in their increasingly irrelevant bookstores. But the winner of this contest will of course be the company that is not forced to carry the cost of several hundred bookstores. Open Yale, MIT’s Open Courseware and MITx courses, Stanford’s Massively Open Online Courses including Corsera, and many others like it all share the Barnes and Noble problem: they need to price their offering to pay for extraordinarily high fixed cost institutions. Their disruptors do not. Barnes and Noble charges customers for a wide range of activities unrelated to book purchases. It designed many of its stores as community centers where authors and  could meet readers. It built fun sections for kids to discover books. It integrated Starbucks in many locations. But books are simply not going to be sold in stores much longer, so these activities added more cost than value and ended up making the problem worse. Likewise, many institutions of higher education support multiple activities with tuition: research, sport, socialization, teaching, and credentialing. Online education exposes the fault lines between these different businesses, just as Amazon did with Barnes and Noble.

  • Research. Top schools recruit faculty based on their ability to contribute new knowledge to their field not on their ability to teach. This is terrific for graduate students, who apprentice and occasionally indenture themselves to senior faculty, but suboptimal for undergraduates because the correlation between insightful research and capable undergraduate teaching is somewhere between weak and negative. Once undergraduates can receive a higher quality education at a lower cost by studying online, many will do so. Once Amazon made books cheaper, nobody wanted to pay for those kids play areas — not even people who liked them.
  • Sports. That giant sucking sound is money draining from university budgets to support massively wasteful professional sports programs — while managing to abuse college athletes in the process. Intercollegiate sports are fine. Division 1 football and basketball is a scandal — and both universities and the NCAA know it.
  • Teaching. Teaching and learning are rapidly becoming another online interactive social media. Some online learning will doubtless be indistinguishable from games. This part of what a university does will be rapidly mashed, commodified, and redistributed, just as books and movies have been. Universities often claim that they make use of these online technologies in “hybrid” classrooms. This is like selling Nooks in bookstores: the customers who buy will never come back.
  • Socialization. Residential undergraduate programs deliver to young people a group of peers and the experience of learning independently with them. Some of what the university provides is in loco parentis — a structured environment for 18-22 year olds to transition to self-sufficiency as they learn. The question is how much families will pay for this service. As high quality online education becomes universally available, middle class families will be very tempted to forgo residential colleges for their kids. Now that families cannot enhance their incomes by working longer hours, sending a second adult to work, or borrowing easy money against overvalued homes, families will be willing to cut back on college expenses if it does not compromise the quality of their children’s education.
  • Credentialing. Credentials are necessary for employers and future education institutions to distinguish between similar candidates. Many markets with this problem rely on brands or other signaling effects (watch how you select wine next time you are confronted with dozens of plausible choices). University degrees emerged long ago as a critical signal of professional capability independent of what the degree holder knows. Part of this is because of selection effects, as Malcom Gladwell explained some years ago:

Social scientists distinguish between…treatment effects and selection effects. The Marine Corps, for instance, is largely a treatment-effect institution. It doesn’t have an enormous admissions office, grading applicants along four separate dimensions of toughness and intelligence. It’s confident that the experience of undergoing Marine Corps basic training will turn you into a formidable soldier. A modeling agency, by contrast, is a selection-effect institution. You don’t become beautiful by signing up with an agency. You get signed up by an agency because you’re beautiful.

Top-tier universities produce top graduates by accepting applicants who are very likely to succeed — they trade heavily on selection effects. I once published a proposal in the campus newspaper challenging the Dean of the Harvard Business School to compare people who were admitted to HBS but did not attend with those who were admitted but did attend to see if the school was adding value or simply selecting people who were going to succeed anyway. He showed little enthusiasm for my research proposal, although other scholars (including Alan Krueger, who now chairs Obama’s Council on Economic Advisors) have since documented these selection effects.

Treatment effects also create signals, whether anybody learns anything or not. Imagine that you have two job candidates who 25 years earlier attended the same school and took the same courses. One candidate failed every course and did not graduate. The other got straight As in the courses and graduated with honors, but has forgotten 100% of the material. Neither currently knows anything that they learned in college. But if this is all the information you had, you would hire the successful student — you’d be crazy not to. You have a signal that this person is capable of hard work and learning, even if they don’t retain it 25 years later. In labor markets, signaling matters a lot and university degrees are powerful signals. Online education will not quickly change this — although the creation of alternative credentialing mechanisms may.

Who decides what signal a degree sends? Employers do. If Google or Goldman begin hiring software engineers or managers who received their professional degrees online, the value of elite professional degrees will come into question. As a future post will detail, this is very likely to happen, since the knowledge and skill imparted by most professional degree programs can more easily be standardized, sequenced, and captured on standardized tests than undergraduate education can. Universities are rushing to offer professional degrees online because because students are willing to pay high tuition to finance a degree that will significantly increase their earnings. If competition from online professional degree programs pressures schools to reduce either tuition or admissions requirements, universities will see their professional degree cash cow led to slaughter. For this reason, better known universities hope fervently that dozens of competing online degree programs to emerge, saturate the market, and preserve the signaling value of the premium degree they offer. As high quality education moves online, it will kill the weakest first: those schools that charge more and deliver less. Elite research universities will be forced to trade heavily on their brand and the signaling value of their credential, which may become easier as online programs proliferate and education markets become even more global. The experience of going to college may never be reducable to interactive social media — but classroom teaching and learning surely is.

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Is Detroit Moving to Silicon Valley

Is Detroit Moving to Silicon Valley?

 

f 015 luxury motion mercedes concept self driving car

As the value of an automobile moves to its electronics and cars become networked, self-driving computers, will the car industry move to the west coast? Consider:

  • Google now logs more than 10,000 miles weekly with self-driving cars — more than a million miles to date. Most of this is Mountain View (also Austin). Nobody else knows as much about navigating self-driving cars and building the underlying mapping technology as Google.
  • San Francisco-based Uber is widely expected to begin testing driverless car services. California’s recent move to classify drivers as employees is likely to accelerate this effort. Few can match Uber’s expertise at quickly matching drivers with riders in hundreds of markets worldwide.
  • Electric car pioneer Tesla, based in the former NUMMI plant in Fremont, is widely expected to offer driving services that compete with Uber.
  • Apple is unlikely to sit this one out — although the extent to which they aspire to build self-driving cars is unclear. The Wall St. Journal announced this week that Apple plans to ship a car in 2019 and has been hiring industry veterans for the secret project (code name Titan, which sounds slightly Titanic).

Ben Evans at Andreessen Horowitz has given some thought to how cars are evolving. He makes several useful points:

  1. The current focus is on building an autonomous car that can drive down the street and not hit anything. This is the Google skill — and maps are critically important. Maps, he points out, have moved from discretionary accessory to vital necessity.
  2. As autonomous cars grow, they are likely to be deployed as a service by companies that can optimize a fleet of autonomous on-demand cars in a city on a real-time basis. This takes NetJet type optimization skills and seems well-suited to Uber or Google. It also radically reduces the number of cars (and parking spaces) the world will need. The industry will shrink.
  3. The buyer and thus the car is likely to change — and this will change the cars. Cars will become simpler, partly because they are increasingly electronic. At first they will still have a steering wheel. Eventually however, they may not have brake pedals or windshield wipers. And if you are summoning a fleet car, they will be purchased based not on Tesla-elegant styling, but by corporate fleet managers, much like PCs are today.

Even high tech cars will remain a large business. Indeed, that’s what attracts Apple and Google. There are simply not many industries left to revolutionize that can move the dial on companies with revenue measured in the hundreds of billions of dollars. Evans’ chart showing the place of the $1.2 trillion global car industry in the minds of technology CEOs is instructive.

Evans on car market 1
As Evans notes however, this is today’s market — the one that looks to get smaller.

“Some analysts are talking about unit sales halving over time (with growing demand from China and other newer markets offsetting new technology). Meanwhile, moving to electric can reduce the price of a car, or of course (Apple’s preferred option) expand margins.”

He notes that even if Apple goes after the premium car segment, as seems likely,

“the bubble on the chart above shows Mercedes-Benz, BMW, Audi and Lexus, which combined sell 5-6m cars a year for $220bn in revenues (and so averaging $40,000 per car). That’s where Tesla is aiming now, and where one might expect autonomous cars to arrive first. For comparison, iPhone revenue in the last 12 months was $146.5bn….To look at that another way, if Apple created a car business as big as BMW and Mercedes combined, that business would generate less profit than the iPhone.” (my emphasis)

In short, yes — Silicon Valley will be the next Detroit. Seat belts advised — this will be a wild ride.

 

Draw This…


Draw This…

Henry Blodget is the former head of Internet research at Merrill Lynch. (Background: once upon a time there was something called Internet research. And once upon a time there was something called Merrill Lynch).  NY Attorney General Eliot Spitzer convicted Blodget of touting stocks in public while sending emails disparaging those same securities. Spitzer was later thrown out of office after his foes revealed him to be “Client 9” in an expensive Wall St. prostitution ring. Both men are now exiled from their former professions and both have become media entrepreneurs. Blodget now leads Business Insider and last night presented a very good piece of research on the growth of mobile to a conference in San Francisco. Towards the end, he describes Draw Something, a game app that has created a buzz around here. Blodget argued that Draw Something, by a startup called OMGPOP, reveals just how explosive the combination of mobile, social, and games can be. He reminded us that Draw Something launched just six weeks ago.

  • It has since been downloaded 20 million+ times. It is the #1 app in 79 countries. It has 12m daily users and generates $100,000 of revenue daily for a small team in New York.
  • Users are highly engaged. They drew 3 drawings per second on Feb 12. Two weeks later, they drew 100 times that: 333 drawings per second. 10 days later, it was up to 3,000 drawings per second. Users bring in other users, who bring in even more users. This is what viral growth now looks like on global, Internet scale — and stories like this are about to become fairly common.
  • The resulting growth rate is unhinged. It tool AOL nine years to acquire 1 million users. It took Facebook nine months to earn its first million users. Draw Something did it in nine days.
On March 16, TechCrunch ran a headline; “Zynga No Longer Has The Biggest Game On Facebook By Daily Users. OMGPOP Does.” Five days later, Zynga bought the startup (which had been trying to mix games, mobile, and social since 2007) for $180+ million. Early backers include Y-Combinator, Marc Andreessen, Kevin Rose, and a bunch of other folks whose periscopes are slightly longer than yours or mine. Note that Zynga may have made a really smart acquisition or, quite likely, overpaid for a game with a short life span. We’ll know soon enough. Here is the full Blodget presentation. You cannot make this stuff up…
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Favorite Quotes


Favorite Quotes

I like aphorisms, axiom, apothegms, maxims, and good old-fashioned sayings. Like ’em even better if they are funny, because I am more likely to remember them. Here are some of my favorites, sort of categorized. I will add to this from time to time.

MEN AND WOMEN

  • “If a woman has to choose between catching a fly ball and saving an infant’s life, she will choose to save the infant’s life without even considering if there are men on base.” — Dave Barry
  • “My girlfriend always laughs during sex — no matter what she’s reading.” — Steve Jobs
  • “See, the problem is that God gives men a brain and a penis, and only enough blood to run one at a time.” — Robin Williams.
  • “The average woman would rather have beauty than brains, because the average man can see better than he can think.”  –Author Unknown
  • “Men who don’t like girls with brains don’t like girls.” –Mignon McLaughlin
  • “Women like silent men.  They think they’re listening.”  — Marcel Achard
  • “The average man is more interested in a woman who is interested in him than he is in a woman, any woman, with beautiful legs.” — Marlene Dietrich

MONEY

  • “I’d like to live as a poor man with lots of money.”  –Pablo Picasso
  • “The real measure of your wealth is how much you’d be worth if you lost all your money.”  –Author Unknown
  • “Money is better than poverty, if only for financial reasons.” — Woody Allen
  • “There’s no money in poetry, but then there’s no poetry in money, either.”  –Robert Graves
  • “When I have money, I get rid of it quickly, lest it find a way into my heart.”  –John Wesley
  • “Too many people think only of their own profit. But business opportunity seldom knocks on the door of self–centered people. No customer ever goes to a store merely to please the storekeeper.” — Kazuo Inamori

POLITICS

  • “Democracy must be something more than two wolves and a sheep voting on what to have for dinner.” — James Bovard
  • “The danger is not that a particular class is unfit to govern. Every class is unfit to govern.” — Lord Acton
  • “The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.” — Bertrand Russell
  • “Politics is not a bad profession. If you succeed there are many rewards, if you disgrace yourself you can always write a book.” — Ronald Reagan
  • “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” — Winston Churchill
  • “A committee is a cul–de–sac down which ideas are lured and then quietly strangled.” — Sir Barnett Cocks
  • “A little government and a little luck are necessary in life, but only a fool trusts either of them.” — P. J. O’Rourke
  • “Whenever you find that you are on the side of the majority, it is time to reform.” — Mark Twain
  • “The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well–meaning but without understanding.” — Supreme Court Justice Louis D. Brandeis
  • “They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” — Benjamin Franklin
  • “There is no way of proving your point to someone whose income and position depend upon believing the contrary.” — Sydney Harris
  • “Government is not reason. Government is not eloquence. It is force. And, like fire, it is a dangerous servant and a fearful master.” — George Washington
  • “One should respect public opinion insofar as is necessary to avoid starvation and keep out of prison; anything that goes beyond this is voluntary submission to an unnecessary tyranny.” — Bertrand Russell
  • “First they ignore you, then they laugh at you, then they fight you, then you win.” — Mahatma Gandhi

EDUCATION, ART, AND SCIENCE

  • “Of course truth is stranger than fiction. Fiction has to make sense.” — Mark Twain
  • “I want to put a dent in the universe.” — Steve Jobs
  • “There is a theory which states that if ever anybody discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable. There is another theory which states that this has already happened.” — Douglas Adams.
  • “The highest result of education is tolerance.” — Hellen Keller
  • “Imagination is more important than knowledge.” — Albert Einstein
  • “Everything should be made as simple as possible, but not simpler.” — Albert Einstein
  • “It is the mark of an educated mind to be able to entertain a thought without accepting it.” — Aristotle
  • “Idealism increases in direct proportion to one’s distance from the problem.” — John Galsworthy
  • “The essence of all beautiful art, all great art, is gratitude.” — Friedrich Nietzsche
INTELLIGENCE
  • “Mad, adj. Affected with a high degree of intellectual independence.” — Ambrose Bierce
  • “The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” – F. Scott Fitzgerald
  • “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.” George Orwell
  • “Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.” — George Orwell
  • “It appears to me that one defeats the fanatic precisely by not being a fanatic oneself, but on the contrary by using one’s intelligence.” –George Orwell
  • “We live in a culture in which intelligence is denied relevance altogether, in a search for radical innocence, or is defended as an instrument of authority and repression. In my view, the only intelligence worth defending is critical, dialectical, skeptical, desimplifying.” — Susan Sontag
  • “‘Tis good-will makes intelligence.” Ralph Waldo Emerson

SUCCESS

  • “To succeed in the world it is not enough to be stupid, you must also be well–mannered.” — Voltaire
  • “I don’t know the key to success, but the key to failure is trying to please everybody.” –Bill Cosby
  • “Beware of all enterprises that require new clothes.” — Thoreau
  • “Failure is only the opportunity to begin again more intelligently.” — Henry Ford
  • “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self–evident.” — Arthur Schopenhauer
  • “If you find yourself in a hole, the first thing to do is stop digging.” — Will Rogers
  • “Hope for a miracle. But don’t depend on one.” — the Talmud
  • “A wise man will make more opportunities than he finds.” — Sir Francis Bacon
  • “The reasonable man adapts himself to the world: the unreasonable man persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” — George Bernard Shaw
  • “It is a paradoxical but profoundly true and important principle of life that the most likely way to reach a goal is to be aiming not at that goal itself but at some more ambitious goal beyond it.” — Arnold Toynbee
  • “It is better to be high–spirited even though one makes more mistakes, than to be narrow–minded and all too prudent.” — Vincent van Gogh

PEOPLE

  • “Clothes make the man. Naked people have little or no influence on society.” — Mark Twain
  • “Tact is the ability to describe others as they see themselves.” — Abraham Lincoln
  • “I am not young enough to know everything.”  – Oscar Wilde
  • “The only difference between genius and stupidity is that genius has its limits.” — Albert Einstein
  • “Few people can see genius in someone who has offended them.” — Robertson Davies
  • “Those who will not reason are bigots, those who cannot are fools, and those who dare not are slaves.” — Lord George Byron”
  • “Never doubt that a small group of thoughtful committed people can change the world: indeed it’s the only thing that ever has!” — Margaret Meade
  • “The truth does not change according to our ability to stomach it.” — Flannery O’Connor

CHARACTER

  • “Be yourself, everyone else is already taken.”     — Oscar Wilde
  • “Seeing a murder on television… can help work off one’s antagonisms. And if you haven’t any antagonisms, the commercials will give you some.” — Alfred Hitchcock
  • “Resentment is like drinking poison and waiting for the other person to die.” – Nelson Mandela
  • “When the only tool you have is a hammer, you tend to see every problem as a nail.” — Abraham Maslow
  • “Oh how sweet it is to hear one’s own convictions from another’s lips.” — Johann Wolfgang Von Goethe
  • “Only when lions have historians, will hunters cease being heroes.” — African Proverb
  • “Moderation in all things, including moderation.”  – Mark Twain
  • “The pursuit of happiness is a most ridiculous phrase; if you pursue happiness you’ll never find it.” — C. P. Snow
  • “Trying to save someone from their own stupidity is like trying to teach a pig how to dance: it wastes your time, and annoys the pig.” — Robert Heinlein
  • “It is easier to forgive an enemy than to forgive a friend.” — William Blake
  • “Courage is the power to let go of the familiar.” — Raymond Lindquist
  • “Do not be too moral. You may cheat yourself out of much life. Aim above morality. Be not simply good; be good for something.” — Henry David Thoreau
  • “Concentration comes out of a combination of confidence and hunger”. — Arnold Palmer
  • “Search others for their virtues, thyself for thy vices.” — Benjamin Franklin
  • “Distrust all in whom the impulse to punish is powerful.” — Friedrich Wilhelm Nietzsche
  • “I have always found that mercy bears richer fruits than strict justice.” — Abraham Lincoln
  • “Curiosity is one of the permanent and certain characteristics of a vigorous mind.” — Samuel Johnson
  • “Nothing great was ever achieved without enthusiasm.” — Ralph Waldo Emerson
  • “Nothing in this world can take the place of perseverance. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of education derelicts. Perseverance and determination alone are omnipotent. The slogan “press on” has solved and always will solve the problems of the human race.” — Calvin Coolidge
  • “I don’t measure a man’s success by how high he climbs but how high he bounces when he hits bottom.” — Gen George Patton
  • “If I had no sense of humor, I would long ago have committed suicide.” — Mahatma Gandhi
  • “Facing it, always facing it, that’s the way to get through. Face it.” — Joseph Conrad
  • “Trust men and they will be true to you; treat them greatly, and they will show themselves great.” — Ralph Waldo Emerson
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Work of the World


Lenin’s Rope: Universities Help Disrupt Universities

Lenin famously bragged that “Capitalists will sell us the rope with which we will hang them.” It would surely gall him to learn that the art of destroying capitalists with their own products has been mastered not by a militant, vanguard-led proletariat but by entrepreneurial capitalists. It appears that even universities, finally, are getting the hang of it and learning to sow the seeds of their own destruction. As an earlier post detailed, universities rarely go out of business. This is thanks to the magic of a three part lock that secures their position and protects them from institutional challenge. For centuries, universities have enjoyed the exclusive right to allocate valuable social capital.

  • Select talent. There is no evidence at all that Stanford, Harvard, or Berkeley do a better job of training undergraduates than Ohio State, Texas A&M, or the University of Florida. But they select far stronger students. If colleges were assigned students randomly, the value of “elite” degrees would plummet overnight. Harvard delivers 90% of its value the day it admits a student, although the market recognizes the value only when the student graduates. In a previous post, I described an experiment I once proposed to compare students admitted to Harvard Business School who attended with those admitted who did not attend. Others have since confirmed what we all know: Berkeley selects strong students, it does not create them. You aren’t smart because you went to Berkeley; you went to Berkeley because you were a certain kind of smart.
  • Credential talent. College degrees confer professional access and mobility. Since mobility is “path dependent” (your current options are constrained by past decisions, even if past circumstances are no longer relevant), it matters enormously what choices a credential opens up for you. Take it from a factory worker who went to Harvard Business School.
  • Signal social standing. Signaling is a cousin of credentialing. A credential is a specific signal to the labor market that a person completed a course of study and mastered a body of knowledge. But it is relevant mainly early in a career. The broader social and economic signal conferred by a university degree extends well beyond the time when the details of the course work are forgotten. An honors degree from the University of Maryland confers standing, especially in Baltimore, that extends well beyond the knowledge gained from a degree in European History. There are very few signals of social standing as powerful as a college degree, even though very little evidence suggests that this should be the case. Powerful alumni affiliations reinforce this effect.

