I have done more work, modeling the three economic sectors of growth, maturity, and decline. Up until now, I have thought that I would reserve it for publication in the economics community. Given developments, political and economic, in past weeks, I am inclined to publish it here. For one thing, given the long time frame in academia, the material, if approved through the long (socially constructed) peer review process, wouldn't come to light for a year or so.
The fact is, though, getting the material published in a significant journal, given my status of as a newly-minted academic at my age (which rounds up to 60 years old now) is slim. I have not grown up in the socially constructed worlds of economics or management and though I find value in their literatures, in my experience, they have often taken the wrong path where they diverged in the past. This is a widespread problem in academic fields of study, which have lost the groundings that seemed to have peaked in the 1960s and fallen back thereafter into what Paul Adler calls "problem-oriented research". Instead of dealing with the big issues, there is a tendency to look for low-lying fruit in a small problem area that seems to lend itself to statistical analysis. A researcher or team will tighten up numbers in that area and get published based on their statistical flair and then brand themselves for their careers on that issue. Actually, the plan is benefited by some level of irrelevance. If the issue is plausibly important, but not so critical as to raise anyone's real interest, researchers get "off the hook". This is to say that they get left alone.
I am a member of the Academy of Management for three years now. You would not know that we have an economic crisis given the content of recent issues of their journals. Why is this the case? Largely due to the long-term nature of their publication process. Still, some mention would be warranted, particularly given the nature of organization crisis we find ourselves in. Finance and the automotive industry are in need of help -- though it is too late in the case of many venerable organizations.
I just spoke to a friend in another city. He indicated that everyone he knows is absolutely frozen in fear of the worst. I just finished an article in the current issue of the Economist. It recounted the details of the current crisis in the context of previous ones. The take home message? "Business cycle failure is brought on by stupidity and greed. Get used to it."
That is pretty much the message of the world's economic and political leaders to the rest of us. Of course, we must ask ourselves, whose stupidity and greed are to account for the crisis? Those who took the credit card debts that they were not going to be able to pay or those who offered it to them, knowing based standards developed over the ages that they would not be paid back? The same with sub-prime mortgages.
The wordsmithing in all of this is interesting. Sub-prime? Prime would signify the best of something, would it not? Sub-prime? Wouldn't that be normal? When they are referring to "sub-prime" assets, are they really saying "non-credit-worthy" assets? Similar to this is the reference to "toxic assets". Such assets aren't toxic, they are worthless (as in railroad stocks in past eras that did not pan out -- and for that matter, gold that did not pan out. By labeling them "toxic", we are dodging reality.
From a model economics perspective, we can say that from the early 1980s on, banks have attempted to continue their growth patterns in the absence of a federal plan for them to be profitable in their main lines of business -- so they used methods, both highbrow (by hiring the physicists and quants) and lowbrow (by giving away money to people that would not pay it back). Since they didn't have a hard monetary constraint (given that they could create money on their own with such plans) they were able to evade the natural limits of the market.
We forget the "eco" in economics. Being biologic beings, what we create to support our livings are as biological and ecological as beaver dams and bird nests, yet we do not acknowledge our roots. This is of particular criticality in the failure of our organizations. This is fundamental to our current status. Within organizations, particularly decaying ones, the people that are knowledgeable, that should be in position to organize and deploy people and resources, tend to not have the power to do so. In many cases, this means that the politicians and the number-crunchers take over, limiting the capacity to do by the subject matter experts and people with marketing ideas, which are viewed as being risky. The organizations assumes the greatest risk of all by failing to innovate. As a side note, doesn't it seem odd that we are absolutely freaked out about not educating our children in math and science and then allow our organizations to be so corrupt and "Dilbert-like" that they can't apply their knowledge in these organizations once they get their jobs?
Back the to automobile crisis. When was the last great transportation entrepreneur? In the automotive world, wouldn't you say it had to be Walter Chrysler -- dating to the 1930 (Iacocca? -- great, great turnaround guy, but no entrepreneur). There are many, many, many, many ideas in that world that have been killed and their authors marginalized (or worse). Could there be a better example to us of necronomy and its effects than that? The success of foreign auto companies is an important testament to the weakness of our entrepreneurial sector in transportation. If competition, real competition had existed in the United States in the postwar period, there would have been no opening for foreign producers to succeed, and yet, they have thrived. Organizational failure and poor policy both conspired to bring the automobile industry to its current desperate state.
