Episode #217: The Subscription Business Model

We used to know the people we bought from: the butcher, baker, blacksmith, barber, farmer, etc. All that knowledge got lost when the Industrial Revolution ushered in the product era. That knowledge is coming back in a big way!

The idea is turn customers into subscribers—the Subscription Economy, according to Tien Tzuo in his book, Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It.

World is moving from products and services to subscriptions, favoring access and outcomes (Transformations) over ownership and deliverables. Customization, not standardization, constant improvement, not planned obsolescence. Lock-in and Switching Costs effects.

According to McKinsey, the subscription ecommerce market has grown by more than 100% a year for past five years. Subscription-based companies are growing eight times faster than the S&P 500 (17.6% vs. 2.2%), and five times than US retail sales market (17.6% vs. 3.6%). Companies running on subscription models grow their revenue more than nine times faster than the S&P 500.

Tzuo argues this model is industry agnostic:

Health Care, Concierge, Direct Primary Care, Amazon Prime and Rx, Education (it fires their customers after four years); Insurance; Pet Care; Utilities; Real Estate; Finance; Automobiles; Newspapers, etc.

Subscriptions are a forward-looking revenue model, as seamless as buying a book on Amazon. It changes the question from “How many services can we sell?” to “What does our customer want, and how can we deliver that as an intuitive service?”

Competitors can steal your service features, but they can’t steal your insights you gain from an active, loyal subscriber base.

Salesforce and Amazon don’t have customer segments, they have individual subscribers (Prime has 90 million subscribers who spend an average of $117 billion per year). Other businesses that have subscription models, either in total or in part:

  • Apple: Earnings call Feb 1, 2018: service revenue $31.15 billion in 2017, growing at 27% a year, more than half of Apple’s growth

  • Spotify: 50 million subscribers > 20% global music industry revenues

  • Netflix: Spends $8 billion a year on original content, providing new and innovative services to its subscribers

  • Gillette: Market share decreased to 54% (2016) from 70% (2010), because of Harry’s and Dollar Shave Club

  • Warby Parker: Averaging $3,000/sq. ft. retail space (slightly less than Tiffany’s), because 85% of foot traffic has done extensive browsing online

  • Uber/Lfyt: 60 million riders (testing flat-rate subscriptions, no surge)

  • Starbucks: More than 13 million Starbucks rewards program

Old business model: Products/Services > Channels > Customers

New business model: Services > Subscriber > Experiences > Channels

From linear transactional channels to a circular, dynamic relationship with your subscriber.

Fender guitars, 90% new users quit within one year, so Fender launched subscription-based online video teaching, Fender Play. By simply reducing the abandonment rate by 10%, it could double the size of its market (applying a service-oriented mindset to a static product).

Instead of margins and unit sales, thinking about subscriber bases and engagement rates.

Other industries where subscription business model is happening:

Automobiles

Hyundai’s new hybrid, Ioniq, you can subscribe to for $275/month. Makes owning a car as easy as a mobile device.

Porsche’s Passport, half dozen models, covers maintenance, insurance, and vehicle tax and registration, starting at $2,000 per month.

Cadillac, $1800/month, switch out vehicles as frequently as 18 times per year.

Volvo: XC40, $600/month.

One out of five autos are expected to be subscription by 2023. Here’s the differences between subscribing to a car and leasing one: 

  • Not bound to specific vehicle

  • Signing up with the company, not the car

  • R&M, etc., go away

  • Can’t buy the car at the end (company’s interest to keep car in good condition, not yours)

Data and services associated with vehicle > vehicle itself (Spotify, Sirius, OnStar). From car manufacturers, but transportation solutions (Ford: make that “bed to bed” journey as simple as possible). 

Airlines

SurfAir: Uber of the skies: limitless flights for a flat monthly fee, western USA and Europe (more than 200 million frequent fliers up for grabs!).

Newspapers

169 million US adults read newspapers online, 70% of the adult population.

  • Financial Times metrics: Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read)

  • The Economist: Charges for digital and print, increased revenue 25%

  • New York Times: 60% revenue comes directly from readers, more than $1 billion, digital-only subscription revenue exceeded print advertising revenue in the second quarter of 2017.

Software

Gartner predicts by 2020, 80%+ software providers will have shifted to subscription-based models (no growth left in on-premises software).

Swallowing the fish: as the revenue curve temporarily dips below the operating expense curve before climbing back upward again.

Adobe launched Creative Suite, a perpetual license in 2012. The new metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value).

Digital subscriptions in May 2013 (Adobe Creative Cloud), let customers know, no longer updating Creative Suite: from 0 to 100% subscriptions in three years, inspired Microsoft, Autodesk, Intuit, and PTC. Today, over 70% Adobe’s revenue is recurring

Microsoft, Office 365, IBM, Symantec, Sage, HP Enterprise, Qlik: IT buyers prefer opex to capex.

Creates deferred revenue, so quarterly GAAP metrics can take short-term hit.

Hardware companies, too: Cisco is swallowing the fish.

IOT and Manufacturing

What can’t your subscribe to? A refrigerator? Roof? Tease out the service-level agreement that sits behind the product! 

  •  Refrigerator: fresh, cold food

  •  Roof: solar energy

Selling the milk, not the cow.

Komatsu uses drones to survey a site in 30 minutes, which changes the question from: How many trucks can I sell you? To How much dirt do you need moved?

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Advantages

  • Predictable revenue

  • Customer lock-in and Switching costs

  • Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

  • Collective knowledge of our customers is a competitive advantage can’t be duplicated

  • 1:1 Marketing: Changes the 4 Ps of marketing (pricing is most important). We’re not pricing a service, we’re pricing an outcome and insurance (peace of mind)

  • Monitor usage, solve problems, pursue opportunities, and provide Transformations 1:1

  • Shift to a long-term relationship focus rather than delivering tasks

  • Allows for faster growth, as will attract new customers (rather than just selling more to current customers)

  • We can plan capacity more effectively

  • Moving beyond efficiencies and into possibilities (don’t solve problems, pursue opportunities, Drucker, otherwise starve your successes and feed your failures)

  • Breaks down silos, mold organization around needs of customer

  • Actuarial approach to risk pricing, work planning, etc. (20/80 rule)

  • Tears down silos: Portfolio approach to analyzing profit, rather than silo DCM and Realization Rates,

  • Truly “one-firm” model (this doesn’t just talk about one-firm, it achieves it!)

  • New metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value)

  • Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read); to keep customers renewing and re-engaging, have to provide real value

  • Dynamic cycle of action: renew, suspend, upgrade, downgrade, etc.

  • Experiment with different value metrics: tied to: seats, boxes, events, gigabytes, locations, texts, family members, you name it

  • Companies that employ a small amount of usage-based pricing in their revenue mix (less than 10%) grew more than twice as fast on average, with lower churn rates.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #216: Interview with Dr. Walter Williams

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Biography

Born in Philadelphia, Pennsylvania, Dr. Walter E. Williams holds a B.A. in economics from California State University, Los Angeles, and M.A. and Ph.D. degrees in economics from UCLA. He also holds a Doctor of Humane Letters from Virginia Union University and Grove City College, Doctor of Laws from Washington and Jefferson College. Dr. Williams has served on the faculty of George Mason University in Fairfax, Virginia, as John M. Olin Distinguished Professor of Economics, since 1980; from 1995 to 2001, he served as department chairman. He has authored ten books: America: A Minority ViewpointThe State Against Blacks, All It Takes Is GutsSouth Africa's War Against CapitalismMore Liberty Means Less GovernmentLiberty vs. the Tyranny of SocialismUp From The Projects: An AutobiographyRace and Economics: How Much Can Be Blamed On Discrimination? and American Contempt for Liberty

Dr. Williams is the author of over 150 publications which have appeared in scholarly journals such as Economic InquiryAmerican Economic ReviewGeorgia Law ReviewJournal of Labor EconomicsSocial Science Quarterly, and Cornell Journal of Law and Public Policy and popular publications such as NewsweekIdeas on LibertyNational ReviewReader's DigestCato Journal, and Policy Review.

He has made scores of radio and television appearances which include “Nightline,” “Firing Line,” “Face the Nation,” Milton Friedman’s “Free To Choose,” “Crossfire,” “MacNeil/Lehrer,” “Wall Street Week” and was a regular commentator for “Nightly Business Report.” He is also occasional substitute host for the “Rush Limbaugh” show. In addition Dr. Williams writes a nationally syndicated weekly column that is carried by approximately 140 newspapers and several web sites. His most recent documentary is “Suffer No Fools,” shown on PBS stations Fall/Spring 2014/2015, based on Up from the Projects: An Autobiography

Dr. Williams serves as Emeritus Trustee at Grove City College and the Reason Foundation. He serves as Director for the Chase Foundation and Americans for Prosperity. He also serves on numerous advisory boards including: Cato Institute, Landmark Legal Foundation, Institute of Economic Affairs, and Heritage Foundation. Dr. Williams serves as Distinguished Affiliated Scholar at the Mercatus Center at George Mason University. 

Dr. Williams has received numerous fellowships and awards including: the 2017 Bradley Prize from the Lynde and Harry Bradley Foudation, the Fund for American Studies David Jones Lifetime Achievement Award, Foundation for Economic Education Adam Smith Award, Hoover Institution National Fellow, Ford Foundation Fellow, Valley Forge Freedoms Foundation George Washington Medal of Honor, Veterans of Foreign Wars U.S. News Media Award, Adam Smith Award, California State University Distinguished Alumnus Award, George Mason University Faculty Member of the Year, and Alpha Kappa Psi Award. 

Dr. Williams has participated in numerous debates, conferences and lectures in the United States and abroad. He has frequently given expert testimony before Congressional committees on public policy issues ranging from labor policy to taxation and spending. He is a member of the Mont Pelerin Society, and the American Economic Association.

Ed’s Questions

Your show Good Intentions, do you think the situation is better or worse, and why can’t we seem to shake this good intentions versus actual outcomes paradigm we’re stuck in?

What, specifically, do you mean by spiritual poverty?

Do you think the current welfare regime contributes to this situation because it encourages this behavior because of the way the programs are structured?

I’ve heard you speak eloquently on the freedom of association and the impact it has from an economic standpoint. Would you mind talking a little bit about that?

I’d actually prefer that bigots self-identify so I could avoid them.

Ron’s Questions

You published your autobiography, Up From The Projects: An Autobiography, in 2010. One story I found fascinating was about your economics professor Armen Alchian, who asked the class: why do we build the Golden Gate bridge when a military bridge would do just fine? He didn’t know the answer. Do you now have an answer to that question?

[Professor Williams recommends the book Universal Economics, based on Armen Alchian’s work].

In 1989, you published South Africa's War Against Capitalism, which sounded like an ironic title at the time. What would you say is the biggest misperception about apartheid [apart-hate]?

Speaking of immigration, what would be your preferred policy on immigration?

Would you be for more legal immigration?

Do you favor a point system, or charging people, to get into the country?

Do you think we’ll ever see a market for body organs?

I find it ironic that Iran allows the sale of body organs, but here in the capitalist west we do not?

You and Dr. Sowell have taught me that a shortage usually has nothing to do with actual physical scarcity but because the price is wrong.

If we had to rely solely on people’s altruism, we’d have a materially lacking life.

If you had a meeting with president Trump, what would be one piece of economic advice would you give him?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #215: Free-rider Friday - October 2018

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Ron’s Topics

Ed’s Topics

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #214: Interview with Chris “Elroy” Stricklin, Colonel (Ret), USAF

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Biography

Chris “Elroy” Stricklin is a combat-proven Air Force Leader who successfully bridged the gap between military leadership and civilian desire to learn about leadership. An acclaimed leadership writer with almost 100 publications and a corporate leadership speaker, he has been recognized as the #1 writer for Switch & Shift, General Leadership and many other online blogs. In addition to leading professionally for the US Air Force and writing online, he also is a leadership advisor at multiple non-profits where he helps ensure future employment for the many transitioning US military officers. He was recently featured in the Military Times article: Leaders Who Tweet, recognized with awards as “Top 10 Business Innovation Posts,” and served the role of Chief Growth Officer driving the fasting growing leadership blog on the web and earning “Top 100 Most Socially-Shared Leadership Blogs of 2014.”

As one of our dynamic team members, his unique experience as a U.S.A.F. Thunderbird coupled with Pentagon-level management of critical Air Force resources valued at $840B, multiple N.A.T.O. assignments, White House and DARPA fellowships, and command-experience in the United States Air Force allow his unique synthesis of speaking, following, leading, management, negotiations, continuous improvement and positive change. Chris is also a Certified Manager with degrees in Economics, Financial Planning, Strategic Studies and Operational Art and Science. He authored a negotiation primer subsequently published and adopted as required Air Force Pentagon new action officer orientation.

Throughout his Air Force career, he has flown combat sorties over both Iraq and Afghanistan and logged more than 50 Ground-Combat convoys throughout Afghanistan. During his time working for NATO, he lead the effort to defend against terrorism and served as lead American negotiator for a hijacked Turkish Airliner (Flight 1476) which ended safely with the hijacker apologizing to the passengers as he deplaned.

Elroy’s inspiration for writing began with the publication of his first work: Stories Around the Table: Laughter, Wisdom, and Strength in Military Life.

Ed’s Questions

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Segment One

What’s been going on at Afterburner since our last show (from November 3, 2017, Episode #166).

Why do you think the focus of Afterburner shifted to more coaching, as opposed to keynote/motivation?

One of my favorite quotes is “If you don’t like change, you’re going to like irrelevance even less,” from General Eric Shinseki. He did some amazing work with the US military while he was Chief of Staff of the US Army, but he struggled as Secretary of the Veterans Administration. His leadership talents didn’t change, or is there just something about government bureaucracy that’s not like the military?

You wrote a Forbes article that was published today “Seven Lessons On Building Elite Teams For Disruptive Innovation,” Forbes, October 19, 2018. What was the inspiration for writing this article?

The seven lessons are:

  1. Demand Diversity of Thought

  2. Remember That Attention Equals Retention

  3. Establish The Value Of Each Employee

  4. Maintain A Situational Focus

  5. Empower Your Team

  6. Trust The Team You’ve Assembled

  7. Ensure They Work With You, Not for You

I liked the first point, Demand Diversity of Thought, explain that, because it’s different than what we hear today about diversity.

Regarding #5 and #6 above, I’ve combined them in my mind, so what’s the difference between those two?

We talk about trust, but our systems seem to undermine it, such as expense reporting systems. Ricardo Semler tells his employees if they need something to do their job better, buy it with the corporate AMEX card. They won’t question it, they just pay it.