It takes decades for universities to establish these privileged positions, which is why, with rare exception, the top decile universities of fifty years ago are the top decile universities today. This is partly due to the place university degrees have come to hold in our culture. It is an unquestioned (but economically threatened) article of faith among middle class families, including mine, that providing children access to higher education is an essential to giving them a full range of life choices. Most people are disinclined to risk their kid’s future on education institutions with highly plausible training programs but unproven power to select, credential, and signal. (Yeah, I’m looking at you Minerva Project). The paradox is that universities clearly add value (after all, college degree holders earn a million dollars more over their lifetimes than non degree holders and many economists declare it our single most competitive industry) but much of this “value” has nothing to do with learning, which is what employers presumably value. And if the credential cannot communicate what you know, then its signaling effects diminish. More accurate and effective approaches to credentialing and signaling become plausible. As detailed earlier, there are dozens of startups ramping up high quality educational programs that are either free or very low cost. But without credentials accepted by employers, all of the free online courses in the world will not translate into increased economic opportunity for graduates. To make these programs viable, they need a portable credential that is widely accepted by employers but not controlled by universities. Who would devise such a thing? Universities, of course. As Kevin Carey describes in the current Journal of Higher Education, the future is full of badges, not unlike the ones you earned as a scout. UC Davis, together with The Mozilla Foundation and the MacArthur Foundation is prototyping the development of digital “open badges” that validate “skill, quality, or interest”. Badges would be online and would allow a potential employer to access details of a student’s written work, test results, videos, etc. Open badges would communicate a great deal more than “BA in Economics from Sonoma State”, which is what employers get today. The article failed to record any sense of irony among the rope makers at the University of California. Under the Mozilla Open Badge framework, a badge “is a symbol or indicator of an accomplishment, skill, quality or interest” used to represent skill or achievement. Badges support a wide variety of learning beyond traditional classrooms including online courses, after-school programs, as well as work and life experiences. Badges not only signal achievement to peers, potential employers, educational institutions and others, but they are a way to recognize and document informal learning as well. Fully developed, badges should help people transfer learning across jobs, industries, and places and portray a richer, more complete profile of an individual’s professionals strengths. Mozilla expects there to be many types of badges. Some capture specific skills, something traditional degrees do quite poorly. Badges can support specialized and emerging fields that do not yet credential learners. They can document a much larger diversity of skills, social habits, motivations, etc. Badges potentially represent an alternative to traditional degrees as a way to enhance identity and reputation among peers, find peers and mentors with similar interest, formalize camaraderie, teams, and communities of practice that today often form around universities or professional associations. Open digital badges, unlike the scouting ones, are valuable because of their metadata. They link to videos, documents, or testimonials demonstrating the work that lead to earning the badge. They link to the issuing authority, which can be a school, a professional body, an international credentialing agency, a community of professional practice, a course, or a company. The supporting metadata reduces the risk of gaming and builds in a system of formal or implicit validation. In this system, a digital badge is backed by metadata that explain the badge, the issuer, the issue date, criteria for earning the badge, the earner’s work or evidence behind the badge, and the current validity of the badge, which, unlike a college degree, can be set to expire. Mozilla is creating an Open Badge Infrastructure to serve as the core technical scaffolding for a badge ecosystem that supports a multitude of issuers, badge earners, and badge displayers. This infrastructure includes the core repositories and management interfaces (each user’s Badge Backpack), as well as specifications required to issue or display badges. Users can build a “Badge Backpack”, which serves as a repository for their digital badge data, accessible only to them, where they can view badges, set privacy controls, create groups, and share badges. Startups like BadgeStack, which gamifies badges, can build OBI compliant sites and award apps. Open badges are a promising idea and one deserving of investigation by companies, entrepreneurs, universities, and investors. They threaten traditional university credentials because they are:

  • Granular. Employers care what you can do; they care relatively little about what you study, except as an indicator of what you can probably do. Badges are likely to reflect specific skills (“architecting social media databases” or “PHP”). Some may complement licensure (“palliative care nursing”) others may document skills in areas where little certification is available today (“Thai cooking” or “cloud-based SQL database administration”).
  • Open. To work, badges need an approval process and an ontology that reflects a hierarchy of skills. An licensed vocational nurse may be able to earn a badge in discontinuing intravenous drips, but I’d prefer that the Thai cook obtain his or her LVN certification before tackling this skill. Once these structures and privacy controls are established, the technology for making badges machine readable, searchable, embeddable, and portable is relatively trivial.
  • Able to evolve. The structure of badges itself needs to be open. Today “Thai Cooking” may be a sensible badge. Tomorrow it may be “Kitchen safety and peppers” (I worked with a cook who accidentally sent 50 diners choking and gasping out the door, hospitalizing two of them for lack of this knowledge). Badges that are ten years old will frequently fade in value as others rise. Badges create a market in skill certification — precisely what should replace university degrees.
  • Cumulative. A single badge may or may not signal a great deal, but a sash full of badges accumulated over many years of effort makes you an Eagle Scout. Employers are very likely to value particular combinations of badges for specific jobs. Today, resumes or transcripts do a notoriously poor job of communicating these capabilities.
  • Essential to reputation markets. Badges form core elements of emerging reputation marketplaces, where professionals collect, curate, and disseminate information that reflects their professional skills and achievements much as Fair-Isaac today distributes information about your credit history. For some positions (VP Marketing for a startup, for example), leadership history may matter more than a documented set of specific skills, but badges will still contribute to the overall picture.

Badges are not a sure thing. At first they will complement university degrees, not substitute for them. Badges face nontrivial privacy and trust issues — many which Mozilla is addressing quite well. They are an essential foundation for a portfolio that documents a range of professional skills, achievements, experiences, and relationships. One of the largest challenges facing open badges are cold start problems: early adopters will not have very few badges and employers will be unfamiliar with them. These are the sort of market development problems that entrepreneurs are good at conquering, although this makes them no less formidable. Mozilla may crack this market wide open.

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Economics, Media, Politics, Technology, WoW


Draw This…

Henry Blodget is the former head of Internet research at Merrill Lynch. (Background: once upon a time there was something called Internet research. And once upon a time there was something called Merrill Lynch).  NY Attorney General Eliot Spitzer convicted Blodget of touting stocks in public while sending emails disparaging those same securities. Spitzer was later thrown out of office after his foes revealed him to be “Client 9” in an expensive Wall St. prostitution ring. Both men are now exiled from their former professions and both have become media entrepreneurs. Blodget now leads Business Insider and last night presented a very good piece of research on the growth of mobile to a conference in San Francisco. Towards the end, he describes Draw Something, a game app that has created a buzz around here. Blodget argued that Draw Something, by a startup called OMGPOP, reveals just how explosive the combination of mobile, social, and games can be. He reminded us that Draw Something launched just six weeks ago.

  • It has since been downloaded 20 million+ times. It is the #1 app in 79 countries. It has 12m daily users and generates $100,000 of revenue daily for a small team in New York.
  • Users are highly engaged. They drew 3 drawings per second on Feb 12. Two weeks later, they drew 100 times that: 333 drawings per second. 10 days later, it was up to 3,000 drawings per second. Users bring in other users, who bring in even more users. This is what viral growth now looks like on global, Internet scale — and stories like this are about to become fairly common.
  • The resulting growth rate is unhinged. It tool AOL nine years to acquire 1 million users. It took Facebook nine months to earn its first million users. Draw Something did it in nine days.
On March 16, TechCrunch ran a headline; “Zynga No Longer Has The Biggest Game On Facebook By Daily Users. OMGPOP Does.” Five days later, Zynga bought the startup (which had been trying to mix games, mobile, and social since 2007) for $180+ million. Early backers include Y-Combinator, Marc Andreessen, Kevin Rose, and a bunch of other folks whose periscopes are slightly longer than yours or mine. Note that Zynga may have made a really smart acquisition or, quite likely, overpaid for a game with a short life span. We’ll know soon enough. Here is the full Blodget presentation. You cannot make this stuff up…
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Economics, Technology, WoW


Peak Apple: Understanding the Foxconn Deal

Apple has quickly raised worker wages to address the highly publicized problems with working conditions in its supplier network. The decision protects Apple’s pristine brand and costs the company next to nothing. It cleverly exploits the high-minded principles and low-level economic literacy of those of us who are its devoted customers. A series of well-researched articles by Charles Duhigg in the New York Times that included a long article on sweatshop subcontractors put Apple on the defensive. It appears that hard working people risk their lives to make sure that our iPads are shiny. Apple responded by asking the Fair Labor Association to investigate working conditions at its Chinese suppliers. Back home, Mike Daisey’s professional self-immolation magnified the controversy by forcing NPR to retract a series of assertions about Apple’s Chinese suppliers. This week, Apple CEO Tim Cook visited a huge Foxconn assembly plant in China as the FLA issued its report. Cook knows a lot about manufacturing both as a global supply chain expert and as a former factory worker. Cook played the event perfectly. When the FLA reported that, shockingly, Chinese factory workers endure long hours for low pay, he promptly gave workers a raise by pledging to cut hours without cutting pay. The audience applauded, the curtain dropped, and the world returned to its apps. The story displays a confidence and an ability to turn crisis into yet another advantage that makes me wonder whether we are approaching peak Apple. Apple raised Chinese wages not simply because it cares so much, but because it can afford to care so little. They know that their move causes bigger problems for their competitors than it does for them. Apple cares less about Chinese labor costs than Dell, HP, Google, and many others who produce lower margin products that use more Chinese labor. Apple spends about $8.25 per iPhone on Chinese labor — a completely irrelevant number in the lifetime economics of an iPhone. Had Chinese workers targeted Apple for a campaign to increase their wages, they would have chosen well. Is Apple’s move good for Chinese workers? Sure — for some of them anyway. Apple’s decision does not mean that Chinese workers will necessarily take home more money — just that they will work fewer hours. This may not sit well with workers at Foxconn and other subcontractors, most of whom move from the countryside, live in company housing at the factory, and want to maximize their earnings, not minimize their working hours. Duhigg’s excellent reporting cited a factory where workers rioted when hours were reduced under pressure from a western customer, acknowledging:

The other (workers) we talked to all seemed to regard it as a plus that the factory allowed them to work long hours. Indeed, some had sought out this factory precisely because it offered them the chance to work more.”

Does China benefit from this decision? Not necessarily. Manufacturing jobs are declining China in favor of Vietnam and Cambodia (the great promise of the campaign this week by Nobel Peace Prize winner Aung San Suu Kyi is that Burma will attract urban factories to relieve the punishing life of rural peasants). It surprises many Americans to learn that manufacturing employment in China is actually declining. With the Apple settlement raising labor costs, peasants in adjacent countries can cheer: soon they too can trade in their hoes and hats for a white coats and the opportunity to polish iPads. Nobody said economic progress was beautiful. Apple’s decision to polish its “Think Different” brand built on images of Ghandi and Cesar Chavez is tribute to both the company’s high moral tone and to it’s willingness to indulge the low economic literacy of its Western customers. Apple sells products to people who prefer a world in which every kid can go to college and work eight hour days. Apple customers hate sweatshops, even those that are demonstrable vehicles of economic progress. We have a hard time acknowledging that countries in South Asia, sub-Saharan Africa, or Haiti demonstrably need more sweatshops. We commit what economist Harold Demsetz memorably called the Nirvana Fallacy: we compare the choices facing overseas workers to the alternatives we have, instead of to the alternatives they have. As economist Eric Crampton notes:

Harold Demsetz warned in a beautiful piece of economic writing back in 1969 against what he called Nirvana Theorizing. He said there that we can’t say markets fail just because they deliver outcomes that we don’t like; rather, we have to compare the outcomes of markets to real-world achievable alternatives. We can’t just assume Nirvana on the other side of the scale. And, most of the arguments against sweatshops effectively assume Nirvana on the other side: if only we were to ban sweatshops or, more realistically, impose bans on the import of products produced by sweatshop labour, the employees would suddenly be freed to pursue fulfilling careers or to go and get that Bachelor’s in Cultural Studies that they’ve always wanted….. It’s only the evil sweatshops that are keeping them from achieving their dreams. If only it were that easy. For proper comparative institutional analysis, we really have to look at how working in a sweatshop compares with what else these workers could be doing.

Inconveniently for the Nirvana view, thousands of people voluntarily line up outside of Foxconn’s gates when factory jobs open up. Those clamoring to work at Foxconn know that factory work is tough and sometimes dangerous. But, like factory workers everywhere, they know that farm work is worse. The Times documented a horrific aluminum dust explosion in a Foxconn plant. This is not something to take lightly (my grandfather, uncle, and kid brother all died on the job or from occupational illness; occupational safety has never been an abstract problem to me), but the risks of factory work are nothing compared to the risk of illness (especially malaria), injury, or poisoning faced by Chinese peasants. Just about everyone who has tried both farm and factory prefers the latter. I worked in several factories; most of the jobs were boring and some were wildly unsafe (I thought for awhile that Westinghouse had a “hire the handicapped” policy because so many of my co-workers were missing fingers or limbs. D’oh). But two days spent harvesting hay under idyllic conditions hurt me worse than any factory job I ever did. Former paper and aluminum mill worker Tim Cook also understands this extremely well. Crampton cites recent work by Benjamin Powell on standards of living associated with sweatshop work showing that in most of the countries he studied, the average wages were equal to or better than the national average. In poor countries like Cambodia, Haiti, Nicaragua and Honduras, sweatshops paid twice the national average. This is why countries like Bangladesh, where 80% of the population lives on less than $2 per day, need more sweatshops, not fewer. Crampton reminds us of Nick Kristof’s reporting on workers in a garbage dump in Phnom Penh. Kristof gets it:

Another woman, Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous. I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade. When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.”

Tom Harkin, a progressive, pro-labor Senator from Iowa, introduced a law in Congress in 1992 that understandably prohibited the import of products made by children under age 15. In 1997, UNICEF investigated the effects of the Harkin Bill and found that even though the legislation had not taken effect, the mere threat had

“…panicked the garment industry of Bangladesh, 60 per cent of whose products — some $900 million in value — were exported to the US in 1994. Child workers, most of them girls, were summarily dismissed from the garment factories. A study sponsored by international organizations took the unusual step of tracing some of these children to see what happened to them after their dismissal. Some were found working in more hazardous situations, in unsafe workshops where they were paid less, or in prostitution.”

Once again, sweatshops are hardly the bottom of the heap — indeed the export shops targeted by Harkin are on average the better places to work. Most child labor is local production or rag picking, so if you ban exports, you may push some of the world’s most vulnerable children into the garbage dump, begging, child prostitution and starvation. This is not an argument for unfettered child labor or dangerous factories — just a note that exploitation is relative not absolute, protection is never free, and economic progress proceeds in steps not leaps. Apple understands that paying slightly higher wages simultaneously pressures their competitors, appeals to western decency, and exploits economically ill-considered aversion to sweatshop labor. But in technology, companies with more competitive advantages than they can possibly exploit should worry about hitting their peak. Having watched first Microsoft and now Google decline after amassing what once seemed to be insurmountable advantages, it is time to ask whether peak Apple is now in sight?

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Economics, Politics, Technology


Will Technology Burst Higher Education’s Bubble?

Imagine a market with incumbents whose core processes are unchanged since medieval times that is held together by huge federal subsidies and protected by a system of self-accreditation designed to exclude rivals. Imagine that the resulting enterprises exploited their monopoly power by overcharging customers and wasting the revenue that resulted on guaranteeing senior employees lifetime employment and discretionary funds, on massively expensive professional sports teams, and on protecting an overstaffed and comically inefficient bureaucracy worthy of the Indian railroads. Who would put up with such a mess? Welcome to American colleges and universities, which are both the envy of the world and ripe for disruption. It’s a big business (about $350 billion in the US alone) and a really soft target. It is, after all, run by tenured scholars whose idea of competition is a snarky jibe in the faculty lounge. The dons have allowed their costs to not only rise faster than family incomes, but faster than health care costs, which ain’t easy. That they have lasted this long is due to the monopoly they enjoy on certifying talent. As Kevin Carey noted in a recent New Republic article,

The historic stability of higher education is remarkable. As former University of California President Clark Kerr once observed, the 85 human institutions that have survived in recognizable form for the last 500 years include the Catholic Church, a few Swiss cantons, the Parliaments of Iceland and the Isle of Man, and about 70 universities. The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever.

Small wonder that thousands of startups are now focusing on the market for higher education. Even the guy who discovered disruption, Clayton Christensen, has declared that online technologies will thoroughly disrupt education at all levels, predicting that half of all K-12 classes will be taught online by 2019. During the past five years, online higher education has gone mainstream. The Sloan Foundation estimates that more 30% of all enrolled college students, some six million people, participated in on-line learning at accredited U.S. colleges and universities in 2011 and that the U.S. market for online higher education grew 12-14 percent annually between 2004-2009. Many educators are realizing that the explosion of online education not simply due to its lower cost; it is often higher quality as well. Sometimes this is because of dramatically higher investment in course and instructor development. Christensen notes that the largely online University of Phoenix spends about $200 million each year developing online teachers and highlights a key difference with traditional universities: “..Harvard defines research as creating new knowledge, while The University of Phoenix defines it as finding new ways to provide knowledge. It blows the socks off of us in their ability to teach so well.” Online education is quickly killing the in-class lecture, since recorded lectures have obvious advantages. Students can watch them when they are ready — after they are off work or when the kids are asleep. They can replay the confusing bits or skip the obvious parts. Most important however, is that the lectures themselves are more likely to delivered by world class teachers like Norman Nemrow, whose online accounting course has been taken by several hundred thousand students or by Walter Lewin, the MIT physicist whose lectures are shown on television. Supposedly over five million people have taken his intro to physics course (watch his promo reel below to see why. What? Your professor did not have a promo reel?) It is not only lectures that fare better online. Instructors in online classes can measure outcomes and tailor the course to the needs of each student. Modern learning management systems provide live seminars with multi-location live video, backchat, social media, and many other capabilities not available in a classroom. Quizzes can be graded instantly so that both faculty and students get feedback fast enough to change course. Algorithms distill questions from thousands of students so that they can be answered either live or off-line. Students can undertake projects online with “classmates” who have never been on the same campus — or even the same country. This is a time of vast experimentation with online education technologies. Two years ago, the Kahn Academy began to attract huge notice as a self-tutoring tool based on the brief lectures of one talented teacher. A year ago, 2Tor closed a large Series C and got very serious about providing major universities with technology, marketing, and course development assistance. A month ago, Google’s self-driving car maven Sebastian Thrun gave the talk at BLD in Munich that launched Udacity after 160,000 students from around the world completed his Stanford-based online computer science course (268 students achieved perfect scores on all the quizzes). In October, Knewton, an education technology startup, raised $33 million in its 4th round of funding to roll out its adaptive online learning platform. Earlier this year, Apple launched a suite of authoring and course scheduling tools to allow universities to move content to iTunes University. Only yesterday ShowMe launched its 2.0 platform that takes the Kahn Academy model and makes it social — anyone can use the platform to teach anything. Universities are developing their own online education initiatives, often plagued by a terrifying thought: what if online education is just another form of digital media? They know full well that that as books, movies, and music, moved online, few incumbents survived. In each case:

  • Content was disaggregated and mashed. Just as record albums were broken into songs, ringtones, and clips, educational content is unlikely to remain entirely within current disciplines or courses. Literature will not remain separated from history, nor calculus from chemistry. As technology makes it easier to recombine and repurpose courseware, it may become possible for two students to complete the same course without confronting the same content in the same sequence or manner. New forms of learning will produce certifications not limited to degrees, concentrations, or even courses.
  • Engagement became social.  Digital movies benefitted Hollywood much less than YouTube and Netflix. It should not surprise us to see more learning become self-paced, socially certified, and delivered outside of colleges and universities. Startups may increase the demand for formal education, but they could also substitute for it just as many of the needs once filled by campus fraternities or alumni associations are now met by online social networks.
  • Value shifted from content creators to aggregators. Book publishers and music labels learned that aggregators of content (Amazon and iTunes) hold a lot of cards. Will universities aggregate and distribute high quality educational content regardless of its origin? Or will universities, like film studios, attempt to remain relevant by offering exclusive, premium-priced, high-quality, proprietary content protected through careful online distribution and syndication? Top universities are betting on the Hollywood model, which is not only under sustained attack, but presumes producers who control their IP. Universities, in contrast, rarely limit the ability of their faculty to sell lectures and other courseware to the highest bidder, even though the university paid the professor to produce the content. In no other industry is such theft conceivable — a fact that Udacity will not be the last to exploit.
  • The product went global. Books, movies, and music are licensed or sold in tightly controlled, nationally bounded markets, but digital media is naturally global because there are far fewer natural distribution barriers. This means more customers, which is why universities are now lusting after talented and wealthy Indian and Chinese students who are (at the moment anyway) willing to pay US-type tuition for a degree from a globally prestigious institution.
  • Prices fell as comparison shopping became easier. It appears that the revenue optimal price for eBooks is between $2 and $5, depending on the author and in some cases the publisher. For songs it is between $1-$2, forcing record labels and publishers to seek entirely different business models to monetize their content. As a result, many of media markets actually shrank as they went online (if you only measure product sales. In music, for example, the market is about the same size, because concerts and merchandise make up for losses in record sales). Once

The response of universities to the rise of online education is like the response of Barnes and Noble to online bookselling. Faced with the rise of Amazon.com in the 1990s, the chain store simply created barnesandnoble.com. When Amazon launched the Kindle, they launched the Nook and merchandised it in their increasingly irrelevant bookstores. But the winner of this contest will of course be the company that is not forced to carry the cost of several hundred bookstores. Open Yale, MIT’s Open Courseware and MITx courses, Stanford’s Massively Open Online Courses including Corsera, and many others like it all share the Barnes and Noble problem: they need to price their offering to pay for extraordinarily high fixed cost institutions. Their disruptors do not. Barnes and Noble charges customers for a wide range of activities unrelated to book purchases. It designed many of its stores as community centers where authors and  could meet readers. It built fun sections for kids to discover books. It integrated Starbucks in many locations. But books are simply not going to be sold in stores much longer, so these activities added more cost than value and ended up making the problem worse. Likewise, many institutions of higher education support multiple activities with tuition: research, sport, socialization, teaching, and credentialing. Online education exposes the fault lines between these different businesses, just as Amazon did with Barnes and Noble.

