The last Friday of every month Ed and Ron will do “Free-Rider Friday.” Most of our shows are “topic” driven, where we dive deep into one subject. Free-Rider Fridays are designed to be “event” driven, whatever issues are in the news that we (or you) find worthy of commentary. In economics, free riding means reaping the benefits from the actions of others and consequently refusing to bear the full costs of those actions. This means Ed and Ron will free ride off of the news, and each other, with no advanced knowledge of the events either will bring up. If you’d like to call-in during the live show, the listener line is: 866-472-5790. You can also participate on Twitter at #ASKTSOE, @asktsoe, or email us at email@example.com.
Ed challenges you to to determine if the follow are from his horoscope or a personality profile. See answers at the bottom of the post.
- Horoscope or profile: Some words that describe you are: Directive, Decisive, Driven, and Friendly. You are task-oriented, and you probably get a great deal done. You probably like problem solving and getting results. You are comfortable interacting with others to make things happen.
- Horoscope or profile: If you have been given a task to do that hasn't been explained properly, you may feel at a loss. It's best to go back to the person who assigned the work and ask for more details. This could be temporarily humbling, but remember, it's better to ask a stupid question than to make a stupid mistake.
- Horoscope or profile: It can be very difficult to work with a (Type or sign) as a co-worker. They are very ambitious and very hard workers—in fact, they have a tendency to overwork in order to accomplish the goals they have for themselves or to make themselves look good in the eyes of their managers and supervisors. They will do whatever is necessary to meet goals that will make them look good in the eyes of their superiors and don’t care whose feet they must step on in order to accomplish those goals.
- Horoscope or profile: (Type or sign) are natural-born leaders and embody the gifts of charisma and confidence, and project authority in a way that draws crowds together behind a common goal. (Type or sign) are characterized by an often ruthless level of rationality, using their drive, determination and sharp minds to achieve whatever end they’ve set for themselves.
Carl Jung pondered differences in personalities for a deeply personal reason: his split with Sigmund Freud caused him deep depression. Why did they see things so differently?
He concluded Freud was an extrovert while he was an introvert. Jung believed that personality was dynamic and it could change throughout life.
“Every individual is an exception to the rule. To stick labels on people is nothing but a childish parlor game.”
A midwestern mental hospital is where The Minnesota Multiphase Personality Inventory (MMPI) was created in the 1930s to sort mental patients into diagnostic categories.
It was a 567-questionnaire, and the quantification it provided gave it more validity than inkblots. Starke Hathaway, the developer, became skeptical in old age of assessments, doubting that personality profiling was possible at all.
Myers-Briggs Type Indicator (MBTI), 1940s
- This is the leading profiling test administered.
- 89% of the Fortune 100 use Myers-Briggs
- 2.5 million people each year take it
- Some 2500 profiles are on market
- It’s a $500 million industry, with 8-10% annual growth
- Thrived in the shade of casual neglect
Created by Pennsylvania housewife Isabel Myers, along with her mother Katharine Briggs. Isabel thought the test could bring about world peace:
If President Woodrow Wilson had not been so wrapped up in his own introversion, he would have negotiated more effectively as Versailles, and World War II might have been averted.
Personality profiles were used to combat Frederick Taylor’s “one best way.” It was people themselves that need sorting and shaping, since every position in the company had the right profile fit.
Jesus was an ENTP, so is Steve Wozniak. Don’t ask how they know about Jesus. Of course, popularity does not at imply scientific validity.
Test data is confidential, so cannot be tested to determine effectiveness. The tests are popular among consultants, who are paid good money to administer them in a convivial atmosphere.
The fallacy is the tests measure what we are like and who we are, not what we know, believe, or what we can do. They confuse labeling personality with understanding it. They confirm what people already know about themselves (the “aha reaction”), what psychologists call the permanency tendency. They also tend to validate the positive characteristics we all believe we possess, the so-called Pollyanna principle.
As they say, if you really want to learn what someone is like, marry them or work for them. Annie Murphy Paul, former senior editor at Psychology Today, has written a scathing indictment against these tests, labeling them modern-day phrenology—the “science of the mind” (“bumpology”). A leading Phrenologist was Franz Joseph Gall, University of Vienna, in the 1870s:
- Phrenologize Our Nation, for thereby it will Reform the World!
- Phrenology will improve the prosperity and material good of the next generation and greatly enhance the happiness of the race, besides abolishing poverty and nearly abolishing crime.
- Walt Whitman, Clara Barton (Red Cross), Charles Dickens, Edgar Allan Poe, and Oliver Wendell Holmes were all believers.
- Two US presidents, James Garfield and John Tyler, got readings. Mark Twain was a skeptic!
For business, it could no longer depend on reputation or word of mouth, so personality profiling was too useful not to be true. Rorschach test used thousands of time , the second most popular test among mental health professionals. It was created as a parlor game! Jeffrey Dahmer responses “were normal to the point of being mundane”
The Cult of Personality Testing
The Wall Street Journal wrote that Annie Murphy Paul “draws a veritable quacks’ gallery of modern personality testing. With an eye for the absurd, she makes a compelling case that such tests tell us more about the men and women who put them together than about the subjects taking them.”
Her book, The Cult of Personality Testing: How Personality Tests Are Leading Us to Miseducate Our Children, Mismanage Our Companies, and Misunderstand Ourselves (2004), is essential reading for understanding why these profiles are not at all effective.
Here a few of her more condemning facts:
- [A]s many as three-quarters of test takers achieve a different personality type when tested again (47% by proponents!), and that the sixteen distinctive types described by the Myers-Briggs have no scientific basis whatsoever.
- There is scant evidence that MBTI results are useful in determining managerial effectiveness, helping to build teams, providing career counseling, enhancing insight into self or others, or any other of the myriad uses for which it is promoted.
In 1968, Personality and Assessment was published, by Stanford University psychology professor Walter Mischel. He found the correlation between personality and behavior was .30. In other words, at best personality explained about 10% of behavior. Mischel believed that our actions are driven by situations, not personality.
The Life Story interview protocol, developed by Gordon Allport, is an alternative to sterile personality profiles.
Defined by Our Beliefs, not Our Knowledge or Personality
Professor Erkko Autio, department of management at HEC Lausanne in Lausanne, Switzerland, pointed out the same defects with respect to the current fad of “emotional intelligence” in a letter to The Economist:
It might interest you to know that not a single serious study has ever been able to demonstrate a link between “emotional intelligence” and leadership effectiveness. The most robust and consistent single predictor of leadership effectiveness is, simply, intelligence. Emotional intelligence sells well, but scientific evidence supporting it is almost as solid as that supporting the effectiveness of homeopathy (The Economist, Aug 26, 2006: 14).
Professor Autio is certainly correct in the assertion that intelligent quotient (IQ) is a better predictor of executive effectiveness, as The Bell Curve has scientifically demonstrated. If you were confined to learning one number about an individual to predict their standard of living, you would be hard pressed to find a better one than their IQ.
However, firms are not confined to knowing just one thing about their human capital. As Rabbi Daniel Lapin wrote in Thou Shall Prosper: “You are best understood and appraised by others on the basis of the things you believe rather than on the basis of the things you know.”
Or, we might add, rather than on the basis of your personality or year of birth (see Generational Astrology). [See Ron’s book review of Thou Shall Prosper, and his LinkedIn blog post on Generational Astrology].
We are better off understanding people’s beliefs if we want to even begin to understand how and why the Germans of the Third Reich could carry out their murderous orders in acquiescent servility, or the people who flew airplanes into buildings killing innocent civilians on September 11, 2001.
Trying to simplify the spirituality and soul of a human life by labeling it with a personality type (or even an IQ) is to disregard the uniqueness of individuals, which requires judgment and discernment far more than measurement.
As Peter Drucker once wrote, “There is no such thing as an infallible judge of people, at least not on this side of the Pearly Gates.” Chinese philosopher Lin Yutang, from his book, The Importance of Living:
To me…man’s dignity consists in the following facts which distinguish man from animals. First, that he has a playful curiosity and a natural genius for exploring knowledge; second, that he has dreams and a lofty idealism…third, and still more important, that he is able to correct his dreams by a sense of humor, and thus restrain his idealism by a more robust and healthy realism; and finally, that he does not react to surroundings mechanically and uniformly as animals do, but possesses the ability and the freedom to determine his own reactions and to change surroundings at his will. This last is the same as saying that human personality is the last thing to be reduced to mechanical laws; somehow the human mind is forever elusive, uncatchable and unpredictable, and manages to wriggle out of mechanistic laws or a materialistic dialectic that crazy psychologists and unmarried economists are trying to impose upon him. Man, therefore, is a curious, dreamy, humorous and wayward creature. In short, my faith in human dignity consists in the belief that man is the greatest scamp on earth.
Michael Novak, R.I.P.
Michael Novak was one of Ron’s all-time favorite authors. A former Democrat who converted to the right, and a profound defender of free market capitalism, in the pantheon with George Gilder, Rabbi Daniel Lapin, Father Robert Sirico, Milton Friedman, Deirdre McCloskey, among others.
