Posted by Marc Hodak on July 21, 2007 under Invisible trade-offs | 
I was a paper boy in high school. I would get up at about 5 a.m., go to my drop point where a stack of papers would be waiting for me, and deliver them through the neighborhood in time for me to get back home and get ready for school. Once a month, I would go around door-to-door to collect money from the families on my route. It was generally the only time I saw them. They would tell me what a fine job I did, and often tip me a quarter or 50 cents. A couple of customers even tipped me a dollar. I always remembered who they were. Every now and then, someone might tell me that I wasn’t always getting the paper to them early enough, or that they preferred to get the paper at their side door rather than their front door, and I would adjust my deliveries to accommodate them.
Collecting money was a pain. I might have to go to some houses two or three times before finding someone home. After I collected the money, I would count up what I owed the newspaper, based on the wholesale price of the subscriptions, and put it in an envelope to give to Mr. B., the man who dropped off the papers for me each morning. The difference between what I collected and the wholesale price is what I got to keep.
One day, Mr. B. drove by to pick up the money, and he asked me if I would be interested in giving up collections. He offered to send out invoices, collect the money by mail, and instead of picking up an envelope of cash from me once a month, he’d bring me a check. He said it would be more efficient all around. Win-win.
I thought about it. The prospect of saving several hours a week not having to collect money definitely appealed to me. On the other hand, if I didn’t collect it myself, I would lose the tips, which were nice, and what little interaction I had with my customers, who were also generally nice, and who sometimes let me know when I needed to change something in my delivery. In the end, I decided that it was worth it to let Mr. B. handle collections.
The next month, instead of running around to collect money, I sat back in my room at home, finished some homework without having to rush, and generally enjoyed what seemed like a little time off. Then I got my check from Mr. B.
I looked at it, and quickly realized it was less than I expected. I asked him what happened to the rest. He smiled, shook his head, and explained that he subtracted the administrative costs associated with collections. I told him that he didn’t tell me about these administrative costs when he offered to do this. I was willing to give up the tips, but not this administrative cost, too. I told him this no longer seemed like such a win-win to me, and that I would just as soon return to the old way of collecting. Mr. B. smiled, shook his head, and said that there was no going back. I felt rooked.
That was my first experience with hidden trade-offs. After that, I became more careful whenever someone offered me a “win-win” opportunity. When a salesman promises me some sort of deal, I insist on understanding where, exactly, the value will come from. Will I be giving up some level of service in exchange for reduced costs? If not, where do the productivity gains come from? Sometimes, I would get good answers, and take a chance on the deal. If I didn’t get good enough answers, I would pass.
I love getting value for my time, energy, or money, but I always react to offers with a little skepticism. Certain people tend to gain my trust pretty easily. They tend to be deliberate, precise types who back up their claims with logical explanations and sound data. I’m glad to have the kind of training that enables me to understand their explanations and evaluate their data, otherwise my skepticism would have long ago degenerated into cynicism. Other kinds of people have very little credibility with me. They tend to smile and shake their heads when explaining why their last deal didn’t work out as well as they had promised. I no longer pursue their promises, no matter how wonderful they sound. Politicians generally belong to that group.
I wish more people had my experience of feeling duped at a time when the cost was low but the impact was high. Such an experience might coax more people to better learn how to evaluate promises. Unfortunately, it seems that most of my fellow citizens tend to be either credulous or cynical. I think that many of the problems we face today arise from that imbalance.
Posted by Marc Hodak on July 19, 2007 under Collectivist instinct |
Every now and then, I figure that maybe Europe is at a stage where it might begin keeping America honest. They may look over here at our freedoms, and decide they don’t want to be collectivist also-rans anymore, that they’re ready to step up to the challenge of being the place where the world wants to live, and reduce taxes, and reduce regulations, and spread those human rights like warm Nutella on a baguette.
Then they pull sh*t like this.
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Posted by Marc Hodak on July 18, 2007 under Invisible trade-offs |
Health policy advocates have long contended that the FDA’s power to review medical treatments has lead to far more patient deaths than lives saved. The theory, supported by a growing body of evidence, is underpinned by a simple set of incentives. If an approved drug leads to someone’s illness or death, it may get all over the news, and we know how the FDA’s antsy, congressional patrons would react to that. If an unapproved drug might have prevented hundreds or thousands of deaths, there would be no media or congressional reaction, because no one would likely know about it. So, the FDA has an institutional bias against drug approval below the very highest margins of safety, a decidedly non-economic standard, one that costs countless lives.