We don't need total conquest by entrepreneurs, but they need to be supported and allowed to take market risks. We need balance. I have run some numbers on this and I plan to post them soon.
Thursday, January 29, 2009
Saturday, January 17, 2009
Necronomy
I began a book in the mid 1980s when I was a young partner in a venture capital fund. Though it was mostly done by the time I started international relations studies at UC San Diego in 1989, I didn't publish it until this Fall. Basically I was so put off by what was going on in the economy that I dusted it off, updated it, and published it in the most expeditious way I could at the time, through VDM Verlag, who had recently published three other books. The problem is that the book is not cheap -- about $100. I couldn't talk them down, but I thought it was better to just get it out. The name is: It's the Necronomy, Stupid: Introduction to Model Economics. It is actually a pretty upbeat book, but the point of necronomy is somewhat negative.
Nonetheless, having published the book, I sent op-ed introductions to a number of prominent papers as a means of getting the word out. I sent it to the Washington Post, the New York Times, the Wall Street Journal, the Financial Times, the Christian Science Monitor, (I think) the Chicago Tribune, and the Los Angeles Times. Given that you have to wait for several days (or weeks) in each case, the process took a couple of months. They all said "no" in so many terms.
I don't have any evidence but what I got an autoresponse in each case, telling me that they get so many submissions that they simply can't read mine. I understand. On the other hand, I haven't made a systematic effort to find viable solutions to our economic dilemma, but I do keep pretty current, and I haven't seen ANY. Not really even any attempts. Alan Greenspan said that banks need more capital in The Economist, but not really how or why other than that they will when the stock markets bounce back. Rising tide and all of that, I suppose. Not too inspiring.
There is an abstract at the beginning.
The article considers biological groundings for our economic system. It points out an omission in study and oversight of our political economy in that we do not explicitly consider issues related to growth, maturity, and decline of enterprises. This oversight is held to contribute to a weakened banking sector and questionable financial service markets. The article makes reference to a biological condition called necrosis, where death and decline is disorderly, not contributing to general well-being. The point is made that policy should anticipate these cycles of growth, maturity, and decline and consider the needs of organizations in these phases by class to directly stimulate growth, to support the needs of mature enterprises and stave off necronomy, and to develop principles for the support and repositioning of organizations found to be in a state of decline.
------------------------------------------------
It's The Necronomy, Stupid
We are biological creatures. Our various creations have biological origins, given that they come from our imaginations and experience. We acknowledge our connection to cycles in business and other affairs, but we do so incompletely. We like to build and we invest our efforts in new creations, but we seem surprised and dismayed when they eventually falter and decay. We love growth, but we tend to forget the requirements of development. We enjoy economic maturity, but we tend to forget that nothing lasts forever. We abhor decline. We attempt to delay its effects and stretch the capabilities of organizations well past their useful lives.
Our biological home, the complex system of which we are a part, is based on varying life processes of organisms that are dependent on similar cycles of growth, maturity, and decline down to cellular and molecular levels. To grow, organisms need protection, a reasonably generous flow of resources, and an appropriate incubation or generative period. Organisms in homeostasis, or biological balance, enjoy the greatest of benefits, armed as they are with the greatest of bounties and the greatest capacity to do. Interestingly, at the cellular level, when the life cycle of living matter reaches its limits, a series of events naturally nurse matter through its last stages of life, where its resources are brought to bear in other states that can make better use of the energy and resources. This natural winding down process is referred to in biology as apoptosis, a natural dying process.
There is another kind of death for living matter, one that does not benefit from the gentle processes of apoptosis. This is a process called necrosis, a destabilizing process of decomposition that has serious negative consequences to organisms and living tissues. Necrosis is disorderly and ugly. An example of necrosis is what happens when a recluse spider or a snake bites. An economy characterized by necrosis, as outlined by Vladimer Papava, has problematic dead spots that cannot be recovered in an environment of open markets and competition.
Challenges to our economic system brought on by the liquidity problem bring concerns with respect to growth, maturity, and decline on two levels. First, as arbiters and dispensers of cash and its variants, financial intermediaries provide a critical function in the growth, maturity, and decline of all organizations within the economy. The availability of cash should function as a hard constraint on enterprises. Maintaining such a constraint is a critical public function, one that depends on stability underlying the management of monetary assets. If this function is compromised, our ability to judge the performance of all institutions is questionable.
