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    Entries in economics (18)

    Tuesday
    Jul112017

    Learn a new word: The General Theory of Second Best

    There's nothing I care more about that NBA basketball, (I promise this isn't another basketball post, but I may have to dig out a basketball analogy to make the point), with the possible exception of learning new things.

    Which is why, I think, I run the 'Learn a new word' series on the blog. I am also falling into the trap of thinking 'if this is interesting to me, then it should be interesting to people who read this blog'. After 10 years of this, I am not really sure if that is even true. But I persist.

    So here's today's 'Learn a new word' entry - The General Theory of Second Best.

    What in the heck is that?

    A decent description can be found in the Economist: (emphasis mine)

    The theory of the second-best was first laid out in a 1956 paper titled, sensibly enough, "The General Theory of the Second Best", [paid access] by Richard Lipsey and Kelvin Lancaster. Roughly put, Lipsey and Lancaster pointed out that when it comes to the theoretical conditions for an optimal allocation of resources, the absence of any of the jointly necessary conditions does not imply that the next-best allocation is secured by the presence of all the other conditions. Rather, the second-best scenario may require that other of the necessary conditions for optimality also be absent—maybe even all of them. The second-best may look starkly different than the first best.

    Let's think on that for a moment and take it back (sorry) to the basketball analogy I hinted at in the open.

    The optimal allocation of resources for say a basketball team has traditionally consisted of five different kinds of players, with different body types, playing styles, and characteristics that when assembled, would provide the team with the right balance of scoring, passing, rebounding, and defensive play that would result in winning.

    But let's say that the team can't acquire or develop one of the positions, let's say the point guard - the player who usually is charged with handling the ball, setting up his/her teammates for easy scores, and functioning as the on-court leader of the team. If this example team can't find a good enough point guard, the Theory of Second Best suggests that 'answer' to the problem isn't making sure the other four positions/roles are filled as designed and slotting in any old player as the point guard.

    The theory suggests that the 'optimal' solution, when one resource (the point guard), is missing, may be to take a completely different approach to building the team. Maybe the team looks for more 'point guard' like skills in the other positions, or maybe the team implements a different style of offense entirely to mitigate the problem.

    The real point is that once conditions appear that make the 'first best' strategy impossible to execute, that you may need to think really, really differently about what will constitute the 'second best' strategy. 

    The second best may look starkly different than the first best.

    I really dig that and hope you think about it too, once your plans in business or in life run into some challenges.

    Friday
    Jun302017

    CHART OF THE DAY: All jobs matter

    Super quick shot for a 'let's get out of town for the long weekend' Friday.

    Today's chart comes courtesy of our pals at Bloomberg and depicts the types of jobs that have seen the most total job losses in the first part of 2017.

    Here's the chart. then some quick FREE comments from me. 

    Three quick hits then let's fire up the grill for some hot dogs...

    1. 'Wired' telecommunications jobs seeing the most losses so far in 2017 is not terribly surprising. More and more folks have abandoned a hard phone line at home, and I bet it won't be too much longer until most companies do the same for their employees. 

    2. Most of the rest of the impacted job sectors are in the physical retail space. Department stores, sporting goods stores, general clothing stores, all are under significant pressure from the likes of Amazon, Walmart, and others. I went to one of the local malls a week or two ago, (weird, I know), and it was half-empty and I issued an over/under of 11 months until it closes for good.

    3. I want to go to one more chart for point #3 - one that shows the comparative job losses in department store employment (which we seem to not care about that much) vs. coal mining employment (which, at least in election season, we care about a lot). Take a look...

    Almost 10x more jobs lost in the department stores than in the coal mines. But for whatever reason I bet most folks would have no idea of that disparity.

    Why?

    Some of it is political I suppose. There are pockets of the remaining coal mining jobs that are in important areas and states for electoral purposes. 

    But department stores are, or at least were, everywhere. And the people that work in them probably need and care about their jobs just as much as any coal miner. And if it is because of Amazon or Walmart or changing shopping tastes that thousands or potentially hundreds of thousands of department store employees end up out of work then that is likely more of a national concern than a few hundred coal miners here or there.

    That is not to diminish the coal miners who are at risk. Not at all.

    It's just to make a point that the department store workers matter too. And so do the warehouse workers. And the cashiers. And the bookkeepers. 

    And everyone whose job is under threat from automation, politics, outsourcing, or anything else.