The exception that proves the rule: AIDS drugs. Here, the FDA’s cumbersome, time-consuming, costly review process was highlighted by a politicized, media-savvy group that acutely felt the lack of progress in the development of treatments.
Last year, the FDA’s authority was successfully challenged in court by the Abigail Alliance. This group was founded on behalf of 20-year old Abigail Burroughs (pictured above) who was denied access to a drug in 2001 that had passed Phase I trials. The drug that was later approved by the FDA, after she died. Imagine an FDA bureaucrat patiently trying to explain to you why a particular drug might have only an 9.3 percent chance of working on your dying child, and thus preventing your doctors or the drug manufacturer from selling it or giving it to you until more tests are done on its efficacy.
So, for the non-politicized masses with rarer diseases or no press agents, how far will the FDA go to protect its authority to tell dying patients what potentially life-saving drugs they may or may not take? After the court’s Abigail Alliance decision last year, the FDA filed a brief challenging the standing of Abigail Alliance members who have all died since their original briefs were filed in 2003. That’s right. The FDA, which arguably hastened their deaths, is arguing that their death undermines their standing to challenge the FDA.
That might be a statement about the size of their agency’s balls, or about the agency’s desperate grasp at a remedy for a judgment that threatens their regulatory body.
Posted by Marc Hodak on July 16, 2007 under Invisible trade-offs |
Most proponents of universal health care see the basic trade-off as health of the poor versus leisure of the well-off. Most economists, however, believe that the real trade-off is between access, cost control, and innovation. You can’t have more of one without less of the others. They also observe that in the real world, those trade-offs tend to place cost control first and innovation last. Access, sandwiched in the middle, is invariably compromised by rationing due to cost control. Elected officials have the last word on these trade-offs, and no one facing election in the next two-to-four years will spend scarce political capital on investments that might pay off in the next decade.
So, while proponents of universal health coverage posit that one can’t trade-off lives versus dollars, the laws of economics force those very trade-offs both today and into the future. The only difference between lack of universal coverage versus the lack of innovation is that those deprived of coverage can be filmed by Michael Moore today to get sympathy for universal coverage in this election cycle. Those deprived of innovation won’t be victims for years or decades, and Moore, if he hasn’t died from self-inflicted wounds by then, won’t have any idea which of the people dying from incurable diseases might have been cured if there had been greater rewards and incentives to innovation. Eventually, entire generations may be spared if innovation could proceed quickly enough.
So, the degree to which innovation affects life expectancy is an interesting question. This question has been partially answered by Frank Lichtenberg, a researcher at Columbia University. In short, innovation dramatically affects life expectancy, much more than policy-makers might suppose (or wish to acknowledge). Lichtenberg finds that life expectancy has increased very unevenly across the United States. In the last 13 years, life expectancy has increased by three to four years in some states while it has gone up less than a year in other states. Lichtenberg shows that two-thirds of that variation is due to differences in the availability of newer drugs, based on different Medicare policies across states.
This study indicates that the development and use of new medical goods and services…have been responsible for many recent gains in the health and longevity of Americans.
So, while party activists are asking, “how many people must die this year because they can’t afford medical care,” they will necessarily ignore the question: “How many people will die ten or twenty years from now because you want to force people and corporations supplying treatments today to make medical care universally affordable this year?”
Posted by Marc Hodak on under Invisible trade-offs |
The pervasive collectivist instinct discussed in certain posts here may seem discouraging to some of you, but take heart. I believe that the future belongs to those who love freedom. The evidence, though all around us, is sometimes disguised as braying by government officials. To wit:
It’s simply unconscionable from an ethics standpoint for this company to go in from this unfair bargaining position…It’s just exploiting a desperate town.
The company in this case is Google; the town is Lenoir, NC; and the complainant is a former North Carolina judge now running for Governor. He’s bellyaching that Google negotiated away most of the taxes they would have to pay as a condition for locating some of its vast computer systems in Lenoir. He’s pandering to residents who feel their town was “bullied into the deal and deprived of potential revenue.” Never mind that “potential” in this case means non-existent. They didn’t have those revenues, and never would if they failed to attract an employer like Google. So, the real complaint is that they had to compete for Google.
