Category Archives: Economics

When Society Stops Rewarding Industry, We See Galtism

Following up on what motivates us to work and create, I want to point out a few cases of “Galtism” in current events.

(As background, John Galt is a character in Atlas Shrugged who leaves society when it stops rewarding his ingenuity and hard work.)

First, a letter from Jake DeSantis, an executive vice president at A.I.G. who resigned after the company reneged on its bonus contracts after it became politically unpopular:

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house. (Jake DeSantis, “Dear A.I.G., I Quit”, Ny Times, March 24, 2009.)

Second, some musings on “what happens when government regulation makes it more expensive to bill for medical services than providers receive”:

More and more of my fellow doctors are turning away Medicare patients because of the diminished reimbursements and the growing delay in payments. I’ve had several new Medicare patients come to my office in the last few months with multiple diseases and long lists of medications simply because their longtime provider — who they liked — abruptly stopped taking Medicare.

This scenario is not academic. The health systems in Canada and the UK have shortages of doctors, especially specialists…which is why it takes months to get testing and diagnosis even for serious illnesses.

Among P.J. O’Rourke’s well-known lines is “If you think health care is expensive now, wait until you see what it costs when it’s free.” The full speech is worth reading:

Freedom is not empowerment…. Anybody can grab a gun and be empowered. It’s not entitlement. An entitlement is what people on welfare get, and how free are they? It’s not an endlessly expanding list of rights — the “right” to education, the “right” to health care, the “right” to food and housing. That’s not freedom, that’s dependency. Those aren’t rights, those are the rations of slavery — hay and a barn for human cattle.

There is only one basic human right, the right to do as you…please. And with it comes the only basic human duty, the duty to take the consequences. (P.J. O’Rourke, “The Liberty Manifesto”, May 6, 1993.)

What Motivates Us to Work and Create

I recently read Mind the Gap, an essay by Paul Graham on wealth, industry, and incentives. It’s almost 5 years old now, but it seems timely as our nation appears to be on a road toward socialism.

Wealth is not money. Money is just a convenient way of trading one form of wealth for another. Wealth is the underlying stuff—the goods and services we buy….

Where does wealth come from? People make it. This was easier to grasp when most people lived on farms, and made many of the things they wanted with their own hands. Then you could see in the house, the herds, and the granary the wealth that each family created. It was obvious then too that the wealth of the world was not a fixed quantity that had to be shared out, like slices of a pie. If you wanted more wealth, you could make it.

This is just as true today, though few of us create wealth directly for ourselves…. Mostly we create wealth for other people in exchange for money, which we then trade for the forms of wealth we want.

If you suppress variations in income, whether by stealing private fortunes, as feudal rulers used to do, or by taxing them away, as some modern governments have done, the result always seems to be the same. Society as a whole ends up poorer.

You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I’m not talking about the trickle-down effect here. I’m not saying that if you let Henry Ford get rich, he’ll hire you as a waiter at his next party. I’m saying that he’ll make you a tractor to replace your horse. (Emphasis added.)

Similar ideas can be found in a monologue from Francisco d’Anconia, the wealthy mine owner in Ayn Rand’s book Atlas Shrugged.

“Money demands that you sell, not your weakness to men’s stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade—with reason, not force, as their final arbiter—it is the best product that wins, the best performance, the man of best judgment and highest ability—and the degree of a man’s productiveness is the degree of his reward.

“…you will see the rise of men of the double standard—the men who live by force, yet count on those who live by trade to create the value of their looted money—the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law—men who use force to seize the wealth of disarmed victims—then money becomes its creators’ avenger.

“When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal, not in goods, but in favors—when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed.

“If you ask me to name the proudest distinction of Americans, I would choose—because it contains all the others—the fact that they were the people who created the phrase ‘to make money.’ No other language or nation had ever used these words before; men had always thought of wealth as a static quantity—to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created….” (Ayn Rand. Atlas Shrugged. pp. 411-14. Emphasis added.)

More Important to Teach Principles than Facts

This week I read The Leader in Me, Stephen Covey’s new book about teaching the Seven Habits of Highly Effective People to elementary school students. Schools in North Carolina, Alabama, Illinois, Guatemala, Singapore, and elsewhere have successfully incorporated 7 Habits into their curriculum.

As an outsider to education, what most interested me were the chapter on teaching effectiveness principles in the home (chapter 10) and the following thoughts on curriculum.

Parents, teachers, and business leaders recognize that simple transmission of facts is no longer a sufficient education, as it may have been many years ago. This is what makes teaching effectiveness principles so attractive. Principles and habits transcend facts.

While factual information remains a key factor for survival in today’s world, it is no longer sufficient. With the massive spread of the internet and other digital resources, facts that at one time were closely guarded trade secrets and only available from the top universities can now be accessed in most every nook and cranny on the globe at the click of a mouse. As a result, many of the so-called elite professions that once required extensive schooling are today being passed on to computers or to people at far lower education levels and wages across the planet. Factual knowledge alone is thus no longer the great differentiator between those who succeed and those who do not. (Stephen R. Covey. The Leader in Me. p. 7)

What’s needed, in Mr. Covey’s opinion, is a greater emphasis on “meta” skills such as being proactive, setting goals, resolving conflicts, and listening well. (I previously wrote about “intellectual self-sufficiency”, which I believe is one of these meta skills that is larger than other academic skills.)