    All jobs matter. And so, too, do the people that work them.

    Whether they live in a swing state or not. Whether they have a PAC or not. Whether we think they are 'good' jobs or not.

    Have a great 4th of July weekend!

    Monday
    Mar062017

    CHART OF THE DAY: The World Economy in One Chart

    You may have seen this chart passed around a week or two ago when it was published on Visual Capitalist, but as I was digging through my 'Read Later' pile over the weekend I felt like it was too good and interesting not to share.

    So without further delay,  visual look at the global economy, represented by country contribution to global GDP, and then as you DEMAND, some free comments from me after the data.

    (Email and RSS subscribers may need to click through to see the chart, and clicking on the chart will bring you to a much larger version)

     

    Courtesy of: Visual Capitalist

     

    Really interesting and cool chart, right? Three quick observations from me about what 'normals' like us should be thinking about when looking at the data.

    1. Go USA! Ok, not trying to be too much of a cheerleader here. But while many other economies (namely China, but I will get to that in a second), have emerged on the world stage in the last twenty or thirty years, the USA still accounts for a shade under a quarter of World GDP. This is important for organizations, particularly US-based or centric organizations to remember even as they make their plans for international expansion. It probably would be a mistake to concentrate too much time and energy on markets that either are relatively small, (say the Netherlands or Spain), or not expected to grow as rapidly in the next ten years, (Germany or the UK).

    2. Don't sleep on China, (and to a lesser extent Japan and India). I know that it can be hard for many US businesses to wrap their minds around places like China and Japan. It is hard to to business there. The language and cultural barriers are more significant than say in Western Europe. It may take longer to establish a presence there. But make no mistake, future growth is being defined by what is happening in Asia - not in Western Europe. It may take a little more time, but the organizations that can make the investments, get in front of their competition, will be better equipped to capitalize in the parts of the world that are growing the fastest. 

    3. Perspective is really the biggest takeaway from a chart like this I think. We can, here in the US, get really full of ourselves,(see above), and it is a good reminder that even as the largest economy, more than 75% of economic activity is happening elsewhere. Insert your own country in the above sentence and the percentages get even more sharp. Places that we think of as economic leaders like Germany and the UK contribute less than 5% each to global GDP, while seemingly set up for being surpassed soon by places like India and South Korea. None of us are all that big a deal.

    Anyway, that's it from me for a busy Monday - have a great week!

    Monday
    Feb062017

    Want a larger piece of the (economic) pie? Look for the most competitive industries

    Caught a really interesting piece over the weekend at The Atlantic looking at one potential reason why (relatively speaking) that worker's or labor's share of GDP is decreasing when compared to 'capital's', i.e. ownership's share. This divergence in share has been thoroughly examined as a primary driver of increasing economic inequality, and was the main subject of Thomas Piketty's influential Capital in the Twenty First Century from 2014.

    Said differently, and much more simply, today in the aggregate is getting a smaller piece of the overall economic pie than in the past. There are tons of data points you can examine on this, but they all more or less show the same thing - on average, workers are no better off today, and might be worse off, than they were 20 or 30 years ago.

    Why The Atlantic piece titled One Reason Workers are Struggling Even When Companies are Doing Well caught my attention is that it shared some insights from a recent NBER research paper on not just that this share divergence is happening, but offered some reasons as to why it is happening.

    And the theory is kind of an interesting one, and if true, can help better inform anyone making career/industry decisions moving forward. Best of all, it is a pretty simple idea that boils down to this - The more concentrated an industry is, (fewer competitors and the ones that dominate are all pretty large), the lower labor's share of the income for that industry will be.

    Here's some color from The Atlantic piece:

    The researchers looked at data from the U.S. Economic Census between 1982 and 2012 for nearly 700 industries in six major sectors, including manufacturing, retail, wholesale, services, finance, and utilities and transportation. Looking at how much the four largest firms in each industry accounted for in terms of total sales in the industry, they found an upward trend in concentration in all of the six sectors, meaning that it was increasingly common that just a few firms accounted for the bulk of sales. Since the U.S. Economic Census reports payroll, input, and employment, the researchers were able to observe a negative correlation between concentration and labor’s share—meaning that this trend of so-called superstar firms tends to mean workers taking home a smaller share of the pie. Moreover, the more concentrated an industry had become, the larger the decline in labor’s share.