Here is Father Robert Sirico’s video tribute to Novak:
Answers to Ed's Quiz
Scorpio for February 2017
Myers Briggs Profile
Scorpio - About your sign
Companies use personality tests for a variety of purposes, such as employment screening, assessing leadership potential, fostering corroboration and teamwork, etc. The most widely used is the Myers-Briggs Type Indicator (MBTI), created by Pennsylvania housewife Isabel Myers. This particular test is utilized by 89% of the Fortune 100, given to 2.5 million people each year to identify strengths and enhance teamwork. The Minnesota Multiphase Personality Inventory (MMPI) was developed in 1946 to sort mental patients into diagnostic categories. It was then expanded in an attempt to describe normal people. Of course, popularity does not imply validity. What is worse, most companies keep these tests confidential so the data cannot be tested to determine effectiveness. These tests are also popular among consultants, who are paid good money to administer them in a convivial atmosphere. Helpful or hokum? We will attempt to answer in this week's show.
Ludwig von Mises, economist, author, and one of the founders of the “neo-Austrian school” of economics.
Mises told his future wife: “If you want a rich man, don’t marry me. I am not interested in earning money. I am writing about money, but will never have much of my own.”
Our show was a discussion of the eBook, The Essential Ludwig von Mises, published by the Foundation for Economic Education, available for free.
At last, economics was whole, an integrated body of analysis grounded on individual action; there would have to be no split between money and relative prices, between micro and macro. –Murray Rothbard
Ludwig von Mises (1881-1973), born in Lemberg, 350 miles east of Vienna (today, part of Ukraine).
The oldest of three sons, from a prestigious Jewish family. His father was a construction engineer, who was titled “von” for his work on the Austrian railroads—similar to “sir” in Great Britain, but the title is inherited by all male, and unmarried female, descendants.
Mises entered University of Vienna turn of century, where he read Carl Menger, one of the creators of the subjective theory of value. In 1906, age 25, he graduated with a doctorate of laws, and became the chief economist at the Vienna Chamber of Commerce.
In 1912, published The Theory of Money and Credit, which challenged Irving Fisher’s quantity theory of money.
He finally got a teaching job, but only part time. He failed to be appointed for three reasons: 1) he was Jewish; 2) he was a staunch advocate of laissez-faire; and 3) he was personally dogmatic and intransigent. He was a private man, a confirmed bachelor for many decades, who finally married at age 57.
His younger brother, Richard, earned a PhD in mathematics, who became an aircraft designer. Mises always worried he’d be outdone by him.
Both brothers fought for Austria in the Great War, Mises being an artillery officer at the Eastern front who was decorated for bravery three times.
In 1934 he left Vienna to teach at the University of Geneva. In 1938, Nazis stormed Mises Vienna apartment and confiscated his writings, 38 cases in call.
In the 1990s, Richard Ebeling of Hillsdale College discovered them stored in KGB files in Moscow, over 10,000 pages. What Irony! One of the foremost intellectual opponent of socialism in the 20th century, had his papers in the tender care of the Communist Party of the Soviet Union!
Ebeling has written Austrian Economics and Public Policy, among other works, which describe the contents of some of these papers. Mises personal library is located at Hillsdale College in Michigan
Mises emigrated to New York City in August 1940 (brother Richard was at Harvard). He never got a full-time teaching position, so his salary was subsidized by friends and foundations.
Brother Richard was a member of the “Vienna Circle,” which included members such as Ludwig Wittgenstein and Karl Popper. They favored logical positivism, using empirical evidence to test theories.
Mises rejected this approach, preferring to rely on pure deductive reasoning instead.
Murray Rothbard once asked Mises what he thought of Richard’s book, Positivism: “I disagreed with that book, from the first sentence until the last.”
Peter Drucker, who knew Mises in his youth in Vienna and in New York, said of Mises: “He was the most depressing person I ever saw.” Murray
Rothbard disagreed, said Mises was a “joy and an inspiration.” Mises’ wife, Margit, said: “He wasn’t gentle. He had a will of iron, his mind a steel blade, and he could be unbelievably stubborn.
At a Mont Pelerin Society (founded by Friedrich Hayek in 1947) meeting in 1953 Milton Friedman chaired a session on income distribution. During the discussion, Mises stood up, announced “You’re all a bunch of socialists” and stomped out of room.
During his time at the Vienna Chamber of Commerce, he did support use of “limited trade retaliation” against countries that raised import taxes, to nudge them back to free trade.
In the early 1920s, Austria resorted to hyperinflation, like Germany. Hayek recalled his salary was 5,000 kronen/month in October 1921, then raised to 15,000/month in November and to 1 million/month by July 1922.
The League of Nations sent a commission to Vienna, along with some Austrian government officials, who paid a visit to Mises, asking for his advice on stopping the hyperinflation. “Meet me at 12:00 midnight at this building and I’ll tell you.”
“Hear that noise? Turn it off!” The Building was the government printing office. They did, and inflation ended.
Mises was Hayek’s teacher, and Eugen Bohm-Bawerk was Mises’ teacher.
Mises and Hayek forecasted the Great Depression, Mises being the originator of the Austrian theory of money and business cycles. He thought unemployment was a pricing problem, not a demand-management problem, and felt Keynesian was nothing but special-interest group politicking. Hayek advanced Mises’ theory of business cycles, winning a Nobel Prize in 1974.
Mises died in New York City on October 10, 1973, age 92.
The Foundation for Economic Education ebook: The Essential Ludwig von Mises, contains five chapters, which we discussed.
1. Liberty and Property
A lecture to the 9th Meeting of the Mont Pelerin Society, October 1958
The Greeks and Romans thought freedom was only for the elite. Pre-capitalistic system was based on military conquest and opposed to innovation.
The characteristic feature of capitalism: principle of marketing, to satisfy the needs of the masses.
“If any of the socialists chiefs had tried to earn his living by selling hot dogs, he would have learned something about the sovereignty of the customers.”
“Government is a necessary institution, the means to make the social system of cooperation work smoothly…Government is not a necessary evil; it is not an evil, but a means, the only means available to make peaceful human coexistence possible. But it’s the opposite of liberty. It is beating, imprisoning, hanging.”
2. Profit and Loss
Mont Pelerin Society, September 1951
Bureaucratic management is the only alternative where there’s no profit and loss. Capital does not beget profit, as Marx thought.
It’s the entrepreneurial decision—mental acts, a product of the mind, a spiritual and intellectual phenomenon.
Lenin believed that production could be easily accomplished, since it consists of simple operations.
Taxing profit is tantamount to taxing success of those best at serving the public.
One main function profits: shift capital to those who best deploy it to satisfy the public.
Why is anyone better to expropriate than anyone else? Why shouldn’t immigrant’s wealth be taken by residents of their native country?
There is no third system: the choice is between capitalism and socialism.
3. Planned Chaos
Statoltry: combines idolatry with the state.
No such thing as a scientific ought. Science is only competent to establish what is.
Opponents of capitalism argue it hass no plan? Sure it has plans, just not that of the state, but those of individuals pursuing happinesss.
Capitalism vs. socialism: it’s not a fight over distribution, but which system best serves human welfare.
Marx never distinguished between communism and socialism, nor did Lenin who used socialist in the name of the USSR. In 1928, Stalin, at the Communism International, made a distinction between the two words.
Ending: “What’s needed to stop the trend towards socialism and despotism is common sense and moral courage.”
4. Middle-of-the Road Policy Leads to Socialism
The so-called third way between capitalism and socialism is known asinterventionism, such as price controls, minimum wages, the National Industrial Recovery Act of 1933 (part of FDR’s New Deal), etc.
Mises labeled this third way nothing but “socialism by installments.”
5. The Place of Economics in Learning
Human Action, 4th ed, 1949
Cancer research can help fight disease, but business cycle research cannot stop recessions or depressions.
Economics is abstract reasoning, it can never be experimental and empirical.
There’s no such thing as labor economics, agriculture economics, etc. The same is true of ethics. There’s only one coherent body of economics.
Present-day universities are by and large “nurseries of socialism.”
Economics too important to be left to specialists.
Mises’ Magnum Opus
Human Action, published in 1947, was the culmination of Mises work.
Human Action is to capitalists what Das Kapital is to Marxists.
What’s it about: “Everything!”
Economist Gary North has posited a “fat-book” theory: Producing a revolution requires a fat book. Examples:
- Adam Smith, The Wealth of Nations (1,097 pages)
- Karl Marx, Das Kapital (2,846 pages)
- Joseph Schumpeter (1,260 pages)
- Murray Rothbard, Man, Economy and State (987 pages)
- Milton Friedman, Monetary History of USA (860 pages)
- Deirdre McCloskey, Bourgeois trilogy (2,000+ pages)
- Mises, Human Action (907)
- Baker, The Professionals Guide to Value Pricing
Mark Skousen says this is nothing but the Labor theory of value, since the Communist Manifesto was only 62 pages, and probably the second most influential book in history, next to the bible. The Four Gospels of the Bible are only 177 pages.