Actually, Lenoir did once have those revenues, but they lost them in the competition to keep their previous local industry. Alas, this is not really news. Localities always have to compete, and not just in the U.S. This competition is simply getting more visible, all over the world. That’s economics.
People who lose jobs to competition don’t like the laws of economics any more than people who fall and hurt themselves appreciate the laws of physics. But there is no point pretending they’re not real, or that the government can override them. Economic relationships and consequences are becoming increasingly transparent, to the point that anyone can see them. Eventually, taxation and regulations will be competed down to the lowest level needed to competitively provide essential services. Yes, troubled readers, we may very well be on the path toward libertarian Nirvana. All you have to do is live long enough to see it.
Posted by Marc Hodak on July 14, 2007 under Unintended consequences |
For most of our history, the U.S. penny was made mainly of bronze, which is 95 percent copper and 5 percent zinc and tin. As the penny’s value deflated over time, it’s constituent metals became worth more than one cent. In 1962, the tin content of pennies was removed to increase their melting point. By 1982, when the copper value of pennies became sufficiently worth more than a cent that pennies were again in danger of getting melted for their intrinsic value, the mint re-designed the penny to become a copper-coated zinc coin–97.5 percent zinc and 2.5% copper. Last year, even that mineral content was no longer cheap enough. The cost of minting a penny was about 1.23 cents, and once again an arbitrage opportunity for coins appeared.
Like all organizations involved in making things, government’s have various tools at their disposal, such as mineralogy and production efficiencies, with which to react to the arbitrage opportunities they sometimes create. But when all else fails, governments have a tool that no other organizations possess–a monopoly on violence. So, last December, the U.S. government instituted fines and jail time for anyone melting coins for their mineral value.
How effective are such government interventions? I guess it depends on how you define “effective.”
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Posted by Marc Hodak on July 12, 2007 under Invisible trade-offs |
Only the worst managements do it. It’s a recipe for unintended consequences, like pushing for higher sales, and ending up with crappy profits because you gave up too much secure the sales. Or pushing for higher profits and ending up with crappy returns on investment because you invested too much to gain those profits. I see it all the time.
Guess what? You do too, when watching those managing our country:
“The longer I’m here, the more I’m persuaded that Iraq cannot be analyzed by these kind of discrete benchmarks,” [Ryan C. Crocker, U.S. ambassador to Iraq] said.
After the Iraqi government drew up the first list of benchmarks last year, American officials used them as their yardstick, frequently faulting the Iraqis for failure to act on them…
Measured solely by the legislative benchmarks, he said, “you could not achieve any of them, and still have a situation where arguably the country is moving in the right direction. And conversely, I think you could achieve them all and still not be heading towards stability, security and overall success for Iraq.”
The point here is not to support or criticize our position in Iraq. I’d like to avoid that verbal quagmire. The point here is how similar this sounds to Red Auerbach, former coach of the Boston Celtics.
For those of you not into basketball history, Red Auerbach was a heck of a coach. His Celtics won eleven NBA titles in 13 years. Maybe you remember how dominant the Chicago Bulls with Michael Jordan and Phil Jackson were the ’90s. Those Bulls would have had to win another five straight championships to match Auerbach’s record.
So, Red didn’t trust benchmarks, or “the stats” as he called them. Like all great coaches, Auerbach had a mental framework for what it took to win at his game: The person with the best shot should take the shot; the team should ensure that that person gets the ball; the team should prevent their opponents from getting good shots… Pretty straightforward. All that mattered to him was the score at the end of the game. He stayed away from the stats, especially as they applied to individual performers.
There’s only one stat I was ever concerned about. When this guy’s in the game, does the score go up in our favor or go against us? The Boston Celtics never had a league’s top scorer. We won seven championships without ever placing one Celtic in the top ten.
No Celtic got rated according to how many points or rebounds or assists or anything else he might have compiled. Each man was assessed according to his contribution toward making us a better team. That’s all I cared about. In our system, the guy who sets the good pick was just as important as the guy who made the shot.