  • Research. Top schools recruit faculty based on their ability to contribute new knowledge to their field not on their ability to teach. This is terrific for graduate students, who apprentice and occasionally indenture themselves to senior faculty, but suboptimal for undergraduates because the correlation between insightful research and capable undergraduate teaching is somewhere between weak and negative. Once undergraduates can receive a higher quality education at a lower cost by studying online, many will do so. Once Amazon made books cheaper, nobody wanted to pay for those kids play areas — not even people who liked them.
  • Sports. That giant sucking sound is money draining from university budgets to support massively wasteful professional sports programs — while managing to abuse college athletes in the process. Intercollegiate sports are fine. Division 1 football and basketball is a scandal — and both universities and the NCAA know it.
  • Teaching. Teaching and learning are rapidly becoming another online interactive social media. Some online learning will doubtless be indistinguishable from games. This part of what a university does will be rapidly mashed, commodified, and redistributed, just as books and movies have been. Universities often claim that they make use of these online technologies in “hybrid” classrooms. This is like selling Nooks in bookstores: the customers who buy will never come back.
  • Socialization. Residential undergraduate programs deliver to young people a group of peers and the experience of learning independently with them. Some of what the university provides is in loco parentis — a structured environment for 18-22 year olds to transition to self-sufficiency as they learn. The question is how much families will pay for this service. As high quality online education becomes universally available, middle class families will be very tempted to forgo residential colleges for their kids. Now that families cannot enhance their incomes by working longer hours, sending a second adult to work, or borrowing easy money against overvalued homes, families will be willing to cut back on college expenses if it does not compromise the quality of their children’s education.
  • Credentialing. Credentials are necessary for employers and future education institutions to distinguish between similar candidates. Many markets with this problem rely on brands or other signaling effects (watch how you select wine next time you are confronted with dozens of plausible choices). University degrees emerged long ago as a critical signal of professional capability independent of what the degree holder knows. Part of this is because of selection effects, as Malcom Gladwell explained some years ago:

Social scientists distinguish between…treatment effects and selection effects. The Marine Corps, for instance, is largely a treatment-effect institution. It doesn’t have an enormous admissions office, grading applicants along four separate dimensions of toughness and intelligence. It’s confident that the experience of undergoing Marine Corps basic training will turn you into a formidable soldier. A modeling agency, by contrast, is a selection-effect institution. You don’t become beautiful by signing up with an agency. You get signed up by an agency because you’re beautiful.

Top-tier universities produce top graduates by accepting applicants who are very likely to succeed — they trade heavily on selection effects. I once published a proposal in the campus newspaper challenging the Dean of the Harvard Business School to compare people who were admitted to HBS but did not attend with those who were admitted but did attend to see if the school was adding value or simply selecting people who were going to succeed anyway. He showed little enthusiasm for my research proposal, although other scholars (including Alan Krueger, who now chairs Obama’s Council on Economic Advisors) have since documented these selection effects.

Treatment effects also create signals, whether anybody learns anything or not. Imagine that you have two job candidates who 25 years earlier attended the same school and took the same courses. One candidate failed every course and did not graduate. The other got straight As in the courses and graduated with honors, but has forgotten 100% of the material. Neither currently knows anything that they learned in college. But if this is all the information you had, you would hire the successful student — you’d be crazy not to. You have a signal that this person is capable of hard work and learning, even if they don’t retain it 25 years later. In labor markets, signaling matters a lot and university degrees are powerful signals. Online education will not quickly change this — although the creation of alternative credentialing mechanisms may.

Who decides what signal a degree sends? Employers do. If Google or Goldman begin hiring software engineers or managers who received their professional degrees online, the value of elite professional degrees will come into question. As a future post will detail, this is very likely to happen, since the knowledge and skill imparted by most professional degree programs can more easily be standardized, sequenced, and captured on standardized tests than undergraduate education can. Universities are rushing to offer professional degrees online because because students are willing to pay high tuition to finance a degree that will significantly increase their earnings. If competition from online professional degree programs pressures schools to reduce either tuition or admissions requirements, universities will see their professional degree cash cow led to slaughter. For this reason, better known universities hope fervently that dozens of competing online degree programs to emerge, saturate the market, and preserve the signaling value of the premium degree they offer. As high quality education moves online, it will kill the weakest first: those schools that charge more and deliver less. Elite research universities will be forced to trade heavily on their brand and the signaling value of their credential, which may become easier as online programs proliferate and education markets become even more global. The experience of going to college may never be reducable to interactive social media — but classroom teaching and learning surely is.

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Economics, Media, Politics, Technology, WoW


Two Questions for California’s College Students

Perhaps the only thing more depressing than the sight of hundreds of students and faculty on a “99 Mile March” to defend California’s system of higher education from budget cuts is the failure of the state legislature to vigorously defend the engine of the state’s wealth and economic mobility. The protests now underway in Sacramento demonstrate why California’s system of higher education is far too important to entrust to faculty, students, or legislators. Any group wishing to challenge cuts in public spending that benefit them directly has a political problem if taxpayers see costs without benefits. So the group wishing to protect themselves from the cuts needs to answer two questions: Who else benefits from the spending? and How can we increase our public contributions? If the marchers trying to channel their inner Cesar Chavez had taken the first question seriously, they would have built a coalition. Had they been courageous in their answer to the second, they would have built a movement. Chavez, not incidentally, understood this and knew that those who ask only what their country can do for them produce the political equivalent of a large yawn.

Who Else Benefits?
California’s three-tiered system of higher education is justifiably the envy of 49 states. If Hollywood and Silicon Valley are the symbols of California’s economic prowess, our colleges and universities are the engines that make them possible. Consider:
  • The California Community Colleges is the largest higher education system in the nation.  Its 112 colleges provide more than 2.9 million students with basic skills education, workforce training, preparation for four-year universities. They attract working student and ambitious immigrants in very large numbers. I used my local community college to learn blueprint reading and geometric dimensioning and tolerances to become a machinist; I also took classes in physics because they were exceptionally good.  Almost 60% of CSU graduates and 30% of UC graduates originally transferred from a California community college.
  • California State University has 23 campuses, some 427,000 students, and 44,000 faculty and staff. It is the largest, most diverse, and one of the most affordable university systems in the country. CSU graduates 44% of the life sciences college graduates California, more than 60% of all of the state’s teachers, including 9 out of 10 of California’s public school educators, and 45% of the state’s computer and electronic engineers. CSU is an outstanding resource for underserved populations, awarding more than half of the bachelor degrees earned by African American, Latino, and Native American students in California.
  • The University of California is a top-tier research university and an economic catalyst for the state. UC’s ten campuses enroll more than 220,000 students and employ more than 170,000 faculty and staff. Its three national labs manage hundreds of millions of dollars of state and federal research. A recent study estimated that UC generates $46.3 billion in annual economic activity for California, not counting benefits such as technology startups that grow directly out of university research.

Berkeley remains the premier UC campus and an amazing public institution, despite its bottomless capacity for self-parody (disclosure: my wife is a dean at Cal).

  • A National Research Council analysis of U.S. universities concluded that UC Berkeley has the largest number of highly ranked graduate programs in the country. The analysis ranked doctoral programs within a range (such as between 1st and 5th), and found that 48 out of the 52 Berkeley programs assessed ranked within the top 10 nationally.
  • Over the past decade (2000-2009), the National Science Foundation awarded more Graduate Research Fellowships to UC Berkeley students than to those of any other university (MIT was 2nd; Stanford 3rd; Harvard 4th).
  • 135 Berkeley faculty are members of the prestigious National Academy of Sciences, exceeded only by Harvard with 150.  91 are members of the National Academy of Engineering, exceeded only by MIT with 105. Membership in the American Philosophical Society, the American Academy of Arts and Sciences, or winners of National Medal of Science teach overwhelmingly at three schools — Berkeley, Harvard and Stanford. Only one of these is a public institution.
  • Berkeley’s single proudest claim however, ahead even of its 24 national rugby championships, is that it enrolls more students on Pell Grants than all of the Ivy League schools put together. A Pell Grant is a scholarship based on financial need. By serving academically qualified students on Pell Grants, Berkeley ensures that smart, hard-working kids from low income families can get a top-flight education.

The combined effects of this system on the California economy are astonishing. Community college students who earned a vocational degree or certificate in 2003-2004 saw their wages jump from $25,856  to $57,594 three years after earning their degree , an increase of over 100 percent. Census data indicate that an average college graduate earns a million dollars more during their working lifetime than a high school graduate. A masters degree adds another $400,000 and a doctorate another million on top of that. A professional degree adds another million on top of that (average lifetime earnings are $1.2 for those with only a high school diploma, $2.1, $2.5, $3.4, and $4.4 for BA, Masters, PhD, and professional degrees, respectively). Depending on what you count and how you count it, a dollar invested in California higher education returns $3, $5, or $14 but it doesn’t really matter — it’s a great public investment. And because many of the benefits accrue to individuals, not all of the investment needs to be public;  students can and should bear some of the cost, so long as financing is available with repayment schemes adjusted for students that pursue lower paying occupations. This system of higher education is the goose whose eggs make California the Golden State. And playing the part of Aesop’s short-sighted fool who wishes to slaughter the creature for short term gain, is California’s legendary and dysfunctional state legislature. This august body last year, cut $500 million from UC, $500 million from CSU, and $400 million from the California Community Colleges to close a state budget deficit in 2011-12. California is not alone in this trend: between 2002 and 2010, states have cut funds for public research universities by 20 percent in constant dollars according to a report issued by the National Science Foundation. Every Californian should be alarmed at the proposed “trigger cuts”, which would slash another $300 million, unless taxpayers pass a special ballot initiative to increase state taxes — which are already the nation’s highest. Where does all the money go? Pension spending aside (and it cannot be put aside for long), it goes to health care and to prisons. California is the only state that spends more on prisons ($10.7 billion in the current budget) than on higher education ($9.8 billion). Both are dwarfed by the state’s $42 billion Health and Human Services budget. How Can We Contribute? On these facts alone, students and faculty should be able to rally public support, not just each other.  Serious and sustained public support however, requires more. What, precisely, are students and faculty offering to contribute to make increased public investment even more compelling? Two ideas could completely change the conversation. 1. Use campuses year round. The University of California and CSU teach either three ten week quarters or two fifteen week semesters each year, meaning that 33 large and expensive campuses are fully utilized less than 60% of the time. Adding a fourth quarter or a third semester would produce revenue that would go a very long ways to paying for fixed assets, including facilities, administration, admissions, counseling, health care, technology, and similar services that are staffed year round, even though paying students attend only part of the year. Even if campuses completely eliminated so called “Summer Session” revenue and did not alter faculty teaching loads and research expectations (meaning that new faculty would be hired or current ones paid more in order to meet increased teaching demand), year round operations would generate hundreds of millions of dollars for the system as a whole (and based on limited public data on UC, it would more than makes up for the loss of state funding). Without reducing degree requirements or creating a cut-rate three-year undergraduate degrees, this approach would enable a student who undertook full time studies to complete the work for an undergraduate degree in three years or less and would substantially relieve pressure for additional tuition increases. Faculty should embrace year round operations, which would not need to reduce time for research at UC but would offer the option for all faculty to earn additional teaching income. They should rally in support of an approach that would enable most departments to add new faculty positions, which will simply not happen otherwise. Year round campus operations would be very quickly copied by other top flight universities if UC and Cal State take the lead. As financial stewards of state educational resources, university leaders should admit that operating campuses 30 weeks per year (a schedule designed originally to make sure students made it home to help with the harvest) is economically wasteful, socially indulgent, and politically untenable. 2. Repay a public investment with public service. As a candidate, Barrack Obama proposed a national service program that would serve as “a central cause of my presidency”. It hasn’t, but it should. He proposed to spend $3.5 billion to expand AmeriCorps to 250,000 volunteers and to double the size of the Peace Corps. He envisioned tuition tax credits for college students who performed community service while in school. His plan supported promising nonprofit community startups, expanded the GI Bill, and created a Classroom Corps to help teachers and students in high-need and underserved schools. Obama proposed a Health Corps to improve public health information and outreach to areas with inadequate health systems such as rural areas and inner cities and a Clean Energy Corps to promote weatherization, renewable energy projects, pollution clean up, trea planting, and park maintenance. Other volunteers would serve veterans or help communities with disaster preparation. Not only is national service a good idea, but the politics of enacting it are not nearly as awful as they are on many other issues (recall that the GI Bill, one of the most popular and successful social programs in US history, was initiated by the American Legion together with FDR). In this spirit, the federal government could, for a modest amount of money, guarantee loans and offer tuition tax credits proportional to the public service performed. By accepting only freshman applicants who have performed at least one year of community service, California could set an example for the rest of the country and begin the long overdue process of rebuilding public support for its activities. One of the faculty spokespersons for the current band of protesters is a leftist professor, a tenured friend who for decades has rarely missed a good demonstration. Not long ago, I asked him what he believed today that he did not believe in 1968, when his political habits were formed. He thought for a moment before declaring that “1968 was a very good year”.  But he and his campus comrades appear to have forgotten the lessons of ’68: that lasting political change requires public education, coalition building, and a commitment to public service. Why do I suspect that the last people to figure this out will be those closest to the problem?

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Media, Politics, WoW


Whatever Happened to the United Farmworkers?

On New Year’s Day, a friend mentioned that Frank Bardacke had published his long-anticipated history of the rise and fall of Cesar Chavez and the United Farmworkers. It was worth the wait, he assured me and “completely stunning. Just get it and read it. You won’t put it down.” He was right. Bardacke, a respected labor activist and educator based in Watsonville California, was first mentioned in this blog six years ago in connection with his research on Cesar Chavez. Like Bill Gates and Mark Zuckerberg, he dropped out of Harvard after his freshman year and moved west to change the world. Unlike them, he joined the Berkeley Free Speech Movement and has had an abiding interest in radical politics ever since. In the early 70s, I traveled to China with Bardacke to get a first hand look at Mao’s proletarian dictatorship. Frank admired all things proletarian; I feared the dictators. Bardacke often views the world through a different template than I do, but I have learned a lot from him and continue to have enormous respect for his views. Bardacke became a farmworker – one of a handful of Anglos and surely the only former Harvard student to work the celery fields. He became fluent in Spanish and formed friendships with many of the union staff and farmworkers who appear in his book. He spent more than a decade interviewing every major participant in the drama, reading every known book on the farmworkers and scouring every archive. He received help in managing this massive project from faculty in history and politics at nearby UC Santa Cruz. The result, Trampling Out the Vintage: Cesar Chavez and the Two Souls of the United Farmworkers, is the most complete account yet of the rise and fall of the UFW. It is also an epic, Shakespearean drama with all of the elements of a Hollywood blockbuster. The pitch meeting would be surreal:

OK, picture this: we have a conservative Catholic who fasts and marches like he’s Ghandi. He courts progressive clerics and hires liberal Jews and alienated Anglos to mobilize immigrant Mexicans and Philipinos to fight Slavic and Italian growers. At first David slays Goliath, but then he morphs into King Lear and destroys his newly built kingdom amidst slaughter and recrimination. We’ve got side plot romances between devotees who work for $5/week and bad food trying to raise farmworker pay. We’ve got violent Teamster, UFW, and grower thugs straight out of the Sopranos. We’ve got a certifiably batshit human potential guru who wreaks havoc getting everyone to criticize everyone else. And under the carpet here somewhere, we may even have communists trying to advance a proletarian revolution without a proletariat. How can we miss?

Astonishingly, it is a true story and Bardacke delivers it with intelligence and compassion. Unique among labor historians, he grounds his analysis in “the work itself”, with brilliant, memorable descriptions of how different stages of production for different crops in different regions of California all affect the ability and willingness of different crews to self organize. He describes clearly why organizing was often sustained by the tight-knit, highly skilled lechugeuros or the celery cutters, not the garlic or asparagus workers or those in ladder crops. He describes the skill and endurance that the work requires, introduces leaders that arise from various crews, and captures in fine detail how they interact with a union that was built on a very different set of principles from farm work. In a decade spent organizing waiters, housekeepers, nurses, bartenders, machinists, cannery workers, and assembly workers, I observed precisely these differences. The work itself shapes our propensity to organize. Bardacke is the first writer to apply this principle to the fields and he does so with a deep understanding and compassion for the work.

Cesar Chavez and Marshall Ganz
Cesar Chavez and Marshall Ganz

Bringing an existing union into a workplace is an act of industrial combat not for the faint of heart — but starting a new union from scratch is a herculean task that almost always fails.  I started a company that has lasted more than a decade, a public agency that lasted three years, and a union (United Espresso Workers – I was a bit early) that lasted all of three weeks. With the proud exception of the United Farmworkers, I cannot think of a single independent union formed in the United States in the past 50 years that was not sponsored and controlled by an incumbent union (I can think of several that tried and died – but none who made it). This was not always true — new unions once spawned regularly in the US. There are many reasons for the change, but the lack of competition between unions has positioned them nicely for extinction. Organizations evolve through the mutation, variation, and selection that is always produced by competition. The labor movement stopped growing the instant the AFL joined with the CIO and prohibited unions from competing with each other. When two teachers unions competed, both grew. The instant the Teamsters stopped raiding the UFW, growth stopped. I hated the Teamsters (who were kicked out of the AFL-CIO for corruption and are not subject to the noncompete provisions) and I took a nasty beating from them once, but like sharks or wolves, they have their place in the ecosystem. (I am aware of no union leader who agrees with this view, by the way. Most feel that they have all the competition they can handle from employers). But for a brief moment following the civil rights movement in the 1960s, a new labor union arose in the United States and in the least likely place. If you had asked in 1960 where in the economy a new union might appear, you would never have selected the farmworkers of California. Organizers prefer workers who are tied to one place and to one employer, not workers who are seasonal and often itinerant. Probably wrongly, organizers prefer workers who are covered by labor laws, which had always exempted farmworkers. Organizers like English-speaking Americans, not Tagalog or Spanish-speaking immigrants or Braceros who are tolerated for a season then ushered back to Mexico. A dozen or so failed efforts by farmworkers to form agricultural unions seemed to validate Marx and Lenin’s belief that workers would organize once they were forced into factories and worked for a single employer. Bardacke demonstrates that Cesar Chavez succeeded in organizing farmworkers because he was, at heart, a brilliant and hard-working Alinksy-trained community organizer. As a community organizer, Chavez pioneered an enormous innovation that had the potential to transform labor organizing: he mastered the secondary boycott (illegal for most workers under the federal labor law, which thoughtfully excludes farmworkers). Chavez tirelessly organized enormous boycott operations in grapes, lettuce, and against major retailers including Safeway. Farmworker boycotts were the Occupy movement of the 70s and 80s – a way for college students, community activists, and middle class young people to participate directly in the tough work of social change. And credit Chavez’s brilliant leadership, it worked magnificently: faced with effective boycotts, growers raised wages and improved working conditions and politicians begged the army of grass-roots Chavistas to help register voters and turn them out on election day. The UFW became a powerful force for social change.

Frank Bardacke

But the UFW was only briefly a powerful labor union. Bardacke correctly diagnoses the boycott as creating a formidable tension within the UFW. He frames the tension between labor and boycott organizing as a struggle between the “two souls” of the UFW. The metaphor is fraught. As Bardacke demonstrates, the UFW collapses not because it has two souls, but because none of its activities were organized, financed, or led in a manner that enable them to grow. The problem is not that community organizing is a distraction — most American labor unions lack a community service organization and are much the weaker for it. This is tragic: having discovered and refined one of the few recent innovations in union organizing, Chavez cannot let it grow. Instead, he strangles his own child. One of the heros of Bardacke’s book is Marshall Ganz, one of America’s most innovative labor organizers. Ganz also dropped out of Harvard, but moved south to organize for civil rights before heading west. After his exile from the UFW, Ganz helped the Silicon Valley Central Labor Council build a powerful neighborhood-based political organization for the 1984 elections. He was terrific at posing fundamental questions – and at directing me and others to writers and thinkers who helped answer them. In 1984 he urged me to read, of all things, a business book, In Search of Excellence. I quickly developed an appetite for business writing. decided to get trained in it, and ended up working with the book’s authors. Marshall returned to Harvard, got his degree after a 28 year hiatus, and now teaches at the Kennedy School. (His version of the UFW story, told in Why David Sometimes Wins, is a fine companion volume. It suffers for being his PhD dissertation and dwells more deeply on theories of organizing and less on the dynamics of local struggles). So let’s ask a Marshall Ganz-like question: what does it take for an organization to grow successfully? Venture capitalists, a group not deeply concerned with the welfare of those who produce their salads, obsess about this question. There are at least as many answers as there are VCs, but common elements include:

  • A big market. If there is not substantial demand for the product or service an organization produces, the organization cannot get very big.
  • Positive unit economics. If serving one more person imposes more cost on the organization than it generates in revenue, then growth makes no economic sense and the organization will depend for growth on funding from charity or government. Anyone can sell a dime for a nickel; selling a nickel for a dime means that an organization has to add at least a nickel’s worth of value if it wants to grow.
  • Customer or member acquisition costs that scale. Every organization has a cost of acquiring a customer that must be repaid over the lifetime of that customer or member. Smart organizations exhibit declining COA: the cost of acquiring each incremental customer declines with scale. Very smart organizations (and effective social movements) are viral: COA approaches zero as current participants recruit new ones. See Facebook, Google, or Arab Spring.
  • Leadership. Growth is very, very demanding on an organization. Everyone in a fast-growing organization has to grow with it: jobs change radically every few months. Not everyone grows at the same pace, so leaders must recruit furiously, communicate direction and values continually, promote and replace people regularly, and test what works all the time. It is stressful and a lot of fun – ask anyone who has been involved in a fast-growing company, boycott, strike, or organizing campaign.