    Unpack that a little bit to show a pretty straightforward formula:

    Industries have tended to consolidate over time --> the more dominant the four largest firms in an industry become --> then decreasing shares of the overall industry profits find their way to workers/labor.

    There are a couple of reasons on offer for why more consolidated, big-firm dominated industries are getting worse in terms of share of profits for workers. One is that these companies are simply growing revenues at a faster pace, and labor costs just have not (or do not need to) keep pace. Another is that modern, transparent business practices make it easier for consumers to find and reward the 'best' companies, which drives out competition in the industry faster than before - and reduces the potential number of firms competing for workers.

    The takeaways for the average employee?

    Probably that it might pay, (no pun intended), to keep on eye on the relative levels of competition in your industry, particularly if you are in a role that feels industry-specific. If your industry has seen consolidation with weaker competitors being driven out of business (or being acquired), the trends suggest a shrinking percentage of profits will find their way to you and your colleagues.  

    You might be better off thinking about an industry that seems to have more, and more even competition, where the market share, (and to some extent the demand for labor), is not being controlled by two or three big companies. And one where the threat of competition for your skills can either score you a better offer somewhere else, or give you more leverage and power in your next compensation negotiation with your current shop.

    More options might not be better for the owners of your company, but they might be much, much better for you.

    Have a great week!

    Monday
    Jun012015

    When liberal hipsters turn out to be ruthless capitalists too

    It seems to be a pretty widespread and more or less accepted assumption that the next generation of folks entering the workplace are more concerned with an organization's reputation for responsibility, for doing 'good', and for acting as a good community citizen than were prior generations. Where the boomers and Gen X were much more pragmatic (and possibly cynical), the Gen Y and Gen Z and the whatever comes next cohorts are going to evaluate organization's commitments and actions in the community and towards their customers and employees much more closely and critically when they make their decisions about where to work and (probably more importantly), where to spend. Like another nemesis of mine, 'Culture eats strategy for breakfast', (don't get me started...), this notion has been reported on and repeated so many times that I think it is worth considering if, you know, it actually isn't true, or at least isn't completely accurate.

    I started thinking about this when reading about of a new play titled World Factory being staged in London at the Young Vic theater. In the play, audience members participate in what is essentially a global business strategy game, placed into teams who have the job of navigating a fictional global clothing manufacturer through a complex set of scenarios and decisions. It is basically like the kind of gamified scenario exercise you'd see in any college business strategy class. But what has been happening at World Factory is kind of interesting.

    From a recent review of World Factory in the Guardian:

    The audience becomes the cast. Sixteen teams sit around factory desks playing out a carefully constructed game that requires you to run a clothing factory in China. How to deal with a troublemaker? How to dupe the buyers from ethical retail brands? What to do about the ever-present problem of clients that do not pay? Because the choices are binary they are rarely palatable.

    The classic problem presented by the game is one all managers face: short-term issues, usually involving cashflow, versus the long-term challenge of nurturing your workforce and your client base. Despite the fact that a public-address system was blaring out, in English and Chinese, that “your workforce is your vital asset” our assembled young professionals repeatedly had to be cajoled not to treat them like dirt.

    And because the theatre captures data on every choice by every team, for every performance, I know we were not alone. The aggregated flowchart reveals that every audience, on every night, veers towards money and away from ethics. But what shocked me – and has surprised the theatre – is the capacity of perfectly decent, liberal hipsters on London’s south bank to become ruthless capitalists when seated at the boardroom table.

    Fascinating, and possibly kind of revealing as well. It is certainly much, much easier to say that corporate ethics and community responsibility is important in making employment and consumer decisions. But, even in a fictional exercise like World Factory, it is often, (maybe always), much harder to live and take decisions that are 'responsible' when facing incredibly tough business, environmental, and social challenges. 

    Business if often messy. Capitalist systems often force tradeoffs to be made, ones that at least according to what we think we know about Gen Y and Gen Z are not in line with those generations world views. But once Gen Y and Gen Z are actually in charge? World Factory is just one small exercise, but what if it hints at what Boomers have known for a while - every generation follows pretty much the same trajectory as they mature, take on more responsibilities, and get more experience in how the world works.

    And then in about 10 or 15 years we will have moved on to a new set of young people who will be lamenting the materialistic robber barons formerly known as Gen Z.

    Have a great week!