The debate between economists John Maynard Keynes and F. A. Hayek set to rap.
The debate between economists John Maynard Keynes and F. A. Hayek set to rap.
The tragedy of the commons is the name economists use to describe the abuse of common property. For example, overfishing in international waters. Someone who owns a lake will not over fish his own lake because he knows he will benefit in the future from restraining his fishing now. But in international waters, no individual has an incentive to restrain fishing. Mankind as a whole certainly benefits from restraint, but single fishermen do not.
Michael Heller discusses an opposite effect, the tragedy of the anti-commons, on the EconTalk podcast. The tragedy of the commons describes the over-use of a resource nobody owns. The tragedy of the anti-commons describes the under-use of resources with many owners. For example, suppose an acre of land belongs to 43,560 individuals who each own one square foot. The land will never be used for anything as long as thousands of people have to agree on what to do.
The example of land being divided into tiny plots is a artificial. A more realistic example is the ownership of patents. Building a DVD player requires using hundreds of patented inventions. No company could ever build a DVD player if it had to negotiate with all patent holders and obtain their unanimous consent. These patents would be worthless due to gridlock. Fortunately, the owners of the patents used in building DVD players have formed a single entity authorized to negotiate on their behalf. But if you’re creating something new that does not have an organized group of patent holders, there are real problems.
According to Michael Heller, it is simply impossible to create a high-tech product these days without infringing on patents. A new drug or a new electronic device may use thousands of patents. It may not be practical even to discover all the possible patents involved, and it is certainly not possible to negotiate with thousands of patent holders individually.
Small companies can get away with patent violations because the companies may not be worth suing. But companies with deep pockets such as Microsoft are worth suing. These companies develop their own arsenal of patents so they can threaten counter suits against potential attackers. This keeps the big companies from suing each other, but it doesn’t prevent law suits from tiny companies that may only have one product.
Listen to the EconTalk interview for some ideas of how to get around the tragedy of the anti-commons, particularly in regard to patents.
“If you make $30 per hour, you should outsource everything you do that you could hire someone else to do for less than $30.” Rubbish. I don’t know how many times I’ve heard this advice. It sounds good, for about two seconds. But it doesn’t work because it ignores transaction costs.
Suppose you’re an accountant making $60,000 per year, an hourly rate of $30. If someone is standing in front of you and says “Hey, I’ll do your yard work for the next hour for $20. Why don’t you go inside and do an hour of accounting?” In that case, it makes sense to take the yard worker up on his offer (unless you want to work outside for non-monetary reasons). But reality is seldom so simple. First of all, if you are a salaried employee, you probably don’t have the option of putting in an extra hour’s work for an extra hour’s pay. But even if you do freelance accounting, you may not be able to find an hour’s work when you want it.
Say you have some freelance accounting to do, and you’d like to get out of your yard work. You’ve got to find someone to do the work unless there happens to be landscaper standing outside your door. You might ask friends for recommendations, search the web, make a few phone calls, etc. Finding a landscaper is easier than finding accounting work, but it still takes effort.
The effort necessary to find work or to find workers is called a transaction cost. So is negotiating compensation, drawing up contracts, etc. If you have a steady stream of accounting work, you might think “I’m going to need to free up some time to do this extra work. I’ll outsource some of my chores, like my yard work.” And that makes sense. But unless you have enough work at hand, it’s worthwhile to do many things for yourself that in theory you could pay someone else to do.
Transaction costs are not all bad. They give life stability and variety. Salaried jobs exist because transaction costs make it expensive to put every task out for bid. And we develop a variety of skills because it is impractical to ask someone else to do everything for us outside of our narrow professional specialization.
From A Bias for Action:
The simple fact is that being busy is easier than not. Most managers cannot admit that a fragmented day is actually the laziest day, the day that requires the least mental discipline and the most nervous energy. Responding to each new request, chasing an answer to the latest question, and complaining about overwhelming demands are easier than setting priorities.
The answer to a feasibility study is almost always “yes”.
I hadn’t thought about that before, but it certainly rings true. I can’t think of an exception.
Some say about half of all large software projects fail, and presumably many of these failures passed a feasibility study. Why can’t we predict whether a project stands a good chance of succeeding? Are committees sincerely overly optimistic, or do they recognize doomed projects but tell the sponsor what the sponsor wants to hear?