Back to the fields. Boycotts have completely different economics than labor organizations. Boycotts have huge markets: liberals eager to shop their conscience. Churches and colleges do the recruiting at very low cost to the boycott sponsors. Every convert adds more value (the grapes they don’t buy) than cost (the very low cost of volunteers leafleting).
Read the rest of this entry »

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Economics, Media, Other classics, Politics, WoW


What Lives After: Remembering Five Who Died This Week

Shakespeare’s immortal eulogy delivered by Mark Anthony for Julius Caesar resonates this week: “The evil that men do lives after them; The good is oft interred with their bones.” We lost five remarkable men from different parts of the world. Four of them made the planet an immeasurably better place. One devoted his life to evil that survives his death. George Whitman, 1913-2011 I have known hundreds of booksellers; the most memorable by far was George Whitman, proprietor of Shakespeare and Company, across from Notre Dame at point zero in Paris. His store, like its namesake run by Sylvia Beach during the 1930s, became point zero for two generations of writers and wanderers. I am one of tens of thousands of people who was taken in by George, absorbed into his literary world, made part of his little “Rag and Bone shop of the heart”. George never cared about money, food, or finery — he cared about people, literature, and travelers. He was especially drawn to young people, to whom his generosity was legendary. I last saw George four years ago. My tribute to him at the time reads nicely today. I recalled my days living in Shakespeare in January of 1976, decades after Jackie Onassis had come through as a student and around the time that a young Greek immigrant named George Soros hung his hat at Shakespeare & Co. for several days. The New York Times ran a wonderful obituary about George, who had written his own eulogy years earlier. Inscribed over a doorway that led to the upstairs of Shakespeare was a motto: “Be not inhospitable to strangers,” it counseled, “for they may be angels in disguise”. George did not, in fact, treat every visitor like an angel in disguise. But he gave visitors a place to discover their literary angels, and more than a few rose to the challenge.   Christopher Hitchens, 1949-2011

The finest essayist of our time, honored in this blog here, here, and here (where I noted that “one of my goals in life is to avoid debating Christopher Hitchens, and the list of people I would avoid debating is very short”). Hitch was our Orwell, our Paine, and at times our Byron. He was biting, slashing, cheerily contrarian, unfailingly self assured, honest, manly, and literary. Despite his eloquent rationalizations, he also smoked, ate, and drank himself to death.
Two of his reflections apply to his own highly compressed life:
A life that partakes even a little of friendship, love, irony, humor, parenthood, literature, and music, and the chance to take part in battles for the liberation of others cannot be called ‘meaningless’ except if the person living it is also an existentialist and elects to call it so.”

and

Beware the irrational, however seductive. Shun the ‘transcendent’ and all who invite you to subordinate or annihilate yourself. Distrust compassion; prefer dignity for yourself and others. Don’t be afraid to be thought arrogant or selfish. Picture all experts as if they were mammals. Never be a spectator of unfairness or stupidity. Seek out argument and disputation for their own sake; the grave will supply plenty of time for silence. Suspect your own motives, and all excuses. Do not live for others any more than you would expect others to live for you.”

Hitchens was always provocative, occasionally irritating, and frequently funny. I will miss his voice enormously.

  Vaclav Havel, 1936-2011 Imagine a political upheaval so profound as to be accurately called a revolution, so bloodless and smooth as to be called velvet, and so artistic that its leader was a playwright who conducted the insurrection from, and I am not making this up, the Magic Lantern Theatre, in Prague. Vaclav Havel is the Nelson Mandela of Eastern Europe, and his personal role as catalyst of the communist collapse his hard to overstate. From the Times:

In 1977, Havel was one of three leading organizers of Charter 77, a group of 242 artists and activists who called for basic human rights in Czechoslovakia. Havel was arrested and imprisoned. He spent five years in and out of Communist prisons, lived for decades under daily police surveillance and suffered the suppression of his literary works.

Later he served 14 years as president, resigning rather than see his country separated. He is author of  19 plays and dozens of essays, including “The Power of the Powerless”, which influenced a generation of activists much as King’s “Letter from a Birmingham Jail” had done in the United States. By the time he became President of Czechoslovakia, Havel had written more serious fiction than most heads of state had read. Timothy Garten Ash, then a British graduate student, witnessed the remarkable Havel in action during the Velvet Revolution. Havel’s moral standing, his poetic use of language, and his patience made him as the dominant figure in resistance politics in Prague in 1989. Garten Ash reports in his indispensable first hand account of events that year in Prague, Budapest, and Berlin that Havel served as the chief behind-the-scenes negotiator who brought about the end of more than 40 years of Communist rule and the peaceful transfer of power. The revolt was so smooth that it took just weeks to complete and not a single shot was fired.   Warren Hellman 1934-2011 In business school, I became friends with Marco, the kid in the next seat everyone called Mick. I recall the day when a classmate told me “his father is Hurricane Hellman — the youngest partner in the history of Lehman Brothers. He ran the place before he turned 40″. Although I only met Warren Hellman a handful of times, I came to respect him as an icon of a group of prominent postwar Bay Area business Republicans who were deeply civic, secular Jews whose contribution to life in these parts is rarely noted. Architect Art Gensler and Gap Founder Don Fischer are others, as, excepting the Republican bit, are banker Bill Hambrecht and Levis heir Robert Haas. If you live in the Bay Area, it is hard to overstate the impact of Warren Hellman. He saved San Francisco over a billion dollars by financing a ballot measure to reform the city’s tottering pension system. He built the parking garage beneath teh DeYoung Museum in Golden Gate Park. He chaired the Board of Trustees at Mills College and reversed the decision to admit men (still a very popular decision, although I have argued a dubious one). He funded the San Francisco Free Clinic and endowed aquatic sports at UC Berkeley, where he had played water polo as a student. And in 2001, Hellman launched the Hardly Strictly Bluegrass festival, an annual three day event in Golden Gate park that draws more than 300,000 people and is put on for free. Hellman paid the musicians, usually including EmmyLou Harris and the late Hazel Dickens. Hellman himself was a serious amateur banjo player and toured with his group, the Wronglers, until quite recently. Hellman was not only born into a remarkable family, but he created one as well. He was the great grandson of Isaias Hellman, California’s first banker, who created what became Wells Fargo Bank and built the University of Southern California. His kids are high achievers who share his passion for athletics. Warren competed in extreme sports, once finishing a 100-mile high altitude race in the Sierra after falling and breaking a rib at mile 25. His kids have won championships in m mountain bike racing, skiing, and other sports. Hellman was the sort of one percenter that the Bay Area loves: a guy who took much more pleasure from giving his money away than he did from making it; who walked away from Wall Street to build an investment firm as “the opposite of Lehman Brothers”, who rarely wore a tie and never seemed to take himself terribly seriously, and who was disarmingly candid about his many failures. He has much to teach the pashas of Silicon Valley; I sincerely hope that they are up to the task.   Kim Jong Il, ??-2011 Those looking for evidence that God has a sense of humor had a fine week. Not only did the Iraq war and the life of Christopher Hitchens end on the same day, but the loss of four of our finest was followed by the unmourned death of perhaps the worst human alive. History will struggle to find a single kind word to say about Kim Jong Il. He built a hermetic garrison state, imprisoned and starved millions of his people, sponsored untold terrorist activities including the downing of a civilian airliner, and undertook military provocations and kidnappings against Japan and South Korea. He developed and tested thermonuclear weapons and sold them to some of the most unstable governments in the world, including Pakistan. He refined his doctrine of Juchu into a personality cult that represents the precise opposite of everything George Whitman, Christopher Hitchens, Vaclav Havel, or Warren Hellman stood for.  As Shakespeare predicted, the evil that Kim did will survive him. Kim’s sudden death is problem for South Korea but an even larger problem for China. China has tended to treat North Korea as their pain-in-the-ass psychotic kid brother who refuses his meds but performs a useful service by keeping the neighbors on their guard. But an unstable North Korea is not a good thing for China. There is a strong argument that China will need to take over North Korea as a client state — effectively a new province. In a generation or two, Korea would either unify in a Chinese economic sphere or the North would be forcibly absorbed, Tibet-like, into Han culture. It ain’t Jeffersonian democracy, but it is hard to argue that this would be a worse outcome for the people of North Korea than the continued demented rule of the last standing communist dynasty.

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Protection That Makes You Weaker

I have taken up running and, like boomers everywhere, I worry about hurting myself. Data suggest that between a third and half of runners get hurt running every year, making running a surprisingly high risk exercise. Why is this? Journalist Chris McDougall wondered why he was getting hurt when humans have been running for two million years. His best-selling book, Born to Run, is a well-told tale of people who run barefoot without getting hurt and of researchers who discover a paradox: support can make you weaker, not stronger. The more support a running shoe gives you, the more it weakens your foot, ankle, and calf muscles and the more prone you become to injury. McDougall presents the stories that led to the science and the science that has led to a resurgence of barefoot or minimal shoe running. He visits the Tarahumara, an impoverished clan of long distance runners living in the very remote Copper Canyons of Mexico. McDougall romanticizes their lives, describing men and women of all ages routinely running for dozens of miles in sandals over hot, steep mountains. Scientists have studied the Tarahumara for years because their isolation makes them good subjects. As roads arrive, the Tarahumara embrace modernity: their diet goes from corn meal and long runs to pickup trucks and Hohos. Epidemiologists have documented the diabetes, cancer, and heart disease that result. McDougall looks past this, focusing instead on the propensity of the canyon-dwelling Tarahumara and some of their more crazed gringo brethren to race ridiculous distances wearing heuraches cut from old tires. Back home, McDougall consults a Stanford track coach who refuses to let his athletes wear expensive running shoes and discovers data suggesting that both the extent and severity of injuries go up with the price of shoes. He interviews Daniel Lieberman, a Harvard biomechanics professor, who explains precisely how the support a of a running shoe makes most runners over stride and heel strike, which delivers a much sharper blow than a barefoot runner who lands mid foot. A good video of Lieberman explaining his research is below. The peer reviewed work is here in Nature. Lots of testing and learning is still being done both by individuals and by researchers, but nobody these days takes for granted that running shoes are always helpful. Shoe companies are trying to shift their designs and their message to promote “minimalist” shoes, some of which are now best-sellers. Is this just a fad? Of course any shoe can become a fad if well marketed. On the other hand, humans have run barefoot for two million years but have worn running shoes for only about 30. I would not bet against barefoot running, given the injury rates that shod runners experience. Protection turns out to be deceptive. It seems completely normal to me that as a runner, I would prefer a protective shoe. I want lots of cushioning. I want to avoid pronation, which must be awful because it sounds so bad. It would be simple to sell me orthotics — hey, my knees hurt sometimes. Although some people surely do fine in running shoes, for many people, highly protective shoes are like a cast. They reduce your mobility and your foot gets continually weaker as a result. Economists, of course, know that protection often makes competitors weaker. They believe instinctively that competition strengthens counterparties, be they muscles, individuals, teams, companies, or regions. I have even argued that those who want stronger labor unions need to force unions to compete. Economists left and right can show that trade protection weakens both parties, although this knowledge never stops companies, communities, or workers who are hurt by trade from seeking it. Doubtless some similar principal applies to parenting: too much protection weakens your kids. Fine, now buckle your damned seat belt. To evaluate social programs or parenting, we need the equivalent of the Tarahumara — a group isolated from extraneous influences that can test whether social protections produce more benefits than costs. Fortunately, an impressive young economist has shown that many of our protective programs are testable. Esther Duflo is an MIT professor, a MacArthur genius grant winner, and the winner of the  2010 John Bates Clark Medal for the best economist under the age of forty. Watch her fascinating TED talk on how she tests programs to fight malaria, educate kids, and immunize children. This is barefoot economics at its best. Testing of this sort requires an appetite for failure. Politicians, business people, and scientists each approach tests differently, depending on how failure affects them.

  • Politicians pay a huge price for failure. This forces them to simplify problems and promise sound bite solutions. If they do not do this, they won’t be elected and they won’t be politicians. Politicians cannot say “wow, this is a tough problem. Let’s try a bunch of things, fail at most of them, and learn what works.” Most politicians suffer from what Tim Hartford calls the “God Complex”. Hartford writes the Undercover Economist column for the Financial Times. He has published a terrific book called Adapt: Why Success Always Starts with Failure. You can get a flavor of his thinking at his fantastic TED talk. The God Complex is the equivalent of intelligent design: certainty that complex systems can best be managed centrally and that complex questions can be answered without the painful process of trial and error. Parents, CEOs, physicians, gods, and anyone else who pays a high price for failure are especially vulnerable.
  • Business people embrace trial and error mainly because markets force them to. Hartford notes that ten percent of all businesses fail every year.  A market economy can be looked at as a huge, ongoing experiment that evolves, like every complex system, because of variation and selection. The best leaders of complex systems acknowledge that leading edge problems don’t have obvious solutions and encourage a structured process of trial and error. Hartford’s book discusses the value of lots of small, low cost trials that are decoupled so that they don’t spill over and of carefully documenting and interpreting results. An important and highly recommended read.
  • Scientists love failure. It’s how they learn. They understand that humans have evolved as complex systems through millions of years of variation and selection. They reason either deductively from data or inductively to ask have we evolved to run? Evolutionary biologists have long noted that the unique way we sweat for thermoregulation, our hairlessness, our odd bipedal design (more energy efficient than any quadruped), our unusual ability to breath multiple times per step, and our highly engineered feet, ankles, and hips all suggest anatomy designed to run.

But until the 1980s, researchers were stymied by one big problem: we are slow. Why on earth would running matter, when every mammal worth eating can outrun us?  It fell to David Carrier, a graduate student at the University of Utah, to notice something that had escaped other scientists: we are built for endurance, not for speed. The case for humans designed for endurance running is now widely accepted. This is partly because we have discovered a story that backs the data. Hunter-gatherers in the central Kalahari Desert in Southern Africa still practice persistence hunting: they run their prey to death (there is one other group that practices persistence hunting — or at least remembers it. Our pals the Tarahumara). Running down a large mammal takes as little as an hour or as long as 8 hours, but if a human can keep a mammal galloping so that it cannot catch its breath, cool down, or rejoin its herd, it will collapse of exhaustion before the human does. It appears that before we invented spears, humans survived by high-endurance, persistence hunting. Barefoot. The BBC managed to film a group of men in the Kalahari hunting a kudu this way. Despite the drums and the breathless narration, it is a stunning film. Notice that the runners are shod in cheap shoes that do not let them heel strike. They look a lot like the sneakers we all wore as kids.

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Economics, Media


Three Dimensional Science

The World Science Forum currently underway in Budapest is a summit of academics who have traded their lab coats for leadership positions atop public and private agencies that promote and fund scientific research. These are fine people who support some of the best work in the world — balancing real, complex science with often Byzantine organizational and national politics to advance the intellectual work that drives our world forward. To an outsider (that would be me), they are also convivially self-parodying academic Eurocrats and lobbyists who could have walked off the pages of a David Lodge novel. The United States maintains posh embassies around the world to host worthies from events such as these and our current ambassador to Hungary did not disappoint. Obama’s emissary is Eleni Tsakopoulous Kounalakis, Berkeley grad but Stanford donor, daughter of a real estate tycoon and a California-based Democratic activist of the Phil Angelides school of progressive realtors. She raised more than a million bucks for Hillary, which made her ambassador material. Budapest isn’t bad duty (one can imagine her politely passing on an opportunity to serve in Athens, the family homeland). She was a fine hostess and thoughtfully included entrepreneurs from interesting Hungarian startups including Prezi, UStream, Logmein, and NNG (formerly iGo). But the highlight of the reception and dinner hosted at the embassy came when Koualakis tapped my shoulder to introduce a short, shy, graying fellow “I’d like you to meet Erno Rubik”. I fought back the urge to bow, shook his hand, and realized that he, like many others in the room, would rather be working. Rubik is, of course, the inventor of the world’s most popular toy — the maddening twistable puzzle instantly understood by any child and rarely solved even by accomplished adults. It has spawned an industry of competitions, including speed-cubing, foot cubing (current world record for solving a Rubik’s cube using only your feet is a bit over a minute), and blindfold cubing (look at the scrambled cube, get blindfolded, and work from memory. Good luck with that.) We were all challenged to complete a scrambled cube (yeah, I know. There is an app for that. You photograph the cube and it shows you how to solve it. Erno even earns royalties on every download. But for once, I resisted). Personally, I always thought that the real innovation behind the cube was the weird bit of plastic in the middle that can be twisted every which way without breaking. And yes, I have taken a cube apart to see it, although I admit that there was a hammer involved. (If you want to try it, just twist the top 45 degrees and you can pop the thing apart pretty easily. Of course, you can reassemble it solved — that’s how many people do it). Naturally neither America’s top scientists nor Hungary’s top entrepreneurs, people who solve three dimensional problems in their sleep, could restore a scrambled cube, which got me to wondering: which came first, the mathematics of the cube, or the puzzle itself? Surely a brilliant Hungarian mathematician like Rubik had computed the various solutions to a cube. Perhaps he had even tried to solve the “God number” question: what is the fewest number of moves that will restore any cube? The God number turns out to be 20 for a 3*3 cube, and a lot of mathematics together with 35 years of Google-donated CPU time went into figuring that out. Turns out however, that Rubik is an architect and game designer, not a mathematician. There are of course, people who make solving Rubik’s cubes look incredibly easy. For example, the world’s record for solving a cube is….you won’t believe it. So watch — but don’t blink or you’ll miss it.

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Media


Hang 30: Time Surfing

Been awhile since we showed first rate surfing videos. This one from Aussie Rip Curl, uses a “30 camera array” and six world class surfers to enable editors to shift perspective, freeze frame from a combination of angles, and create the “Matrix” like illusion of perspective. Pretty cool.

They also produced a video on how they produced the video. Worth a look.

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Media, Technology


Seven Forces that Doom Bookstores and Publishers

During the past few years, the music industry has been hammered. As music went digital, it was pirated, deconstructed, and mashed. As music stores and labels disappeared, their lobby, the RIAA, screamed bloody murder. But amidst the carnage, a funny thing happened: the music industry grew larger even though it had fewer labels and far fewer retailers. Revenue from CDs was replaced by revenue from live concerts, ring tones, downloaded singles, merchandise, and sponsorships. The new industry has its challenges (many of them traceable to lousy music), but it has hardly collapsed. This transformation presages the coming destruction of traditional book publishing and retailing, even as their overall publishing industry grows. Here are the seven reasons that bookstores and traditional book publishers are doomed. 7. Americans have stopped reading books. This is a non-trivial problem (after all, we did not stop listening to music). But the landmark National Endowment for the Arts study “Reading at Risk” confirms what we intuitively know: Americans read less than we used to. 43% of Americans read no books outside of work or school — a number meaningfully lower than Canada or most European countries. Those who do read books, don’t read many of them. About 24 percent of Americans read eight or more books in 2002, a lower percentage of “strong readers” than two thirds of European countries surveyed. Only 16% of the US population reads a book or more each month. According to Morgan Stanley, 20% of all book buyers purchase a majority of all books. Men read much less than women. NPR reports that among active readers, women typically read nine books in a year, compared with only five for men. Women read more than men in all categories except for history and biography. When most of us read, we prefer magazines and online articles that are shorter and less demanding than books. Kind of like you are doing right now. 6. Many of the books we read are crap. The largest single book category is still romance novels — a fact so embarrassing to the New York Times and other tastemakers that they exclude the category entirely from best seller lists. These bodice-rippers, together with religion, self-help, fantasy, and thrillers, account for a majority of books sold in the US (Gothic romance, which did not exist before 1972, by itself accounts for a majority of all paperback sales). Nearly all of these sales are to women, but women buy and read a lot more books than men even if you adjust out the Harlequins. Part of this is, no doubt, that brains exposed to constant media are not well wired for long form reading. We prefer writing that is built around tidy lists…oops. Nice essay to this effect by Alan Jacobs (hey, if you have read this far, you can manage it). 5. We can easily get books for free. Just Google “Torrent” and “Books” along with anything else and you will be directed to many sites that enable you to download books as pdf files easily readable on a tablet or an eReader. The site I checked helps you steal any of several dozen books on religion, most of which presumably counsel the reader against theft. It is always hard to estimate the economic impact of illicit downloading. I wonder if the net effect isn’t positive, even if authors howl. WordPerfect marketer Pete Peterson had a sensible point when he said that “if someone is going to steal software, I hope they steal ours”. Every illegal download is not a lost sale — but every time a reader finishes a book and raves about it, the marketing leads to new sales. Realizing this, most publishers will let you read the first chapter for free anyway. If we see publishers offering books for free but with advertising, we will know that the torrent sites have struck a nerve. My current bet is that it won’t happen for the same reason that iTunes curbed illegal music downloading. Customers like the ancillary content and the reliable file quality enough that if the experience is frictionless and the price sensible, we will pay. 4. “Books” are mutating.  Like music and movies, books are becoming a service, not a product. Today Amazon launched its Kindle Lending Library, which turns books into a service like Spotify for music or Netflix for movies. The number of publishers who have embraced this idea? Zero. These guys would rather face the Torrent sites than let Amazon loan their books. But publishers need to monetize their back list. Over time, they will do a deal with Amazon, even if they require Amazon to purchase a new copy after a finite number of rentals. Many publishers require libraries to do that now — and would doubtless oppose libraries as socialist if Ben Franklin hadn’t established libraries before they got organized.
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Economics, Media, Other classics, Technology, WoW


One more thing: Real artists ship.