Segment Three

When you were talking about communication, I thought of George Bernard Shaw who said, “The trouble with communication is the illusion it has taken place.” I did a workshop with you on mission planning, and when it comes to a go vs. no-go decision, I think a lot of companies struggle with the courage to say we need to stop here.

I’m reminded of Captain Chesley Sullenberger, who landed the plane in the Hudson, and in an interview he said, “My job was to successfully crash the aircraft.” So many companies also need to successfully crash some projects—what are we going to say no to?

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If an AI system was in charge of that aircraft, I don’t think it would have come up with landing in the Hudson River.

On your article, “36 Leadership Experts Reveal What Truly Exceptional Leadership Is All About,” I wanted to get your reaction to my favorite definition of leadership, from Peter Block, “Leadership is about confronting people with their freedom.”

First rule of leadership, train your replacement.

Who are some of your favorites from a military leadership perspective, such as MacArthur or Patton?

Ron’s Questions

Segment Two

On your Forbes article (above), #1, I’ve started to use the word “variety” instead of diversity, because diversity is such a loaded word these days. I just wanted to get your thoughts on that?

Speaking of words, I wanted to ask you about four: Volatility, uncertainty, complexity, and ambiguity, or VUCA, from the military. I’m hear this acronym more and more in the private sector. Tell me about VUCA from a military, or fighter pilot, perspective (see Chris’s LinkedIn post, “The Value of a Consultant.”

Yes, organizations make plans, but they rarely explore the uncertainty or ambiguity in those plans.

Another post your wrote that I really like is “Improving Workplace Morale is Easy With These Two Simple Words” what are those two words?

Communication + Value

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I find an appalling lack of communication in most organizations. Do you find that as well?

Your work with Afterburner fascinates me, since I know you’re trying to introduce the Debrief and Lessons Learned process in organizations. I get a lot of resistance, especially from professional firms, and I’m just wondering how that’s going for you. Is it being embraced?

I think about some of the After Action Reviews (AAR) I’ve conducted after jobs have gone bad, and it does show the worth of the process, but it’s still a real challenge to embed the process into the culture.

I sat through an AAR in an ICU ward, and the team was admitting mistakes, in a no fear environment. It was amazing.

Segment Four

Chris, you wrote another post, “36 Questions Which Lead Leaders,” and it made me think about something the physicist Richard Feynman said: “I would rather have questions that can't be answered than answers that can't be questioned.” You start the post by writing, “Leadership is not about having the right answers, it is the ability to ask the correct questions.” That is brilliant.

That’s a fine tradeoff isn’t it, between being an expert and playing ignorant, not showing off your expertise?

In your companion post, “36 Leadership Experts Reveal What Truly Exceptional Leadership Is All About,” you say you had an “Aha moment”: “You are the average of the five people you spend the most time with.” I love that, who said it?

Another post of yours I read this morning was “A Celebration of Survival!”, published on September 14, 2018. I can’t do this post justice in words, so I’m going to ask you to explain it. Explain to us what happened on September 14 [15 years ago].

You teamed up with Joel “Thor” Need, a fellow pilot and cancer survivor, to tell your story, accepted for publication by Elva, titled Survivor’s Obligation, I love that phrase, it’s beautiful [due out in the Fall of 2019. We will have Chris back on to discuss the book].

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Struggle is a big part of life, it makes us stronger and more vibrant.

We’ve talked about planning, VUCA, Debrief, Lessons Learned, what other strategies, principles, and practices, have you brought from the  military that apply to the business world?

One of the things I’ve incorporated into my presentations on After Action Reviews since our first interview with you, is you cite a statistic that there have been 325+ Thunderbirds, and the teams turnover 50% every two years, then after four months they are able to do an air show. Some teams in companies have been together years or decades, and can’t perform at anywhere near that level. That’s a real powerful message.

Ed tells the story of doing AARs with his kids over dinner, do you do the same with yours?

2 Comments

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #213: Interview with Russ Roberts

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Background

Russell Roberts, Associate Editor, founder and host of EconTalk, and founding advisory board member of the Library of Economics and Liberty. Roberts is the John and Jean De Nault Research Fellow at Stanford University’s Hoover Institution. His two rap videos on the ideas of John Maynard Keynes and F.A. Hayek, created with filmmaker John Papola, have had more than eight million views on YouTube, been subtitled in eleven languages, and are used in high school and college classrooms around the world. His latest book is How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness (Portfolio/Penguin 2014). It takes the lessons from Adam Smith’s little-known masterpiece, The Theory of Moral Sentiments, and applies them to modern life.

He is also the author of three economic novels teaching economic lessons and ideas through fiction. The Price of Everything: A Parable of Possibility and Prosperity (Princeton University Press, 2008) tells the story of wealth creation and the unseen forces around us creating and sustaining economic opportunity. The Invisible Heart: An Economic Romance (MIT Press, 2002) looks at corporate responsibility and a wide array of policy issues including anti-poverty programs, consumer protection, and the morality of the marketplace. His first book, The Choice: A Fable of Free Trade and Protectionism (Prentice Hall, 3rd edition, 2006) is on international trade policy and the human consequences of international trade. It was named one of the top ten books of 1994 by Business Week and one of the best books of 1994 by the Financial Times. Roberts blogs at CafeHayek.com and archives his work at russroberts.info.

A three-time teacher of the year, Roberts has taught at George Mason University, Washington University in St. Louis (where he was the founding director of what is now the Center for Experiential Learning), the University of Rochester, Stanford University, and the University of California, Los Angeles. He earned his Ph.D. from the University of Chicago and his undergraduate degree in economics from the University of North Carolina at Chapel Hill.

Ron’s Questions

Segment One

I’m fascinated by some of the professors you studies under at the University of Chicago.

Also wanted to thank you for recommending and doing shows on the book, In the First Circle, by Aleksandr Solzhenitsyn. Both Ed and I are reading it, and loving it.

You wrote three economic novels, which is not only a great way to teach economics, but also a good way to learn economics. What got you into writing novels?

I love how in The Choice: A Fable of Free Trade and Protectionism you bring David Ricardo back to life. The only other novel I’ve read that’s done something similar is Saving Adam Smith by Jonathan Wight.

In The Choice, you point out a restaurant meal eaten by a foreign tourist is the same as shipping food abroad, and how our universities are an major export. Why do you think people have a manufacturing fetish? Our manufacturing sector produces more than ever, some $2 trillion, which makes it the 9th largest economy in world. Is it the Materialist fallacy?

If economics has taught me anything it’s that you can’t measure a sector based upon its inputs (jobs), but rather it must be measured based upon its outputs? Also, this line between service and manufacturing seems an outdated false distinction. Toyota might make 9 million cars per year, but try selling a car without services: financing, repairs, warranty, auto dealer inventory financing, etc. We romance the car and ignore these more boring, but vital, services.

We had Donald Boudreaux on the show and we asked him if we should we do away with the trade deficit statistics. He said yes, what do you say?

Segment Three

Just to finish up your discussion with Ed on Rabbi Lapin, I think his problem is the programmers have to decide how a car will react to certain situations—the classic Trolley problem—and because there’s no human judgment at the time of the decision.

Back to your novels. In your book The Invisible Heart: An Economic Romance was perhaps the first time I encountered the argument: what if the government forced you spend 15% of your money with minority-owned or 50% at women-owned businesses, to prove you’re not a racist or sexist? Why is it we only focus on one-side of the transaction—the employer, but not the employee or the customer?

One thing I’ve learned from Gary Becker and Thomas Sowell is the market does impose a cost on people who discriminate, which lessens it.

In The Price of Everything: A Parable of Possibility and Prosperity  you take on the price gouging issue so well. People get upset that the price for essentials increase after a natural disaster. Why is it moral for the truck driver in Ohio to sit on the couch watching college football rather than driving needed goods to Florida hurricane victims? We blame the driver who is delivering needed supplies. Why isn’t that just as bad as gouging?

In How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness , Smith uses the example of losing your little finger to avoid a catastrophe, and when I teach ethics I’ve updated the thought experiment to avoid 9/11 would you be willing to lose your little finger: The overwhelming majority of every audience answers yes. It illustrates Smith’s point that people naturally desire not only to be loved, but to be lovely (as you always say). Yet Smith is tagged as being for greed and selfishness. Can you explain the Smithian difference between selfishness (Ayn Rand), and self-interest?

Ed’s Questions

Segment Two

I’m a big fan of EconTalk, and one of my favorite episodes is when you had Bill James on the show, the father of Sabermetrics. I wanted to ask you about the famous game in 2001, Armando Galarraga and his near-perfect game. Do you think instant replay is robbing us of our humanity?

One of the guests we’ve had a couple of time (here and here) is Rabbi Daniel Lapin, and I’ve heard you refer to yourself as a religious Jew. One of things he says is he would have an ethical problem riding (or owning) an autonomous automobile, since no human judgment is involved in decision making.

Segment Four

I know you are a devotee of the musical Hamilton, in fact you put a great video in 2010 (Fear the Boom and Bust: Keynes vs. Hayek Rap Battle), a rap video between Keynes and Hayek. Obviously, Lin-Manuel Miranda stole your idea…

What, if any, influence did Adam Smith have on Alexander Hamilton?

Obviously you’d like to have Adam Smith as a guest on EconTalk. What other guest from history would you like to have on EonTalk, limiting it to people who are no longer with us?

We don’t buy books anymore, with the Kindle, what are we going to have to pass on to our kids—I have books from my dad.

Your essay “The Outrage Epidemic,” on tribalism, and you did a great monologue show on this as well. Is it also a contributing a factor that this lack of an external, existential threat that we have in the US now. For almost the entirety of the 20th century—from World War I and II, to the Cold War—and then that changed. Now we seem to be turning on each other.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #212 : Interview with Erik Asgeirsson and Ron Quaranta

Ron and Ed are excited to be joined by Erik Asgeirsson and Ron Quaranta. 

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Erik is the President and Chief Executive Officer of CPA.com. He has more than 20 years of experience in leading technology organizations and driving business growth. Over the past ten years Erik has driven CPA.com's focus on cloud computing and the transforming opportunities available to accounting firms and their business clients. Erik is a frequent speaker at professional conferences and is regularly quoted in the accounting and business trade press.

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Ron Quaranta is the Founder and Chairman of the Wall Street Blockchain Alliance. He is a recognized expert in the area of blockchain innovation, particularly its impact on the world of financial markets. He has over 25 years of experience in the financial services and technology sectors.

Ed’s Questions

First Segment

Erik, what does the President and CEO of CPA.com do on a daily basis?

Ron, what does the Founder and Chairman of the Wall Street Blockchain Alliance (WSBA) do on a daily basis?

Ron, what the spark of this relationship between WSBA and CPA.com?

Erik, what’s the genesis of this relationship and how has it evolved?

Erik, let’s chat a little about the Blockchain Symposium, which I attended. You mentioned why you’re doing it, but talk about the process and tangible items that resulted?

Ron, how does this interaction with the CPA profession help the WSBA and where you are going?

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Third Segment

We haven’t even discussed the basics of blockchain, so if you’re not familiar with this technology, see our Additional Information below for prior episodes that explain the technology and its implications.

Erik, we were talking about the implications on audit, but let’s talk about the impact on accounting. Aaron Harris of Sage Intacct, believes that subledgers will exist on private blockchains, or semiprivate blockchains, as opposed to a full-on public blockchain. Ron, you answer first, then we’ll go to Erik.

Let’s move over to the tax side of things. Government sponsored blockchains that houses all recordable tax transactions, and we go in and simply verify the information. Talk about that, Ron?

About a month we had George Gilder on the show, on his book Life After Google [see below for links] and his position on what blockchain is going to do—build security into the layer of the network. We’ve experimented with the Brave browser, and our two properties—TSOE and VeraSage—our on this browser and we receive micropayments [full disclosure: so far totaling .42¢].

Ron’s Questions

Second Segment

Erik and Ron, How will blockchain specifically impact assurance service and its impact on the audit profession.

Erik, on assurance services on smart contracts, I read about a Japanese company, the Hosho Group, that provides attest services on smart contracts. I’m assuming that some of this assurance work is not just going to be done by CPAs with their traditional audit monopoly on the financial statements, but that this could be opened up to other competitors. What do you say to that?

Ron, would love to hear your views on this. 

Fourth Segment

Erik, when you see radical technology like this [blockchain], and even the government is struggling how and from which agency to regulate it, those types of technologies manifest themselves in business model changes. I’m curious how you both see what has to happen to the traditional CPA firm business model to incorporate this technology—how we price, what we measure, how we hire, educate, etc.

Ron, how do you see this technology impacting business model changes in the professions?

On centralized autonomous organizations, if I own a car that sits idle 90% of the time, this technology allows me to rent it out without the involvement of Uber or becoming an Uber driver—it disintermediates Uber potentially, doesn’t it?

Where should the regulation sit on this. With ICOs it’s not clear if they are a security, or goods and services, etc.?

Additional Information on Blockchain

Our two-part Interview with Doug Sleeter, Episode #96 and Episode #99.

Our interview with George Gilder on his book, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy, Episode #207.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #211: Free-rider Friday - September 2018

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Ron’s Topics

South China Morning Post, September 8, 2018, “Doctors said the coma patients would never wake. AI said they would—and they did.”

Thank you to our listener Geir for passing this along.

Surveillance State,” Kevin D. Williamson, September 13, 2018, National Review

When everyone is the last one out,” The Economist, August 4, 2018

Japanese work notoriously hard, 12 hour days are not uncommon, only 10 holidays per year, and it leads the world in paternity care, but only 5% men use it, and then for just a few days.

The Japanese have given the world the term karoshi—death by over work. They had employment for life post World War II, making it nearly impossible to fire, vestiges of which is holding them back: Japan has the lowest productivity of the G7 countries.

Companies tend to judge employees by input not output, and pay not on merit, but years served. The law should make it easier to hire and fire, allowing women more chances; fathers could bring up offspring, and it might even lead to more babies, suggest The Economist. The latter seems doubtful to me.

“Having a Cow,” Metro USA [from The Limbaugh Letter]

Fragile Millennials can now engage in “cow cuddling.”

For $300, stressed snowflakes can hug and “groom” a cow for 90 minutes at Mountain Horse Farm in upstate New York. We guess, don’t knock it until you tried it, but…

Cows will “pick up on what’s going on inside and sense if you are happy, sad, feel lost, anxious, or are excited, and they will respond to that without judgment, ego, or agenda.”