Second, banks are economic institutions in their own right, with products, customers, marketing objectives, staffing requirements, and shareholders. They share characteristics with all organizations that compete for resources and attention. The ability to monitor their own cycles of growth, maturity, and decline affects bankers' public functions, bringing the potential for conflicting objectives, conflicts of interest, and distortions of their primary missions. This process broke down in the last several decades, bringing our present situation.
Much of our current dilemma can be traced to the Banking Act of 1981. A provision of the bill overrode usury laws, allowing banks to charge whatever interest rates they wanted. Monetary policy, virtually institutionalized in that period, allowed central bankers to control the cost of credit and take steps to control the money supply by keeping rates low. Problematically, in the era of low interest rates and controlled growth, bankers since the 1981 Act found their margins from commercial credit virtually evaporating. While they now had the legal right to charge more for the money they lent, federal policy kept rates low, making it difficult for banks to profitably service creditworthy organizations.
You can most likely recall how the dilemma was resolved. Bankers expanded on loose consumer credit. Household credit was not tied to monetary policy and formal rate adjustments, making it a manageable, profitable vehicle. Loose consumer standards and high rates brought increased business for the banks, but on shaky ground. As one market was taken from the banks, nothing viable was put in its place. Banking became oddly bifurcated in the process, with high standards and low commercial rates alongside a casino environment with virtually no standards and onerous interest and penalties for consumers.
This set the stage for the sub-prime mortgage debacle and related necrosis. Low-standard arrangements for distributing cash never really were markets. Such conditions proved a seedbed for the derivatives concept, which allowed for the creation of money apart from the realities of of the economy of useful products and services.
Given that we do not have a policy structure that differentiates between stages of development of the enterprises that make up the economy, understanding of such kinds of problems and viable solutions to them tend to not come to light. Organizations are allowed -- or encouraged -- to live past their prime without encouragement of viable suitors as a class. This is the underlying problem that we must resolve in banking and elsewhere.
The automobile dilemma? Another example. Where are the entrepreneurs and the innovative ventures in that sector? The last successful one was probably Walter Chrysler -- about eighty years ago. I for one am cheering for Tessla, which is pretty innovative and apparently uncovering what has been a big white lie, the electric cars are of necessity "wimpy". Is it possible that necronomy has existed in that sector, where mature enterprises (and even government representatives) have kept innovation out of the equation in anti-competitive, non-market ways? Do you suppose that foreign auto makers would have been so successful in U.S. auto markets if competition had been effect domestically? It is not likely.
--------------------------------------
Nonetheless, having published the book, I sent op-ed introductions to a number of prominent papers as a means of getting the word out. I sent it to the Washington Post, the New York Times, the Wall Street Journal, the Financial Times, the Christian Science Monitor, (I think) the Chicago Tribune, and the Los Angeles Times. Given that you have to wait for several days (or weeks) in each case, the process took a couple of months. They all said "no" in so many terms.
I don't have any evidence but what I got an autoresponse in each case, telling me that they get so many submissions that they simply can't read mine. I understand. On the other hand, I haven't made a systematic effort to find viable solutions to our economic dilemma, but I do keep pretty current, and I haven't seen ANY. Not really even any attempts. Alan Greenspan said that banks need more capital in The Economist, but not really how or why other than that they will when the stock markets bounce back. Rising tide and all of that, I suppose. Not too inspiring.
There is an abstract at the beginning.
The article considers biological groundings for our economic system. It points out an omission in study and oversight of our political economy in that we do not explicitly consider issues related to growth, maturity, and decline of enterprises. This oversight is held to contribute to a weakened banking sector and questionable financial service markets. The article makes reference to a biological condition called necrosis, where death and decline is disorderly, not contributing to general well-being. The point is made that policy should anticipate these cycles of growth, maturity, and decline and consider the needs of organizations in these phases by class to directly stimulate growth, to support the needs of mature enterprises and stave off necronomy, and to develop principles for the support and repositioning of organizations found to be in a state of decline.