In preparation for landing at SFO, I had closed the MacBook Air and turned off the iPad, but as I touched down, my iPhone beeped. The text from my son made my heart sink: Steve Jobs died :(. At least three people left the plane in tears. I felt like someone had unplugged my compass. Steve Jobs was by any reasonable measure the greatest entrepreneur and the greatest CEO in American history. He was a hero to his customers, but to most technology entrepreneurs, he was a God. He revered the Beatles and always reminded me of John Lennon: a genius with round glasses, a rebel with a mischievous grin, and an artist who showed the world things that it had not realized it wanted. With both, it takes years to absorb the full loss.   Steve Jobs had the soul of an an artist. Like Leonardo DaVinci, Samuel B. Morse, or Edwin Land, he lived at the intersection of humanities and technology and could ruthlessly carve away marble until only his vision of beauty remained. He was a practical poet who understood that “real artists ship”. He accomplished his goal of “making a dent in the universe” — but his premature death has left a dent in the hearts of people the world over. Steve was the rarest of creatures: a business revolutionary motivated by a deep love of technology and its power to change the rules. We always knew that his “Think Different” ad was really about him:

Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

Steve broke rules eagerly. He dropped out of college and dropped acid. He fathered a daughter and disclaimed her, much as his Syrian biological father had lost track of him. He followed very odd diets and lived on communes. At age 20, he made a sojourn to India to see a guru. He learned to focus and focus some more. Often, this meant removing features. The original Mac had no cursor keys. Steve was the first to take away keyboards, mice, modems, floppies, Flash, screens, and CD-ROMs. Reviewers raged and the digerati derided him, but Steve knew that “innovation means saying no to a thousand things”. His passion often made him obnoxious. Seated next to him on a flight in 1979, he learned that I had made my Apple II usable for word processing by inserting a Z-80 card so that I could run WordStar under the CP/M operating system. He was appalled: “Why on earth would you ever do that?” he asked twice, shaking his long hair and making it very clear that I had flunked the bozo test. He publicly insulted competitors and employees. He launched huge products, including the iPad, with no market research (“it is not the consumer’s job to know what they want”.) At a dinner in 2006, he repeatedly assured me and others that Apple would never sell a telephone under any circumstances. Nobody believed him for a moment (six months later, he unveiled the iPhone), but any other CEO would have deflected the rumor instead of lying outright. This sort of behavior famously got him fired from his own company. I harped constantly in this blog and elsewhere on his insistence that he control every aspect of the user experience. I recall construction workers building Pixar across the street from my company shaking their heads in awe every time Jobs would land on the property in his baby blue helicopter and take a pencil to their blueprints. He spent millions moving walls and even foundations at the last minute so they would end up precisely where he thought they should go.  He obsessed about details that few CEOs notice (when you upgrade your iPhone next week, notice that as you bring the message shade to a full close, a very tiny animation rounds off the squared edges. Nobody but Steve Jobs would bother to do that.) Steve Jobs failed. A lot. The Apple III was a disaster. The Lisa sold so poorly that tens of thousands of computers named after his daughter ended up in a large land fill in Utah. You have hardly heard of the Pippin, the Newton, the Copeland, HiFi, the G4 cube, Mobile Me, and several other products that were complete busts. It didn’t matter. Jobs remained unbelievably self-assured and ridiculously demanding. Over the years, I met several Apple employees who worked insane hours and suffered nervous insomnia because they had to present a product or an idea to Jobs — and were terrified at the prospect. One such encounter, possibly apocryphal, was reported in The Atlantic.

When engineers working on the very first iPod completed the prototype, they presented their work to Steve Jobs for his approval. Jobs played with the device, scrutinized it, weighed it in his hands, and promptly rejected it. It was too big. The engineers explained that they had to reinvent inventing to create the iPod, and that it was simply impossible to make it any smaller. Jobs was quiet for a moment. Finally he stood, walked over to an aquarium, and dropped the iPod in the tank. After it touched bottom, bubbles floated to the top. “Those are air bubbles,” he snapped. “That means there’s space in there. Make it smaller.”

As I drove north towards San Francisco following the news of Steve’s death, the radio reported that mourners were gathering at Apple headquarters, at Apple stores, at Jobs’ house, and in Dolores Park. Tributes followed from around the world – many of them written and read on devices that Steve built. Here are some that resonated:
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Technology, WoW


Will Obama Ask Biden and Clinton to Swap Jobs?

Should the President ask his VP and his Secretary of State to trade jobs? This is one of those too-delicious by half ideas that builds up as beltway buzz and becomes the stuff of gossip columns and talk show chatter. Increasingly however, the idea is not crazy if Obama gets the timing right. It cannot cannot happen mid-term, because under the 25th Amendment, the Republican-controlled House would have to approve the switch — and strengthening the Democratic ticket is not high on Speaker John Boehner’s list of things to do.

Why ask them to swap when both Clinton and Biden are by all accounts doing a great job? Mainly because it would revitalize and unify the Democratic ticket, which will face a formidable opposition, contrary to popular wisdom. I don’t know whether the Republicans will nominate Perry or Romney, but I have a pretty good idea of who the short list for VP will be — and Sarah Palin and Michelle Bachman don’t need to wait by the phone.

The strongest VP candidates for Perry or Romney are David Petraeus and Mario Rubio. Petraeus is unlikely to do it. He is a Rockefeller Republican, who Romney could not appoint. He just began a job running the CIA, which takes him out of domestic politics. I hope. He is not Tea Party certified and while he clearly brings huge strengths to any ticket, is not an experienced campaigner (military campaigns don’t count, although the differences are fewer than many realize).

Rubio is a different matter entirely. He is young, son of Cuban exiles, the politically savvy former Speaker of the Florida House, telegenic, and a Senator from a battleground state. He is fully credentialed by the TP crowd. A Romney – Rubio ticket will begin with massive strength in the south and will be very tough to beat in Florida. Romney will play well in the Midwest, where his father was a popular governor, and to conservative parts of New England. Rubio would energize Hispanic voters and extend the Republican base beyond the rich, the pugnacious, and the certifiably looney. It would be a tough ticket to beat — and Obama knows it.

Hillary helps Obama to rally Democrats and Independents. She is a formidable, even relentless, campaigner and she works harder than anyone in politics. It is not simply that she has handled problems in North Korea, Iran, and Israel without upstaging Obama, or that she has been supportive of the president and has been serious, intelligent, and energetic. It’s not just that people in the State Department like her — and some like her a lot — or that she has kept her husband out of the limelight, despite the fears many had. It’s that, unlike Joe, Hillary has a devoted constituency. She draws women, independents, and blue collar voters in much larger numbers than Biden or Obama. She adds deeply to the ticket.

The case for Biden as Secretary of State is also clear: it is the job he has always wanted and he would be very good at it. He was the ranking member and often the chair of the Senate Foreign Relations Committee, he has the requisite rolodex, and he likes diplomacy. He will rely more on personal relationships with foreign leaders than Hillary has, but that’s fine. Biden has built a very solid relationship with Obama and would continue as a senior advisor — a role he enjoys and excels at.

The timing of the Great Swap is constrained by the Constitution. Section 2 of the 25th Amendment states that “Whenever there is a vacancy in the office of the Vice President, the President shall nominate a Vice President who shall take office upon confirmation by a majority vote of both Houses of Congress.” At the moment, that confirmation would be far from assured, so Obama is not likely to ask Biden to resign, appoint Hillary VP, then appoint Biden to State (where his Senate confirmation would be a cake walk). Instead, if he decides to do this, he would plan the move now and nominate Hillary at the convention. Once nominated, Hillary would resign her position and Obama would name Biden to fill it immediately. No House vote needed.

Will Obama make the Great Swap? A lot can go wrong with moves like this — but Obama knows better than anyone that a Presidential campaign requires imagination and energy. Much can and will change before the convention, but we can count on this: Obama is considering this move.  

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Politics


Promising not to promise….

In yesterday’s New York Times, Warren Buffett argues that super rich folks should pay higher taxes. Had I asserted that the rich should pay more, it would be an entirely unremarkable example of the famous ditty by Senator Russell Long (“Don’t tax me, don’t tax thee, tax that fella behind the tree”). These days, you can substitute “cut” for “tax” and make the same point. But as the world’s third richest mogul, Buffett seems to be arguing against his own economic interest. Buffett might assert that higher taxes, a more stable economy, and even less inequality are in the long term economic interest of the super rich. Might be true, but it is still unusual for people to campaign against their short term interests. As a group, his fellow moguls are not only fighting for tax cuts, but for cuts in public spending that will not affect them either.  At a minimum, Buffett is showing off the contrarian view that made him rich. Buffett provides an interesting contrast to Congress, where arguments against interest are as common as snowballs in August. Congress is, by some measures, more divided than at any time in the past 120 years. We badly need Congressional leaders who will argue against their political interest: Democrats who will fight waste, Republicans who will support short term fiscal stimulus. What we get instead is a culture of pledges designed to prevent this.

  • The Tea Party is circulating the short, radical, and malign “Cap, Cut, and Balance” pledge, which has been signed by most Republican presidential candidates.
  • Other Tea Party members are circulating a more comprehensive “Contract From America“, signed by more than 300 elected leaders.
  • The Susan B. Anthony list is circulating an anti-abortion pledge, promising to cut all funding for Planned Parenthood and close all abortion clinics. It was signed by  by Michele Bachmann, Newt Gingrich, Ron Paul, Tim Pawlenty and Rick Santorum.
  • Most GOP members have signed Grover Norquist’s Taxpayer protection pledge
  • Norquist is also backing the pledge to support the Parental Rights Amendment, which massages the erogenous zones of the conservative family values crowd
  • The American Council for Immigration Reform is circulating a Congressional pledge to oppose amnesty in any form for illegal aliens
  • The made for Jon Stewart Marriage Vow promises to to oppose same-sex marriage, reject Shariah law and pledge personal fidelity to their spouse . Good luck with that.

These pledges represent a promises not to think, not to negotiate, and especially, not to compromise. The pressure to sign them is intense. Only one leading Republican, Jon Huntsman, has refused on principle to sign pledges (although he joined the band of imbeciles in Iowa who promised to reject a hypothetical budget deal that offered ten times more spending cuts than tax increases).  Huntsman’s campaign is imploding and stuck in single digits. Certified theocrat Rick Perry, who looks from here to be the likely nominee, won’t even have Huntsman as VP. Democracy is built on negotiation and messy compromise. Pledges subvert this, and are fundamentally anti-democratic. Compromise means your interest does not always prevail — we don’t always tax the fella behind the tree. A leaders takes an oath of office and recites a pledge of allegiance. That’s all they should commit to: on principle, no leader should ever sign an interest group pledge.

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Politics


The GOP Raises Interest Rates. China Cheers.

Cryin' Time

As of tonight, it is not at all clear when the US debt ceiling will get extended or when the entirely artificial crisis caused by Republican House members will be resolved. But one thing is now very clear: the ham-fisted GOP tactics will raise interest costs for every American family and business. It is the economic equivalent of a tax increase — except that that it increases government expenses, not revenues. These higher interest rates are caused by Congressional flakiness. Interest rates reflect perceived risk — and China and other lenders now see the US as a lot riskier than we used to be. Real risk is unchanged — but perceived risk is higher, and that’s what counts. The power to punish political stupidity with higher borrowing costs is what once caused Clinton advisor James Carville to announce that in his next life, he wanted to come back as the bond market, since it powerfully influenced all federal economic decisions. It used to anyway. At least one rating agency, S&P, is poised to downgrade US debt. This is unlikely to be calamitous, but it is entirely avoidable and it will needlessly increase US borrowing costs. This makes government more expensive, not less. Worse, it increases interest rates for banks whose borrowing costs that are pegged to Treasuries, which is roughly all of them. It erodes our privilege of serving as the world’s reserve currency — the equivalent of a tax break extended by the world economy to Americans but to no other country. The President of France once termed it an “exorbitant privilege” — and he was right.

For Cryin' Out Loud

This is very likely to end badly for Republicans. There is no economic crisis — the US is obliged by self-interest, to say nothing of the 14th amendment, to pay all debt obligations. Obama will however, end up paying doctors and soldiers late or with IOUs, like California did a couple of years back. The fractious Republican Party will quickly begin to devour it’s Tea Party wing, which has already been denounced by Gingrich, McCain, and Anne Coulter — hardly left wingers. If the market starts downward, plenty of people will buy stocks because many investors regard the “crisis” as temporary political insanity. Economic fundamentals, although not great and not helped by a spike in interest rates, are also not vastly changed. Treasury bonds have to remain the global fixed-income benchmark because there’s no good alternative. The $9.3 trillion of Treasury securities in circulation is five times more than the total debt of countries like France, Germany, or the UK and the $580 billion of US bonds that trade every day is 17 times higher than UK gilts, the next highest triple-A rated government debt security. The world is learning what every bank knows: if I borrow a small amount from you, I am your debtor, but if I borrow a large amount, I am your partner. Still, Congressional perfidy will cost Americans billions of dollars in needless interest expense. Nobody benefits except banks and China — the banker to the US government. Perhaps there is after all a reason Speaker John Boener cries so often.  

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Economics, Politics


Amazon.com: America’s #1 Tax Evader?

== Update:

On September 7, Amazon relented and made a deal to pay sales taxes on shipments to California (no doubt the trenchant analysis that follows persuaded them to do the right thing). For details of the deal see http://goo.gl/kNwjQ.

Now every other state in America needs to make a deal with Amazon — even if they have fewer than California’s 10% of the population. This reinforces the need for Congress to enact a cross-border VAT and to rebate 100% of the funds to the state to which the product ships.

==

Amazon’s refusal to collect sales taxes is bad for the company’s reputation, bad for honest retailers, and bad for state governments. Six states have taken modest steps to level the tax playing field, causing Amazon to respond with a business, political, and legal offensive to protect its tax-avoidance strategy. The first battleground will be California, where Amazon and national retailers will fight a very expensive ballot initiative. Longer term however, Congress should close the unintended sales tax loophole created by Article I of the US Constitution.

One-click Tax Evasion?

Unlike almost every modern country, the US has never had a national sales tax. Most states tax sales within their state but are rightly prevented by the Constitution from taxing out of state transactions. Amazon has turned this important limit on state tax authority into a major piece of its business model. Unfortunately, a smart tactic is becoming a stupid strategy. Congress needs to level its head — and then level the playing field. From its first day of business, Amazon.com has taken extraordinary measures to avoid collecting sales taxes. It locates distribution centers in low population states to minimize the number of customers for whom it must collect sales taxes. It builds complex software to ensure that every possible product ships across state lines so that customers have no tax obligation. It puts engineers and logisticians to work in shell corporations even if they work on Amazon’s retail website just to avoid creating “taxable nexus” — which obligate Amazon to collect sales taxes. It hires legions of attorneys to minimize and manage the inevitable tax claims. When states like Texas attempt to collect taxes, Amazon retaliates by closing facilities and filing f-you lawsuits. When states declare that Amazon’s hundreds of thousands of third party sellers and affiliates amount to a physical presence in the state, Amazon simply closes the programs — as it did last week in California. Today Amazon went even further: they filed a state ballot initiative in California that will let Californians vote on whether or not to pay sales taxes on third party purchases. National retailers are gearing up for a mammoth fight.

California Turns Green

Amazon is now America’s Number One Tax Evader. The company says that if you buy Hot Freddy’s Thai Salsa from a Los Angeles seller on Amazon, the sales taxes on the transaction are for you and Fred and the state to sort out. Unlike the corner grocery store, they won’t collect these taxes. Nobody disputes that Fred owes taxes on his sales to Californians, but Amazon says that collecting them is Fred’s job, not theirs. Since, as a practical matter, it costs California more to chase Fred than it is worth, Amazon’s policy needlessly costs California tax revenues and denies Californians badly needed public services. So California sensibly joined five other states that require Amazon to collect sales taxes on the intrastate sales of third party sellers. The law goes further, and declares that third party sellers or affiliates (sites that earn commissions on traffic they send Amazon) constitute taxable nexus — as do subsidiaries. Jerry Brown signed the measure into law on June 30, whereupon Amazon immediately notified all California third party sellers and affiliates that they were discontinuing their program. Amazon has built its business model around a court decision. In 1992, the Supreme Court ruled  in Quill Corporation v. North Dakota that a state can compel a company to collect taxes only if they have a physical presence, or a nexus, in the state. Absent nexus, the court held that online retailers and mail-order companies can sell products across state lines without collecting the tax. This decision reflects the current law and our national architecture as a republic formed in an era when very few goods were traded across state lines. It also reflects an odd twist in the way the US collects sales taxes: by taxing transactions based on where the seller does business not based on where the buyer lives, we effectively tax selling, not buying. In old fashioned Main Street America it doesn’t matter: every sale is local. But the rise of mail order and online retail meant that our peculiar approach created a giant loophole. I am aware of no other country that makes this mistake.
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Economics, Politics, Technology


“We are Going to Pass” -10 Reasons VCs Turn Down Startups

Every few years, Silicon Valley grows strong, flies high, makes beautiful music and then, like the Phoenix of ancient myth, burns to ashes and starts the cycle again. At the moment, the Valley is a frenzy of startups. The rest of the country may be in the economic doldrums, but dozens of technology companies are being formed here every day. Many seek to raise capital and at the moment anyway, money is flowing. Angel and venture investing will surely set new records this year. During the past two months, I have helped three technology startups raise early stage growth capital and casually advised several others. Each business is in a completely different market: mobile, pharma, cloud computing, crowdsourcing, global communications, etc. Each has unique strengths and weaknesses. The entrepreneurs have wildly different backgrounds and personal qualities. Not all have completed their funding, but in the process each team has learned similar lessons in how best to approach outside investors (investments from friends, family, and fools doesn’t count. They apply different criteria.) Although I managed to raise tens of millions of dollars for early stage businesses, mainly Alibris, I have personally made most of the mistakes listed here and I have made some of them more than once. Nor is this list particularly unique: investors and experienced entrepreneurs write about them all the time. So here is my list of the top ten mistakes that entrepreneurs make when they try to raise money from outside investors:

1. No story.  Entrepreneurs try to convince investors that they have a winning business – but investors have no idea which businesses will really work. It’s just too complicated. So investors do what human brains are wired to do when confronted with bewildering complexity: they listen for a coherent story. They listen for a particular kind of story that nearly always has three parts: a strong team that achieves impressive traction solving a big problem. These may be called Team has Traction on Trouble or Management has Momentum in a big Market, but to sell your company, you need to tell your version of this story.