Mises built his system of economic though on logic and self-evident assumptions, similar to geometry. He rejected econometrics and mathematics in economics, believing there was no such thing as quantitative economics:
If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not “measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact.
Mises was a dualist who divided nature into two components:
- Human beings, who think, adopt values, make choices, and learn (social sciences)
- Animals and things, mechanical and predictable (physical sciences)
Revolutions to produce new words, and Mises introduced a few.
Praxeology is the study of human action. Then economics was the study of praxeology under conditions of scarcity. As Mises explained:
The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology.
Catallactics is a theory of the way the free market system reaches exchange ratios and prices. It aims to analyze all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are, rather than as they "should" be.
In every market there are two kinds of fools. One charges too much, the other charges too little. Russian proverb.
There are only three pricing strategies: Skim, penetration and neutral.
Pricing is how we divide up value.
Tim Smith, author of Pricing Done Right, refers to these as price positioning. He believes pricing strategy includes things like segmentation, competitive reaction, and pricing capability.
Price is the primary driver of the purchase decision with penetration pricing.
It can be effective and profitable, yet it is by far the least understood. After all, if your goal is to maximize market share, you could set your price at zero, or negative—pay customers to use it!
The literature is overwhelming: there are more failures than successes with this type of pricing.
It tends to attract the least loyal customers, who are thus the first to defect to a lower-priced offering.
Price cuts easy to match by the competition, then you get neither market share or profit.
Companies who appear to have implemented this strategy successfully:
- Southwest Airlines (Ryanair in Europe is even more profitable)
- Freemium variation of Penetration
One question with all these strategies is: your price compared to what?
- Your offering’s value, or
- Your competitors’ price
Reed Holden has changed his mind on this issue. In his prior book (written with Tom Nagle), The Strategy and Tactics of Pricing, he wrote that it was compared to your offering’s value.
Yet, in Pricing with Confidence, he writes it’s compared to your competitor’s price.
Success Factors with Penetration Pricing
- Begin with strategy from day one
- Operate extremely efficient, constantly driving costs out of the system and sharing those saving with customers
- Guarantee consistent quality
- Focus on core products/customers
- High-growth, high-revenue focus
- Procurement champions
- Little debt
- Control as much as possible (brands, value chain, etc.)
- Advertising focuses on price
- Never mix messages
- Understand your place (there’s room for only a tiny number of companies, in any industry, that can successfully deploy this pricing strategy)
As one pricing manager said: “In a war, the atomic bomb and price are subject to the same limitation: both can only be used once.”
If any of these strategies guaranteed success, everyone would do it. That said, skim pricing can be very profitable, as these companies that use it prove:
It’s not unusual for a premium priced product to have the highest market share. For example, P&G’s Gillette razor, at one point, had 70% of the market.
Success Factors with Skim Pricing
- Superior value
- High quality
- Branding, Marketing (vs. sales)
- Shy on special offers
An excellent example of how dangerous this form of pricing can be because it invites competition is Xerox vs. Canon. Xerox never defended it’s higher position with a lower-priced flanking product.
Contrast Xerox with Apple, which is very adept at protecting it’s high-end value.
Beyond skim pricing is luxury whereby you take advantage of prestige, or so-called snob, effects. For instance, Switzerland is 2% of world’s watch production, yet it produces 53% of value.
The president of USA Porsche once said: “The second Porsche on the same street is a catastrophe.” It obviously focuses on profits, not market share, which might explain why, in 2013, it generated an18% profit margin, higher than any other auto company.
With skim, or even neutral, pricing, if you can offer a world-class guarantee, that can be a very effective strategy.
Such as the guarantee offered by Florida based “Bugs” Burger Bug Killers (BBBK)” exterminators:
- Guaranteed to eliminate to rodents and roaches
- If you or a guest see one, you get a refund of one year of our services
- And we will pay another exterminator for one year
- And to the guest who sees a roach: we will pay their bill, send a letter of apology, and invite them back as our quest
BBBK’s price is as high 10x its competitors.
Michael E. Raynor and Mumtaz Ahmed (both with Deloitte Consulting), in their April, 2013 Harvard Business Review article, “Three rules for making a company truly great,” April 11, 2013, wrote the three rules
- Better before cheaper—in other words, compete on differentiators other than price.
- Revenue before cost—that is, prioritize increasing revenue over reducing costs.
- There are no other rules—so change anything you must to follow Rules 1 and 2.
They also point out that very rarely is cost leadership a driver of superior profitability—Amazon is a good example.
Tim Smith, in Pricing Done Right, says that neutral pricing is the default strategy, and generally the most profitable. It’s also least likely to trigger a price war. Successful examples:
- Seiko watches
Where the basis of competition and the purchase decision is focused on other attributes rather than price: service, features, guarantee, convenience, etc.
Good for no-growth, or slow-growth markets.
It can leave money on table, and it tends to signal average value.
Herman Simon, in his book, Confessions of the Pricing Man, cites a survey his firm conducted and found that managers spend 70% of their time focused on cost reduction; 20% on increasing volume; and only 10% on price. These percentages are the opposite of profit effects of these actions!
Choosing a Pricing Strategy
From Reed Holden’s Pricing with Confidence:
- Understand your value, absolute and relative
- Where’s your offering in the life cycle?
- Industry economics (capacity, fixed vs. variable costs)
- Competitive dynamics
- Consensus (Ron says leadership, the opposite of consensus)
You can use Skim and Neutral across the cycles, but penetration is not optimal during introduction/emerging, mature, or decline phases.
Calexit - A group started collecting signatures to hold a referendum on California's seceding from the United States. Ed's take is if Hillary Clinton had won, we would be talking Texit instead.
Self-Deception - Ed recently attended a leadership workshop on self-deception held by John Engels of Leadership Coaching Inc. A primary source of self-deception is when we equate what is "true for me" with "the truth."
Hitendra Patil article on AccountingWeb, Why Anxiety Around Automation is Absurd caught Ed's attention. It is an excellent piece but is missing the impact of the billable hour model on stalling the needed changes in the industry.
Ed thinks his iPhone and Facebook were listening to a conversation we was having resulting in a ad for Five Guys Burgers showing up in his stream. He did some digging and found an article: which addresses this "phenomenon." - If you’re not paranoid, you’re crazy.
According to a recent paper by Srikant Devaraj and Erik Nessen, "for $0.10 increase in real minimum wage, total hygiene violation score increases between 3.35 and 8.99 percent.” Is the minimum wage actually sickening?
In what is both an amazing scientific achievement and a source of ethical consideration, scientists announced that they can create human-pig embryos.
Hamilton—raise your price!
“Battling bots,” The Economist, January 7, 2017
“When I was 25, having studied economics for 6 years, I grasped suddenly that prices are for allocation, not fairness. When I was 28, an assistant professor with Steve Cheung as an office mate, I grasped that prices are only one possible system of allocation (violence and queuing are others) but socially the cheapest." -Deirdre N. McCloskey, How to Be Human *Though an Economist
Deloitte Invests in Blockchain
Accounting Today, January 14, 2017, “Deloitte opens blockchain lab in New York”
Google’s Business Model Threatened?
“Still searching,” The Economist, December 17, 2016
Border Adjustability Tax
Trump wants to reduce the corporate tax rate from 35% to 15%; Paul Ryan wants 20%. Both want full expensing, and a territorial system, where companies are taxed where they make the product, not on world-wide income as we do now.
But Republicans have proposed a border adjusted tax, whereby you are taxed at the consumption point, not the production point.
It’s very similar to a Value Added Tax, a sort of border-adjusted sales tax, or a cash flow consumption tax.
Corporations could not deduct the cost of imported goods, or interest expense.
Say Rolls-Royce exports a jet engine made in Britain to France: It pays a French VAT on the sale, and British tax on profit.
America currently imposes no VAT on imported goods.
So the border adjusted tax penalizes imports while subsidizing exports.
Boeing and GE love it! Wal-Mart and Target hate it! (the tax could exceed their profits, the cost being passed on to consumers).
Economists say, in theory, this wouldn’t affect trade since it would push up the dollar’s value. To offset a 20% border-adjusted tax, the dollar would need to rise by 25%.
This tax may violate WTO rules.
Steve Forbes writes it could cost consumers $1.2 trillion over 10 years, or more (since future Congresses could raise the rate easily).
“Gain and pain,” The Economist, December 17, 2016
Steve Forbes, “OMG! House Republicans Are Preparing To Hit Consumers With A Horrible New Tax That Will Harm Trump And Hurt The Economy,” January 11, 2017.
“Border Adjustability Is Already Fueling Tax Reform Controversy,” Forbes, December 8, 2016
Driverless Cars and Lidar
“Eyes on the road,” The Economist, December 24, 2016
Trump’s Inauguration Speech
George Will wrote it was the worst inaugural speech in history.
It was short: 1433 words.
Fundamentally optimistic: “We must think big, and dream even bigger.”
He slammed the political class.