How did Auerbach assess that while the game was being played? By watching. By being there.
Now, imagine his coaching task if, before every game, he went behind a curtain and could only manage his team by receiving stats and the play-by-play announcement? The inherent limitation of “managing by the numbers” becomes quite plain.
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Posted by Marc Hodak on July 11, 2007 under History |
My dad was the first to call this morning to wish me a happy birthday. I figured he was the first person to wish me that when I came into the world, but he reminded me that things were different then. The father typically paced the waiting room until a doctor came out to announce, “Congratulations, it’s a boy.” After a while, the dad would be taken to a window behind which were an array of newborns that all looked much less like him than his bald, crotchety Uncle Saul. My case was complicated, my dad told me, by the fact that the doctors found the umbilical cord around my neck, and had to cut my mom to get me out which, at that time, was still a serious operation.
In contrast, when my big guy was born on this same day 18 years ago, I was in the operating room to see him emerge. (Like me, a generation earlier, he decided he wouldn’t leave his mother without a scar for her trouble.) So, like every year since, we wished each other a happy birthday.
Actually, it’s birthday week. My best friend was also born this day, and my wife on Monday. I took her out then, and she’s taking me out tonight. Neither of us is that into growing older, but I always remind her that it’s better than the alternative.
Which reminds me of the lady who brought me into the world. She was a 22 year old girl when the doctors cut her. Year’s afterward, she often showed me her scar to remind me of the day I started causing her trouble–probably the weakest attempt at Jewish mother guilt I’ve ever seen. No doubt, the biggest trouble I caused her–also no fault of mine–was my near death due to illness just a few months after I was born. The doctors plainly told my parents that my survival was a miracle. My dad, who was hunted by Nazis as a child in France, probably took it as just another bit of good luck in an outrageously lucky life, but event clearly traumatized my mom. I believe it contributed to her unadulterated sincerity every time she wished me happy birthday thereafter. I’ve missed her calls very much these last few years.
Posted by Marc Hodak on July 10, 2007 under Patterns without intention |
The McKinsey Quarterly features an interesting article on organizational complexity, offering the following advice:
Executives should distinguish between two types of complexity—institutional and individual. The former concerns the number and nature of interactions within a company, the latter the way individual employees and managers experience and deal with complexity.
This is similar to the powerful distinction of internalizing complexity. That’s when an organization takes on additional work processes in order to spare individuals from having to deal with them. For example, consider where electricity comes from. For the producer, it comes from a bewilderingly complex system of plants, wires, engineers, etc. And behind that, the complexity mushrooms into coal suppliers, an educated labor pool, ad infinitum. But for you and me, it comes from a wall outlet. Where does water come from? The faucet. Where does your friend’s voice come from? The cell phone. How does a car move? Push down on the accelerator.
One of the things that markets do extremely well is simplify our lives. Complexity has a cost, and producers compete on minimizing costs to their customers. So, if a producer has a choice between complicating their own life versus that of their customer, the producer will tend to absorb the complexity. Only then will they seek ways to minimize complexity within their organization so it can function more efficiently. Disney World is a notoriously difficult place to work precisely because it’s a seamless paradise for kids and families. All the complexity required to produce the “Disney Magic” is absorbed by the folks behind the scenes.
Contrast that with how well government “services” internalize complexity–or not.
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Posted by Marc Hodak on July 9, 2007 under Revealed preference |
If you wanted to enhance the credibility of the teaching of good governance, wouldn’t you go to an organization like the U.N.? Of course. That is why the U.N. has endorsed certain guidelines for business school education such as:
We will incorporate into our academic activities and curricula the values of global social responsibility as portrayed in international initiatives such as the United Nations Global Compact.
Since I think the U.N. should be taken at its word, I have begun to think about cases that can be used to teach these principles. For example, Principles 1 and 2: “Businesses should support and respect the protection of internationally proclaimed human rights; and make sure that they are not complicit in human rights abuses” could be illustrated with examples of how the U.N. has built its organizational capability to clean up human rights abuses. Or Principle #10: “Businesses should work against corruption in all its forms, including extortion and bribery” could be illustrated with this.
Gee, if I wasn’t so busy preparing for my course on corporate scandals, I’m sure I could dig up lots of examples of U.N. initiatives to illustrate good governance.