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Economics, Other classics, Technology, WoW


Freedom Comes Out

Gay Freedom does not matter yet to most Americans — but it will, soon enough. Andrew Cuomo’s profile in political courage in mobilizing the New York legislature to allow gay marriage is a civil rights landmark. It is also more evidence that public attitudes have tipped. Twenty years from now, people may wonder what the fuss was all about, but today Cuomo deserves our profound thanks. Watch Cuomo in 2016. One of the great strengths and great weaknesses of humans is that we form tribal attachments. We are drawn to people like ourselves, which allows us to form families,  communities, enterprises, and governments. Tribes enable science, education, commerce, and religion. Tribes probably enable language itself. The problem, of course, is that the bonds that tie can also enslave. Tribes have boundaries and reject those who cross them. They have to or it isn’t a tribe. Children have a known tendency to wander from their parent’s tribe. Thank God for that — human progress surely depends on the freedom to form and demolish tribes. In general, the more of both the merrier. Tribes matter — we cannot and will not do without them — but they rarely evolve. Gay freedom is at least in part about the ability of people to re-form or reshape our tribe of birth. Most members of the LGBT tribe were not born into it and most people outside the tribe are nervous about their kids or friends joining it. It’s an unusual tribe because, unlike being female, black, or Asian, being gay or lesbian isn’t visible. Imagine the history of feminism if first, one had to acknowledge the socially unpopular fact of being female. This is the context for Tales of the City, the exuberant musical now on at San Francisco’s ACT. It is a huge, sprawling, production based on bits from the beloved books by Armistead Maupin. The play, (like The Beginners, featuring George Plummer as a man who comes out at age 75) is saved from a meandering and implausible script by wonderful characters and spectacular acting, just as the music is saved from forgettable melodies by terrific lyrics and enthusiastic performances. I have not enjoyed myself at a musical this much since Avenue Q, (the talented Jeff Whitty wrote the libretto for both). Even three years ago, following the passage of Prop 8 in California, it was not clear that New York, backed fully by Wall Street and large numbers of business Republicans, would endorse gay marriage. It was very clearly not true in 1976, the setting for Tales of the City. But some small decisions made that year have rippled forward to the present day. Recall that in 1976, San Francisco mayor George Moscone prevailed in a campaign to legalize homosexuality by repealing California’s sodomy laws.  That same year, San Francisco was gripped by the trial of Patty Hearst for helping an apparently drug-addled group called the Symbian Liberation Army to rob a bank. Patty was the granddaughter of William Randolf Hearst, the American publishing magnate who printed, among other rags, the San Francisco Chronicle. Then, as now, the Chron was not a real newspaper. We bought it to find out when movies were playing and to read Doonesbury. Also Herb Caen, the irreverent cataloger of left coast life and father of three dot journalism…When interest in the SLA trial began to wane, the editors of the Chronicle decided to try something new: a serialized novel. Printing a novel in daily installments in the local newspaper was an old idea, not a new one. It is how much of Charles Dickens, first came out (US papers would plagiarize each episode without paying Dickens or his publishers a dime. Made him mad as the dickens…). The Chron ran a column by writer nobody had ever heard of. Armistead Maupin, who called his column Tales of the City. Oh. My. God….the effect was amazing. It was like soap opera — you hated to miss an installment. Pretty soon you actually cared about the friends and neighbors at Barbary Lane — the fictional community invented by Maupin. The plots never made any sense (a cult of cannibals at one point took over St. Mary’s cathedral on Nob Hill), but it was a helluva lot of fun. And not only that, it was outrageous gay fun — which at the time seemed considerably more fun than the sort the rest of us were having. This was the year that George Moscone nominated a respected community leader, Jim Jones of the People’s Temple, to San Francisco’s Housing Authority and banned roller-skating on public streets. It was the year that Bob Dylan, Eric Clapton, Joni Mitchell, Neil Young, Van Morrison, Muddy Waters, and Ringo Starr performed “The Last Waltz” with The Band at Winterland, which Martin Scorcese made into a fine movie. Within two years, Maupin was a successful author and an important voice of a gay community that continued to grow in power. In 1978, the Gay Freedom march drew 250,000 people — double the size of the San Francisco antiwar marches of a few years earlier. Reaction was swift: orange juice commercial queen Anita Bryant launched a Save the Our Children Campaign, a crusade that received national attention and politically galvanized conservative churches. The gay community retaliated, boycotting Florida Orange Juice, costing Bryant her lucrative endorsements, and driving her into bankruptcy. John Briggs, the Orange County Republican, tried to ban gays from teaching positions in California. But the cause of Gay Freedom seemed only to grow, spreading from San Francisco and New York to major cities around the country and the world. What could stop this sort of delirious progress? It was a dizzying, naive, and stupid time — wonderful and amazing to recall. To preserve the momentum hes saw building, Moscone played hardball: he led San Francisco to district elections. This meant that San Franciscans voted by neighborhood. For the first time, they elected a Chinese-American leader, an African American woman, a single mother, and, most incredibly and for the first time in US history, an openly gay man: Harvey Milk of the Castro. Those who wondered when the progress would end soon found out. San Francisco was forming new tribes and demolishing old ones at a record pace. Some tribes were crazy like SLA wannabes such as the Red Guerrilla Family and the New World Liberation Front. Or the People’s Temple. Moscone responded by installing metal detectors in City Hall. But in November, Jim Jones, who had left the Housing Authority and taken his followers to Guyana, killed 900 of them in a mass suicide. Nine days later, Dan White, a disgruntled Irish Catholic cop and former supervisor who had lost out in district elections, assassinated both Moscone and Milk. He avoided Moscone’s metal detectors by crawling in through a basement window. Within three years, gay men were being diagnosed with an illness nobody understood. Doctors knew that it was an immune disorder, but had no idea what triggered it, so they could only call it a syndrome, an acquired immune deficiency syndrome. The disease is now a global pandemic and has killed more than thirty million people. Nearly two million people die from AIDS each year, even though it is now a disease that can be medically managed. I can think of no social movement in human history that has been so disproportionately affected by a contagious illness that targets its members. AIDS slowed the cause of gay rights by at least twenty years. Which makes this week’s victory all the more powerful. Liberty and the pursuit of happiness cannot happen in a closet and often cannot happen in one’s tribe of birth. Those who care about freedom, and that is a very large group, need to defend the freedom of all people to define, discover, and celebrate their own identity at least as vigorously as we protect our ability to form tribes.

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Media, Politics, WoW


Kwik Fixin’ Oakland

I love Oakland. It is immigrant, black, and blue collar. The town has a great history and a solid soul. Ours were among the first neighborhoods in America where all of the whites did not move out when blacks moved in. Of course, along with a heart of oak, the town also has a brain of well mashed potatoes. We celebrate diversity beyond parody and indulge in thousand clown politics “somewhere to the left of whoopee!”. Our schools work with immigrant kids that show up speaking more than two dozen languages (actually, nobody speaks two dozen languages. That’s the problem. Each kid speaks one. A different one). Like our libraries, these schools are collapsing under the weight of dodgy managers, paleolithic unions, and ineffective parents (not necessarily indifferent, just collectively ineffective outside of Crocker Highlands). My part of town, near Lake Merritt, has been brought together by a weekend farmer’s market and by the perpetual comedy of the Grand Lake Theater billboard (typical offering: “Prosecute Dick Cheney for torture” followed by “Kick Ass II”). We have a terrific neighborhood association which, like most neighborhood associations, is where liberals go to be conservative. Ours is earnestly opposed to rich corporations. And to poor corporations. But perhaps not to Trader Joe’s, because they are German and cool. Also not to Peets, because he was Dutch, their coffee is cool, and they come from Berkeley. (Starbucks: you are clearly suspect). We like “small local businesses” because they are so small and local. The Gap is a dilemma. It is local, but not small — so like Starbucks, we tolerate but do not embrace. What matters here is not whether you create stable, well-paying jobs with health care benefits or even whether you deliver useful goods or services. What matters most in Oakland is that you are small, local, and (ideally) ethnic. Our motto: we love you. Unless you succeed. Which pretty much rules out McDonalds. In 2004, the Golden Arches wanted to take over Kwik Way, a burger joint that had been abandoned for years. In 1980, Commander Cody and his Lost Planet Airmen memorialized Kwik Way in “Two Triple Cheese” on their Lose it Tonight album. The lyrics suggest that the Commander lived in this part of town, even if he takes liberties with the street names. His ode to saturated fat, salt, and cholesterol now enjoys a place of honor in the permanent collection of the Museum of Modern Art in NYC. Watch it below: it’s pretty good. Post Cody, the Kwik Way became an abandoned dump and a favorite haunt of sketchy crackheads who sold stuff in plastic tubes and left them lying all over the massive drive-in parking lot. McDonalds offered to renovate the place, hire local kids to run it, and keep it swept up. The arches might have framed the Grand Lake Theater quite nicely, but no way. The ‘hood mobilized against the would be corporate trespassers. Conveniently ignoring the KFC next door, we stopped Big Mac by asserting that the traffic would snarl up the place (we argued, in short, that “we gotta stop this restaurant because it might be so popular”). Gleeful idiocy of this sort mixed with strong coffee is what keeps Oakland running. Truly if you polled my neighbors, 65% would nod solemnly at the assertion that McDonalds was responsible for Dick Cheney and his Guantanamo torture. (The sordid truth, of course, is that McDonalds has killed more people than Dick Cheney ever dreamed of and quite likely contributed to the Veep’s own lousy ticker. But the Oaklandish among us objected to the crowds that McDonalds would attract, not to the celebrated American tradition of serving cardiotoxins to teenagers.) Kwik Way crumbled until it was finally sold to a local developer with an appreciation of mauve, ecru, and other soothing colors. He relaunched it as a higher priced burger joint a couple of weeks ago. The place sells food that is arguably more salty, fatty, and sugared than McDonalds, but hey, it is small and local. Here is a video of the opening (a prime specimen of neighborhood values appears at the 1 minute mark). Comparing the two videos, who wants to argue that we have made real progress?

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Media


Nostalgia: Not as Seductive as it Used to Be.

Nostalgia Midnight in Paris Movie

With my wife grounded by a nasty ankle injury, we took in three movies and I escaped to a rock band reunion. Oddly, they all confirmed the same lesson: nostalgia is a temptress — fun, but wholly unreliable. 

Owen Wilson is the hero of Woody Allen’s new movie, Midnight in Paris. He is a Hollywood screenwriter working on a piece about a nostalgia dealer even as he visits Paris and is transported in style back to the Lost Generation of the 1920s and 30s. The film is complete with a hysterical Hemmingway, a brilliant Stein, and appearances by Dali, Picasso, and both Fitzgeralds. It is a romp — the sort of film that Allen made in the good old days before he married his step-daughter.

nostalgia paris

Allen understands that mature cities are built on memoriesperhaps Paris most of all. Memory is impossible in emerging cities (in Beijing today, the drivers frequently get lost because entire neighborhoods are transformed so thoroughly that they seem foreign). Mature cities are often wealthy enough to be politically liberal but most are culturally conservative, even as they attract the great minds of every age. Inevitably, the Golden Age of any great city is thus built by people who idolize an earlier Golden Age. Into this vortex steps Wilson, a Texan version of the traditional Woody Allen romantic, neurotic schlurb. It all works well, with the obvious exception of Carla Bruni, who should stick to her day job as the first lady of France. (Unable to cut her from the film altogether, Allen simply created a new character, wonderfully played by Lea Seadoux, to take over 90% of the role offered to the hopelessly wooden Bruni). nostalgia surise

We also treated ourselves to a pair of movies I passed on when they first came out but have since been told by many constitute the best romance films ever made: Before Sunrise and Before Sunset. Both films consist almost entirely of conversation between Ethan Hawke and Julie Delpy. Once again, there are ties to Paris and nostalgia, and some of the ties are subtle. For example, the second film opens at Shakespeare and Company, the famous bookstore founded by Sylvia Plath and frequented by Hemmingway, Dos Passos, and other characters out of Midnight in Paris. Plath famously published James Joyce’s Ulysses, which takes place on a single day, June 16, Dublin. Before Sunrise takes place during a single day in Vienna and ends with our two lovers agreeing to reunite in Paris the following summer on, you guessed it, June 16. The second film opens with viewers wondering whether either had shown up. The movies are wonderfully rendered, brilliantly acted, and an ode to the trap of powerful memory, especially powerful romantic memories. Very highly recommended and available for streaming on Netflix.

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On the advice of a friend, I caught the Buffalo Springfield reunion concert down the street at Oakland’s the newly restored Fox Theater. The theater is beautiful, but tells a powerful political tale. It was refurbished by Jerry Brown as mayor using redevelopment money, despite the Paramount, a landmark Art Deco theater one block away. The Paramount was empty the night of the Springfield reunion — and Jerry Brown is now proposing, quite rightly, to eliminate California’s wasteful, zero-sum, redevelopment spending.

The Springfield are nothing these days if not nostalgic. The concert opened with On The Way Home: “When the dream came, I held my breath with my eyes closed”, which pretty much described the graying, cannabis-mellow crowd.  

Buffalo Springfield reminded me of the new atomic elements reported in today’s Times. Like all of the heavy particles, it is highly unstable and blows apart after a split second. The three founders still seem deeply incompatible. Stephen Stills is a classic rocker and always has been. He looked pretty good, he has lost some weight, but he can no longer sing. Furay is a pop singer, good at the girl songs, who should have joined the Eagles. He can sing, but his guitar playing is like a guy leading church camp. Which figures, since Furay has been a Christian minister for the past three decades, but apparently needs another 15 minutes of rock star fame. 

Then there is Neil Young (who Stills once wrongly accused of being “a folk singer who wants to play in a rock band”). Young is just more talented, more committed, and all around more bad ass than Stills or Furay. Young played off to one side, but the stage always tipped his way. In the encore, he broke loose and lit up the place with Keep on Rocking in the Free World, which revealed Stills and Furay to be what they always were: Young’s backup band. The idea that these guys in their 20s and on drugs even practiced together, never mind made albums and toured, is hard to imagine. The reunion produced some memorable music, but ultimately no nostalgia can overcome the core incompatibility of the band’s founders, who stayed together less than two years. 

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Media

Microsoft: Signs of Life. Google Chrome: Under Attack.

Microsoft: Signs of Life. Google Chrome: Under Attack.

 

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Two decades ago, Steve Ballmer proudly showed his mother a copy of Windows 98, the new operating system that featured a “start” button so prominent that Microsoft bought the Stones “Start Me Up” for the launch. When Ballmer’s mother asked him how to shut the program down however, Ballmer could have sung “you make a grown man cry” as he confessed that to stop Windows, you press the start button.

Microsoft never understands the deep loathing that it inspires in those forced to use it. Its software is frequently ugly, as Steve Jobs memorably put it, “not in a shallow way, but in a deep way”. It is badly architected, contains embarrassing UI goofs, and assumes that users will adapt to it — which we of course do, by the tens of millions.

Silicon Valley has gone from fearing Microsoft as a monopolists to ignoring it as a zombie. Microsoft famously was so preoccupied with its Windows monopoly that it missed the rise of the Internet. It then missed mobile. Ballmer, suddenly awakened, frantically purchased Nokia, evidently on the theory that two stones sink slower than one. He launched Windows mobile in the charming hope that what iOS and Android developers, handset makers, and users really needed was a third mobile platform. With Bill Gates focused on philanthropy ever since the stock peaked and Ballmer treated as the clown prince of software, many technologists forgot about Microsoft for the last decade.

Which is why recent mobile software from Microsoft is so interesting. Although its new CEO cannot revive a dead man to the extent that “Start Me Up” suggests, Microsoft is nonetheless showing signs of life. The iOS version of Office is not only excellent, it is free. MS will require a subscription only for devices with screens over 10″, so laptops and pro tablets will pay, but phones and normal tablets are free. And since a family of 5 licenses is only $9.99/month, MS is setting prices at much more realistic levels.

On iOS, Office is now easier to use and better integrated with cloud storage than Apple’s own Pages, Keynote, and Numbers. It has replaced native Apple applications on my phone and tablet. Outlook, which releases a trial 2016 version for OSX and Windows tomorrow, will hopefully move some of its mobile innovations to the desktop.

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As Microsoft comes to life, Google is suddenly facing a real threat. Chrome, Google’s browser, owns about a two-thirds of all desktop traffic because it is free, stable, and fast. And because Internet Explorer, which Microsoft gives away, was for many years plain goofy.

But desktop browsing is yesterday’s market; today’s game is mobile. We are approaching a time when every human on the planet will have a smartphone and billions of dollars will be made and lost in services and ads. Which is why a small feature of iOS 9, support for robust ad blockers, is a big deal. In my experience, Safari with ad-blocking enabled transforms the mobile web from endlessly irritating to quite usable.

Apple did not enable ad blocking simply because they thought consumers would like it better — although we do. They did it to stick a knife in the ribs of Google’s only real source of revenue. They appreciate that Google will not happily enable ad blockers in Chrome. Indeed, Google has responded by disabling popular extensions that block ads, planning new subscription services for YouTube, and launching Google Contributor, which enables users to pay Google $2, $5, or $10 monthly depending on how much ad-blocking you want.

Will this work? Will anyone use Chrome if it cannot block ads? Will Apple enable deep ad-blocking in Safari and host free user-generated videos to put a bullet in YouTube? Yeah, they will. I doubt that Apple will kill Google — but I have no doubt that they will try and I have serious doubts that this week’s campaign of moral pleading launched by Google will do anything but make them look pathetic.

A few years ago, Oracle CEO Larry Ellison called Google a “one trick pony”, adding “but it’s a hell of a trick”. With Apple now exposing Google to a bit of full-contact capitalism, we will soon know how many new tricks Google can learn.

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Lenin's Rope: Universities Develop Badges to Disrupt Universities


Lenin’s Rope: Universities Help Disrupt Universities

Lenin famously bragged that “Capitalists will sell us the rope with which we will hang them.” It would surely gall him to learn that the art of destroying capitalists with their own products has been mastered not by a militant, vanguard-led proletariat but by entrepreneurial capitalists. It appears that even universities, finally, are getting the hang of it and learning to sow the seeds of their own destruction. As an earlier post detailed, universities rarely go out of business. This is thanks to the magic of a three part lock that secures their position and protects them from institutional challenge. For centuries, universities have enjoyed the exclusive right to allocate valuable social capital.

  • Select talent. There is no evidence at all that Stanford, Harvard, or Berkeley do a better job of training undergraduates than Ohio State, Texas A&M, or the University of Florida. But they select far stronger students. If colleges were assigned students randomly, the value of “elite” degrees would plummet overnight. Harvard delivers 90% of its value the day it admits a student, although the market recognizes the value only when the student graduates. In a previous post, I described an experiment I once proposed to compare students admitted to Harvard Business School who attended with those admitted who did not attend. Others have since confirmed what we all know: Berkeley selects strong students, it does not create them. You aren’t smart because you went to Berkeley; you went to Berkeley because you were a certain kind of smart.
  • Credential talent. College degrees confer professional access and mobility. Since mobility is “path dependent” (your current options are constrained by past decisions, even if past circumstances are no longer relevant), it matters enormously what choices a credential opens up for you. Take it from a factory worker who went to Harvard Business School.
  • Signal social standing. Signaling is a cousin of credentialing. A credential is a specific signal to the labor market that a person completed a course of study and mastered a body of knowledge. But it is relevant mainly early in a career. The broader social and economic signal conferred by a university degree extends well beyond the time when the details of the course work are forgotten. An honors degree from the University of Maryland confers standing, especially in Baltimore, that extends well beyond the knowledge gained from a degree in European History. There are very few signals of social standing as powerful as a college degree, even though very little evidence suggests that this should be the case. Powerful alumni affiliations reinforce this effect.

It takes decades for universities to establish these privileged positions, which is why, with rare exception, the top decile universities of fifty years ago are the top decile universities today. This is partly due to the place university degrees have come to hold in our culture. It is an unquestioned (but economically threatened) article of faith among middle class families, including mine, that providing children access to higher education is an essential to giving them a full range of life choices. Most people are disinclined to risk their kid’s future on education institutions with highly plausible training programs but unproven power to select, credential, and signal. (Yeah, I’m looking at you Minerva Project). The paradox is that universities clearly add value (after all, college degree holders earn a million dollars more over their lifetimes than non degree holders and many economists declare it our single most competitive industry) but much of this “value” has nothing to do with learning, which is what employers presumably value. And if the credential cannot communicate what you know, then its signaling effects diminish. More accurate and effective approaches to credentialing and signaling become plausible. As detailed earlier, there are dozens of startups ramping up high quality educational programs that are either free or very low cost. But without credentials accepted by employers, all of the free online courses in the world will not translate into increased economic opportunity for graduates. To make these programs viable, they need a portable credential that is widely accepted by employers but not controlled by universities. Who would devise such a thing? Universities, of course. As Kevin Carey describes in the current Journal of Higher Education, the future is full of badges, not unlike the ones you earned as a scout. UC Davis, together with The Mozilla Foundation and the MacArthur Foundation is prototyping the development of digital “open badges” that validate “skill, quality, or interest”. Badges would be online and would allow a potential employer to access details of a student’s written work, test results, videos, etc. Open badges would communicate a great deal more than “BA in Economics from Sonoma State”, which is what employers get today. The article failed to record any sense of irony among the rope makers at the University of California. Under the Mozilla Open Badge framework, a badge “is a symbol or indicator of an accomplishment, skill, quality or interest” used to represent skill or achievement. Badges support a wide variety of learning beyond traditional classrooms including online courses, after-school programs, as well as work and life experiences. Badges not only signal achievement to peers, potential employers, educational institutions and others, but they are a way to recognize and document informal learning as well. Fully developed, badges should help people transfer learning across jobs, industries, and places and portray a richer, more complete profile of an individual’s professionals strengths. Mozilla expects there to be many types of badges. Some capture specific skills, something traditional degrees do quite poorly. Badges can support specialized and emerging fields that do not yet credential learners. They can document a much larger diversity of skills, social habits, motivations, etc. Badges potentially represent an alternative to traditional degrees as a way to enhance identity and reputation among peers, find peers and mentors with similar interest, formalize camaraderie, teams, and communities of practice that today often form around universities or professional associations. Open digital badges, unlike the scouting ones, are valuable because of their metadata. They link to videos, documents, or testimonials demonstrating the work that lead to earning the badge. They link to the issuing authority, which can be a school, a professional body, an international credentialing agency, a community of professional practice, a course, or a company. The supporting metadata reduces the risk of gaming and builds in a system of formal or implicit validation. In this system, a digital badge is backed by metadata that explain the badge, the issuer, the issue date, criteria for earning the badge, the earner’s work or evidence behind the badge, and the current validity of the badge, which, unlike a college degree, can be set to expire. Mozilla is creating an Open Badge Infrastructure to serve as the core technical scaffolding for a badge ecosystem that supports a multitude of issuers, badge earners, and badge displayers. This infrastructure includes the core repositories and management interfaces (each user’s Badge Backpack), as well as specifications required to issue or display badges. Users can build a “Badge Backpack”, which serves as a repository for their digital badge data, accessible only to them, where they can view badges, set privacy controls, create groups, and share badges. Startups like BadgeStack, which gamifies badges, can build OBI compliant sites and award apps. Open badges are a promising idea and one deserving of investigation by companies, entrepreneurs, universities, and investors. They threaten traditional university credentials because they are:

  • Granular. Employers care what you can do; they care relatively little about what you study, except as an indicator of what you can probably do. Badges are likely to reflect specific skills (“architecting social media databases” or “PHP”). Some may complement licensure (“palliative care nursing”) others may document skills in areas where little certification is available today (“Thai cooking” or “cloud-based SQL database administration”).
  • Open. To work, badges need an approval process and an ontology that reflects a hierarchy of skills. An licensed vocational nurse may be able to earn a badge in discontinuing intravenous drips, but I’d prefer that the Thai cook obtain his or her LVN certification before tackling this skill. Once these structures and privacy controls are established, the technology for making badges machine readable, searchable, embeddable, and portable is relatively trivial.
  • Able to evolve. The structure of badges itself needs to be open. Today “Thai Cooking” may be a sensible badge. Tomorrow it may be “Kitchen safety and peppers” (I worked with a cook who accidentally sent 50 diners choking and gasping out the door, hospitalizing two of them for lack of this knowledge). Badges that are ten years old will frequently fade in value as others rise. Badges create a market in skill certification — precisely what should replace university degrees.
  • Cumulative. A single badge may or may not signal a great deal, but a sash full of badges accumulated over many years of effort makes you an Eagle Scout. Employers are very likely to value particular combinations of badges for specific jobs. Today, resumes or transcripts do a notoriously poor job of communicating these capabilities.
  • Essential to reputation markets. Badges form core elements of emerging reputation marketplaces, where professionals collect, curate, and disseminate information that reflects their professional skills and achievements much as Fair-Isaac today distributes information about your credit history. For some positions (VP Marketing for a startup, for example), leadership history may matter more than a documented set of specific skills, but badges will still contribute to the overall picture.