Jean-Claude Juncker, primer minister of Luxembourg: “We all know what to do; we just don’t know how to get re-elected after we’ve done it.”
On this episode, we explored the recent developments in companies that have moved away from the annual performance appraisal.
We originally explored this issue, including our suggested three replacements to the performance appraisal: Key Predictive Indicators, Drucker’s Manager’s Letter, and the After Action Review.
You can listen to our Episode #5: Replacing the Annual Performance Agony, from August, 2014. Also, the show notes contain the books we recommend and other resources.
Some six percent of Fortune 500 companies have eliminated their rankings. Here is a list of companies that have also eliminated the annual performance appraisal:
- Accenture (as of 9/1/15)
- The Gap
- Ernst & Young
- Procter & Gamble (which hasn’t done annual appraisals in decades)
In big move, Accenture will get rid of annual performance reviews and rankings, published in The Washington Post, Lillian Cunningham, July 21, 2015 detailed that Accenture had 330,000 team members around world and 95% managers were dissatisfied with the annual performance appraisal process, even though each manager was spending approximately 200 hours per year doing them.
The CEB (Mgmt Research Firm) found: 90% HR managers doubt accuracy of the information contained in appraisals.
Also, the CEB estimates: companies with 10,000 employees, on average, spend $35 million on annual performance appraisals.
Accenture is not eliminating them for cost savings, but rather to improve the future performance of its workers.
We Don’t Have Performance Reviews at Our Startup: Here’s What We Do Instead, January 19, 2016, by Courtney Seiter, published on Buffer Open (company blog).
Rather than annual appraisals, Buffer does ongoing, weekly feedback: one-on-one between team leader and member, lasting approximately one hour.
The team member sets the agenda. It’s a mentor-mentee relationship.
Also, there are optional Masterminds, lasting 1-2 hours, which are peer-to-peer conversations.
Harvard Business Review, April 2015, Cover Story:
Reinventing Performance Management, Marcus Buckingham and Ashley Goodall, Director of leader development.
Deloitte employs 65,000 people.
It was spending 2 million hours per year on annual performance appraisals, and 58% of its executives didn’t believe they drove engagement or high performance.
It eliminated cascading objectives, annual reviews, and 360-feedback.
The article cites research that assessing skills produces inconsistent data, and 62% of that variance are due to the rater’s peculiarities. Only 21% was related to actual performance.
3 Objectives of Deloitte’s New System
- Recognize performance
- See performance
- Fuel future performance
The Team leader is in the best position to makes the assessment.
It asks the Team leader not about the skills of the team member, but rather their own future actions with respect to the team member.
Here are the four questions the team leader answers:
- Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus [1-5 scale, from “strongly agree” to “strongly disagree”].
- Given what I know of this person’s performance, I would always want him or her on my team [same five-point scale].
- This person is at risk for low performance [yes-or-no basis].
- This person is ready for promotion today [yes-no-basis].
One problem we discussed with this approach is the economist’s notion of revealed preference: watch what people do, not what they say. This can seriously distort surveys such as this.
In any event, this data is the starting point, not the end point, for compensation at Deloitte.
Of course, it still mentions performance metrics: hours and sales.
It does at least quarterly, or per-project, snapshots, and a weekly check-in with team leader.
Sports teams have a plethora of data on each player, while doctors have pages of blood work numbers.
But Deloitte found that having only one number was the problem.
Better understanding comes from conversations, not data.
McKinsey & Company Article
“Ahead of the curve: the future of performance management,” May 2016, Boris Ewenstein, Bryan Hancock, and Asmus Komm.
An excellent article exploring the disadvantages of the annual performance appraisal process.
This week, Ron and Ed profiled Frédéric Bastiat, a French economist and author who was a prominent member of the French Liberal School. He introduced the Parable of the Broken Window. He was also a Freemason, and member of the French National Assembly.
As a strong advocate of classical liberalism and the economics of Adam Smith, his views favoring free trade and opposing protectionism provided a basis for libertarian capitalism and the Austrian School.
The focus of our conversation will be around the works published in the free eBook entitled, The Essential Bastiat, published by the Foundation for Economic Education. Click on the link to get your copy.
“Frédéric Bastiat was the most brilliant economic journalist who ever lived.” –Joseph Schumpeter (1954)
Bastiat was an indefatigable advocate free trade, laissez-faire policies, unrelenting debater and statesman. He’s often compared to Voltaire and Benjamin Franklin, integrity, purity, and elegance.
He was unrivaled in exposing fallacies, using reductio ad absurdum.
He attacked statism of all kinds—socialism, communism, utopianism, and mercantilism, labor theory of value, exploitation theories.
Born June 29, 1801 in Bayonne, the south of France and tragically died young on December 24, 1850. He had poor health and weak lungs his whole life.
Son of a landowner and merchant in Spanish trade. His mother died when he was seven, father when he was nine, raised by his aunt and grandfather. Strong believer in the Catholic faith.
Heavily influenced by Jean-Baptise Say and Adam Smith.
In 1846, he moved to Paris, writing on free trade and in 1848 the peasants in France rebelled against the French monarchy, and their rallying cry was socialism.
Bastiat wrote of the rebellion: “We have tried so many things; when shall we try the simplest of all: freedom?”
He elected to the National Assembly in 1848, and was vice president of the finance committee. He sat on the left side, where the liberals and radicals sat.
Henry Hazlitt (1894-1993), author of Economics in One Lesson, 1946, has often been called a modern-day Bastiat. We will profile Hazlitt in a future Memorable Mentors show.
In 1843 Karl Marx moved to Paris to become editor of a monthly German magazine. He met Friedrich Engels in Paris, who became his life long collaborator.
Marx labeled Bastiat: the most “superficial apologist of the vulgar economy.”
We discussed the five essays included in the free FEE book, mentioned in the introduction above. Here are some excerpts.
The Youth of France
Are men’s interests, when left to themselves, harmonious or antagonistic?
Socialists love for society they dreamed up; actual society cannot be destroyed soon enough.
Socialism, like astrology and alchemy, proceeds by way of imagination.
Political economy, like astronomy and chemistry, proceeds by way of observation.
Deny evil! Deny pain! Who could? We are talking about mankind.
For the laws of Providence to be harmonious, it’s not necessary they exclude evil.
Since man is free, he can choose; since he can choose, he can err; since he can err, he can suffer.
What are the things men have right to impose upon another by force? I know of only one, and that’s justice.
What Is Seen and What Is Not Seen
The difference between good and bad economist, whole difference: the bad one takes account of the visible effect; the good takes account both of the effects which are seen, and also those which are necessary to foresee.
It almost always happens when immediate consequence is favorable, the ultimate consequences are fatal, and the converse.
We learn this lesson from two masters: experience and foresight. Experience teaches effectually, but brutally.
Society loses the value of things which are uselessly destroyed.
How much trade would gain by the burning of Paris?
If the nation profits from the Army, then we should enroll the entire male population.
If we disapprove of State support, we are supposed to disapprove of the thing itself, like the arts, education, health, environment, public works, etc.
Section VIII. Machinery
A curse on machines, is to curse the spirit of humanity!
If true, there is no activity, prosperity, wealth, or happiness possible for any people, except those who are stupid and inert, and to whom God has not granted the fatal gift of knowing how to think, to combine, invent.
All men seek to obtain the greatest amount of gratification with the smallest possible amount of labor.
If a machine discharges a workman: the seen is there’s an unemployed worker but there’s also a capitalist with an unemployed franc.
What is saved by one, profits all.
Probably Bastiat’s most famous writing: “A Petition: From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.”
We are suffering from unfair competition at a fantastically low price: the sun.
Please pass a law ordering the closing of all windows, skylights, shutters, curtains, and blinds.
A Negative Railroad
Should there be a break in the tracks at Bordeaux on hte railroad from Paris to Spain? It would be profitable for boatmen, porters, hotels, taverns, etc.
Then we shall end by having a railroad composed of a whole series of breaks in the tracks, i.e., a negative railroad.
Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.
Law has been perverted by the influence of two different causes: stupid greed and false philanthropy.
Labor is pain, so history shows man will resort to plunder.
Look at the USA . There’s no country in the world where the law is kept more within its proper domain: the protection of every person’s liberty and property.
But, there are two issues that have always endangered the public peace.
Slavery is a violation, by law, of liberty. Tariff, by law, of property.
Socialists rely on the law; they practice legal plunder, not illegal plunder.
Other Bastiat Wit
If exports are good, and imports are bad, then we should sink the ships at sea.
The Right Hand and the Left (a Report to the King). This is one of Ron’s favorite of Bastiat, and we believe it applies to hourly billing (see Ron’s article from a Harcourt Brace Newsletter, from October 1997, posted on the VeraSage site). Here is the crux of the argument.
Deep study of the protectionist system has revealed to us this syllogism:
- The more one works, the richer one is.
- The more difficulties one has to overcome, the more one works.
- Ergo, the more difficulties one has to overcome, the richer one is.
- We propose that you forbid your loyal subjects to use their right hands.