Perhaps we could teach better by teaching less:

“It is time to recognize that the major flaw in the de facto curriculum of American public schools is not that schools do not do enough, but that they attempt to do too much. Even though American students have fewer school days each year than their Asian and European counterparts, they are expected to learn far more curriculum content. Confronted with a curriculum that is ‘a mile long and one-half inch deep,’ teachers have become preoccupied with ‘coverage.’ They feel unable to teach for student mastery of knowledge and skills because of the race to cover content. One of the most meaningful steps a school can take to promote significant improvement is to develop a process for identifying significant curriculum content, eliminating non-essential material, and providing teachers with time to teach the significant curriculum.” (Richard DuFour and Robert Eaker. Professional Learning Community. p. 165. Quoted in The Leader in Me. pp. 197-198.)

“U.S. mathematics textbooks address 175 percent as many topics as do German textbooks and 350 percent as many topics as do Japanese textbooks. The science textbooks used in the United States cover more than nine times as many topics as do German textbooks and more than four times as many topics as do Japanese textbooks. Yet German and Japanese students significantly outperform U.S. students in mathematics and science.” (Robert J. Marzano. What Works in Schools. pp. 26-28. Quoted in The Leader in Me. p. 198.)

I’m not saying these are magic answers for education, or even that they’re new, but I thought they were interesting. As the internet makes it easier to connect with people and access any information, I see wisdom in learning and teaching better personal effectiveness skills.

Eric Hoffer said, “It is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.”

Amtrak series: Pick good metrics and stay on track, if it matters

As I mentioned, this weekend I came from Sacramento to Provo by Amtrak train. I flew to Sacramento on Southwest Airlines, buying a one-way ticket so I could decide later whether to depart from SAC or San Francisco. But at the last minute I instead decided to indulge my long time desire to ride a train. (I had long talked of hopping a train with my college roommate, but we never learned if it’s a misdemeanor or a felony and I didn’t think want to risk the latter.)

The ride took 21 hours, which afforded lots of time for reading, listening to music and talks, and taking pictures. I also met several people: a guy moving with everything he owned to start a new life in Denver, an artist-musician couple vacationing (the wife said Steve Case, founder of AOL, asked her to high school prom but she turned him down), and a guy from Wisconsin who’s been in the military for 24 years and thinks we should have gone to Darfur long ago. All very different and interesting stories.

The price for this trip, not including dinner in the dining car, was $74.00 or $3.52/hour. Compare that with my Southwest flight which cost a whopping $37.92/hour.

But when did the price per hour of a trip ever matter?

If you want to accomplish something, you must measure it:

If you don’t measure something, you can’t change it. The process of leadership is one of painting a vision, then saying how you’re going to get there, and then measuring whether you’re actually getting there. Otherwise, you risk only talking about great things but not accomplishing them. (Source: Mitt Romney)

I like the idea of using metrics to incent the right behavior. For example, “cars with realtime MPG usage displays tend to make people more efficient drivers.” (source, also) If you keep track of how often you read important books or go to the gym, or how meaningful your time is with your family (even in a subjective sense), those things are sure to improve over time. Pick your own metrics and stick to them.

More on metrics: High resolution mistakes by Seth Godin and Domino Rally business models by Paul Allen

So what could possible be meaningful about a trip with a low price per hour? That metric could only incentivize inefficient, slow-paced trips with no regard for urgency or schedule. Or in other words, I was just in this one for the ride.

The value of free

I just bought Norah Jones’s latest single “Thinking About You” from Yahoo Music, a good song made better by the fact that it’s offered in 192 kbps unprotected MP3 format. That is, there’s no Digital Rights Management (DRM) to “control” it. The publishers take the risk that I’ll (illegally) share the song with all my friends and the world at large, while I Mr. Consumer enjoy the play-anywhere convenience.

The Wall Street journal reports that Yahoo Music General Manager David Goldberg favors unprotected downloads:

Antipiracy software on music isn’t helping the industry because the same music is already available without copy protection on CDs and through Internet file-sharing programs. What’s more, many consumers don’t like the limitations that copy protection imposes on how and on which devices they can listen to their music. (The Wall Street Journal)

This also allows Yahoo Music to compete with the iTunes Music Store since these unprotected MP3 files will play on any iPod.

This week on Forbes.com Cory Doctorow, sci-fi author and co-founder of BoingBoing.net, explains the value of giving away something for free. He invokes Tim O’Reilly who said, “Obscurity is a far greater threat to authors and creative artists than piracy.”

As a consumer, I have too many choices and not enough attention span. To win my attention, give me something for free. To win my wallet, make it easy to buy and consume your product.