How udderly inspiring, as Rush says. No mention of barnyard odors.

What about consent? #MooToo?

States’ deregulatory push threatens CPA licensure,” Journal of Accountancy, September 7, 2018

Rory Sutherland, Spark.me, July 2017, “The Science of Knowing What Economists Are Wrong About,” in Montenegro

Another excellent video from Rory worth watching.

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Donald Trump’s speech to the United Nations, September 25, 2018

Geir’s question

Wonder what you think of his speech and your view on the ideology "globalism"? I prefer the ideology of liberty.

Ed’s Topics

Scarcityist-in-Chief,” Donald Boudreaux, CafeHayek

See our show with Donald Bodreaux here.

XKCD.com, 66 Time, September 21

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #210: Interview with Ryan Lazanis of Xen Accounting

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Ryan’s Biography

Ryan Lazanis is a CPA by trade but doesn’t consider himself a normal accountant. He identifies more with being an entrepreneur and loves disruptive technologies and business models. His aim is to help modernize the old, boring, traditional accounting profession. After spending many years in public practice at a small, traditional CPA firm, he started Xen Accounting in 2013. The firm was one of the first of its kind in Canada: 100% online, totally paperless, and fully cloud-based. Xen is a firm of geeky CPA’s, bookkeepers and technologists. They looked at what millennials hated at traditional accounting firm and turned that on its head to offer a new service. Ryan also likes writing & speaking on the subject of technology (including blockchain & cryptocurrency!). He’s been a writer for Techvibes, and has spoken at events around the world. Prior to Xen Accounting he was an active DJ in Montreal but says that his biggest passion is traveling to remote destinations with his wife.

Ryan Lazanis has been operating Xen Accounting without timesheets for the past five years. Founder of Xen Accounting, an innovative firm in Canada, Ryan embraced by the idea of blowing up the old “We sell time” business model of traditional accounting firms. Join Ed and Ron and learn how Ryan’s done it, the lessons he’s learned, and what it’s really like to work in a firm where time is merely a constraint, not a measure of anyone’s worth.

Ed’s Questions

Have you ever been in a tertiary meeting?

Tell us a little bit more about yourself and Xen Accounting.

Why do you do what you do, Ryan? Why did you get involved in accounting in the first place?

When you formed Xen Accounting in 2013 did you form it with the intention of not doing timesheets from the very beginning?

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When you brought your first couple of colleagues on, you didn’t have them do a timesheet?

You knew your costs in advance?

When you brought these folks on board, do they ask where the timesheets were?

What about customers? Did you find any resistance, did they ask you about the hours or your hourly rate?

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Right on your website it says, “Bitcoin accepted here.” Has anyone ever paid you in Bitcoin?

Are you more high on blockchain, or Bitcoin?

How do you see blockchain unfolding, regarding its impact on bookkeepers, accountants and auditors?

Do you see a public blockchain where multiple companies will post transactions when they interact with one another?

There’s different schools of thought on this. One colleague at Sage thinks the blockchain will replace the subledgers (A/P, A/R, etc.) rather than the General Ledger. Any thoughts on that?

Other than Bitcoin, are there other cryptocurrencies you like? [Ripple is his favorite]

Any others, Ether, etc.?

Let’s talk about Artificial Intelligence. Where do you see AI impacting the accounting profession in the shorter-term, 12-18 months out?

What about any other technologies you’re excited about? Any particular application of AI you’re high on?

Ron’s Questions

Did you grow up in Montreal?

See Ryan’s Blog post, The firm I run, Xen Accounting, has been operating for 5 years…(gulp)…without a timesheet

You said you made this change because you wanted to create a better customer experience, which is exactly why I did it back in 1989. Just love that you did it for that reason, too.

This aspect gets lost around the whole debate around hourly billing, pricing theory, behavioral economics. It’s really about creating a better customer experience?

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How has this change affected your practice in terms of recruiting talent?

You said your customers were receptive to this change. I find it’s not the customers that need to be convinced, it’s our fellow professionals isn’t it?

When you get rid of timesheets, your focus becomes creating more value for customers, what has been the sense of creativity, innovation, and collaboration—has it increased in your firm because of this change?

How about after the price has been set, and now you’re doing the work and taking care of the customer relationship, is there more creativity and collaboration?

What inspired you to write this blog post? [See above]

What’s been the reaction from your colleagues to this blog post?

We see more and more firms adopting this model. Do you think this business model is starting to diffuse and running towards a tipping point?

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On your website, you offer three options on your website: Simply Xen, Absolute Xen, and Supreme Xen. So many of our listeners are moving to this model, what are the percentages of customers’ selection for each option?

What do you think is the number one issue facing the accounting profession today?

What’s the biggest opportunity for firms in the profession right now?

What advice would you give to a young, aspiring CPA?

Would you advise I go work for a Big 4?

Do you find ex-Big 4 folks to be good talent for your firm?

Ryan, you’re obviously an entrepreneurial person, what is the best advice you’ve received in your career?

The other thing I noticed about your options, you have Fathom in your top option, and that is more of an advisory role. Do you find your firm, more and more, helping your customers make history rather than just report on it?

Do you see business advisory services growing?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #209: Why Trade Deficits Don't Matter

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What happens when one country’s imports consistently exceed its exports, creating a deficit in the international balance of trade? There is probably no greater misunderstanding about the real nature of wealth than when a discussion turns to the balance-of-trade question.

Justice Oliver Wendell Holmes: “We need to think things instead of words.” Nowhere is this more important than with international trade, so many misleading and emotional words used to describe and confuse things that aren’t very difficult to understand.

Henry Hazlitt, author of Economics in One Lesson explained this phenomenon when he wrote: “… the same people who can be clearheaded and sensible when the subject is one of domestic trade can be incredibly emotional and muddleheaded when it becomes one of foreign trade.”

Ron recently taught an economics course to a group of learned professionals, and this one topic was the most contentious. Most everyone seemed to have an inordinate fear of China, India, and other foreign nations accumulating more and more of America’s debt.

He asked the group a simple question: If China and India become wealthier, is that a threat to America? The general consensus seemed to be yes, illustrating how zero-sum thinking is endemic to this discussion. Adam Smith eloquently wrote about this in 1776 in his seminal book, The Wealth of Nations:

Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.

One of the reasons the United States of America is such a relatively wealthy country is that it maintains a free trade zone among its 50 states. The Constitution prohibits the states from interfering with trade among their respective citizens; there are no tariffs or import, export, or other restrictions within the 50 states. No individual state worries if it is running a deficit with another.

Economist Russell Roberts posed this challenging question in his delightful academic novel, The Choice: A Fable of Free Trade and Protectionism:

Shouldn’t Florida help out Minnesota by importing just as many oranges from Minnesota as Minnesota imports from Florida? Trade flows should be unequal. … if you pick any one state in the United States and look at its trade position with respect to other states, you’d see a lot of deficits and surpluses.

Trade deficits and surpluses are merely accounting conventions with no explanatory relationship to the underlying reality of an economy, which is why accountants and economists have different worldviews. If a free trade zone works internally for the United States, why would it not work internationally among the countries of the world?

 It helps to keep in mind that countries do not trade, people do. In any transaction, as Adam Smith pointed out, both parties must gain for it to take place at all—the antithesis to a zero-sum condition.

You buy a Lexus only because you perceive it as being of higher value than the price you are paying. The government, for all practical purposes, has nothing to do with it. Nor is it any of its business.

As individuals, we run trade surpluses and deficits all the time. I run a deficit with my local grocery store, importing more from them than I sell to them. You run a large surplus with your employer, who pays you more than you buy in products or services from them in return. So what? The resulting accounting deficits and surpluses simply do not reflect the economic reality behind these billions and billions of individual transactions around the world.

This is what Adam Smith meant when he wrote, “Nothing can be more absurd than this whole doctrine of the balance of trade.”

The gains from trade are what we import, not export. The purpose of production, in the final analysis, is consumption. The more imports we can acquire for fewer exports, the wealthier we are, either as individuals or as a country.

Other countries face the same realities, and we are no more likely to obtain the goods and services we desire by trading pieces of green paper with other nations than we are to send letters to the North Pole and get gifts from Santa Claus.

Basic Economics
By Thomas Sowell

Being a creditor or debtor nation simply has no correlation with a country’s standard of living. Thomas Sowell exposes this fallacious concept in Basic Economics:

In general, international deficits and surpluses have had virtually no correlation with the performance of most nations’ economies. Germany and France have had international trade surpluses while their unemployment rates were in double digits. Japan’s postwar rise to economic prominence on the world stage included years when it ran deficits, as well as years when it ran surpluses. The United States was the biggest debtor nation in the world during its rise to industrial supremacy, became a creditor as a result of lending money to its European allies during the First World War, and has been both a debtor and a creditor at various times since. Through it all, the American standard of living has remained the highest in the world, unaffected by whether it was a creditor or a debtor nation.

No one revealed the specious reasoning behind balance-of-trade concerns better than the French economist, statesman, and author Frédéric Bastiat (1801–1850), whom the Austrian economist Joseph Schumpeter said was “the most brilliant economic journalist who ever lived.”

Bastiat used entertaining fables and carried the logic of the proponents of protectionism to their logical extreme, with biting wit. One of his most famous essays, “Petition of the Candlemakers,” was a parody letter from the manufacturers of “candles, tapers, lanterns … and generally of everything connected with lighting,” arguing against the unfair competition—since since its price was zero—of the sun.

Bastiat understood that exports were merely the price we pay for imports, and having to work harder to pay for those imports did not lead to wealth. Using impeccable logic, Bastiat wondered if exports are good and imports are bad, would the best outcome be for the ships carrying goods between countries to sink at sea, hence creating exports with no imports?

Stop worrying about the accounting fiction known as the trade deficit. It’s meaningless, and leads to harmful fallacies in public policy.

Kevin D. Williamson, in Understanding Trade Deficits, National Review, July 29, 2018, points out that a trade deficit is not the same as the budget deficit; it’s not a useful term (it’s a bookkeeping term).

Trade deficits and surpluses are not caused by tariffs and other protectionist policies

  • USA/EU, on average, have same tariff rate: 1.7% USA, 2% EU

  • Significant variance by item

  • Germany has a 10% tariff on automobiles (US 2.5%)

  • One-half of Europe’s cars are exported to USA (600,000 German cars)

  • USA imposed a 25% tariff on light trucks, imposed by the Johnson administration in 1964 in retaliation for French and German tariffs on American chickens

  • China cut tariffs on autos July 1st from 25% to 15%, but could raise them back up to 40% to retaliate against president Trump

  • Manufacturers can get around tariffs by building factories in the US, such as done by BMW and Daimler. For an auto factory to be productive it needs to produce somewhere between 200,000 and 400,000 cars per year

  • 63% of Japanese branded autos sold in US were made in the US in 2006

  • Average tariffs have been cut in half since early 1990s

  • China cut tariffs on average by 90%, from 32.2% to 3.5%, since the 1990s

Trade deficits and surpluses are not driven mainly by consumer behavior, but rather several other factors

  • Macroeconomic factors, tax policies

  • Savings rates

  • Strength of the currency

  • Attractiveness to investors (Trump’s tax reform could increase our trade deficit)

  • Largest USA exporter? BMW, which produces SUVs in Spartanburg, SC, and employs 9,000 Americans; our trade deficit with Germany made that possible (100,000 BMWs alone are exported to China)

Trade deficits and surpluses are not an indicator of economic trouble or health

  • The last time the US ran a surplus was 1975, not a great economic era

  • The US ran surpluses all through the Great Depression of the 1930s, with both imports and exports lower than 1920s levels

  • Britain ran a trade deficit from Waterloo to the Great War, a century marking the apogee of its power, and it grew incredibly wealthy

  • Nigeria had years of surpluses, yet remains one of the poorest countries in world

  • US factories output doubled since 1990, and are much higher than in the 1950-60s, and employs fewer people

  • That, not trade deficits, is why manufacturing’s relative share of employment has declined

  • The US was officially a debtor nation for generations on end (it ran trade surpluses). During WW I it became a creditor nation (running trade deficits). Since then, we’ve been both. Accounting details are not determinants of American prosperity or problems.

Three types of gains from trade

  1. Absolute Advantage—We buy bananas grown in the Caribbean because of nature, geography, or skills (beer and pianos are overwhelmingly produced by Germany and Germans in other countries, even China’s most famous beer—Tsingtao) was created by Germans)

  2. Comparative Advantage—Being able to produce anything more cheaply is not the same as being able to produce everything more cheaply. We’d have to produce everything more efficiently than Canada by the same percentage for each product for there to be no gain from trade.

  3. Economies of Scale—200-400K autos per year, Australia shut down auto plants, can’t cover high costs, even though the number of OZ owned per capita is higher than US, there are 12x more Americans

Over 1,000 economists signed a letter to Senator Smoot, Congressman Hawley, and President Herbert Hoover to protest the Smoot-Hawley Tariff Act, and the last line read: “We cannot increase employment by restricting trade.”

Four measures of how US firms do in China

  1. China % of foreign sales of US firms: 15% (20% would be in line with China’s share of world GDP) = 1% American firm’s global sales

  2. American firm’s aggregate market share in China = 6%, almost double China’s in America

  3. Do US firms underperform other multinationals and local firms? Comp adv in tech, Apple, Intel, Qualcomm, top 50, sales increase 12% compound annual rate, local firms = 9%, European firms = 5%

  4. US firms shut out of some sectors. Yes. Alphabet, FB and Netflix are nowhere

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #208: Free-Rider Friday - August 2018

Ed’s Topics

Accounting Today’s Top 100 Most Influential People in Accounting

Ed and Ron both made the list, along with VeraSage Fellow Michelle Golden River, and from Sage, Jennifer Warawa, and friends of VeraSage, including:

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  • August Aquila

  • Gary Boomer

  • Jim Boomer

  • Jim Bourke

  • David Cieslak

  • Angie Grissom

  • Tom Hood

  • Allan Koltin

  • Mark Koziel

  • Gregory LaFollette

  • Taylor Macdonald

  • Stan Mork

  • Jody Padar

  • Hitendra Patil

  • Darren Root

  • Marc Rosenberg

  • Donny Shimamoto

  • Geni Whitehouse

  • Jennifer Wilson

  • Joe Woodard

Ron was also voted #6 among the Top 10 Most Influential, coming in one vote less than Donald Trump, possibly due to Russian collusion.

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Should Commuting Count as Work?

We noticed this post in LinkedIn and it was picked up absolutely everywhere. 