No longer permissible to work except with the foot. As a last resort, we should take recourse to the limitless possibilities of amputation.
George Orwell wrote, “Each joke is a tiny revolution.”
Bastiat killed protectionism and socialism with ridicule.
Consumption is the end of all economic activity, production merely the means.
To sacrifice the consumer’s interest to that of the producer is the sacrifice of the end to the means. The interest of the consumer is identical to mankind.
People insist, it’s not enough to tear down; you must offer something constructive. I, for my part, think that to tear down an error is to build up the truth that stands opposed to it.
No solitary man would break his own tools to occupy his labor.
To maintain that the time will every come when human labor will lack employment, it would be necessary to prove that mankind will cease to encounter obstacles.
Only two ways to preserve life: production or plunder.
Libertas book, The Tuttle Twins Learn About the Law
We were thrilled to interview Gary and Jim Boomer, the father/son team at the head of Boomer Consulting. Both are recognized as among the most influential people in the accounting profession.
L. Gary Boomer is the Visionary & Strategist of Boomer Consulting, Inc., an organization that provides consulting services and peer communities to leading accounting firms. BCI's vision is to make you more successful and future ready. The areas of focus are: Planning, People and Processes with technology as the accelerator.
Jim Boomer is the CEO at Boomer Consulting, Inc. He is a;so the director of the Boomer Technology Circles, The Producer Circle, The CIO Advantage and an expert on managing technology within an accounting firm. He also serves as a strategic planning and technology consultant and firm adviser to CPA firms across the country.
Segment One Questions
Gary, how many years in a row have you made the Top 100 Most Influential People in Accounting list? (Gary: “It’s based on frequent flyer miles.”).
Tell us about your backgrounds?
Jim, you worked at Arthur Andersen. What was it like, during the Enron scandal, to think you were part of a firm with ethical lapses, especially from a leadership perspective?
Gary, you say the difference between the good and great firms is leadership. What does that mean to you?
Why aren’t CPA firms as focused as, say, Apple?
Segment Two Questions
Joe Woodard refers to Gary as the “pied piper of the top 100 firms.” What do you both think are the major trends, along with biggest challenges and opportunities facing the accounting profession?
Do you see a bold enough vision coming from CPA firm leaders? They love to talk about increasing realization by 4%, but is the vision inspiring?
We’ve been hearing for decades about how important it is for the CPA profession to move from compliance to advisory services. Do you see a lot of movement in advisory services within the larger firms?
If it’s about skill-set, tool-set and mind-set, will firms have to expand the labor pool from which they draw, and not just hire people with technical accounting education?
When you look at Top 100 firms’ revenue that comes from consulting, it’s usually higher than for the firms below the Top 100. Would you agree with that?
Segment Three Questions
What are the implications of Blockchain, triple entry accounting, and Bitcoin for the accounting profession?
With Amazon’s Echo (“Alexa”), can you see a day where someone could ask, “Hey, Alexa, what’s the name of the nearest CPA firm that can handle X?” Or even, Alexa answering a question that normally would be asked of the CPA?
Segment Four Questions
In specific firms, there are a lot of initiatives—from reforming annual performance appraisals, adopting knowledge management, cloud accounting, value pricing, etc.—that require change management. Do you see much innovation in management philosophy among the large firms?
What’s going on with Value Pricing within the Top 100 firms? Is the leadership really ready to embrace it?
Ron and Ed discussed memorable guests and show topics they had on during 2016.
It’s nearly impossible to choose favorite guests, since they are all good! But we asked each other, so here are our choices for 2016, which encompass shows #74 through #122, including the link to the archived show:
- Daniel Susskind (#74)—because of the chain reaction his book kicked off, The Future of the Professions.
- Colonel Rick Searfoss, #91, Astronaut
- Steven Landsburg, #106, economist
- David Friedman, #117, economist
- Dr. Reginald Lee, #112, author of Lies, Damned Lies, and Cost Accounting
- Baruch Lev, #101, author of The End of Accounting
- Daniel Susskind, (#74)— because of the chain reaction his book kicked off, The Future of the Professions.
- Mark Koziel, (#75), VP of Firm Services & Global Alliances at the AICPA, with his reaction to the Susskind’s book, and the state of the accounting profession.
- Paul Kennedy, VeraSage Institute colleague, told his compelling OBK story (#84).
- Rabbi Lapin (#86), our first two-time guest returned in 2016.
- Doug Sleeter, (#96) + (#99), for being Bitcoin and Blockchain obsessed.
- Gregory LaFollette, (#104), for his views on technology and the future of the accounting profession.
- We also did our #100th show.
Favorite Show Topics
Ron: Trashing the Timesheet, #109
Ed: A Check for Everyone? The Basic Income Idea, (#95)
Thank You to Our Audience!
Thank you, thank you, thank you, to our Audience! You are the reason we are here, and we will strive to continue to add value by bringing you leading edge guests and ideas.
Our Latest iTunes Review
LizCPAWriter on December 19, 2016 writes: “Always Though Provoking - I Always learn something new on this podcast. Ron and Ed bring in fascinating guests with interesting points of view. Yes, they are opinionated, but they are firmly committed to the survival of accounting and business advisory work as viable careers. The world is changing and so must we if we are to continue providing value.”
Thank you, Liz.
Segment Two: Favorite Books from 2016
- The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, George Gilder
- Precision, Timothy Chou
- The Scandal of Money: Why Wall Street Recovers but the Economy Never Does, George Gilder
- John Tamny, Who Needs the Fed?
- Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World, Don and Alex Tapscott
- The End of Accounting, Baruch Lev, Feng Gu
- Lies, Damned Lies, and Cost Accounting: How Capacity Management Enables Improved Cost and Cash Flow Management, Dr. Reginald Lee
- A Torch Kept Lit: Great Lives of the 20th Century, James Rosen, editor. A compendium of William F. Buckley, Jr.’s eulogies. Beautifully written about interesting historical figures of the 20th century.
Ron’s Best Book of 2016
The Kingdom of Speech, Tom Wolfe. Here’s some thought-provoking excerpts:
- “The most fundamental questions about the origins and evolution of our linguistic capacity remain as mysterious as ever”
- “Speech is not one of man’s several unique attributes—speech is the attribute of all attributes!”
- “One hundred and fifty years since the Theory of Evolution was announced, and they had learned…nothing…in that same century and a half, Einstein discovered the speed of light and the relativity of speed, time, and distance…Pasteur discovered that microorganisms, DNA, 150 years’ worth of linguists, biologists, anthropologists, discovered…nothing…about language.”
- “Darwin had an even bigger problem: a huge gap in evidence when it came to language, which set humans far apart from any animal ancestors.”
- “He couldn’t find one shred of solid evidence that human speech had evolved from animals…seemed to have just popped up into the mouths of human beings from out of nowhere.”
- “Darwin had fallen into the trap of cosmogonism—the compulsion to find the ever-elusive Theory of Everything…”
Ed mentioned research being done on evolution and consciousness, video interview with Donald Hoffman
Insert video interview with Donald Hoffman
Also, a speech by George Gilder at the 25th anniversary of the founding of the Discovery Institute: “Leap Before You Look: Reflections on the Mission and “Evolution” of Discovery Institute,” from December 2, 2016.
Segment Three: R.I.P.
- First Lady Nancy Reagan
- John Glenn
- Harper Lee, author of To Kill a Mockingbird, from Monroeville, Alabama
- Supreme Court Justice Antonin Scalia
- Thomas Hayden, 60s radical and former husband of Jane Fonda
- Janet Reno
- Arnold Palmer
- Boxing champ Muhammad Ali
- Florence Henderson
- Robert Vaughn
- Doris Roberts
- Gene Wilder
- Patty Duke
- Abe Vigoda
- Carrie Fisher
- Debbie Reynolds
- Garry Shandling , he was 66 (not in his 50s as Ron said)
- George Michaels
- David Bowie
- Merle Haggard
- Songwriters Leonard Cohen and Leon Russell
Article by economist Steven Horwitz predicting that we will see an acceleration of death of famous people, as the Baby Boom generation starts to age.
Fidel Castro, whose funeral car had to be pushed. There were some great Tweets about this, such as, “Even Hell is rejecting him,” and “Who says the embargo didn’t work.”
Ron mentioned a quote from the Talmud, but got it backwards. It is actually a celebration of those who have passed. Here it is:
In a harbor, two ships sailed: one setting forth on a voyage, the other coming home to port. Everyone cheered the ship going out, but the ship sailing in was scarcely noticed. To this, a wise man said: “Do not rejoice over a ship setting out to sea, for you cannot know what terrible storms it may encounter and what fearful dangers it may have to endure. Rejoice rather over the ship that has safely reached port and brings its passengers home in peace.
And this is the way of the world: When a child is born, all rejoice; when someone dies, all weep. We should do the opposite. For no one can tell what trials and travails await a newborn child, but when a mortal dies in peace, we should rejoice, for he has completed a long journey, and there is no greater boon than to leave this world with the imperishable crown of a good name.