Badges are not a sure thing. At first they will complement university degrees, not substitute for them. Badges face nontrivial privacy and trust issues — many which Mozilla is addressing quite well. They are an essential foundation for a portfolio that documents a range of professional skills, achievements, experiences, and relationships. One of the largest challenges facing open badges are cold start problems: early adopters will not have very few badges and employers will be unfamiliar with them. These are the sort of market development problems that entrepreneurs are good at conquering, although this makes them no less formidable. Mozilla may crack this market wide open.

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The iPhone Gets Nuanced

The iPhone Gets Nuanced

iPhone 5 KeyboardI got the iPhone 5 because it was free. The loathsome ATT charged me $300 and I sold the old iPhone 4 on eBay for that amount. I hate ATT, but their 4G LTE is really fast in the Bay Area and factory unlocking a phone under contract to enable overseas SIMs and free tethering is trivially easy. The new phone is like the old one but bigger, faster and thinner — reinforcing my view that Apple post Steve is an incremental innovator, not a disruptive one. Most of the changes are the result of a new operating system, not new hardware. But one feature is blowing me away — totally changing how I use my phone. The new feature is keyboard dictation, which appears on all iOS 6 keyboards, whether you have the new iPhone or not. By dictation, I emphatically do not mean Siri. Siri is a dog that performs a few well-chosen show tricks and inspired at least one hysterical advertising spoof. Siri is very useful for directions, reminders, OpenTable reservations, and a good laugh. Siri entertains — but dictation delights. Dictation has been around for a decade and on iOS since the 4S and third generation iPad, but it was always more trouble than it was worth. But suddenly, dictation not only works, it works shockingly well. For text messages, emails, tweets, and even first drafts of longer documents it is massively faster to dictate than to type (unfortunately I still need to type blog posts the old way. Maybe that explains the 60 day hiatus…).  I have a hard time understanding why Apple is not using its ad dollars to promote dictation, not Siri — unless the processing costs are huge and they are losing money on the feature. What changed? In a word, Nuance plus a massive investment in cloud infrastructure. Nuance Communications is the public company behind Dragon Dictate — which has been the market leader in desktop speech recognition for the past 15 years at least (the company was founded in 1992 out of SRI as Visoneer, known mainly for early OCR software). Neither Apple nor Nuance talk about it, but it looks to many people like Apple has licensed its dictation software, including Siri’s front end interpreter, from Nuance. One sign: before Apple bought Siri, it used to carry a “speech recognition by Dragon” label (earlier, Siri had used Vlingo, which apparently did not work as well). Not only that, but Nuance has built several speech recognition apps for the iPhone and iPad that work exactly like the speech recognition built into the iPad and iPhone 5. This is interesting in part because Apple never licenses critical technology for long. It insists on controlling its core technology from soup to nuts, so many people assume that Apple has considered buying Nuance. The problem is that Nuance holds licenses with many Apple competitors who would disappear if Apple bought the company. Apple would need to massively overpay for the asset — something they never do. More likely, Apple will hire talented speech recognition people and build its own proprietary competing product, just like it did with maps when it declared independence from Google. In this case, figure that dictation will regress for a year or two, just as maps have done, because real time, accurate speech recognition makes maps look simple. Plus Nuance protects its patents aggressively and these patents are, according to some writers, not easy to avoid. Although Google is avoiding them nicely; Android speech recognition is also outstanding. How do they do it? The Google way: throw talent at it. Google hired more PhD linguists than any other company and then they hired Mike Cohen. Cohen is an original co-founder of Nuance and if anyone can build voice recognition without tripping on the Nuance patents, he can. Apple appears likely to pursue a similar course. Mobile dictation works by capturing your words, compressing them into a wave file, sending it to a cloud server, processing it using Nuance software, converting it to text, and sending it back to your device where it appears on your screen. Like all good advanced technology, it passes Arthur Clark’s third law: it is indistinguishable from magic. The tricky bit is the software processing, which has to have a rich set of rules based on context. The software decides on the meaning of each word based not only on the sound pattern, but on the words it heard before and after the word it is deciding upon. This is highly recursive logic and nontrivial to execute real time. Try saying “I went to the capital to see the Capitol”, “I picked a flower and bought some flour”, or “I wore new clothes as I closed the door” and you begin to understand the problem that vexes not only software, but English learners everywhere. Apple dictation handles these ambiguities perfectly — meaning that it either gets the answer right, or it realizes that there are multiple possible answers, takes a guess, and hovers the alternative so that you can correct it with a quick touch. It takes a little bit of practice to use dictation well. It helps to enunciate like a fifth grade English teacher and to learn how to embed punctuation. The iPhone OS6 User Guide has a list of available commands. Four are all you need: “comma”, “period”,”Question mark”, and  “New Paragraph” (or “Next Paragraph”). You can also insert emoticons “smiley” :-), “frowny” :( and “winky” ;-). For anything else, speaking the punctuation usually works: “exclamation point”, “all caps”, “no caps”, “dash”, “semicolon”, “dollar sign”, “copyright sign”, “quote”, etc. Overall, the experience of accurate mobile dictation is a magic moment — like the first time you use a word processor or a spreadsheet (for those who recall typewriters and calculators), or the first browser or email (yeah, we didn’t used to have those, either). Give it a try. Apple has done something amazing and for once, actually under-hyped it. 

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Republicans Have No Head, but Democrats Have No Body.

Republicans Have No Head, but Democrats Have No Body.

 

juhasz art cropped

Last night’s elections make clear that the ongoing comedy of a hapless GOP struggling to find a suitable House Speaker or Presidential candidate is a sideshow that continues to lull Democrats into complacency. As Obama takes his victory lap and Hilary does her on-deck stretches, Democrats would do well to consider:

  • Since Obama was elected, Democrats have been obliterated at the state level, losing more than 900 state legislature seats, 12 governorships. As a result, Democrats only control 7 states outright. Republicans control all branches of 25 state governments. In 11 states where Democrats control both houses of the state legislature, Republicans control the governorship.
  • Democrats have not made up for it at the federal level, losing 69 House seats and 13 Senate seats. There are no plausible scenarios that I am aware of for Democrats to recapture the House — and only highly optimistic ones for recovering control of the Senate.

So what? Well, as Matt Yglesias notes in a widely discussed post, elections have consequences. Which include restricting the rights of Democratic supporters. Voting rights face cutbacks in many states, unions face right-to-work laws in half of all states, and the right to abortion is under attack. As Sara Kliff has documented: “States passed a record 205 abortion restrictions between 2011 and 2013, more than the entire 30 years prior. As a result… 87 separate locations ceased to perform surgical abortions in 2013. These changes are a clear result of pro-life mobilization in the Obama era.”

Well again, so what? The fortunes of our two political parties shift like tides. Political scientists have even called it “thermostatic”since the electorate is like a political thermostat, pulling left when conservatives are in power and right when liberals rule. Recent evidence that this is true point out that the biggest changes come in “wave elections”. But we see no signs of a Hillary wave.

Some (including me) worry that because state legislatures draw most legislative boundaries, conservatives will lock in permanent majorities by the dark art of gerrymandering. My argument, that the ability of voters to choose their leaders is fundamentally compromised if leaders can first choose their voters suffers from one distressing fallacy: a lack of evidence. The optics of gerrymandering appear worse than the results (which is not a defense of the practice). Redistricting does not, for example, explain how Democrats can win a majority of votes but a minority of seats — as happens in recent elections. Many political scientists estimate that it produced at most ten Congressional District victories in 2012 — not a powerful explanation for the GOP’s 33 seat majority in the House.

What is to be done? Revitalizing the Democratic Party at the state and local level is challenging for several reasons (Tom Schaller makes the strong form of this argument here, although I don’t find most of it convincing).

  • Mobilize poor people. The US has a lot of poor people and Democrats should not cede them politically. Do I blame wealthy Democratic donors for this negligence, as some have? On the evidence, no — but as Democrats have shown, it is pretty easy for a wealthy party to overlook the needs of poor people. Democrats should take seriously that Republicans outpoll them among poor voters in many states.
  • Overinvest in small states. The constitution gives the GOP an advantage because it allocates power to small states. As a result, Republicans hold a higher share of Senate seats than the share of voters who back its candidates. Democratic voters are concentrated in cities, which in America is politically inefficient. The solution is to move people, money and organizational talent from dark blue cities to light red suburbs and compete there. Democrats are lousy at this.
  • Enlarge the tent. In Silicon Valley and a few large cities, business leaders are often active Democrats, but this is generally not the case. At a time when the GOP frequently spouts positions that every businessperson knows to be nonsense (including and especially on immigration) Dems should develop business leaders who can articulate Democratic positions — or change those that are hopelessly anti-business.

Above all, Democrats should avoid focusing on the comedy that is the GOP leadership struggles or the drama of the Hillary and Bernie show. When the house fills with smoke, it is time to look up from the TV. 

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Statistical Storytellers

Statistical Storytellers

We now collect extraordinary amounts of data from weblogs, wifi sessions, phone calls, sensors, and transactions of all kinds. The quantities are hard to imagine: we created about five exabytes of data in all of human history until 2003. We now create that much data every two days. Deriving insights from this mountain of data is a big challenge for most organizations. People who are good at this are highly valued and in desperately short supply (career tip: study statistics). But mining data for insights is just the beginning: explaining what you have learned to non-statisticians is often an even bigger challenge. Visualizing data and forming it into a coherent story is a completely separate skill, and one that is evolving quickly. For my money, the pioneers in the field are McKinsey’s Gene Zelazny and the always impressive Edward Tufte. Modern masters include Hans Rosling and Garr Reynolds. It’s not easy to visualize data effectively and it is even harder to weave it into a compelling story. Statisticians make lousy novelists — and vice versa (career tip: study fiction). It often takes a team to do a great job of analyzing and creatively presenting information. Done well, the results are artistic, for me anyway. Here are two good examples. The first is on wealth and inequality in America — not an easy topic to portray. The second is a Hans Rosling’s classic TED Talk on global demographics.

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Is Amazon Inside Apple's OODA Loop?


Is Amazon Inside Apple’s OODA Loop?

John Boyd was a legendary US fighter pilot during the Korean War who later became a fighter pilot instructor. He had a standing bet with his students: he would meet you in the air at 30,000 feet and you would get on his tail. He would reverse the positions and get you in his guns in 40 seconds or he would give you 40 dollars — about $375 today and a lot of money for an Air Force captain. Boyd challenged anyone and everyone including students, other instructors, and the best fighter pilots from around the world. Many took the challenge, but Boyd never lost. He was the best fighter pilot in the world and many believe the best ever. As a Colonel, John Boyd developed a framework to help train combat fighter pilots that became known as the OODA Loop (for observe, orient, decide, and act). He argued that the key to tactical success in combat is to obscure your intentions from your opponent while you simultaneously clarify and anticipate his intentions. By operating at a faster tempo in rapidly changing conditions, you both inhibit your opponent from adapting or reacting to changes and suppress his awareness of your actions. You cause an opponent to over- or under-react to uncertainty, ambiguity, or confusion. In military parlance, adopted by many technology strategists, you get inside their OODA Loop. As an example, Barack Obama has been well inside Mitt Romney’s OODA Loop for the past month on issues of gender equality. His statements have frequently caused Romney to react in ways that Obama has clearly anticipated and exploited. But that’s another post. Today’s question is, has Amazon penetrated Apple’s OODA Loop with respect to eBooks? It sure looks like it. The story begins in 2001, when Amazon observes Apple’s iTunes business model. Amazon CEO Jeff Bezos must have been awed watching Steve Jobs turn digital music, which was free and widely pirated, into a money machine. Jobs integrated a device (iPods), a store (iTunes), and a wholesale deal with music labels for content under which they agreed to let him set the retail price of tracks (it would be $.99). Within a few years, Apple was the world’s largest music retailer and record stores were a distant memory (although a very fond one). Steve Jobs had figured out how to compete with free — the first but not last technology leader to perform this trick. Amazon copied Apple in building its book market. It built a device (Kindles), tied to its store and it bargained with book publishers for a wholesale deal for content. Like Jobs, Bezos insisted that publishers let him set the retail price, which he targeted at $9.99 per book. It is likely that publishers in some cases set wholesale prices higher than that and Bezos lost money on early book sales, but as the market grew, his pricing power grew with it and the full cost of each eBook declined as well. Bezos knew that when Apple entered the book market late, they would be forced to either a) stick to their traditional wholesale model, where he had a significant first mover advantage, knew more about online retailing, and held a brand advantage (do you really think “book” when you think iTunes?) or b) try to compete by attracting publishers and letting them control the product price. Bezos knew he would win either way. Bezos also knew that “talent copies, genius steals” did not apply to Steve Jobs, who never copied anybody. He had a pretty good idea that Apple would try to convince publishers to adopt “agency pricing“, which, in contrast to wholesale pricing, gives the publisher the right to set the retail price and pays the retailer a commission. Jobs knew that agency pricing would attract publishers who resented price pressure from Amazon and that publishers backed by Apple would force Amazon to raise ebook prices. But only the largest publishers were strong enough to threaten to withdraw content from Amazon — most stuck with their wholesale pricing deals. Bezos raised prices reluctantly and selectively to keep large publishers from defecting. That’s why some ebooks now cost $14.99 on Amazon, while most cost $9.99. Better yet, Bezos also knew that the manner of Apple’s entry into the book market looked a lot like price-fixing. Price fixing rarely gets you into trouble when, as in Apple’s music or Amazon’s book terms, you force retail prices lower, but collaborative arrangements that lead to higher prices to consumers frequently incur the wrath of the Department of Justice Antitrust Division. Bezos also understood that Apple could fall afoul of laws against price-fixing, even though Amazon, not Apple, has an effective eBook monopoly. A monopoly is generally not illegal unless you use it to jack up prices. So what does Amazon do the day the Department of Justice discloses its investigation into Apple’s alleged price fixing? It lowers eBook prices. Apple has an estimated 15% share of the eBook market (courtesy, one suspects, of simple iPad users who don’t know any better). That share is heading nowhere but down under the agency model, which is why Apple should give it up as part of a quick settlement with the DOJ. I would not want to be eBook strategist Eddy Cue at Apple this week. But Apple’s is not the only OODA loop in Bezos’ crosshairs. He is also deeply inside the heads of publishers, whose cockpits are blaring with enemy radar lock-in sirens — the last sound many fighter pilots ever hear. As he often does, Clay Shirky said it best:

Publishing is not evolving. Publishing is going away. Because the word “publishing” means a cadre of professionals who are taking on the incredible difficulty and complexity and expense of making something public. That’s not a job anymore. That’s a button. There’s a button that says “publish,” and when you press it, it’s done.

Amazon has demonstrated a much greater ability than Apple to observe, orient, decide, and act to dominate the eBook market. This is the second sign of peak Apple in as many weeks and another indication that Jeff Bezos has taken over from Steve Jobs as the reigning strategist of the technology world. That said, eBooks is not the most important market where these two companies will go head to head. That would be payments, because nobody else has 100 million credit cards on file. Bezos should think very hard about this one. Apple owns a big piece of mobile and has the moves to be on his tail with guns blazing in about 40 seconds.

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Rebuilding California's Engine


Two Questions for California’s College Students

Perhaps the only thing more depressing than the sight of hundreds of students and faculty on a “99 Mile March” to defend California’s system of higher education from budget cuts is the failure of the state legislature to vigorously defend the engine of the state’s wealth and economic mobility. The protests now underway in Sacramento demonstrate why California’s system of higher education is far too important to entrust to faculty, students, or legislators. Any group wishing to challenge cuts in public spending that benefit them directly has a political problem if taxpayers see costs without benefits. So the group wishing to protect themselves from the cuts needs to answer two questions: Who else benefits from the spending? and How can we increase our public contributions? If the marchers trying to channel their inner Cesar Chavez had taken the first question seriously, they would have built a coalition. Had they been courageous in their answer to the second, they would have built a movement. Chavez, not incidentally, understood this and knew that those who ask only what their country can do for them produce the political equivalent of a large yawn.

Who Else Benefits?
California’s three-tiered system of higher education is justifiably the envy of 49 states. If Hollywood and Silicon Valley are the symbols of California’s economic prowess, our colleges and universities are the engines that make them possible. Consider:
  • The California Community Colleges is the largest higher education system in the nation.  Its 112 colleges provide more than 2.9 million students with basic skills education, workforce training, preparation for four-year universities. They attract working student and ambitious immigrants in very large numbers. I used my local community college to learn blueprint reading and geometric dimensioning and tolerances to become a machinist; I also took classes in physics because they were exceptionally good.  Almost 60% of CSU graduates and 30% of UC graduates originally transferred from a California community college.
  • California State University has 23 campuses, some 427,000 students, and 44,000 faculty and staff. It is the largest, most diverse, and one of the most affordable university systems in the country. CSU graduates 44% of the life sciences college graduates California, more than 60% of all of the state’s teachers, including 9 out of 10 of California’s public school educators, and 45% of the state’s computer and electronic engineers. CSU is an outstanding resource for underserved populations, awarding more than half of the bachelor degrees earned by African American, Latino, and Native American students in California.
  • The University of California is a top-tier research university and an economic catalyst for the state. UC’s ten campuses enroll more than 220,000 students and employ more than 170,000 faculty and staff. Its three national labs manage hundreds of millions of dollars of state and federal research. A recent study estimated that UC generates $46.3 billion in annual economic activity for California, not counting benefits such as technology startups that grow directly out of university research.

Berkeley remains the premier UC campus and an amazing public institution, despite its bottomless capacity for self-parody (disclosure: my wife is a dean at Cal).

  • A National Research Council analysis of U.S. universities concluded that UC Berkeley has the largest number of highly ranked graduate programs in the country. The analysis ranked doctoral programs within a range (such as between 1st and 5th), and found that 48 out of the 52 Berkeley programs assessed ranked within the top 10 nationally.
  • Over the past decade (2000-2009), the National Science Foundation awarded more Graduate Research Fellowships to UC Berkeley students than to those of any other university (MIT was 2nd; Stanford 3rd; Harvard 4th).
  • 135 Berkeley faculty are members of the prestigious National Academy of Sciences, exceeded only by Harvard with 150.  91 are members of the National Academy of Engineering, exceeded only by MIT with 105. Membership in the American Philosophical Society, the American Academy of Arts and Sciences, or winners of National Medal of Science teach overwhelmingly at three schools — Berkeley, Harvard and Stanford. Only one of these is a public institution.
  • Berkeley’s single proudest claim however, ahead even of its 24 national rugby championships, is that it enrolls more students on Pell Grants than all of the Ivy League schools put together. A Pell Grant is a scholarship based on financial need. By serving academically qualified students on Pell Grants, Berkeley ensures that smart, hard-working kids from low income families can get a top-flight education.