Innovation is not the same as invention. According to Peter Denning,
An innovation is a transformation of practice in a community. It is not the same as the invention of a new idea or object. The real work of innovation is in the transformation of practice. … Many innovations were preceded or enabled by inventions; but many innovations occurred without a significant invention.
Michael Schrage makes a similar point.
I want to see the biographies and the sociologies of the great customers and clients of innovation. Forget for awhile about the Samuel Morses, Thomas Edisons, the Robert Fultons and James Watts of industrial revolution fame. Don’t look to them to figure out what innovation is, because innovation is not what innovators do but what customers adopt.
Innovation in the sense of Denning and Schrage is harder than invention. Most inventions don’t lead to innovations.
The simplest view of the history of invention is that Morse invented the telegraph, Fulton the steamboat, etc. A sophomoric view is that men like Morse and Fulton don’t deserve so much credit because they only improved on and popularized the inventions of others. A more mature view is that Morse and Fulton do indeed deserve the credit they receive. All inventors build on the work of predecessors, and popularizing an invention (i.e. encouraging innovation) requires persistent hard work and creativity.
Popular business writers often say flat organizations are better than hierarchical organizations, and small businesses are better than big businesses. By “better” they usually mean more creative, nimble, fun, and ultimately profitable. But they don’t often try to explain why small and flat is better than big and hierarchical. They support their argument with examples of big sluggish companies and small agile companies, but that’s as far as they go.
Paul Graham posted a new essay called You Weren’t Meant to Have a Boss in which he also argues for small and flat over big and hierarchical. However, his line of reasoning is fresh. I haven’t decided what I think of his points, but as usual his writing is creative and thought-provoking.
Update: See Jeff Atwood’s comments, Paul Graham’s Participatory Narcissism.
In a recent interview author and economist Tim Harford argued that CEO compensation is not based on the economic value of the CEO’s leadership. Instead, companies compensate their CEO’s generously in order to provide an incentive to aspiring CEOs. In this view, an executive compensation package is a sort of lottery prize designed to motivate those further down the corporate ladder.
There’s a saying that clients can have good, fast, or cheap. Pick two, but then the third will be whatever it has to be based on the other two choices. You can have good and fast if you’re willing to spend a lot of money. You can have fast and cheap, but the quality will be poor. You might even be able to get good and cheap, if you’re willing to wait a long time.
A variation on this theme is the iron triangle. You draw a triangle with vertices labeled “features”, “time” and “resources.” If you make two of the sides longer, the third has to become longer too. Here goodness is defined as a feature set rather than quality, but the same principle applies.
There’s a problem with this line of reasoning: no matter what clients say, they want quality. They may say they want fast and cheap, and if you tell them you’ll sacrifice quality to deliver fast and cheap, you’ll be a hero — until you deliver. Then they want quality. As Howard Newton put it
People forget how fast you did a job, but they remember how well you did it.
Sometimes you can cut features as long as you do a good job on the features that remain, but only to a point. Clients are not going to be happy unless you meet their expectations, even if those expectations are explicitly contradicted in a contract. You can tell a client you’ll cut out frills to give them something fast and cheap, and they’ll gladly agree. But they still want their frills, or they will want them. The client may be silently disappointed. Or they may be vocally disappointed, demanding excluded features for free and complaining about your work. Eventually you learn what features to insist on including, even if a client says they can live without them.
Interaction design guru Alan Cooper gave a presentation recently entitled An Insurgency of Quality. As part of his talk, he explains why programmers cannot be managed. Traditional management has an industrial age mindset, while software development is a post-industrial craft. That mismatch explains a great deal. For example, industrial workers respect authority, but programmers respect competence.
According to Cooper, the leader of a group of programmers should be a facilitator, not a manager. Johanna Rothman in her interview on the Pragmatic Programmer podcast elaborates on this same view. The manager’s job is to remove obstacles to productivity — acquire resources, provide protection from interruptions and distractions, etc. — rather than to manage in the industrial sense.
Cyndi Mitchell in a talk from Rails Conf points out how “enterprise” in the phrase “enterprise software” has taken on the opposite of its customary meaning.