Segment Four: Miscellaneous
Hat tip to John Chisholm (our VeraSage colleague) and listener Bryce for passing along this excellent article from December 21, 2016, in The Guardian: “Why time management is ruining our lives,” by Oliver Burkeman.
Here are some interesting tidbits from the article, which we highly recommend:
- Merlin Mann of “Inbox Zero” fame, which the New Yorker said was “halfway between Scientology and Zen,’ while the NY Post called it “Bullshit,” is discussed.
- The better you get at time management, the less time you feel you have.
- The article lays waste to Frederick Taylor, the founder of “Scientific Management,” which was also the theme of our very first show on The Soul of Enterprise.
- Creativity requires more slack, says Tom DeMarco.
- Time management and efficiency is really nothing more than the fear of death: to die with the sense of nothing left undone: it’s nothing less than the promise of immortality by other means.
- But a gift of being alive is never to be done.
The new Star Wars movie, Rogue One, has a controversy. Peter Cushing has been dead since 1994, but another actor plays him, with Cushing’s face CGI’d on him, so who gets the royalty?
Pot > Starbucks?
Three-fifths of the United States population live in states that allow cannabis (some 28 states allow some form of use, either recreational or medical).
32 million Americans use cannabis, a $6 billion industry in 2015, expected to triple by 2020.
Bigger firms may have edge (Coca-Cola licensing bottlers), interstate bans, regulations, etc. Tobacco companies might come into the industry and cause consolidation.
Colorado now has more cannabis stores than Starbucks outlets!
Are you in the top one percent?
According to the Global Wealth Report by the Credit Suisse Research Institute:
- Survey counts household assets, not income
- $2,222 in net worth makes you wealthier than half the world’s population
- $71,560 puts you in the top tenth
- $744,400, you are in the global 1%
- World’s wealth = $256 trillion (3.4x world’s GDP)
- This wealth divided equally = $52,819/person
- Actual, top 10% own (created) 89% of it
- Over 40% of Americans belong to the top tenth
- 18M to top 1%
- 21 million have debts that exceed assets
Are our pets in the top one percent?
San Francisco and Seattle have more owned dogs than children. Americans spent $400+ million on Halloween costumes for its pets. The Pet food industry grew by 40%, a $43 billion industry. Rover and DogVacay, new startups that offer kennels away from home - $30/night paid to the sitter (20% goes to the company). GPS tracking allows owner to see how far the dog was walked.
What is the collective noun for a group of economists? A gloom, a regression, an assumption. How about just, "Wrong."
Brexit was predicted to be a disaster for the UK, but:
- Apple is consolidating 8 offices, 1400 employees, could double in coming years
- Goolge is building a new HQ alongside King’s Cross station, creating 3,000 new jobs by 2020
- Facebook is expanding by ½, to 1,500, in a new London office to open 2017
- IBM is building four new data centers, tripling capacity, creating hundreds of jobs
The tech is one of the UK’s best sectors: it’s grown 32% faster from 2010-14 than the rest of the economy. Britain issues 200 visas to non-EU tech works (Exceptional Talent scheme).
GE wants “FastWorks,” not Six-Sigma
Siemens is half as profitable as GE. GE is reinventing itself, while Siemens is staying close to roots.
Internet of Things, $11 trillion in economic value annually, according to McKinsey Global Institute. One-third could be in manufacturing.
GE’s platform is Predix, an Android for machines to manage clusters it builds, from wind turbines to locomotives, and jet airplanes.
Siemens platform is Mindsphere, which is more vertical, and a closed system.
GE used to be obsessed with Six Sigma and incremental improvements. Now it wants to take a page from startups and start making mistakes—they call it “FastWorks.”
Create a minimum viable product, discard it quickly if it fails.
Visit to the Las Vegas Neon Museum. It was a walk through the history of Las Vegas condensed into 90 minutes.
- Name derived from Spanish word for shoe
- F.A.C.E. (Folks who Answer CEO Email) Team
- PEC—Personal Emotional Connections
Pope Francis, equating media interest to coprophilia [arousal from excrement].
Interview on Sage Podcast with Gret Glyer, founder of DonorSee (website and App).
Kirk Bowman’s Biography
If you really want to talk shop, Kirk brings over 15 years of experience developing FileMaker databases and web applications as well as systems integration. As the principal of MightyData, Kirk heads an elite team of FileMaker Certified Developers and Authorized Trainers. He is a renowned speaker at the FileMaker Developer Conference and PauseOnError un-conference. Anyone who knows Kirk realizes that to become the Visionary of Value means walking the walk and talking the talk. To that end, Kirk is a Practicing Fellow at the VeraSage Institute and a proud graduate of EntreLeadership.
His podcast, which is excellent: ArtofValue.
Segment One—Ed’s Questions
Ed and Kirk live five minutes apart and both attended the Allen Father Daughter Ball.
You used to be a naysayer with respect to hourly billing. Tell us your story of conversion, and transition to Value Pricing.
What big one or two mistakes did you make during the transition?
What were some of things that surprised you—including internally—of the transition?
Do you think you’ve gotten better at the value conversation?
Are there particular questions that you use to open the value conversation?
Where did you find more resistance in your transition, internal or from your customers?
Why were existing customers harder to convert than new ones?
Segment Two—Ron’s Questions
There are so many new podcasts coming out, and we hear so much about pricing. What do you think is the future of Value Pricing?
I have heard you say that hourly billing requires a calculator, but VP requires courage. Can you prove that statement?
My new mantra has been that value is a feeling, not a number. Professional’s don’t have a high tolerance for ambiguity; we rather be precisely wrong rather than approximately right. How do you deal with that when you help people transition?
In your transition, you started with new customers. I started, in 1989, with current customers first. If new customers like it, why wouldn’t current customers? Have you seen firms start with current customers?
Why do you think hourly billing sticks around and is endemic, and ubiquitous, as it is?
Are people just satisficing (satisfy + suffice)? In other, hourly billing is good enough?
With Value Pricing you learn from your successes and mistakes. Would you agree?
Do you think by offering options you are more focuses on the outcomes rather than delivering a series of tasks?
Segment Three—Ed’s Questions
Tell us about the creation and evolution of your podcast, The Art of Value.
An unfair question: Any particular guests, or particular moment that jumps out at you, from your show. Kirk replied:
- Joni Newkirk, former pricer at Disney who converted the pricing at Walt Disney World.
- Interview Rabbi Daniel Lapin
Have you recorded any shows that you didn’t publish?
What advice would you give to someone interested in starting a podcast?
Tell us about your Value Pricing consulting.
Segment Four—Ron’s Questions
What about the timesheet?
I think it inhibits good pricing because it never breaks that fundamental nexus between effort and value. Do you agree?
Ed says he can see a future where project management dies. Do think it could die?
You talk a lot on your show about the Value Lifestyle. Unpack what you mean by that term.
You’re a tech guy. What’s your take on Richard and Daniel Susskind book The Future of the Professions? Are you a pessimist or an optimist with respect to the future?
What one piece of advice would you give to firms with respect to pricing?
Ed’s LinkedIn Post
- Profit is not an adequate foundation for a strategy
- We do not want for answers; we suffer from an inability to ask new and better questions
- The Mother of All strategic Questions does not come back to revenue
- Strategic planning is more creative than analytical
- Strategy is about effectiveness, not efficiency
Summary of The Rise and Fall of Strategic Planning, by Henry Mintzberg, 1994
Planning is future thinking, or controlling the future.
Planning = Latin = planum “meaning flat surface.” The word entered English language 17th century, referring principally to forms, such as maps or blueprints drawn on flat surfaces.
The squirrel plans (stores nuts): are they more sophisticated or is planning less so?
If only you dumbbells executed better!
If you so smart, why didn’t you take into account we are dumbbells?
To Michael Porter, strategy = position.
To Peter Drucker, strategy = perspective (the theory of thebusiness).
Fundamental fallacies of planning
- Predetermination (predicting the future)
- Detachment (from operations/managers
All three = The Grand Fallacy: that analysis can produce synthesis.
Analysis ≠ Synthesis, and strategic planning is not strategy formulation, so the term is an oxymoron.
Strategic planning (SP) is less about creativity and more about rearranging established categories; stability over adaptability, or institutionalized incrementalism.
It’s more extrapolation than invention.
The quantification of SP is not much more than quantification of goals as a means of control.
Jack Welch dismantled GE’s SP; he wanted more judgment not data.
PPBS = Planning-Programming-Budgeting System. Robert McNamara, Secretary of Defense under President Johnson. Vietnam was USA’s most humiliating military defeat, ever. PPBS has failed everywhere and at all times.
But the planners will say, “Any plan is better than none at all. It’s the process that counts (SP is not Utopia, only the road to it).
But SP is a rain dance, and the process improves the dancing not the weather.
SP assumes there’s “the one best way” to formulate and implement strategy, inspired by Frederick W. Taylor.
SP is not defended for what it accomplishes but for what it symbolizes—rationality.
Henry Kissinger referred to planning as “a sop to administrative theory.”