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Our Patreon Site

Have you ever wanted to listen to the show commercial free? Just think, no Greg Kite commercials! Not only that, Ron and Ed record weekly bonus episodes and share their conversations during the commercials. All this can be yours for $7 per month.

Nudging: Should We Be Wary of the Latest Fad in Behavioral Economics?”, Donovan Choy, FEE, September 1, 2018

Check out our show from August 2014, Episode #8: Mr. Spock and Homer Simpson.

What’s wrong with “nudging”? Two problems:

  1. Policy makers suffer from the same biases that the rest of us do

  2. Political institutions are plagued by inefficiencies

Tucker Carlson Feeling the Bern Illustrates Conservatism’s Hostility to Free Markets,” FEE, August 31, 2018, Tom Mullen

Tucker thinks Amazon, Uber, and Wal-Mart start paying their people more so the taxpayers don’t have to subsidize these workers. We this he is way wrong on this one!

Ron’s Topics

 “The Son Kingdom,” The Economist, May 12, 2018

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Masayoshi Son, founder SoftBank, Japanese telecoms/Internet

  • The Vision Fund = $100 billion venture capital fund

  • Alliance with Muhammed bin Salman, Saudi Arabia’s crown prince, $45B + $5B Apple

  • Exceeds $64B all VC funds raised globally in 2016

Masayoshi’s bet on Alibaba paid off, but in the dot.com crash of 2001, he lost 99% of SoftBank’s market value.

Less than 5% of companies that pitch receive funding, slightly more generous than most VC firms. He gives them 4-5x more than they ask for! Startups perish more from indigestion than starvation. Wants to create an ecosystem and take them into Asia, etc.

The fund invests in 3 areas:

  1. Frontier: singularity, IOT, AI, computational biology, genomics

  2. Bring new tech to old industries (ride-sharing, WAG! Dog walking uber)

  3. Technology, media, and telecoms

If Steve Jobs brought to Apple an understanding of technology and art, Son’s formula is technology plus finance.

The bigger the VC fund, the harder to make high returns

Even if he loses, the fund will shape technology in future, frontier technologies. It will offer startups an alternative to cashing out to giants (FB, Google, etc.)

Bartleby: “Taking minutes, wasting hours,” The Economist, June 30, 2018

In 1957, C. Northcote Parkinson came up with the Law of Triviality: “The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved.”

Bartleby’s Law: 80% of the time of 80% of the people in meetings is wasted.

Corollary: After at least 80% of meetings, any decisions taken will be in line with the HIPPO, or highest-paid person’s opinion.

Start with the most contentious item first, and make sure everyone understands what was actually decided.

I jumpstarted my productivity in 15 minutes—and you can, too!” AICPA guest blogger, July 13, 2018, Brock Gaucette, Manager, Corporate Communications, AICPA

How a firm got more productive by reading more books, through: increased focus, confidence in communicating, improved memory, and a new, improved addiction—reading.

Elizabeth Warren’s Batty Plan to Nationalize…Everything,” Kevin D. Williamson, National Review, August 16, 2018 and “Elizabeth Warren Looks to Make Cronyism Great Again,” Daniel J. Mitchell, FEE, August 25, 2018

The Accountable Capitalism Act: Business with more than $1B in revenue would need permission from federal government (the act establishes within the Commerce Department an Office of US Corporations to review & grant charters). The act would also regulate:

  • Dictate composition of boards

  • Internal corporate governance

  • Compensation practices

  • Personnel policies

This act is unconstitutional (takings clause), unethical, immoral, irresponsible and utterly bonkers, according to Kevin Williamson of National Review.

Companies are already accountable for everyone they exchange with: customers, employees, suppliers, govt, etc.

This is simply Elizabeth Warren staking out the most radical corner for her 2020 presidential run.

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Apple’s shareholders are, collectively, the largest taxpayer in the world. Should we seize those earnings? Isn’t that covetousness and envy?

Businesses don’t have to put up with this? Nearly 50% of the S&P’s companies revenue is from overseas. The USA is home to 64% of the world’s billion-dollar privately held companies, and a plurality of billion-dollar startups.

Economist William Nordhaus estimates that innovators keep just 2% of the social value of their innovations.

“The thaw,” The Economist, June 30, 2018

A new show, “The White Crow,” currently in production, Rudolf Nureyev, a Russian ballet dancer who defected in 1961.

Also in production, a six-part adaptation of John le Carre’s “The Spy Who Came in from the Cold,” a British spy’s assignments in East Germany, also in production

Simon Cornwell, le Carre’s son, got into the Stasi archives, just like The Americans, creator Joe Weisberg (a former CIA officer), got into the Russian archives.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #207: Interview with George Gilder

In lieu of show note, we have opted to post the transcript of our interview with George Gilder about his book, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy

If you would like more on this or want to listen commercial free, please consider subscribing to our premium service at Patreon.

Ronald Reagan:             Like a chrysalis, we're emerging from the economy of the industrial revolution, an economy confined to and limited by the earth's physical resources, into the economy in mind, in which there are no bounds on human imagination, and the freedom to create is the most precious natural resource.

Ron Baker:                    Welcome to the Soul of Enterprise: Business and the Knowledge Economy, sponsored by Sage, energizing business builders around the world through the imagination of our people and the power of technology. I'm Ron Baker, along with my good friend and VeraSage Institute colleague Ed Kless, and on today's show folks, we are talking about life after Google, with the one and only George Gilder, my mentor for 37 years. George, welcome back to the Soul of Enterprise, and thank you so much.

George Gilder:             Oh, it's great to be on.

Ron Baker:                    I have to thank you on behalf of me and Ed for sending us your book a week before it was published [July 17], which we devoured, and just because we know you don't like the free model, we've gone out and bought multiple copies, so I just want-

George Gilder:             Oh, thank you so much. I've been quoting you. I don't know how many of my books quotes you, but a couple anyway.

Ron Baker:                    Well, you've been my 37-year mentor, George.

George Gilder:             Okay.

Ron Baker:                    So, getting quoted in your book Knowledge and Power was one of the highlights of my life. I'm even going to dispense with reading your biography. I'm just going to direct people back to show number 60, which we did with you on September 11, 2015, and you've taken us from the Microcosm to the Telecosm, and now the Cryptocosm, and all the while, you love to cite Carver Mead, who says, "Listen to the technology and find out what it's telling us." George, what's the technology telling you about Google?

George Gilder:             It's telling us ... It's expressing Bell's Law, and Bell's Law is that every 10 years or so, the accumulation of Moore's Law doubling its computer power every couple of years leads to a hundred fold or more rise of computing power, which entails and mandates an entirely new computer architecture. Back in 2006, in Wired Magazine, I wrote a tribute to the Google's launch of the era of cloud computing and machine learning and data warehouses. It's now 10 years, 12 years have passed, and Bell's Law is tolling for Google today, because Google has all these big white elephants, bureaucratic data centers all around the globe, and they're becoming obsolete.

Ron Baker:                    You talk about Google having a materialist, and I love this, neo-Marxist, Burning Man ideology that we humans are nothing but an algorithm, and you reject this, and I just love how you bring in the whole William F. Buckley, "Don't let them immanentize the Eschaton." Can you kind of explain that?

George Gilder:             Well, a lot of people don't understand that [Karl] Marx's real error wasn't the celebration of violence or class war or whatever. It was to imagine that the industrial revolution of the 19th century, all those steam engines and railroads and electric turbines and dark, satanic mills were the ultimate achievement of human productivity, and that in the future, the challenge would not be the creation of wealth, but rather the distribution of wealth, and that was the original Marxism. The new Marxism of Google is to say that artificial intelligence, the machine learning, the robotics, the algorithmic biology, all these ... the search engines, all these capabilities are kind of the ultimate human achievement. Eschaton and Bill Buckley's words, or [Eric] Voegelin’s words, a final thing, and that in the future, we can all retire to beaches and receive the guaranteed annual income while Larry Page and Sergey Brin get on a rocket and go out to some remote planet with Elon Musk in a winner-take-all universe. That's sort of the new Eschaton, the new Marxism, the Google Marxism.

Ron Baker:                    You talk about the priesthood of AI [Artificial Intelligence] and supposedly how it's going to take over the world, destroy all of our jobs, and yet Silicon Valley can't figure out passwords. I love the rant in one of the early chapters in your book where you talk about passwords and asking you for your mother's maiden name and what street you used to live on as a kid. What is the problem here?

George Gilder:             I keep forgetting, really ... I discover that my answers change as I grow older. What I really like is when they pop up, give me your ... one of those little boxes, scantily clad boxes pop up in the middle of your screen saying please insert your password, as if you only have one password rather than hundreds of passwords, many of which a combinatorial explosion can paralyze your whole life. An epidemic of passwords, and they want one. It's like you have extrasensory perception or maybe artificial intelligence to identify precisely the password that's relevant in any particular situation. Every webpage imagines that it's the apple of your eye.

Ron Baker:                    You talk about how security is not an app, it's really an architecture, or at least should be, it's one of the laws or the overriding laws of the cryptocosm, do you think that Silicon Valley has just given up on this issue?

George Gilder:             I think that, yes, they regard security as sort of a retro fix or a patch or a video game, to be conducted by SWAT teams of brilliant pony tailed nerds who crack down on hackers. It's a really infantile view of security. Security is an architecture. It's the way you organize the network with a ground state of factuality and substance. If you don't have a ground state, you really don't have a network. You become dependent on all these Leviathan companies at the top.

Ron Baker:                    Right.

George Gilder:             Like Google-

Ron Baker:                    One of the things that just really struck me about reading the book was when you talked about Kurt Gödel, and the halting problem, but his basic premise was how every logical system depends on propositions that cannot be proved within the system itself, that computers require Oracles to give them instructions. He refuted the whole premise of AI, didn't he, back in, what was it, the '30s?

George Gilder:             1931, and he's the one who persuaded von Neumann, John von Neumann, who was the greatest figure in computer science of the 20th century. It was Gödel who persuaded [John] von Neumann back in 1931 to abandon mathematical physics, essentially, and proceed to computer science. The computer science that Gödel launched, he essentially used a software program to prove that all logical systems are necessarily dependent on axioms that cannot be proved within the system. Alan Turing, who conceived the Turing Machine as the ultimate computer, proved the same point for computers by saying that they're necessarily dependent on oracles, and that's why [Larry] Ellison named Oracle Computer after Turing's Oracle, that the oracles have to be us. They have to be human minds that program the computers. The computers cannot run off and program themselves. They're necessarily dependent on informative, creative, imaginative minds.

Ron Baker:                    Right. If that's been proven, why is it that really smart people, and I know you address this in the book, like [Elon] Musk and [Sergey] Brin, and [Larry] Page and all that, why don't they see this?

George Gilder:             I think they're captivated by their immediate technologies, and they never really address the deeper implications. It's amazing to read these people. My favorite is Ray Kurzweil, who's a friend of mine, and a genius, and he wrote a book called How To Create a Mind, and it's a brilliant book. It brilliantly explains how to create a speech recognizing, pattern recognizing, correlating machine of the computer, but he kind of explains away consciousness. But if you don't understand consciousness, you don't understand mind at all. They imagine that consciousness is a side effect of all these machine learning programs that they understand, but the consciousness is the source of thought. It's not an epiphenomenon or side effect of thought. It is the origin of thought. If they don't understand consciousness or believe that consciousness is something that's going to emerge magically from their machines, it shows they aren't even trying to understand true intellect.

Ron Baker:                    You say that consciousness depends on faith, the ability to act without full knowledge and the ability to be surprised, and to surprise, and I just ... This is kind of an out there question, but how much of this is just due to secularism or atheism?

George Gilder:             Well, it's hard to say, but G.K. Chesterton made what I regard to be a wonderful observation among many wonderful observations when he said that people who don't believe in God don't believe in nothing, they believe in anything. They grope, and that's what Silicon Valley is doing in its current nervous breakdown. It's groping for explanations of the world that correlate with their own desiccated secular vision of multiple parallel universes, infinite numbers of universes they have to postulate, in order to explain our one unique singular universe. Many people in Silicon Valley will earnestly tell you that in all likelihood we're just part of some alien race's, some advanced alien race's simulation, 3-D simulation. They actually believe in the material of superstition, that human beings are nothing but ... and nothingbutery is another concept of Chesterton, I believe, that we're nothing but material, we're nothing but chemistry and physics. It's what I call the flat universe theory.

Ron Baker:                    Well, George, this is great, and I know Ed wants to pick up on the consciousness question with you, but unfortunately, we're up against our first break, and folks, I'd like to remind you, check out www.thesoulofenterprise.com. We will post our full interview with George Gilder along with books and links to where you can find more of his work, and now we want to hear from our sponsor, Leading Results.

Ed Kless:                       And Ed Kless here on The Soul of Enterprise, and we are with George Gilder, author of the fantastic book Life After Google. George, I want to just pick up where Ron left off, and from a quote from the book, it says, "The blind spot of AI is that consciousness does not emerge from thought. It is the source of it." Are you aware of the work of a guy by the name of ... I think he's done a TED Talk, Donald Hoffman, who has posited-

George Gilder:             No.

Ed Kless:                       ... in proof that-

George Gilder:             Well, is Donald Hoffman ... Who is he? I may have heard of Donald Hoffman.

Ed Kless:                       Yeah. He did a TED Talk about three or four years ago, and his book has been anticipated since 2017. It hasn't come out yet, but his position is basically ... He goes through this mathematically, that it's consciousness that creates the reality that we see, and he's got a really-

George Gilder:             Yeah.

Ed Kless:                       It's an interesting position.

George Gilder:             Yeah. Well, I think it's an interesting position if it understands that our consciousness is a reflection of the greater cosmic consciousness that we call God. The idea that somehow our consciousness is kind of an artificial construct doesn't appeal to me, but I do believe we are in a hierarchical universe, and our consciousness reflects a larger consciousness of our creator in some sense. This is not some religious affirmation, essentially. It's a scientific observation that corresponds to all the evidence we experience, which is that consciousness is a fundamental property of life, and infuses the universe with life, and that human beings in some sense are created in the image of their creator.

Ed Kless:                       Yeah. He, at least in the interviews that I've seen, kind of takes an agnostic approach to that, but I suspect, just in seeing him, that he would agree that it's a greater consciousness that has started all of this. So, it's pretty interesting.