The combined effects of this system on the California economy are astonishing. Community college students who earned a vocational degree or certificate in 2003-2004 saw their wages jump from $25,856  to $57,594 three years after earning their degree , an increase of over 100 percent. Census data indicate that an average college graduate earns a million dollars more during their working lifetime than a high school graduate. A masters degree adds another $400,000 and a doctorate another million on top of that. A professional degree adds another million on top of that (average lifetime earnings are $1.2 for those with only a high school diploma, $2.1, $2.5, $3.4, and $4.4 for BA, Masters, PhD, and professional degrees, respectively). Depending on what you count and how you count it, a dollar invested in California higher education returns $3, $5, or $14 but it doesn’t really matter — it’s a great public investment. And because many of the benefits accrue to individuals, not all of the investment needs to be public;  students can and should bear some of the cost, so long as financing is available with repayment schemes adjusted for students that pursue lower paying occupations. This system of higher education is the goose whose eggs make California the Golden State. And playing the part of Aesop’s short-sighted fool who wishes to slaughter the creature for short term gain, is California’s legendary and dysfunctional state legislature. This august body last year, cut $500 million from UC, $500 million from CSU, and $400 million from the California Community Colleges to close a state budget deficit in 2011-12. California is not alone in this trend: between 2002 and 2010, states have cut funds for public research universities by 20 percent in constant dollars according to a report issued by the National Science Foundation. Every Californian should be alarmed at the proposed “trigger cuts”, which would slash another $300 million, unless taxpayers pass a special ballot initiative to increase state taxes — which are already the nation’s highest. Where does all the money go? Pension spending aside (and it cannot be put aside for long), it goes to health care and to prisons. California is the only state that spends more on prisons ($10.7 billion in the current budget) than on higher education ($9.8 billion). Both are dwarfed by the state’s $42 billion Health and Human Services budget. How Can We Contribute? On these facts alone, students and faculty should be able to rally public support, not just each other.  Serious and sustained public support however, requires more. What, precisely, are students and faculty offering to contribute to make increased public investment even more compelling? Two ideas could completely change the conversation. 1. Use campuses year round. The University of California and CSU teach either three ten week quarters or two fifteen week semesters each year, meaning that 33 large and expensive campuses are fully utilized less than 60% of the time. Adding a fourth quarter or a third semester would produce revenue that would go a very long ways to paying for fixed assets, including facilities, administration, admissions, counseling, health care, technology, and similar services that are staffed year round, even though paying students attend only part of the year. Even if campuses completely eliminated so called “Summer Session” revenue and did not alter faculty teaching loads and research expectations (meaning that new faculty would be hired or current ones paid more in order to meet increased teaching demand), year round operations would generate hundreds of millions of dollars for the system as a whole (and based on limited public data on UC, it would more than makes up for the loss of state funding). Without reducing degree requirements or creating a cut-rate three-year undergraduate degrees, this approach would enable a student who undertook full time studies to complete the work for an undergraduate degree in three years or less and would substantially relieve pressure for additional tuition increases. Faculty should embrace year round operations, which would not need to reduce time for research at UC but would offer the option for all faculty to earn additional teaching income. They should rally in support of an approach that would enable most departments to add new faculty positions, which will simply not happen otherwise. Year round campus operations would be very quickly copied by other top flight universities if UC and Cal State take the lead. As financial stewards of state educational resources, university leaders should admit that operating campuses 30 weeks per year (a schedule designed originally to make sure students made it home to help with the harvest) is economically wasteful, socially indulgent, and politically untenable. 2. Repay a public investment with public service. As a candidate, Barrack Obama proposed a national service program that would serve as “a central cause of my presidency”. It hasn’t, but it should. He proposed to spend $3.5 billion to expand AmeriCorps to 250,000 volunteers and to double the size of the Peace Corps. He envisioned tuition tax credits for college students who performed community service while in school. His plan supported promising nonprofit community startups, expanded the GI Bill, and created a Classroom Corps to help teachers and students in high-need and underserved schools. Obama proposed a Health Corps to improve public health information and outreach to areas with inadequate health systems such as rural areas and inner cities and a Clean Energy Corps to promote weatherization, renewable energy projects, pollution clean up, trea planting, and park maintenance. Other volunteers would serve veterans or help communities with disaster preparation. Not only is national service a good idea, but the politics of enacting it are not nearly as awful as they are on many other issues (recall that the GI Bill, one of the most popular and successful social programs in US history, was initiated by the American Legion together with FDR). In this spirit, the federal government could, for a modest amount of money, guarantee loans and offer tuition tax credits proportional to the public service performed. By accepting only freshman applicants who have performed at least one year of community service, California could set an example for the rest of the country and begin the long overdue process of rebuilding public support for its activities. One of the faculty spokespersons for the current band of protesters is a leftist professor, a tenured friend who for decades has rarely missed a good demonstration. Not long ago, I asked him what he believed today that he did not believe in 1968, when his political habits were formed. He thought for a moment before declaring that “1968 was a very good year”.  But he and his campus comrades appear to have forgotten the lessons of ’68: that lasting political change requires public education, coalition building, and a commitment to public service. Why do I suspect that the last people to figure this out will be those closest to the problem?

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Early Warning Signs

Early Warning Signs

Early-Robin

Business competition is always interesting, in part because smart companies figure out how to avoid competition by specializing and differentiating their product or service. When Sun Tzu admonished his generals against assaulting walled fortresses, he understood that head-to-head competition is a sure path to a headache. Many US universities have not read their Sun Tzu: they compete head-to-head for the same students. In normal markets, schools would specialize. Some would seek students with strong quantitative skills, others would focus on training people who are especially empathic. Some might cater to students who write well, or are poor, male, female, interested in fashion or language studies, or born in another country. This happens of course (except for the male part: the US has no men’s colleges left and only nine all women’s colleges), but most colleges recruit for the same student profile: high grades, high test scores, compelling outside activities. They are assaulting a walled fortress. What accounts for their failure to differentiate? One problem is that universities are lazy: they compete for those who need them least. No university seeks out or even really wants people who most need education. They  seek students who will be successful even if the university is not. I wrote earlier about selection effects: the tendency of elite universities to compete for students with traits that strongly predict future success regardless of education. When those young people proceed to be professionally and often economically successful, their alma mater is always there, hand outstretched, with a gentle reminder of their formative influence. Employers, desperate for a shorthand method of segmenting talent markets, reinforce these effects by preferentially hiring graduates of “good” colleges. Pretty soon, your college becomes a critical part of your personal brand. It’s a racket, and one in which I enthusiastically participate, benefit from, and perpetuate as a parent, student, employer, and advisor to university leaders. Selection effects lead to a second market failure: universities don’t scale. What other business deliberately limits access to a compelling service? Can you imagine a law firm declaring that they would only accommodate the first 100 clients? Unthinkable — they will grow to meet demand and maybe a bit more. For top universities, being selective is not a necessity, it’s a choice. Most elite schools admit about the same number of students today as they did 100 years ago — that’s what makes them elite schools. As my younger son starts to think about college, I have begun to pay attention to how colleges are thinking about him. He will be a major catch (translation: they will compete for him because he shows every sign of being a kid who will do just fine in life with or without their help). So how do colleges compete for talent? In particular, how do colleges compete for the students that they all think they want?  When competing for talented high school students, universities worry either about their selectivity or their yield. Selectivity is admissions/applicants. Yield is enrollment/admissions. To boost selectivity, you do more marketing to increase the number of applicants. But to boost yield, you actually have to improve your school. Boosting yield is really hard in a competitive market, which is why yield drives college rankings (which improve yield — a longer story). US News, the FT, the Economist and others that have jumped into the college ranking game realize that yield is a very strong market indicator of quality. After all, a school that could admit 1,000 students and then enroll all of them would have to be seen by every student as their very best choice. Except that most schools cheat. To avoid head-to-head competition, most universities schools offer students the following deal: don’t force us to compete and we will give you a leg up. They call it early decision but they should call it yield improvement. They tell students that if they apply early to their school only, the school will lower the admissions bar. Careful research suggests that students who apply for early decision receive an advantage equal to an extra 150 points on their SAT score. (Universities deny this, but the numbers are unequivocal.) Colleges enforce severe penalties against students who are admitted early and do not enroll by colluding to blacklist the offending student — a practice that should arguably be challenged in court. Early decision is marketed as a way to reduce the stress of applying to a dozen colleges — and it does that. But it has a benefit that few seem to have noticed: it boosts the school’s yield. Every student admitted under early decision programs will attend: that’s the deal. The yield on early decision admissions is 100% — small wonder that they are growing as a share of total admissions. Nor is there anything wrong with this: it allows applicants into better schools than they would on average get into if they applied later. Businesses do similar things all the time, ranging from no-shop agreements during M&A discussions to exclusive distribution deals in exchange for preferential pricing. Negotiated exclusivity is a battle-tested element of many walled fortresses.  In the last decade however, the most selective schools have started to rethink early decision. They have decided to compete on selectivity by removing exclusivity. They say to students: “apply early, get an early decision  and you are not bound by our offer”. Today Harvard, Princeton, Yale, Chicago, Stanford, and MIT offer nonbinding “early action” programs and a handful of other schools do as well. These schools realized that they were the top choice for the overwhelming majority of those they admit — they already had great yields. So they decided to increase their selectivity by signaling that they want every strong student to apply. With no reason not to take a shot at it and no obligation to attend, applications skyrocketed and schools that were already preposterously selective became even more so. The result of these two strategies is exactly what you would expect: applications have skyrocketed, driving admission rates down. Acceptances went out today and this year, Yale accepted fewer than 7% its applicants, the lowest acceptance rate in its history. It offered 1,991 seats to 29,610 applicants for an entering class of about 1,300. Harvard admitted 5.8%, Princeton 7.3%. There are actually three reasons that Ivy League applications are up. First is early action. Second is the Common Application, an online form that makes it easier for students who do not apply for early decision to apply to many more schools than they used to. When Harvard or Stanford say that they are twice as selective as they used to be, remember that each student they consider is also applying to twice as many schools. When I was seventeen, I applied to four schools and hand typed each application. Few kids today who are serious about college apply to fewer than eight and many apply to more. When the music stops, most kids who have prepared themselves for college still end up with a chair. The third reason that Ivies are attracting interest is more mundane: they pay better. Harvard, Yale, Princeton and Columbia are “need blind” schools, where the ability of a student’s family to pay isn’t considered by the admissions office. Harvard has announced that it will boost its financial-aid budget to $182 million, a 5.8% increase. For many students, it actually costs much less to attend an expensive, elite school than it does a local state university. The trick, of course, is getting in. Over the next decade, early decision will not solve the core problem facing most non Ivy universities: they are a lousy investment. Universities operate medieval business models designed for a core purpose that has disappeared. As late as the 1970s, universities accounted for a huge share of knowledge creation, storage, and transmission. They earned the right to certify who was smart and talented because they held a near monopoly on skill and knowledge. This monopoly has now vanished as knowledge creation has diffused and fragmented, information storage has become free and ubiquitous, and skill transmission has taken many forms — some teacherless. The main privilege that colleges cling to is certification — and that too is increasingly under challenge. The assault comes not mainly from online education, which has been widely discussed and over-hyped, but from enterprises that treat education as a business opportunity. For example, the MBA with the fastest payback now comes from not from a college but from Hult International, which was tiny five years ago and is now the largest producer of MBAs in the world. 2U  now builds large scale, fully credentialed online degrees that produce thousands of graduates each year in partnership with major universities. The Mozilla Open Badge Initiative and dozens of social startups want to supplant traditional degrees with more specific and timely credentials. There are literally hundreds of enterprises devoted to disrupting higher education — whose walled fortresses will not withstand the siege for long. Education mattered to me, it matters more to my kids, and will matter even more to my grandkids. But thanks to competition and innovation, it will cost less, deliver more, and signal actual capabilities much more precisely than today’s universities do.

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Peak Apple: Understanding the Foxconn Deal


Peak Apple: Understanding the Foxconn Deal

Apple has quickly raised worker wages to address the highly publicized problems with working conditions in its supplier network. The decision protects Apple’s pristine brand and costs the company next to nothing. It cleverly exploits the high-minded principles and low-level economic literacy of those of us who are its devoted customers. A series of well-researched articles by Charles Duhigg in the New York Times that included a long article on sweatshop subcontractors put Apple on the defensive. It appears that hard working people risk their lives to make sure that our iPads are shiny. Apple responded by asking the Fair Labor Association to investigate working conditions at its Chinese suppliers. Back home, Mike Daisey’s professional self-immolation magnified the controversy by forcing NPR to retract a series of assertions about Apple’s Chinese suppliers. This week, Apple CEO Tim Cook visited a huge Foxconn assembly plant in China as the FLA issued its report. Cook knows a lot about manufacturing both as a global supply chain expert and as a former factory worker. Cook played the event perfectly. When the FLA reported that, shockingly, Chinese factory workers endure long hours for low pay, he promptly gave workers a raise by pledging to cut hours without cutting pay. The audience applauded, the curtain dropped, and the world returned to its apps. The story displays a confidence and an ability to turn crisis into yet another advantage that makes me wonder whether we are approaching peak Apple. Apple raised Chinese wages not simply because it cares so much, but because it can afford to care so little. They know that their move causes bigger problems for their competitors than it does for them. Apple cares less about Chinese labor costs than Dell, HP, Google, and many others who produce lower margin products that use more Chinese labor. Apple spends about $8.25 per iPhone on Chinese labor — a completely irrelevant number in the lifetime economics of an iPhone. Had Chinese workers targeted Apple for a campaign to increase their wages, they would have chosen well. Is Apple’s move good for Chinese workers? Sure — for some of them anyway. Apple’s decision does not mean that Chinese workers will necessarily take home more money — just that they will work fewer hours. This may not sit well with workers at Foxconn and other subcontractors, most of whom move from the countryside, live in company housing at the factory, and want to maximize their earnings, not minimize their working hours. Duhigg’s excellent reporting cited a factory where workers rioted when hours were reduced under pressure from a western customer, acknowledging:

The other (workers) we talked to all seemed to regard it as a plus that the factory allowed them to work long hours. Indeed, some had sought out this factory precisely because it offered them the chance to work more.”

Does China benefit from this decision? Not necessarily. Manufacturing jobs are declining China in favor of Vietnam and Cambodia (the great promise of the campaign this week by Nobel Peace Prize winner Aung San Suu Kyi is that Burma will attract urban factories to relieve the punishing life of rural peasants). It surprises many Americans to learn that manufacturing employment in China is actually declining. With the Apple settlement raising labor costs, peasants in adjacent countries can cheer: soon they too can trade in their hoes and hats for a white coats and the opportunity to polish iPads. Nobody said economic progress was beautiful. Apple’s decision to polish its “Think Different” brand built on images of Ghandi and Cesar Chavez is tribute to both the company’s high moral tone and to it’s willingness to indulge the low economic literacy of its Western customers. Apple sells products to people who prefer a world in which every kid can go to college and work eight hour days. Apple customers hate sweatshops, even those that are demonstrable vehicles of economic progress. We have a hard time acknowledging that countries in South Asia, sub-Saharan Africa, or Haiti demonstrably need more sweatshops. We commit what economist Harold Demsetz memorably called the Nirvana Fallacy: we compare the choices facing overseas workers to the alternatives we have, instead of to the alternatives they have. As economist Eric Crampton notes:

Harold Demsetz warned in a beautiful piece of economic writing back in 1969 against what he called Nirvana Theorizing. He said there that we can’t say markets fail just because they deliver outcomes that we don’t like; rather, we have to compare the outcomes of markets to real-world achievable alternatives. We can’t just assume Nirvana on the other side of the scale. And, most of the arguments against sweatshops effectively assume Nirvana on the other side: if only we were to ban sweatshops or, more realistically, impose bans on the import of products produced by sweatshop labour, the employees would suddenly be freed to pursue fulfilling careers or to go and get that Bachelor’s in Cultural Studies that they’ve always wanted….. It’s only the evil sweatshops that are keeping them from achieving their dreams. If only it were that easy. For proper comparative institutional analysis, we really have to look at how working in a sweatshop compares with what else these workers could be doing.

Inconveniently for the Nirvana view, thousands of people voluntarily line up outside of Foxconn’s gates when factory jobs open up. Those clamoring to work at Foxconn know that factory work is tough and sometimes dangerous. But, like factory workers everywhere, they know that farm work is worse. The Times documented a horrific aluminum dust explosion in a Foxconn plant. This is not something to take lightly (my grandfather, uncle, and kid brother all died on the job or from occupational illness; occupational safety has never been an abstract problem to me), but the risks of factory work are nothing compared to the risk of illness (especially malaria), injury, or poisoning faced by Chinese peasants. Just about everyone who has tried both farm and factory prefers the latter. I worked in several factories; most of the jobs were boring and some were wildly unsafe (I thought for awhile that Westinghouse had a “hire the handicapped” policy because so many of my co-workers were missing fingers or limbs. D’oh). But two days spent harvesting hay under idyllic conditions hurt me worse than any factory job I ever did. Former paper and aluminum mill worker Tim Cook also understands this extremely well. Crampton cites recent work by Benjamin Powell on standards of living associated with sweatshop work showing that in most of the countries he studied, the average wages were equal to or better than the national average. In poor countries like Cambodia, Haiti, Nicaragua and Honduras, sweatshops paid twice the national average. This is why countries like Bangladesh, where 80% of the population lives on less than $2 per day, need more sweatshops, not fewer. Crampton reminds us of Nick Kristof’s reporting on workers in a garbage dump in Phnom Penh. Kristof gets it:

Another woman, Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous. I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade. When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.”

Tom Harkin, a progressive, pro-labor Senator from Iowa, introduced a law in Congress in 1992 that understandably prohibited the import of products made by children under age 15. In 1997, UNICEF investigated the effects of the Harkin Bill and found that even though the legislation had not taken effect, the mere threat had

“…panicked the garment industry of Bangladesh, 60 per cent of whose products — some $900 million in value — were exported to the US in 1994. Child workers, most of them girls, were summarily dismissed from the garment factories. A study sponsored by international organizations took the unusual step of tracing some of these children to see what happened to them after their dismissal. Some were found working in more hazardous situations, in unsafe workshops where they were paid less, or in prostitution.”

Once again, sweatshops are hardly the bottom of the heap — indeed the export shops targeted by Harkin are on average the better places to work. Most child labor is local production or rag picking, so if you ban exports, you may push some of the world’s most vulnerable children into the garbage dump, begging, child prostitution and starvation. This is not an argument for unfettered child labor or dangerous factories — just a note that exploitation is relative not absolute, protection is never free, and economic progress proceeds in steps not leaps. Apple understands that paying slightly higher wages simultaneously pressures their competitors, appeals to western decency, and exploits economically ill-considered aversion to sweatshop labor. But in technology, companies with more competitive advantages than they can possibly exploit should worry about hitting their peak. Having watched first Microsoft and now Google decline after amassing what once seemed to be insurmountable advantages, it is time to ask whether peak Apple is now in sight?

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Bio


Bio


Marty Head

I have enjoyed an unusual leadership career in business, government, and nonprofit organizations. Until recently, I served as the Executive Director of the San Francisco campus of the Hult International Business School. Hult operates campuses in Boston, London, Dubai, and Shanghai, as well as San Francisco. The Financial Times ranks Hult in the top five business schools worldwide for international business and the Economist rated Hult as the best investment (highest ROI) of any business school in the world. The Hult Prize awards $1 million each year to a promising social entrepreneur. 

I founded or co-founded three companies: RedLink, Reputation Networks, and Alibris, once the premier global exchange for used, rare, and out-of-print books. I raised the money and hired the team that built the company and served as CEO for ten years. In 2005 Alibris was named to the Deloitte Technology Fast 500 and to the Silicon Valley Fast 50 list of North America’s fastest-growing technology companies. The New York Times declared that Alibris had “radically changed the buying and selling of used books”, and I was named a Finalist for Ernst & Young’s Entrepreneur of the Year Award. National Public Radio produced a brief history of Alibris in 2004 that you can listen to here. I have also had the privilege to advise some terrific entrepreneurs, including Kiyo Kubo, Todd Carter, Georgios Papadopoulos, Art Gensler, and Mike Rippey.

I also founded a federal agency. As President, Bill Clinton appointed me to serve as Assistant Secretary of Labor. Following Senate confirmation, I created the Office of the American Workplace under Labor Secretary Robert Reich to promote high performance workplaces. Prior to my government service, I advised the leaders of large and often troubled companies as a partner with Waterman & Company and as a consultant with the San Francisco office of McKinsey & Company. I served as Managing Director of Kaiser Permanente, where I led a restructuring of Kaiser Hospitals. We decided to abandon plans to build a hospital across the street from the Alibris offices in Emeryville, California. Steve Jobs built a much nicer building there, that now looks like this.

During the seventies and early eighties I was a union organizer. I held elected or staff positions with the Silicon Valley AFL-CIO and several labor unions, including this one, this one, this one, and this one. I was a journeyman machinist in the heart of Silicon Valley here, a room service waiter here, and a hot grabber for two seasons in a green bean cannery run by these guys here.  My first employer was Richard Nixon’s cousin who owned this restaurant in Whittier, California (my departure 35 years ago appears to have frozen it in time. Or was it Dick’s resignation?).

I live in Oakland, California with my wife, a wonderful woman who is a highly entrepreneurial Dean of the Information School at UC Berkeley. We have two phenomenal sons and a Boston Terrier. 

I received honors BA degrees in Politics and Education from the University of California at Santa Cruz and an MBA with distinction from Harvard Business School. I am a voracious reader, and oddly fond of bicycles and woodworking.

Here are some of my favorite quotes. My Twitter feed and blogroll reflects what I read and pay attention to. Someone posted a sort of accurate bio of me on Wikipedia.   

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