Pseudo-scientific knowledge can be more dangerous than plain ignorance or common sense.
Americans get off on strategy like French get off on good food.
How do you make God laugh? Tell him your plans.
Ed and I were honored to have Joe Woodard on the show.
As an author, consultant, Intuit contractor and national speaker, Joe has trained over 75,000 accounting professionals in the areas of practice development, changing technology trends, and how to maximize the use of QuickBooks in their accounting practices.
In 2012, 2014 and 2015, Joe was recognized by Accounting Today as one of the Top 100 Influencers within the Accounting Profession. In 2008, Joe was recognized by CPA Practice Advisor as one of the top 40 up and coming thought leaders under the age of 40.
Woodard has adopted a powerful vision: “To transform small business through small business advisors.”
Woodard’s purpose is an extension of its vision – a single statement that shapes every task Woodard performs to achieve its vision: “We empower small business advisors.”
What Woodard Does
As part of a larger purpose to empower small business advisors, Woodard fosters networking relationships among small business advisors, conducts the highest quality learning experiences for small business advisors, and builds relevant, powerful resources for small business advisors.
Questions We Asked Joe
- Explain your Vision Statement
- Why focus on small business as opposed to medium or large business?
- Why accountants, and not lawyers, or others who serve small businesses?
- What’s your view on the Efficiency vs. Effectiveness (Eff’ing) debate?
- What are the major challenges and opportunities you see facing the accounting profession? (Joe thinks Automation for both).
- Do you agree with the strategy of giving away compliance work for free in order to get the advisory services? After all, I’ve been hearing about the death of compliance services since I’ve been in the accounting profession. Do you really see compliance work going away?
- When you look out at the vast majority of the accounting profession, do you really think it’s possible for them to make the transition to advisory services?
- Do you see a lot of firms moving to Value PricingWhat is your opinion on timesheets? And why do consultants to the profession advocate for them?
- We’re all fans of the Susskind book, The Future of the Professions. Tell us about your “Rise of the Machines” webinars and work.
- The competition that kills you doesn’t look like you. What will disrupt the profession?
- Have you use Amy, the AI that helps you schedule meetings?
- Are you in alignment with Ray Kurzweil on the arrival of the Singularity by 2029?
- What advice would you give a young CPA about to launch his career?
Theo Epstein broke the curse of both the Red Sox and the Cubs. Ed thinks he destined for the Baseball Hall of Fame.
The prediction markets, Nate Silver, and the polls got the election wrong. They all reinforced each other and it was a classic example of an echo chamber.
Only three polls got the results right, and one private pollster: Investors Business Daily, Los Angeles Times, and Trafalgar. The private pollster was working for the Trump campaign, John Mclauglin of the Hoover Institution.
Is the election result similar to the 1961 World Series, when the Pirates beat the Yankees in four games, even though the Yankees outscored them overall?
If we scrapped the Electoral College, it’s a static analysis to argue that Hillary would have won. The election dynamics would have been different, with the candidates spending time differently in different states.
Did Trump receive a mandate?
Have the Democrats been reduced to a bi-coastal party?
The plurality of Americans voted for no one, which has always been the case.
Either way, voting is a flawed way to make decisions.
Imagine making decisions on whom to marry, what car to buy, where to live, your job, by popular vote.
Ed explained Approval Voting and N/3 Analysis as a way for organizations to make better decisions than simply majority or plurality voting.
Author of The Last Campaign: How Presidents Rewrite History, Run for Posterity & Enshrine Their Legacies, Anthony Clark appeared in this segment to discuss the Obama Presidential Library.
The Obama Presidential Library site has been selected: Historical Jackson Park, Chicago, Illinois, expected to open in 2021.
However, the records will be out in 2121—it takes 100 years for the National Archives to process and release all the records. More emphasis is placed on opening the museum to promote the legacy rather than hiring archivists to process records.
The Reagan Library opened in 1991 and they still haven’t processed 75% of the records yet.
“I’d like to die on Mars. Just not on impact.”
On September 27, Musk outlined his plans to colonize Mars within 10 years:
100 passengers @ $200K each
The journey will take 6 months
It’s a hedge against Earth-bound extinction. Stephen Hawking, among others, believes we are all sitting ducks for a supervirus, malevolent AI, nuclear war, etc.
The Economist called this view “Claptrap.”
Living on Mars would be difficult: Need pressurized buildings, communication with Earth would be tedious, you’d have to recycle nutrients and waste, etc. Biosphere 2 in the 1990s was quickly abandoned as impractical for some of these reasons.
Musk also said the government would have to open its checkbook.
Musk might be more impressive to show results here on Earth first, perhaps by turning a profit in one of his three enterprises.
$1.3B Tesla subsidies
Export/Import Bank subsidized payloads for SpaceX launches
$4.9B in total subsidies over the past 10 years, according to the Heritage Foundation (approximately 50% of Musk’s wealth).
“Quick and Dirty,” The Economist, October 8, 2016
Short-Termism is a problem?
The average holding period of shares is 200 days
Managers are perceived to be harried to meet targets in one year or less
This is not a helpful lens: the same system that’s poured capital into Tesla, Uber, Twitter, Amazon, etc., is accused of short-termism.
America is the most hyperactive market with the best-performing economy, and with dominant firms.
S&P has a new index, and it claims to track firms with a long-term focus.
Three out of ten of its largest holdings are cigarette firms, which may outlive their customers for all the wrong reasons.
The tension between short-term vs. long-term is what makes capitalism tick.
About Our Guest
Ron and Ed are thrilled to have as a Guest this week, the self described anarchist-anachronist-economist David Friedman.
David is an American economist, physicist, legal scholar, and libertarian theorist. He is known for his writings in market anarchist theory, which is the subject of his most popular book, The Machinery of Freedom.
He has an active blog at which he opines about everything from medieval recipes to global warming.
Segment One: Ed’s Questions
What are your thoughts on the election?
Would President Obama pardon Hillary Clinton, even though she hasn’t been convicted of anything? Is there precedent in any legal system for a pre-emptive pardon?
Should we transfer the pardon power to Congress?
Segment Two: Ron’s Questions
In Hidden Order: The Economics of Everyday Life, 1996, you discuss the assumption of rationality. It’s false, but useful. It describes our actions, not our thoughts.
Why do economists hold on to the assumption of rationality?
You haven’t seen any major advances because of behavioral economics?
Price discrimination. What are the welfare benefits of price discrimination?
Segment Three: Ed’s Questions
The market is often blamed for inequality, but you point out that often times it is government that is more unequal to the poor. Could you give us an example or two?
You’ve written on public-key encryption, is blockchain and Bitcoin a manifestation of that?
Question from Jay, one of our listeners: Who or what led you to your anarchism?
Segment Four: Ron’s Questions
In Law’s Order, you point out that the death penalty is irreversible, but so is prison time. And since prison has to be imposed at a higher probability to get same deterrent effect, there will be proportionally more mistakes with imprisonment than the death penalty.
You have a PhD in physics. What’s your view of Global Warming?
Are you concerned about the declining population in some countries, such as Europe, Japan, etc.?
Three times as many disagreements each year among eBay traders are resolved using its online dispute resolution system than there are lawsuits filed in the entire US court system. Might this be an example of some of the ideas in The Machinery of Freedom being implemented?
Illustrated Summary of Machinery of Freedom
More Books by David D. Friedman
- Price Theory: an intermediate text, 1990
- Hidden Order: The Economics of Everyday Life, 1996
- Law’s Order: What Economics Has to Do with Law and Why it Matters, 2000
- Future Imperfect: Technology and Freedom in an Uncertain World, 2008
- The Machinery of Freedom: Guide to a Radical Capitalism, 3rd edition, 2014
Dr. Tim J. Smith is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right and Pricing Strategy, and founder of Wiglaf Pricing. He has been a keynote speaker and workshop leader on a variety of pricing topics to professional audiences across the globe. Smith began his career as a research scientist in quantum mechanics. He’s an Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, a member of the American Marketing Association, Business Marketing Association, and American Physical Society.
He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago Booth School of Business.
Segment One—Ron’s Questions and Summary of Answers
You have a PhD in physical chemistry. How did you get into pricing?
I fell into it! Became an entrepreneur in technology and sales and discovered that value-based selling was basically the same as value-based pricing. Selling and math make a pricing professional.
Your first book was Hawks, Seagulls and Mice, (2006), what was it about?
It looks at the structure of sales and marketing across different industries, and how they vary.
In Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, 2012, you write:
The science of pricing refers to the act of gathering information, conducting quantitative analysis, and revealing an accurate understanding of the range of prices likely to yield positive results.
The art of pricing refers to the ability to influence consumer price acceptance, adapt structures, and align pricing strategy.
Is pricing more art or science, or conceptual? You write it’s not an engineering challenge, but a strategic challenge?
It’s a strategic science, which puts it closer to an art.
You wrote in your latest book, Pricing Done Right
Although price not a competitive advantage, pricing may be.” Rethinking the unit in pricing, and change your industry, such as hourly to fixed prices, Zipcar, iTunes and music, etc.