George Gilder:             It all depends what kind of thinking you're doing. Human beings only live for awhile, and we only have a limited perspective. So, if we're going to make any serious decisions or choose any particular path of behavior, we got to have faith, and we have to act in the faith of incomplete knowledge. That's just the predicament of the human being. So, I think ... So, to say that you're agnostic, of course we're agnostic, we can't really know of the mind of God in a profound way, at least short of some ecstatic revelation, but at the same time, we have to act in the darkness of time, and in order to act in the darkness of time, we have to have what's called faith, and faith precedes knowledge. Faith precedes action. Faith precedes meaning.

George Gilder:             This is really what Gödel discovered. He discovered you can't have any logical, rational systems without faith. You've got to have some actions outside the system that can't be proven within the system. And then, in case Gödel wasn't enough and von Neumann wasn't enough, two of the great minds of the 20th century, Alan Turing went and proved it again, and then Gregory Chaitin went and proved it [with] algorithmic information theory, and Claude Shannon essentially proved it again. They all have shown that this dream of a hermetically sealed package of complete knowledge imparted through some mathematical set of algorithms is delusional, and people who believe in it are victims of Chestertonian delusion.

Ed Kless:                       It's interesting. When I've been discussing your book with, well, basically everybody I run into for the last month or so, and one of the things that does come up on more than one occasion is somebody said, "Well, what about IBM's Watson and its ability to create a recipe? Wasn't that creative?" As I was thinking about it, I said, well, I guess it was creative, but at some point somewhere in the code, in the innards of Watson somewhere, there was an if/then statement coded by some human being that said if cilantro seems to be a good ingredient, include it. That's how I kind of meant it to understand. There has to have been a decision that was pre-made that ultimately manifested itself in what the decision that Watson makes.

George Gilder:             Well, they had to choose a bounded area of deterministic behavior, and of course, the computer can run through a set of algorithms that covers some defined set of degrees of freedom. It's a deterministic domain. Chess, for example, or Go, or one of these games that computers can play, and are functioning in a deterministic domain, where there's one answer in essence. Of course they can explore a deterministic regime, but creativity, by definition, comes as a surprise to us. It's the unexpected bits that constitute information, and Claude Shannon's information theory that's the foundation of computer science and the internet. This is ... It's unexpected bits, surprisal, and if a machine starts surprising you, it's breaking down…surprise is bad news in a machine.

Ed Kless:                       Yes.

George Gilder:             The Google philosophy, the way they think they compensate for determinism of their programs, is to insert randomness, but randomness subtracts information. It doesn't add information. It doesn't provide imagination. It doesn't endow creation. So, it just ... wherever they go, they end up in the Gödel trap, and when they're in the Gödel trap, they fantasize infinite multiple universes and simulations of aliens and other bizarre illusions.

Ed Kless:                       I love that. I wanted to ask you, we've got about three minutes until our next break, and picking up on the non-deterministic piece, you talk about this in the book, that applying it to self-driving cars, that this technology would ultimately fail without new sensory and human guidance. You talk about so many technologies in the book, but you don't really address this. Do you think that we will have fully autonomous vehicles in relatively short order, or is that not something that's ever going to come, or is driving deterministic enough, I guess is the question?

George Gilder:             We can certainly ... if we create a bounded arena for these cars to function within, we can obviously have self-driving vehicles. We already have self-driving vehicles in lots of private kinds of parks and home residential neighborhoods. If you have essentially a controlled environment, you can have self-driving cars. As the self-driving technology improves, and the point I make in Life After Google is the improvement will not just be in machine learning. It's not just that the cars learn how to drive. It's also that the technologies of Lidar have to improve as well, and that's a major challenge. One of the companies I describe, Luminar, which is started by a [Peter]Thiel fellow, lured out of college by a $100,000 Thiel Fellowship, a guy named Austin Russel, launched the company called Luminar, which is improving the effectiveness of Lidar by a factor of 50 or something, which gives the car as much as seven seconds to respond to unexpected events. It takes that kind of improvement in hardware in order to make it possible for these software programs to arrive at coherent solutions.

Ed Kless:                       Yeah. It's like-

George Gilder:             It's not something that's going to happen all at once. It's something that will incrementally occur as cars gain increasing capabilities, but it doesn't usurp human minds. It's not a singularity that this displaces human beings. It's just, as technology improves, human productivity increases, and human beings become more employable, not less employable. This is the whole history of technology. It's as if these people have amnesia of some kind and can't understand the manifest experience of hundreds of years of human creativity and progress.

Ed Kless:                       Yeah. No, absolutely.

George Gilder:             Jobs get better, and more productive, and safer, and more creative, and more interesting, all the time.

Ed Kless:                       No, absolutely. Great stuff. Well, we're up against our break at the bottom of the hour. We want to remind you that you can contact Ron or me by sending an email to asktsoe@verasage.com. The website, www.thesoulofenterprise.com, with show notes and also preview shows, as well as the one that we did with George Gilder back on September 11th of 2015 I think it was, but now a word from our sponsor.

Ron Baker:                    All right. Well, welcome back, everybody. We're here with the author of Life After Google, George Gilder, and George, you do a really good job in the book of taking down the whole free model of Google. Not only does it give them an incentive not to worry about security, because who wants to steal free stuff, but it's not free, because we're not paying in money, but we're paying with our time. It's kind of like a barter system that we've left behind in the Stone Age, as you point out. It's a real problem, isn't it? Not to have customers.

George Gilder:             Yeah. Well, I think it's a problem for Google. It's a problem for Google that they don't have prices. It's a problem for Google that they don't have lessons that a real market imparts to companies and guides their investment and their future. It's a problem for Google that they don't have real customers, that ... to whom they have obligations and incur liabilities. It's a problem for Google that they don't have the whole process ... They talk about machine learning all the time, but the fact is that machines can't learn, but humans can, that in order for humans to learn, they’ve got to have experiments that can go wrong. They can't have a guaranteed world where everything's free and no learning experiences really can arise.

George Gilder:             My whole theory, the information theory of capitalism, is that wealth is knowledge, and we know that because the conservation law says that all matter that ever existed, existed in the Stone Age. The difference between our age and the Stone Age is entirely the growth in knowledge, and if knowledge is wealth, then economic growth is learning, and that's what it is. So, if you prohibit learning by not having any prices for your goods or any real relationships with your customers, or you restrict your customers to a few big corporate offices that buy your advertising or even hundreds of thousands of small businesses who purchase your advertising, you restrict your market and you restrict your learning process, and that is what will ultimately bring Google down, because there are all these companies out there that are confronting real markets and getting real price signals and conducting real Popperian experiments [named after Karl Popper], which yield new knowledge.

Ron Baker:                    Right. No, your equation there is brilliant, wealth is knowledge, growth is learning. So, okay, Google's doomed. Its business model is doomed because of this new layer of the internet that we're going to get because of the cryptocosm, and I love how you profile some of the 1517 fund entrepreneurs and the Thiel Fellows, and you talk about all this new technology that's coming out that I guess will be the new architecture of the blockchain economy. Can you kind of unpack that? You say the clouds are going to disburse across the sky and everything's going to move down to the decentralized blockchain. Is that the essence of the cryptocosm?

George Gilder:             Yep. The key point is that in order for capitalism to really to work, you have to maximize the creativity of individual human minds, and individual human minds are disbursed, and we're distributed, we're separate. We function largely peer to peer. Internet architecture that corresponds to the disbursal of human intelligence, of humans' minds, is the blockchain and all the other technologies that have erupted around the blockchain and some of them even obviate specific blockchain structures, they have other similar structures, but they all are identifiable by their disbursal of information and intelligence. They don't try to create a porous internet stack, where all the knowledge and money rise to the top. Instead, you have a block stack, you have a system at the bottom that retains personal data, personal content, personal creativity, on the foundation. This is the foundation of security that the blockchain offers for a new internet that correlates with the very nature of the human mind, and its disbursal around the planet.

Ron Baker:                    And George, when you look at all these entrepreneurs that you profile, they're all really young. Some are college dropouts, Thiel Fellowship winners. They all seem to be in their 20s. I know we've talked about Charles Murray's book, Human Accomplishment. One of the striking things in that book is all of these great leaps forward in learning take place from people below the age of 40. Is there something to that still, that innovation is really a young person's game?

George Gilder:             It is, because anybody's capabilities are limited, and you gain your power over the environment by focusing, and by developing specific modes of behavior, habits and disciplines. The new generations stand on the shoulders of the old generations, but it's hard to stand on your own shoulders. So, it is true that Thiel, Peter Thiel, had a brilliant insight when he decided to lure the best entrepreneurs out of college before they graduated, because these colleges were becoming sclerotic and bureaucratic and sort of houses of political correctness, chambers of diversity, politics ... It's just no longer serving the future, sort of clamping down on new generations, stultifying new generations.

George Gilder:             One of the first Thiel Fellows was Vitalik Buterin, who created a new blockchain, imitating the Bitcoin blockchain with a number of improvements that allowed it to be extended into a new global computer platform that could use a new software language called Solidity to create smart contracts that could function with a new currency called Ether, which in turn fed on a new value metric called Gas and this Ethereum blockchain has already accumulated some $20 billion of new ICOs, initial coin offerings, and people keep stressing that 46% of them have already gone bust and a number of them are frauds, and yeah, there's a lot of chaos and a lot of mischief in the blockchain world, but there's also an efflorescence of creativity that closely resembles the initial efflorescence of creativity around the internet itself. It really constitutes a new architecture for the internet based on a new concept of security, which is derived from distributing information everywhere rather than concentrating it at the top in a few giant data centers.

Ron Baker:                    George, is it safe to say that you have more faith in virtual reality than artificial intelligence, because VR tends to augment the human?

George Gilder:             Yeah. The virtual reality challenge is trying to accommodate human consciousness and allow us to see the universe in new ways. Photons ... Virtual reality is essentially manipulating photons and Jules Urbach, who as the founder of OTOY Corporation with me and Alissa Grainger and Ari Emanuel and a bunch of people, but Jules is really the genius. He points out that the big bang was an explosion of photons and what virtual reality has to do is simulate little bangs of photonic explosions that impinge on human consciousness and give us a new perspective on reality. That's a great challenge. It doesn't try to usurp human minds. It tries to serve human minds.

Ron Baker:                    Right, right. My last question, George, and then Ed will take us out, but Google is full of really smart people, so I have a two-part question for you. One, have they invited you internally to speak to them about this book?

George Gilder:             No, they haven't. I've sent messages. I think they'll get around to it. I really believe that the word of this book and ... It's been the number one book in digital currencies and the number one book in computer science theory or whatever on Amazon for much of the last month, and I don't think it's entirely a coincidence that Google has been yacking about their concern with security increasingly as the days pass. We'll see. I expect to speak at Google at some point. I don't think that they're that intimidated that they think they can't learn from me, but maybe ... We'll see. It'll be interesting. I respect them tremendously. I think they're the dominant company of this era. They've made a huge contribution. They just have exaggerated the significance of their contribution. They've tried to inflate it into an Eschaton, a final thing, and it isn't. It isn't. Artificial intelligence does not eclipse human intelligence at all. It has nothing to do with human intelligence, really. It's an extended function.

Ron Baker:                    Right, right. Well, that's a great note for me to leave it on, George, as we enter our next break, and folks, like to remind you if you want to send Ed or myself an email, send it to asktsoe@verasage.com, and now we want to hear from our sponsor, Sage.

Ed Kless:                       And we are back with The Soul of Enterprise. Unfortunately, we have lost George Gilder. Ron.

Ron Baker:                    Yes. Oh, he's back.

Ed Kless:                       Oh, he's back. He's back. Okay. Hi, George, you back?

George Gilder:             Yeah, I'm back. I don't know what happened.

Ed Kless:                       All right, awesome. No, clearly Google does not want this interview to continue. That's what it is. In all seriousness, I'm going to take you through to the last segment. We've got about six minutes left.

George Gilder:             Okay.

Ed Kless:                       A couple things you and Ron were talking about got me to thinking. What are your thoughts on what Apple is doing from a security standpoint? They at least seem to be attempting to shift it down to the device, to make it a little bit more personal, a little bit more human. Do you think that's going to be an assistance in the future, or do you think that that's going to be blown up with the whole new security realm itself?

George Gilder:             Well, the first place, I think Apple and Amazon are both different from Google in that they spurn the free temptation. They are brilliant at collecting money from real customers. I think they're not part of this Google system of the world in the same way. That said, I think Apple is deteriorating, to some degree. Their constant passwords, their PINs, their constant harassment of their users, their increasing closure of their systems, where you can't repair them. The right to a repair is an important phenomenon, and to try to create a closed, essentially, company store where their customers can't be creative anymore, I think Apple is deteriorating since the times of Steve Jobs. I think they need ... Their leadership has to open up a bit. I don't think they've solved the security problem at all. They're just compounding it with more security busy work, more pettifoggery that really chiefly stops their customers from using their own devices.

George Gilder:             If you make a slight mistake with your Apple drive, they can't retrieve it for you. If you forget your special password for your Apple drive, you got to wipe it clean before you can proceed, and you lose everything you haven't stored at the Apple Cloud. This whole security model that these companies are pursuing where they try to create their own little secure walled garden, while leaving all the intersections between the various separate walled gardens open to hackers to play, is futile and quixotic and will have to end.

Ed Kless:                       Agreed. We have about two minutes left, George. What I do want to ask you, first of all, thank you for the recommendation on the Brave browser. I've actually started playing with it myself, and I think I see where it's going, probably not as clearly as you, but it's pretty fascinating technology. What I wanted to ask is, do you think that the blockchain or some variant form of it might be a potential answer for the challenges that we see with voter fraud?

George Gilder:             Yeah. I think voter fraud ... to the extent that we really can't solve voter fraud with the existing technologies, I don't think we've got an awful lot of voter fraud in the United States. Maybe I'm wrong about that. But blockchain is a complex technology that's being developed along many different tracks at the moment, and one of the applications is voting, and it’s being used in Estonia and several other countries, and Singapore wants to use it. There are lots of experiments going on using blockchains in politics, and we'll see how they turn out.

Ed Kless:                       Yeah, no, well, and then the other side of that question is as security becomes more personal, and we've got about one minute left, do you think that disrupts the NSA from their "spying" on us as well?

George Gilder:             Yeah. I don't mind NSA doing metadata churning or metadata through their computers. Does not threaten me. FBI agents pounding on my front door or breaking into my garage, threaten me. I think computer intrusions are sort of benign and necessary in an age where nuclear weapons can be potentially put in small boxes and deployed. They're just real terrorist threats that the NSA has to address, and I think this paranoia about privacy with the NSA is misconceived.

Ed Kless:                       Interesting. Well, thank you, George Gilder.