If you call a person enterprising, you have in mind someone who takes risks and accomplishes things. And “Enterprise” has been the name numerous ships, real and fictional, based on the bold, adventurous overtones of the name. But Cyndi Mitchell says when she thinks about enterprise software, the first words that come to mind are bloatware, incompetence, and corruption. I wouldn’t go quite that far, but words like “bureaucratic” and “rigid” would certainly be on my list. In any case, “enterprise” has a completely different connotation in “enterprise software” than in “USS Enterprise.”
Kevin Kelly has a post entitled Better than Free that lists eight things people will pay a premium for, even while closely related things are free or cheap:
Daniel Pink has a related list in his book A Whole New Mind. (Here’s an interview with Pink that gives an overview of his book.) Pink says the skills that will be increasingly valued over time, and difficult to outsource, are:
In The World Is Flat, Thomas Friedman says four kinds of people are “untouchable,” that is, immune to losing their job due to outsourcing. These are people who are
In Friedman’s terminology, “special” means world-class talent, someone like Michael Jordan or Yo-Yo Ma. Anchored means geographically anchored, like a barber. For most of us, our best options are to be specialized or really adaptable.
How do these three lists fit together? You could see Kelly’s and Pink’s lists as ways to specialize and adapt your product or service per Friedman’s advice.
Seth Godin has a post this morning about what he calls the three key marketing levers: fear, hope, and love. He concludes
The easiest way to build a brand is to sell fear. The best way, though, may be to deliver on hope while aiming for love…
People don’t want fear, they want faith. They want to buy something they can place their trust in to alleviate their fears. Replacing the term “fear” with “faith” makes the three levers more parallel, stating each in terms of positive aspiration. With this edit you could summarize Seth Godin’s marketing advice as follows.
Now abide faith, hope, and love. But the greatest of these is love.
I think I’ve read that somewhere before.
Seth Godin has an interesting blog post today called The problem with perfect. Companies with a reputation for perfect service are only remarkable when they disappoint. Being interesting is a more viable business strategy than being perfect.
Everything is supposedly growing exponentially these days. But when most people say “exponential,” they don’t mean what they say. They mean “fast.” Exponential growth can indeed be fast. Or it can be slow. Excruciatingly slow.
If you earn a million dollars a day, your wealth is growing quickly, but not exponentially. And if you have $100 in the bank earning 3% compound interest, your money is growing slowly, but it is growing exponentially.
Linear growth is a constant amount of increase per unit of time. Exponential growth is a constant percentage increase per unit of time. If you buy a pack of baseball cards every Friday, the size of your baseball card collection will grow linearly. But if you breed rabbits with no restriction, the size of your bunny heard will grow exponentially.
It matters a great deal whether you’re growing linearly or exponentially.
When you start a new enterprise — a company, a web site, etc. — it may truly grow exponentially. Growth may be determined by word of mouth, which is exponential (at first). The number of new people who hear each month depends on the number people who talk, and hearers become talkers. But that process can be infuriatingly slow when it’s just getting started. If the number of visitors to your web site is growing 5% per month, that’s great in the long term, but disappointing at first when it means going from 40 visitors one month to 42 the next.
How do you live on an exponential curve? You need extraordinary patience. While any exponential curve will eventually pass any linear curve, it may take a long time. If you’re making barely perceptible but compounding progress, be encouraged that you’re on the right curve. Eventually you’ll have all the growth you can handle. Realize that you may be having a harder time initially because you’re on the exponential curve rather than the linear curve.
How do you know whether you’re on an exponential curve? This is not as easy as it sounds. Because of random noise, it may be hard to tell from a small amount of data whether growth is linear or exponential, or even to tell growth from stagnation. Eventually the numbers will tell you. But until enough data come in to reveal what’s going on, look at the root causes of your growth. If you’re growing because customers are referring customers, that’s a recipe for exponential growth. If you’re growing because you’re working more hours, that’s linear growth.
Nothing grows exponentially forever. Word of mouth slows down when the message reaches saturation, when the talkers run into fewer people who haven’t heard. Rabbit farms slow down when they can’t feed all the rabbits. Most of the things we call exponential growth are more accurately logistic growth: exponential growth slows to linear growth, then linear growth begins to plateau.
How do you live on a logistic curve? Realize that initial exponential growth doesn’t last. Watch the numbers. They’ll tell you when you’ve gone from approximately exponential to approximately linear. Understand the mechanisms that turn exponential into logic growth in your context.