You can imitate a price, but it’s march harder to imitate a pricing structure, which can be a competitive advantage.
Why does cost-plus pricing continue to be endemic?
Because it’s simple, common, mechanical. It’s a form a satisficing (satisfy + suffice). It’s precisely wrong, rather than approximately right.
The shift from setting prices to communicating value is really a business model change, isn’t it?
Clayton Christensen’s new book, Competing Against Luck, argues that the job the customer is doing with your product or service needs to be understood.
It goes back to Ted Levitt, nothing new, really.
Segment Two—Ed’s Questions and Summary of Answers
Why Wiglaf Pricing?
Wiglaf is a character in the Anglo-Saxon epic poem Beowulf. He is the son of Weohstan, a Swede of the Wægmunding clan who had entered the service of Beowulf, king of the Geats. Wiglaf was Beowulf’s advisor, and helped him slay his dragon.
You have a mantra, three questions: What’s my alternative? Are you better or worse? And why should I care? [these are the questions customer’s ask themselves].
If a customer isn’t profitable, they aren’t a customer—they are a leech. It’s all about servicing customer needs... profitably. Not every customer is your customer, or your target customer.
What are some of the biggest mistakes organizations make regarding their pricing strategies?
Treating price as an outcome; what price do we need to make this sale. Pricing is a verb, not a noun—it’s a process.
Do you think discounts are needed in some industries?
They are in some industries, but they need to be managed dynamically, and planned, over time. Unplanned discounts are ripe for better planning. Key question to ask: how will this discount improve the relationship with this customer.
Tim's latest book is Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, 2016, he lays out five key decisions of a Value-Based Pricing Framework:
- Business Strategy
- Pricing strategy
- Market pricing
- Price variance policy
- Price execution
Also, four pricing strategy issues:
- Price positioning
- Price segmentation
- Competitive price reaction strategy
- Pricing capability
Should pricing be centralized or decentralized?
The extreme of both have failed in most firms. I advocate cross-functional teams (marketing, sales, finance and pricing). It’s an enabler, not a replacer—it can’t be alone. Is pricing too important to leave to the pricers?
It’s fascinating research coming out of Germany, demonstrating most profitable firms are those that don’t have complete centralized or decentralized decisions. There’s no way a centralized pricing group has the same tacit knowledge of the sales force in the field. You have to marry that tacit knowledge with the explicit knowledge of the pricers.
This is the approach of Target Costing at Toyota, Nissan, IKEA, etc.
You write neutral pricing is default strategy (least likely to have price wars), and that penetration pricing cannot generally be defended from a strategic viewpoint (failures are greater than success, e.g., Amazon).
GoPro failed with it as well. Just because you have a lower price doesn’t mean people want it.
What industry does the best job at pricing?
Some have the algorithms down well (airlines, hotels), but no one industry has the strategy down. Some individual firms do, such as Eastman Chemical, and Peugeot with its Vespa sales into India.
Sports, music, and other event based industries are dynamically priced. We still don’t have a perfect model, but things are changing.
Is there really such a thing as price gouging?
Price gouging is a legal term. It’s illegal. Outside of that, it’s buyer beware.
Value a feeling?
You write: “Beyond economic benefits, there are behavioral, emotional, hedonistic, and psychological benefits. Though calculating the impact of these benefits may be difficult, their impact on customer choices often outweighs purely economic arguments alone.” Is value a feeling more than a number?
It goes along with it, but I wouldn’t have used the same words.
Pricing legend Robert Cross posited that people with musical ability make good pricers. Do you have any theories on what makes a good pricer?
I’d put diplomacy as number one.
The pricing profession has grown dramatically in the past 15 years or so, do you think professional pricers have lessened, or increased, price wars?
I would like to say yes, but look at the current price wars in airlines, hence they are unprofitable. Freedom includes the freedom to be stupid. Amazon and Wal-Mart were trying to show how low they could sell a book, even below cost.
What advice would you give to someone who wants to get into pricing?
Read my books, join the Professional Pricing Society, understand your business.
Warning and Ed's Note: This show got overly wonky (even for us) and is overly focused on issues related to the Presidential Election in the United States. We will resume our regular commentary next month.
Poverty on the decline
There are fewer people in absolute poverty today the there were in 1820. While this does not mean the problem of poverty can be ignored, it does mean we should celebrate more our human accomplishments over the last two centuries.
Ron added statistics from The Economist, October 8, 2016, How the other tenth lives.
The laws against taking a selfie with your voting ballot. No really there are! Article: In these states, taking a selfie with your ballot could get you arrested
Joe Buck’s dumb-ass commentary
The worse part of watching the World Series is having to endure the droning on of Joe Buck. Article: Joe Buck's 15 Lamest On-Air Moments
Here are some samples of things he said thus far during the Series:
- "Good swing by Soler, he'd like to have that back."
- "If he gets that down, you can't defense it..........uh, there's no defense against that play."
- "That will make Tomlin have to swing that bat. And he shows right there he knows how to do that." As Indians pitcher swings way late on the first pitch he sees. He went on to whiff on three pitches.
Gamblers getting old
Casinos customers are aging, and they are having a difficult time attracting the millennial generation, as explained in Putting it all on grey, from The Economist, Oct 8, 2016.
TSOE Guest Rabbi Lapin on self-driving cars
Rabbi Daniel Lapin’s thought-provoking Thought Tools edition, Strike Them Down.
Lapin discusses the ethics of the self-driving car, and how as an orthodox rabbi he would never buy a car that was programmed to make ethical decisions.
In the comments section, he also discusses the morality of governments invading other countries to feed or protect its people, and the Just War doctrine.
A tirade from Nassim Nicholas Taleb, author of The Black Swan and AntiFragile, entitled The Intellectual Yet Idiot, September 16, 2016.
More on driverless cars
Is Apple teaming up with McLaren, a British maker of sports cars and Formula 1 racing team? Ford announces it will launch a fully autonomous car in 2021, without steering wheel or pedals, for car-sharing schemes.
Ed and Ron reflected on the lessons from the two-day workshop, The Post-Professional Society, they led in Niagara Falls for Strategic Leadership Association. If you are interested in joining this organization check them out.
We discussed the Question Formulation Technique exercise, developed by The Right Question Institute, and how powerful it is to think in questions rather than brainstorming ideas.
There’s much less anxiety; good questions can come from anyone; and everyone tends to agree on what a great question is, as opposed to an idea that can be challenged.
Here is a copy of the slide deck we used with the topics discussed above.
We received the following email from Mark, who suggests a topic we will address in a future show:
I'm working here in my office today listening to you and Ed in the background.Just finished your conversation with Thomas Sowell--wow, outstanding.
As a CFO, my biggest frustration is the 25 flavors of strategic planning. Too much, too many connect-the-dots, too unproductive. So the brainstorm is to have a show about building off-site planning (if any) about what the customer values most. One of my clients is going through Verne Harnish's Scaling Up. One is going through Wickman's E.O.S. But the focus is on internal factors, not what matters to the customer.
I would love to hear your perspective on planning (short, mid, long-term). And just for fun, pick up Stacy Barr's book on Performance Measurement as an example of how these strategy planning processes are too extreme.
Thankfully, Dan Sullivan of the Strategic Coach (I'm in year 4) gets this right through his lingo - Front Stage, Back Stage. So he's making sure our planning is always with the customer and what they value at top of mind.
One last comment. I read the Firm of the Future back in 2004 thanks to a recommendation by Gary Boomer. It ranks right up there with The Goal. Keep writing!! You guys rock. Mark
Thanks, Mark, we think you and all our listeners ROCK!
About Dr. Timothy Chou
Timothy Chou has been lucky enough to have a career spanning academia, successful (and not so successful) startups and large corporations. He was one of only a few people to hold the President title at Oracle. As President of Oracle On Demand he grew the cloud business from it’s very beginning. Today that business is over $2B. He wrote about the move of applications to the cloud in 2004 in his first book, “The End of Software”. Today he serves on the board of Blackbaud, a nearly $700M vertical application cloud service company.
He most recent book is Precision: Principles, Practices and Solutions for the Internet of Things to introduce the basics of the Industrial Internet of Things (IoT). You may not be sure why your coffee pot should talk to your toaster, but precision technology powering an Internet of Things has the potential to reshape the planet.
Interview Notes and Questions
What was it like working for Larry Ellison?
Tim's Three fundamental differences between things and people
- A lot more things than people
- Things can be were people are not
- Things can “talk” constantly
AI has been around for years, why is it gaining more traction lately?
Are you optimistic or pessimistic about the AI transformation? Why?
What about Stuxnet? Are IoT devices secure?
Ed just saw the movie Sully, the drama in the movie was about the NTSB and their simulations that said they could get back to LGA, but when human decision factor was added (35 seconds) they could not. Would it be a good idea to give computers the final say? One the one hand, there is no creativity. On the other there is no “human factor” or delay. Thoughts?
Tim's IoT Framework
And, of course, Tim's new book