Ed Kless:                       No, that's okay. Sorry, we just have to wrap up. We've got about 30 seconds left, and Ron's got to read the outro. Want to really appreciate you being on the show once again. You're a fabulous guest, and thanks for handling all my rapid fire subject changes at the end there. Hopefully you're willing to appear again next time.

George Gilder:             Oh, I certainly will. Thank you so much.

Ron Baker:                    Thank you, George.

George Gilder:             Love your show.

Ron Baker:                    Thank you.

Ed Kless:                       Thanks.

Ron Baker:                    Ed, what's on store for next week?

Ed Kless:                       Next week we're on Free-rider Friday.

Ron Baker:                    All right. See you in 167 hours.

Ron Baker:                    This has been The Soul of Enterprise: Business in the Knowledge Economy, sponsored by Sage, energizing business builders around the world through the imagination of our people and the power of technology. Join us next week folks on Friday at 1 p.m. Pacific. In the meantime, check out thesoulofenterprise.com. We'll post full show notes with our interview with George Gilder. Also, you can contact Ed or myself at asktsoe@verasage.com. Thanks for listening, folks. Have a great weekend.

 

 

Amazon’s George Gilder Author Page

 

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #206: Interview with David Meikle

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David Meikle’s career in marketing communications spans more than two decades during which time he has worked with Grey London and Ogilvy & Mather and for some of this biggest brands and brand owners including Unilever, Ford, GlaxoSmithKline, Nestle, American Express and BP.

In 2003 David joined Ogilvy Russia as Group Managing Director. In less than four years Ogilvy Russia had become WPP’s largest creative group in the Russian Federation, increasing agency revenues by more than 500%.

Returning to the UK, David founded the marketing consultancy and intermediary, Salt Partners. While working for clients such as the Post Office, Bayer, BMI Healthcare and several leading creative and media agencies, he developed the strategic framework that would become The Monkey House and wrote his first book: How to Buy a Gorilla (2017), renaming his business after the book in 2017. David lives in Oxfordshire, with his wife, his son, a Russian-born Welsh terrier called Knopka, a whippet called Molly and a couple of chickens. 

Ed’s Questions

Marketing in Russia: Is that like selling snowballs in hell?

Put it in historical context for us. The famous ad “First Over the Wall,” by Saatchi & Saatchi. [You can see this in Paul Arden’s book, Whatever You Think, Think the Opposite, 2006]. In 2003, how long had Ogilvy been in Russia?

Saatchi.png

How long were you in Russia?

So you’ve been out of Russia for 10 years. Do you still have friends over there?

Has it significantly changed in the last 10 years for advertising, with Putin, etc.?

One of things going on here in the US with Trump and Tariffs, and all that, one comparison I heard is we could have free trade with Russia but it wouldn’t stop the need to pay bribes to get things done.

This is one of the few books I’ve read, that actually mentions the theme music we use here at TSOE.

I work for Sage, the brand name is well known in the UK, but less well known in the USA. Many of the organizations, and listeners to the show, are partners of Sage. Let’s do a deep dive on the Spider Monkey, which is probably the type of advertising that these organizations should be doing. Do you agree with that?

The way Peter Drucker looked at risk, most small companies miss the risks they can’t afford not to take.

I’m going to steal where Ron was probably going to go: What’s it like to work with Rory Sutherland?

Ron’s Questions

Why do I want to buy a gorilla, and why did you write this book?

Explain the Gorilla ad for our listeners.

The Gorilla is high-impact, original, engaging, creative, transformative work. The rest of the Monkey House is:

  • Orangutan—some brands need to play it safe (defending market share)
  • The Spider Monkey—lower available media investment; punch above weight (growing/stealing market share)

Why is Gorilla advertising so rare? I was in Australia earlier this year presenting to advertisers, and I spoke with a creative from Saatchi and asked him which country was most creative in advertising. He said, hands down, New Zealand. What’s your take on that?

I love the “unholy trinity” analogy. In the book, you call it the Mexican standoff: each of the three—agencies, marketers, and procurement—are exclusively in pursuit of his own interest, prepared to kill the others to get it. Rather than focus on wishes/interests of agencies, marketing and procurement, you want focus on business problem that the three need to solve, but that doesn’t seem to happen?

Speaking of confessions of plagiarism, when you spoke in Toronto, and in your book, you talked about leading a class full of procurement people, and you asked two questions:

  • How many are personally incentivized to save money on marketing?
  • Keep your hand up if your bonus is any way contingent on the value of the marketing services you produce?

[That’s brilliant since Brand ROI > agency price + media + production, etc.]

You say we need to hold procurement to the same KPIs as marketing. But we don’t do this. Why not?

A lot of time we don’t say “no” to procurement, which is really frustrating.

There has to be a risk/return tradeoff with procurement, since it’s an investment.

You quote Stephen (M.R.) Covey’s book, The Speed of Trust:

“Without trust we don’t truly collaborate; we merely coordinate, or cooperate at best. It’s trust that transforms a group of people into a team”

How do you think the billable hour has played into the erosion of trust and the unholy trinity?

One of things I love about your book is that you continually say that marketing is about persuasion, it’s an art not a science. You wrote hourly billing is easy to measure, but we might as well evaluate an artist based on the amount paint they say they’ll need. It’s an input measure, not an outcome measure.

Our colleague Tim Williams [See Episode #23 and #133] believes in differentiation and specialization. Is that what you advise your agency customers as well?

Should the marketing community get over this conflict of interest concept, that if we work for Coke we can’t work for Pepsi. But these companies both hire McKinsey?

Have you finished The Americans?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #205: Interview with Mark Skousen

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Mark Skousen, Ph. D., editor of Forecasts & Strategies, is a nationally known investment expert, economist, university professor and author of more than 25 books. In 2018, he was awarded the Triple Crown in Economics for his work in economic theory, history and education, and has been identified as one of the 20 most influential living economists (superscholar.org). He earned his Ph. D. in monetary economics at George Washington University in 1977. He has taught economics and finance at Columbia Business School, Columbia University, Barnard College, Mercy College, Rollins College and Chapman University, where he is currently a Presidential Fellow. He also has been a consultant to IBM, Hutchinson Technology and other Fortune 500 companies. He is the producer of FreedomFest, “the world’s largest gathering of free minds,” which meets every July in Las Vegas. (www.freedomfest.com). FreedomFest attracts several thousand people from around the world.

Ed and Ron are honored to interview economist Mark Skousen, one of Ron’s favorite economics author. He is a former analyst for the Central Intelligence Agency, a columnist to Forbes magazine and past president of the Foundation for Economic Education. His economic bestsellers include: The Structure of Production, Economics on Trial, Puzzles and Paradoxes on Economics, The Making of Modern Economics, The Big Three in Economics, EconoPower, and Economic Logic, a market-friendly textbook. In 2009, The Making of Modern Economics won the Choice Book Award for Outstanding Academic Title. Based on his work The Structure of Production, the federal government began publishing a broader, more accurate measure of the economy, Gross Output (GO), every quarter along with GDP.  It is the first macro statistic of the economy to be published quarterly since GDP was invented in the 1940s.

In honor of his work in economics, finance and management, Grantham University renamed its business school, “The Mark Skousen School of Business.” Dr. Skousen has lived in eight nations and traveled and lectured throughout the United States and 70 countries. He grew up in Portland, Oregon. He and his wife, Jo Ann, and five children have lived in Washington, D.C.; Nassau, the Bahamas; London, England; Orlando, Florida.; New York, New York; and Orange, California.

What We Discussed Before Mark Came On

Mark’s Economics in One Page Essay, which we discussed in the first segment before Mark came on the show.

We also discussed Mark’s book, The Structure of Production: New Revised Edition, Mark Skousen, published in 2015, which explains the U.S. Department of Commerce’s new data series, “Gross Output by Industry.” 

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  • Cato Podcast with Mark Skousen, George Gilder, Steve Forbes
  • The production process, not consumption, is most important aspect of economic life (Marx’s wanted to nationalize the means of production, not consumption)
  • On April 25, 2014, the Bureau of Economic Analysis (BEA) at the U.S. Department of Commerce announced a new data series as part of the U.S. national income accounts, and the BEA began reporting “Gross Output by Industry.”
  • Measures spending throughout the entire production process, not just final output.
  • Measures total sales volume at all stages of production, includes all business-to-business (B2B) transactions that GDP leaves out.
  • Third quarter of 2014, GO hit $31.3 trillion, almost twice the size of GDP, which was $17.6 trillion. GDP measures the “use” economy, GO measure the “make” economy.
  • According to Mark, GO is now approximately $43 trillion dollars (GDP is $20 trillion), and is a leading indicator, it’s more volatile than GDP.
  • GDP is comprised of consumer spending, government spending, investment, and net exports, with the first two of these being the biggest contributors.
  • Overemphasizing consumer and government spending as the driving force behind the economy, ignores supply-side benefits of saving, business investment, and technological advances.
  • “Household spending generates more than two-thirds of total economic output, latest U.S. data on GDP, $17.6 trillion, consumer spending $12 trillion (68%), government spending at $3.2 trillion (18%), Private investment $2.9 trillion (16%), (Net exports at -2 percent.)
  • GO consumers less than 40 percent ($31.3 trillion), Spending by business $16.6 trillion, more than 50 percent of economic activity.
  • Consumer spending is largely the effect, not the cause, of prosperity
  • GO over $23 trillion in 2014. GO significantly more sensitive to the business cycle than GDP. 2008–2009, nominal GDP fell only 2 percent, GO fell by 6 percent and B2B spending collapsed by 10 percent.
  • BEA’s measure of GO does not include all sales at the wholesale and retail level.
  • Wholesale and retail trade figures are included in GO only as “net” or value added.
  • Serious omission, more than $7 trillion dollars in business spending in 2014.
  • We need to include gross wholesale and retail trade figures. They are legitimate B2B transactions that deserve to be counted.
  • I created my own aggregate statistic, Gross Domestic Expenditures (GDE), includes gross sales at the wholesale and retail level and is therefore significantly larger
  • GDE in 2014 at over $37.5 trillion, 25 percent higher than GO and 120 percent more than GDP.
  • Consumer spending actually represents only about 31 percent of the U.S. economy.
  • Adoption of Gross Output most significant advance in national income accounting since World War II.
  • GO is a reflection of Say’s law, a supply-side statistic, while GDP is a symbol of Keynes’s law, a demand-side number
  • “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts”

Ron’s Questions

Mark, we met at Laissez-Faire Books in San Francisco upon the publication of your book, The Making of Modern Economics: The Lives and Ideas of the Great Thinkers, now in its Third Edition (2016). It’s a fantastic book. You discuss the economist’s ideas, but also their little peccadillos.

Explain the Gross Output statistics? (See discussion above).

With this measure, you destroy that old trope that consumer spending is 2/3 of the economy, which is absurd. Either consumers aren’t spending enough, or they’re not saving enough.

Behavioral economics has become a massive field of study within economics. What is your take on behavioral economics and its findings so far?

You wrote your own economics textbook, Economic Logic, which is excellent. What does it tell us about the state of economic education that Alexandria Ocasio-Cortez can get a degree in economics and be a devout socialist, without being able to coherently explain it, other than that everything is free and the wealthy should pay for it all?

Economics on Trial is another fantastic book you wrote. What about the compromise idea that you are responsible for health care up to 15% of your income, and after that, single-payer?

Ed’s Questions

From an economic policy perspective, what grade do you give to the first 20 months of the Trump presidency. Another way of saying it is do you think your colleague Larry Kudlow is pulling what’s left of his hair out?

You’re one of the few economists who have successfully integrated micro- and macro- economics. Since most of our listeners are business owners, what economic principles do you think are most important for small and medium business owners to understand?

What are your thoughts on blockchain technology, and Bitcoin?

What are your thoughts on the “Gig Economy,” is this a major shift, or just a tweak on the way things are done?

What does A.E.I.O.U stand for?

Mark has signed a couple of Ron’s books with A.E.I.O.U. It comes from the tombstone of Frederick III, the first Hapsburg emperor. Many believe it is Latin or German for “Austria will rule the world.” For Mark, it means, “Austrian Economics Is Overall Universal.”

Thank you, Mark Skousen, for appearing on The Soul of Enterprise!

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #204: Interview with John Stossel

Biography

John Stossel is an American consumer television personality, author, and libertarian pundit, known for his career on both ABC News and Fox Business Channel. Stossel's style combines reporting and commentary. It reflects a libertarian political philosophy and views on economics which are largely supportive of the free market.

He began his journalism career as a researcher for KGW-TV, was a consumer reporter at WCBS-TV in New York City, and then joined ABC News as a consumer editor and reporter on Good Morning America. Stossel went on to be an ABC News correspondent, joining the weekly news magazine program 20/20, going on to become co-anchor.

In October 2009, Stossel left his long-time employment at ABC News to join the Fox Business Channel, as the host of a weekly news show on Fox Business, Stossel, which was broadcast from December 10, 2009, to December 16, 2016.

Ron’s Questions

You went from a crusading consumer reporter—who won 19 Emmy’s and lots of other awards—to a leading voice in the libertarian movement. How’d that happen?

Were there certain books, or authors, who influenced you towards libertarianism?

In your book, Give Me a Break (2004), you discuss the FDA announcing a new heart drug that will save 14,000 lives per year. Not one journalist asks: does that mean you killed 14,000 people per year delaying the approval. Why do you think that is—that people think the government can do no harm?

I think of all the government regulations—like the Consumer Product Safety Commission, the ultimate in mamby-pamby-eat-your-vegetables Nanny statism, designed to create a riskless world. But as you point out in the book, it’s not the Nanny State: It’s the Nurse Ratched State (from the movie, One Flew Over the Cuckoo’s Nest). It seems like regulations have gone too far to the other side. Do you agree with that?

We hear a lot about “market failure.” But I’ve learned from economists that a lot this failure is due to no market existing (KFC is not going to let chickens become extinct). In the book, you talk about fires, and today in California fires are burning 455 square miles. A UC Berkley study said there are 100 million dead trees, which is kindling. [Private forests are not likely to burn. If it did, the CEO of International Paper would be public enemy number one, and his company would face bankruptcy, etc.] And yet people will call for government to control more land. Isn’t it frustrating?

We have a mantra here at TSOE: The only antidote to poverty is wealth creation, and you point out that poverty is the number one killer on the plant, more so than smoking, driving, murder, fires, toxic waste, flying, etc. Capitalism has lifted nearly 1 billion people out of poverty in the past 10-15 years, yet this story is unreported in the main-stream media. Why do you think that is?