------------------------------------------------
It's The Necronomy, Stupid
We are biological creatures. Our various creations have biological origins, given that they come from our imaginations and experience. We acknowledge our connection to cycles in business and other affairs, but we do so incompletely. We like to build and we invest our efforts in new creations, but we seem surprised and dismayed when they eventually falter and decay. We love growth, but we tend to forget the requirements of development. We enjoy economic maturity, but we tend to forget that nothing lasts forever. We abhor decline. We attempt to delay its effects and stretch the capabilities of organizations well past their useful lives.
Our biological home, the complex system of which we are a part, is based on varying life processes of organisms that are dependent on similar cycles of growth, maturity, and decline down to cellular and molecular levels. To grow, organisms need protection, a reasonably generous flow of resources, and an appropriate incubation or generative period. Organisms in homeostasis, or biological balance, enjoy the greatest of benefits, armed as they are with the greatest of bounties and the greatest capacity to do. Interestingly, at the cellular level, when the life cycle of living matter reaches its limits, a series of events naturally nurse matter through its last stages of life, where its resources are brought to bear in other states that can make better use of the energy and resources. This natural winding down process is referred to in biology as apoptosis, a natural dying process.
There is another kind of death for living matter, one that does not benefit from the gentle processes of apoptosis. This is a process called necrosis, a destabilizing process of decomposition that has serious negative consequences to organisms and living tissues. Necrosis is disorderly and ugly. An example of necrosis is what happens when a recluse spider or a snake bites. An economy characterized by necrosis, as outlined by Vladimer Papava, has problematic dead spots that cannot be recovered in an environment of open markets and competition.
Challenges to our economic system brought on by the liquidity problem bring concerns with respect to growth, maturity, and decline on two levels. First, as arbiters and dispensers of cash and its variants, financial intermediaries provide a critical function in the growth, maturity, and decline of all organizations within the economy. The availability of cash should function as a hard constraint on enterprises. Maintaining such a constraint is a critical public function, one that depends on stability underlying the management of monetary assets. If this function is compromised, our ability to judge the performance of all institutions is questionable.
Second, banks are economic institutions in their own right, with products, customers, marketing objectives, staffing requirements, and shareholders. They share characteristics with all organizations that compete for resources and attention. The ability to monitor their own cycles of growth, maturity, and decline affects bankers' public functions, bringing the potential for conflicting objectives, conflicts of interest, and distortions of their primary missions. This process broke down in the last several decades, bringing our present situation.
Much of our current dilemma can be traced to the Banking Act of 1981. A provision of the bill overrode usury laws, allowing banks to charge whatever interest rates they wanted. Monetary policy, virtually institutionalized in that period, allowed central bankers to control the cost of credit and take steps to control the money supply by keeping rates low. Problematically, in the era of low interest rates and controlled growth, bankers since the 1981 Act found their margins from commercial credit virtually evaporating. While they now had the legal right to charge more for the money they lent, federal policy kept rates low, making it difficult for banks to profitably service creditworthy organizations.
You can most likely recall how the dilemma was resolved. Bankers expanded on loose consumer credit. Household credit was not tied to monetary policy and formal rate adjustments, making it a manageable, profitable vehicle. Loose consumer standards and high rates brought increased business for the banks, but on shaky ground. As one market was taken from the banks, nothing viable was put in its place. Banking became oddly bifurcated in the process, with high standards and low commercial rates alongside a casino environment with virtually no standards and onerous interest and penalties for consumers.
This set the stage for the sub-prime mortgage debacle and related necrosis. Low-standard arrangements for distributing cash never really were markets. Such conditions proved a seedbed for the derivatives concept, which allowed for the creation of money apart from the realities of of the economy of useful products and services.
Given that we do not have a policy structure that differentiates between stages of development of the enterprises that make up the economy, understanding of such kinds of problems and viable solutions to them tend to not come to light. Organizations are allowed -- or encouraged -- to live past their prime without encouragement of viable suitors as a class. This is the underlying problem that we must resolve in banking and elsewhere.
The automobile dilemma? Another example. Where are the entrepreneurs and the innovative ventures in that sector? The last successful one was probably Walter Chrysler -- about eighty years ago. I for one am cheering for Tessla, which is pretty innovative and apparently uncovering what has been a big white lie, the electric cars are of necessity "wimpy". Is it possible that necronomy has existed in that sector, where mature enterprises (and even government representatives) have kept innovation out of the equation in anti-competitive, non-market ways? Do you suppose that foreign auto makers would have been so successful in U.S. auto markets if competition had been effect domestically? It is not likely.
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