In the book, you write “I told Donald Trump he was a bully when he tried to force Vera Coking out of her home so he could expand his casino in Atlantic City.” “Nobody talks to me that way,” he said. She kept her home. How would you grade President Trump so far?

The moral hazard of government: FDA, SEC, etc., gives its imprimatur, and consumers/investors think all is well, engage in the risky behavior.

In the book, you quote H.L. Mencken: “The urge to save humanity is almost always only a false-face for the urge to rule it.” What is your take on Climate Change?

Do you think there’s a strain in the environmental movement—the so-called water melons, green on the outside but red in the inside—since the call is always for more taxes, government, etc.?

When you see the popularity of Bernie Sanders, and Alexandria Ocasio-Cortez (the person that would result if Chauncey Gardner had a child), and she’s got a degree in economics and international relations from Boston University, and a majority of young kids support socialism, are you optimistic with respect to liberty and freedom in the future expanding?

Ed’s Questions

You had a piece on Reason.tv yesterday on the economic ignorance of Bernie Sanders. Sometimes it seems as if the libertarian party can’t get out of our own way. What’s your observation?

One of the first reports you did for Reason.tv was on saving the rhino, and you confront the environmentalist on the use of artificial horns. You seemed to get very perturbed with her, since she insisted on a total ban.

In a more recent interview with Jordan Peterson, he seemed more angry than anywhere else I’ve seen him. Do you think he’s being worn down by all that is happening to him?

Another piece I just love you did around June, you had a confrontation with the Mayor and City Council of Edgewater, New Jersey about a housing development they are not allowing to be developed because they didn’t know the right people. Any update on that situation?

Another challenge many people have is seeing the difference between capitalism and cronyism. I think these terms have been conflated. Is that your observation as well?

Bill Gates seems to have been chased away by the Department of Justice, accused of giving away a product to consumers for free.

One of the things that just makes me crazy around the holidays is the notion that businesspeople have to give back, which implies a taking that never took place.

There’s a great theory that economist Mike Munger makes [See our interview with Michael Munger, Episode #190]: The Unicorn Theory of Government. How the government is going to solve their problems. We also have to be open to the fact that the libertarians have our own unicorns—the free market will solve everything. Do you see some role for government, or are you moving more towards anarcho-capitalism?

Clearly what you do is incredibly creative process, tell me how you work—how does your team go out and vet stories, what’s that process like for you guys?

What do you try to do differently than what you did at the larger networks; is there anything different to the process?

How many videos are you working on at any given time?

Do some not make it at all?

Looking back on the last year, what were some of your favorite videos?

When did you first read Ayn Rand’s Atlas Shrugged?

Some of her insights were so prescient, and seem to be becoming a reality?

Are we going to get another book from you, or are you mostly going to concentrate on the videos?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #203: Interview with Stephan Liozu

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Check out the “commercial free” edition of The Soul of Enterprise at www.thesoulofenterprise.com/patron, where you can subscribe to the show, receive each episode commercial free, and listen to bonus episodes.

Stephan's Biography

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Stephan M. Liozu is Chief Value Officer of the Thales Group (www.thalesgroup.com) and Chief Marketing Officer of Thales North America. He is also an Adjunct Professor & Research Fellow at the Case Western Research University Weatherhead School of Management. Stephan holds a Ph.D. in Management from Case Western Reserve University (2013), an MS in Innovation Management from Toulouse School of Management (2005), and an MBA in Marketing from Cleveland States University (1991). He is a Certified Pricing Professional (CPP), a Prosci® certified Change Manager, and a Strategyzer Business Model Innovation Coach. Over the past few years, Stephan published academic articles in the Journal of Revenue & Pricing Management, Business Horizons, MIT Sloan Management Review, and Industrial Marketing Management.

He has also written several articles on strategic pricing issues for the Journal of Professional Pricing and is a regular presenter at Professional Pricing Society conferences in Europe and North America as well as the Strategic Account Management Association conferences. He authored four books, Value Mindset, (2017), Dollarizing Differentiation Value (2016), The Pricing Journey (2015) and Pricing and Human Capital (2015). He also co-edited three books, Innovation in Pricing – Contemporary Theories and Best Practices (2012) and The ROI of Pricing (2014), and Pricing and the Salesforce (2015).

Ed’s Questions

Tell us about your background, and what led you to become a pricing expert in the first place?

Do salespeople make lousy pricers?

One of the things I’ve learned in consulting is to replace advice with curiosity, looking at your online videos on YouTube, one of things you mention is curiosity one of the most important characteristics of people who value sell.  Why is that? It’s not something businesses normally look for in the hiring process.

You make a distinction between value-based selling and negotiating around value. Explain?

In addition to being the CVO at Thales Group, you’re the author of several books and an adjunct professor and research fellow at Case Western Reserve University, how do you see the intersect between your background in academia and private industry, how do they complement each other?

You do a lot of work with leadership development, and I’m interested in the overlap between that and your work in pricing?

Another key success factor you talk about is finding the right customers. What are your thoughts on the marketing aspects of trying to attract those customers who get value and want to have that conversation about value?

Our colleague Tim Williams teaches that a brand can stand for only one thing—you can’t be both Ruth’s Chris and McDonalds at the same time.

You were once a CEO. How did that work out, did you have control over pricing?

Do you think pricing is more art or science?

Ron’s Questions

Do you believe pricing is now a profession? Only 9% of universities offer an emphasis on pricing.

Why do you think it is the case that, according to data from the Professional Pricing Society, that fewer than 5% of the Fortune 500 have a full-time function exclusively dedicated to pricing [Stephan’s believes it’s now 10-15%]?

How important is the CEO and C-Suite support to the pricing function?

I know you have the title of Chief Value Officer, how do you define that role, what does it mean to you?

Ideally, who do you think the CVO, or CPO, should report to?

In the book Innovation in Pricing – Contemporary Theories and Best Practices

(2nd edition, 2018) which you edited with Andreas Hinterhuber, you have a chapter with Kellie Ecker titled “The  organizational design of the pricing function in firms: a center-led management approach,” wherein you lay out four possible designs of the pricing function:

  1. Centralized
  2. Decentralized
  3. Center-supported
  4. Center-led

You prefer Center-led, why?

Tell me about your book Pricing and Human Capital (2015), since that’s a big theme of this show and Human Capital is some 80% of the world’s wealth?

Since the Great Recession of 2008, corporate profits have done relatively well, even up over historical levels. Do you attribute any of that to the pricing skills that have entered organizations?

The incidence of price wars has also decreased due to these skills.

During the break, we asked Stephan what industry he believed is the best at pricing. His answer: chemicals.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #202: Free-Rider Friday - July 2018

Ron’s Topics

Proposed SF law could force tech workers to actually go out for lunch,” July 24, 2018, San Francisco Chronicle

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San Francisco wants to ban employee cafeterias on all new office building construction to help restaurants and small business. Here’s the pull quote from one of the supervisors:

This is also about a cultural shift,” he said. “We don’t want employees biking or driving into their office, staying there all day long and going home. This is about getting people out of their office, interacting with the community and adding to the vibrancy of the community.

The Nanny state run amuck.

The EU’s 4.3 Billion Euro Fine on Google Will Hinder—Not Help—European Consumers,” FEE, July 20, 2018, Sam Dumitriu

EU Commissioner for Competition Margrethe Vestager imposing 4.3B Euro fine.

Competition takes place between bus models, not just products/services.

EU is favoring tightly controlled integrated platforms (Apple) over more open Android. Google Play, Google Chrome, Search, creates a “lock-in effect” the EU claims, even though 100 million users installed Firefox on their smartphones.

Besides, Android is free, which benefits makers of low-end mobile phones, and lowers barriers to entry. You can buy a smart phone under £50 now. This could crush low end of the market.

Nirvana Fallacy, comparing messy, complex, real-world w/a simplified idealized alternative.

Let consumers decide on which business model is best.

Shape up, not break up,” The Economist, May 26, 2018

Recent collapse of Carillion, a British contracting firm. Members of Parliament spewed bile against the Big Four, KPMG (the auditor) but also other three—Deloitte, EY, and PWC. They called for a review and asked if the Big 4 should be broken up.

The Big 4 audit 98% of the S&P 500 and the FTSE 350. Yet auditors are paid by the very companies they’re auditing, not by the investors.

The Economist posits that a break up is premature. Here are some proposals to correct incentive problem:

    • Regulators pick auditors—[probably lead to cronyism]
      • Mandatory insurance, insurers hire auditors
      • Stock markets pay auditors [Ron’s favored proposal]
      • Rotation after 20 years; tender after 10, in the EU 
        • Average Dow Jones company tenure with auditor firm, a cosy 66 years
    • Lower the cap on non-audit fee (generous 70%)
      • $47B auditing; $87B consulting and tax for Big 4 as a whole
    • Add more to audit opinion (they should read like movie reviews)

Another problem: lawmakers, investors and courts all disagree about what an audit should be. Who’s fault is this? The profession has done a lousy job marketing exactly what an audit is, and isn’t.

How tech’s richest plan to save themselves after the apocalypse,” The Guardian, July 24, 2018, Douglas Rushkoff

Fascinating article. We will let our listeners draw their own conclusions.

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Another California City is Trying a Universal Basic Income: Will it Work?” FEE, July 20, 2018, Andrew Berryhill

In 2019, Stockton, CA joins San Francisco and Oakland in testing a UBI. 100 Stocktonians will receive $500/month, for 18 months, unconditionally.

This test is being 100% privately funded by a $1 million grant from the Economic Security Project co-founded by Chris Hughes (co-founded Facebook).

In praise of gentrification,” The Economist, June 23, 2018

Gentrifier has become a dirty word—young Yuppies snuffing out local culture. Ta-Nehisi Coates writes: “Gentrification is but a more pleasing name for white supremacy.” This is an urban myth! Gentrification can be more neutrally described as poor urban neighborhoods becoming wealthier.

Economists have failed to find a rise in displacement among the poor; in fact, they are more likely to stay put. In New York, in gentrified neighborhoods between 1990-2014, the number of poor barely moved. The benefits of gentrification include:

    • Reduced crime
    • Better amenities
    • More investment
    • Higher property values
    • Reduces white flight
    • Lawmakers usually promote affordable housing
    • Boosts racial and economic integration
    • Dilutes concentration of poverty
    • One resident of Logan Circle, downtown Washington DC, bough 1993 $130,000, sold for $1.6M

Those who argue against gentrification want to keep poor neighborhoods poor. What accounts for the antipathy towards gentrification?

  1. The cost of housing: 32% of pre-tax earnings is spent on rent in 2001, which increased to 38% in 2015. The poor spend 52%. This has more to do with supply restrictions on new development. Also, the creation of jobs has outpaced additional housing in New York by 2:1; in San Francisco by 8:1.
  2. Culture: Yuppies alter the character (T-Shirts: “Don’t Brooklyn my Detroit). Detroit would do well with a bit more Brooklyn. You can listen to a podcast from NPR On Point podcast on gentrification, which has the journalist on from The Economist, among others.

Ed’s Topics

Bosses are good guys/gals

In Birmingham, AL, an employee walked 20 miles to his first day of work, and his employer bought him a car. 

Lego is bigger than ever due to story telling

Brick by Brick: How Lego Became the Largest Toy Company in a Digital Era,” FEE, Friday, July 06, 2018, Brittany Hunter

Gene editing is very real as long as the FDA doesn't muck with it

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Swift Gene-Editing Method May Revolutionize Treatments for Cancer and Infectious Diseases

From Gina Kolata of the New York Time: Scientists report that they have discovered a way to tweak genes in the body’s immune cells by using electrical fields.

Ethics of autonomous cars

On vacation my family and I discovered this research project at MIT's Museum. Give it a whirl yourself. 

See our Episode #7 on Everyday Ethics: Doing Well and Doing Good, where we discuss Trolleyology, and the book, Would You Kill the Fat Man? By David Edmonds.

It's BACK!

Amazon announces Season 3 of The Man in the High Castle will drop October 5! Ron says he won't be on the show, but I do not believe him. 

Let's Go NUKES!

Why I changed my mind about nuclear power, Michael Shellenberger, TEDx Berlin.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #201: Interview with Jeffrey Tucker

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Jeffrey Tucker is an economics writer of the Austrian School, an advocate of anarcho-capitalism and Bitcoin, a publisher of libertarian books, a conference speaker, and an internet entrepreneur.

He is Editorial Director of the American Institute for Economic Research and Chief Liberty Officer (CLO) of Liberty.me. Tucker is also an adjunct scholar with the Mackinac Center for Public Policy, a research affiliate of RMIT University's Blockchain Innovation Hub, and an Acton Institute associate.

Ed’s Questions

What’s your take on the madness that is the Trump presidency?

I don’t know if you’ve read Scott Adams’ (of Dilbert fame) book, Win Bigly, but it’s an excellent take on Trump—he has “weapons-grade persuasion ability.”

The latest rise in Bitcoin: is this the latest rally, or another bump along the road?

Are you long-term bullish on just Bitcoin, or crypto currencies in general?

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One of listeners submitted a question. Given your anarcho-capitalism beliefs, what about the free-rider problem, such as national defense? Could it lead to the destruction of what we hold dear?

You are an associate of the Acton Institute, and Father Robert Sirico has been a guest on TSOE twice (Episode #16 and Episode #134). You converted to Catholicism. I want to know what brought you to Catholicism and is [Pope] Francis making you rethink it?

You’re also an amateur actor who starred in a play about Ayn Rand written by Murray Rothbard titled “Mozart Was a Red.” You played a character modeled on Nathaniel Branden. Tell us a little about that play.

Ron’s Questions

Your book, Right-Wing Collectivism: The Other Threat to Liberty, published in 2017, has a Preface written by Deirdre McCloskey, our first guest on TSOE (Episode #6).

You write: “The rise of the so-called alt-right is the most unexpected ideological development of our time.” How so?

You write about how right-wing collectivism wants to control population demographics. Supreme Court judge Oliver Wendell Holmes Jr. wrote in a famous decision: “Three generations of imbeciles is enough.” You point out the absence of dissenting voices on the topic, which is amazing looking back on it. It also corrupted the economics profession in the first two decades of 20th century didn’t it?

You also document that eugenics was the origin of the minimum wage, which was a policy designed to erect a high wall to the “unemployables,” and also to control women: imposing maximum work hours, marriage licenses, immigration quotas and controls, and so on.

You take on some rich people in the book, such as Donald Trump, George Soros, Ross Perot, and others. Someone once quipped “The problem with socialism is socialism. The problem with capitalism is capitalists.” Why do you think so many rich people don’t understand free market economics?

What is your view on a Universal Basic Income? (See our Episode #95).

Are you optimistic with respect to the future of liberty, or pessimistic?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #200: Interview with Reginald Lee

Welcome to our 200th episode! Four years on the air! Thank you!

George Gilder was suppose to be on the show today to discuss his latest book, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy, but a change in his schedule would not allow it. George was kind enough to send us an advance copy, which we highly recommend. He will be on the show on August 31, 2018 to discuss this important book.

For our 200th show, we brought back Dr. Reginald Tomas Lee, author of Lies, Damned Lies, and Cost Accounting: How Capacity Management Enables Improved Cost and Cash Flow Management. Reginald first appeared on October 7, 2016, Episode #112.

We focused on his upcoming book, Strategic Cost Transformation: Using Business Domain Management to Improve Cost Data, Analysis, and Management, which is due out this November or December.

Biography

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Dr. Reginald Tomas Lee is an advisor and researcher in the areas of cash flow, capacity management, and profitability. Using a deep background in engineering and math, he has created tools and models that have helped executives in businesses of all types improve the management of cash flow and other financial data.

Professionally, Reginald has worked in industry, academia, and consulting including leading global companies such as EY, GM, IBM, and Oracle. He has advised many marquee names such as Bristol Myers Squibb, Disney, DuPont, Home Depot, Lockheed, Office Depot, Raytheon, Toyota, and United Healthcare. Reginald has a PhD in mechanical engineering from the University of Dayton, and is the author of three books and over 40 published articles and white papers. He is a feature writer for Journal of Corporate Accounting & Finance and a contributor to the Cincinnati Business Courier, and a professor at Xavier University, and is a senior fellow at VeraSage Institute.

Ron’s Questions

What do you teach at Xavier University?

In Lies, Damned Lies, and Cost Accounting: How Capacity Management Enables Improved Cost and Cash Flow Management, 2016, you argue that there are three reasons cost accounting is a bad practice:

  1. It creates and forces math and relationships don’t exist
  2. You lose touch with operations
  3. It creates meaningless numbers that people consider gospel

I know you’re teaching more and more CPAs, what’s there reaction to this?

Engineers developed cost accounting, not accountants. Further, they issued several warnings about how inexact it was, but no one paid attention—it just became gospel. I do blame accountants for that, for educating that cost accounting is some type of exact science.

Your upcoming book is Strategic Cost Transformation: Using Business Domain Management to Improve Cost Data, Analysis, and Management, due out in November [Ron is writing the Foreword]. You start this book by stating: “We’ve been fooled. Bamboozled.” How so?

What is so profound in both your books is the difference between metrics and measurements. Measurements are not dependent upon a choice (e.g., the choice of cost accounting method generates different amounts).

In the new book, you lay out four common cost-related sacred cows:

  1. Costs equal money
  2. Reducing costs saves money
  3. More profit equals more money
  4. Costs and profit are measured

The above looks reasonable to me. Why are they wrong?

Your distinction between cash costs and noncash cost is much better that cost accounting’s distinction between fixed and variable costs that cost accountants use since that still requires you to make arbitrary allocations.

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You say that Strategic cost transformation (SCT) shifts focus of cost analysis from accounting-based to a corporate-wide system that models and aligns cash, operations, and accounting, comprised of:

Business Domain Management =  Operations & Cash Domain (OC) + Accounting Domain (AD)

You point out that no new information is created in the Accounting Domain! The OC domain is information without the drama.

The OC Domain answers such questions such as:

  • How much spending on capacity?
  • How efficiently and productively is it being consumed?
  • What is consuming it?
  • What output is being created?
  • How do we project cash?
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You write that the AD information is “dangerous to the untrained eye.” But really, it’s just as dangerous to the trained eye, providing a false sense of accuracy and control. Imagine the three of us are lost in New York City. Ed says, “I have a map!” And you say, “But it’s of Los Angeles.” And I say, “Yeah, but it’s better than nothing.”

Ed’s Questions

One of the influences on my career in project management is Eliyahu Goldratt, author of The Goal, and he also influenced you on cost accounting.

Time is really a constraint, not a resource. What you’re saying is that cash is not really a resource, it’s a constraint.

The title of your new book is Strategic Cost Transformation. What does that mean?

How does the Operations and Cash Domain differ from just running your business on a cash basis?

Cost accounting is just a derivative of logical positivism, a philosophical term that says just because we have numbers it’s scientific. But it’s not. What about the work you’re doing at the Cash Flow Innovation Lab. How does it translate into the field?

The Goal: A Process of Ongoing Improvement
By Eliyahu M. Goldratt, Jeff Cox
Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #199: Memorable Mentors - Peter Drucker

Peter F. Drucker is one of the truly serious thinkers the management consultant industry can point to with justifiable pride. Even though Drucker passed away November 11, 2005, at age 95, it does not mark the beginning of the end, but the end of the beginning, since he has left such a rich legacy. Along with the economics profession, Drucker alone is responsible for introducing, and being among the first to recognize, the knowledge worker and knowledge economy to the business world. Join Ron and Ed as they discuss the ideas, writings, thinking and influence of the most seminal management thinker of our times.

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Peter Drucker is often invoked as saying, “If you can’t measure it, you can’t manage it.” Yet, you cannot find this as a direct quote of Drucker’s. In our research looking for this quote, I found the following:

Reports and procedures should be the tool of the man who fills them out. They must never themselves become the measure of his performance. A man must never be judged by the quality of the production forms he fills out – unless he be the clerk in change of these forms.

He must always be judged by his production performance. And the only way to make sure of this it by have him fill out no forms, make no reports, expect those he need himself to achieve performance. – Peter Ferdinand DruckerThe Practice of Management, 1954, page 135.

Someone once wrote that you should read Drucker just to learn how he thinks.

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Nowhere is that more true than this gem of a book: Technology, Management, and Society. A collection of 12 essays, dating from 1957 to 1969, which are so evocative all we can say is we are still grappling with the issues Drucker was so prescient in foreseeing over 50 years ago.

The essays are best summed up by Drucker himself, "…they stress constantly the purpose of management, which is not to be efficient but to be productive, for the human being, for economy, for society."

Drucker discusses the vital role of risk and profit in enterprise, as well as the brilliant observation that of all the institutions in society (family, church, government, professions, unions, not-for-profits, etc.) only the business enterprise is designed to create change:

Indeed, in the business enterprise we have the first institution which is designed to produce change. All human institutions since the dawn of prehistory or earlier had always been designed to prevent change—all of them: family, government, church, army.

Change has always been a catastrophic threat to human security. But in the business enterprise we have an institution that is designed to create change. It means that every business, to survive, must strive to innovate.

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We can only provide a few examples of Drucker’s thinking, which do not do this little book justice. Here are some of our favorites:

But it should be said that in human institutions, such as business enterprise, measurements, strictly speaking, do not and cannot exist. It is the definition of a measurement that it be impersonal and objective, that is, extraneous to the event measured. A child’s growth is not dependent on the yardstick or influenced by being recorded.

 But any measurement in a business enterprise determines action—both on the part of the measurer and the measured—and thereby directs, limits, and causes behavior and performance of the enterprise. Measurement in the enterprise is always motivation, that is, moral force, as much as it is ratio cognoscendi.

This is another way of expressing [Ed] Kless’ Law: All measurements are judgments.

On youth, Drucker wrote this, "The young are always in the right, because time is on their side. And that means we have to change."

Executives who believe they can change one aspect of a company without affecting others are ignoring the reality of a firm being an interdependent system. Drucker explained the phenomenon this way:

There is one fundamental insight underlying all management science. It is that the business enterprise is a system of the highest order: a system whose parts are human beings contributing voluntarily of their knowledge, skill and dedication to a joint venture. And one thing characterizes all genuine systems, whether they be mechanical like the control of a missile, biological like a tree, or social like the business enterprise: it is interdependence.

The whole of a system is not necessarily improved if one particular function or part is improved or made more efficient. In fact, the system may well be damaged thereby, or even destroyed. In some cases the best way to strengthen the system may be to weaken a part—to make it less precise or less efficient. For what matters in any system is the performance of the whole; this is the result of growth and of dynamic balance, adjustment, and integration, rather than of mere technical efficiency.

This seems to be lost on advocates of Lean Six Sigma, whether in professional knowledge firms or factories.

There’s also an excellent discussion of why knowledge workers are different than manual workers, and why this requires leaders to change their thinking.

Our only quibble is Drucker gives far too much credit to Frederick Taylor, who recent scholarship has determined was a fraud. 

Peter Drucker on Business Models

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One of Peter Drucker’s (1909–2005) many articles published in the Harvard Business Review (September-October 1994) was entitled “The Theory of the Business,” which laid out what he considered to be the essential elements executives would have to define in order to create wealth:

Not in a very long time—not, perhaps, since the late 1940s or early 1950s—have there been as many new major management techniques as there are today: downsizing, outsourcing, total quality management, economic value analysis, benchmarking, reengineering.

Each is a powerful tool. But, with the exceptions of outsourcing and reengineering, these tools are designed primarily to do differently what is already being done. They are “how to do” tools.

Yet “what to do” is increasingly becoming the central challenge facing managements, especially those of big companies that have enjoyed long-term success.

What accounts for this apparent paradox? The assumptions on which the organization has been built and is being run no longer fit reality. These are the assumptions that shape any organization’s behavior, dictate its decisions about what to do and what not to do, and define what the organization considers meaningful results.

These assumptions are about markets. They are about identifying customers and competitors, their values and behavior. They are about technology and its dynamics, about a company’s strengths and weaknesses. These assumptions are about what a company gets paid for.

They are what I call a company’s theory of the business.

In fact, what underlies the current malaise of so many large and successful organizations worldwide is that their theory of the business no longer works.

It usually takes years of hard work, thinking, and experimenting to reach a clear, consistent, and valid theory of the business. Yet to be successful, every organization must work one out.

What are the specifications of a valid theory of the business? There are four: 

  1. The assumptions about environment, mission, and core competencies must fit reality.
  2. The assumptions in all three areas have to fit one another.
  3. The theory of the business must be known and understood throughout the organization.
  4. The theory of the business has to be tested constantly. It is not graven on tablets of stone. It is a hypothesis. And so, built into the theory of the business must be the ability to change itself.

Peter Drucker’s autobiography: Adventures of a Bystander, 1978, 1994

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“I realized that I, at least, do not learn from mistakes. I have to learn from success.”

Socrates wasn’t a teacher, but a “pedagogue”—a guide to the learner.

The Socratic method isn’t a teaching method, it’s a learning method. For the teacher, the passion is inside him; for the pedagogue, the passion is inside the student.

A Functioning Society: Selections from Sixty-Five Years of Writing on Community, Society, and Polity, 2003

More of Drucker’s books deal with community, society and polity than management.

Marxism was the God that failed. “I once, in 1932, heard Hitler say in a public speech:

‘We don’t want higher bread prices; we don’t want lower bread prices; we want national-socialist bread prices.’ And 5,000 people in the audience cheered wildly.”

He coined the term re-privatization, from which Margaret Thatcher derived her policies of privatization.

The only successful policy of the Megastate is avoidance of World War III.

We no longer expect results from government. Only two things effectively: wage war and inflate the currency.

One thing red-tape is good for: to bundle up yesterday in neat packages.

“In the knowledge organization every knowledge worker is an “executive.” The number of people who have to be effective for modern organization to perform is therefore very large and rapidly growing. The well-being of our entire society depends increasingly on the ability of these large numbers of knowledge workers to be effective in a true organization. And so, largely, do the achievement and satisfaction of the knowledge worker.

To speak of “social responsibility of business assumes that responsibility and irresponsibility are a problem for business alone. Clearly, however, they are central problems for all organizations. The least responsible org today is not business, it’s universities.”

“Organizations don’t act socially responsible when concern themselves with social problems outside of their own sphere of competence and action. They act the most responsibly when they convert public need into their own achievements.”

“We need to what performance means. We need to be able to measure, or at least to judge, the discharge of its responsibility by an institution and the competence of its management….justifies their existence and power. Everything beyond is usurpation.”

“Knowledge workers cannot be supervised effectively. Unless they know more about their specialty than anybody else in the organization they are basically useless.”

Harvard Business Review Article, 1991

“Professional management hasn’t earned an ROI equal to its cost of capital. The raiders thus performed a needed function. Old proverb: If there are no grave diggers, one needs vultures.”

German and Japanese management don’t “balance” anything. Rather, they optimize the wealth-producing capacity of the enterprise (market standing, innovation, productivity, people and their development).

In his book The Landmarks of Tomorrow, 1957 is where Drukcer first used the term knowledge economy, and knowledge worker.

From Management Challenges for the 21st Century, 1991: The most important contribution management needs to make in the twenty-first century is to increase the productivity of knowledge work and the KW.

Knowledge work is unisex, equally well by both sexes. Corporations need knowledge workers more than they need them. Ultimately, knowledge workers are volunteers. Knowledge workers are more loyal to their profession than any organization.

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Profits Come From Risk

Drucker’s three types of risks:

  • The risk a business could afford to take
  • The risk a business could not afford to take
  • The risk a business could not afford not to take

The Effective Executive in Action, 2006

This was the last book he published before passing away.

It details the five practices of the effective executive:

  1. Managing your time;
  2. Focusing your efforts on making contributions;
  3. Making your strengths productive;
  4. Concentrating your efforts on those tasks that are most important to contributions; and
  5. Making effective decisions.

“An organization that is not capable of perpetuating itself has failed. It has to renew its human capital.”

“Strong people always have strong weaknesses too. Performance can only be built on strengths.”

“Character and integrity by themselves do not accomplish anything but their absence faults everything else.”

"Are you a reader or a listener? Trial lawyers are both."

“Good executives focus on opportunities rather than problems. Problem solving does not produce results (reverts to status quo). Exploiting opportunities produces results…”

“A decision is a judgment—a choice between alternatives. Rarely a choice between right and wrong. It is at best a choice between ‘almost right’ and ‘probably wrong.’ Untested hypotheses are the starting point. One does not argue with them; one tests them.”

“There’s too much about leadership and not enough on effectiveness. The only thing you can say about a leader is somebody who has followers. The most charismatic leaders of the last century were Hitler, Stalin, Mao, and Mussolini. They were misleaders.”

“I have yet to see a knowledge workers who couldn’t consign one-fourth of the demands on his time to the wastepaper basket without anybody’s noticing.”

There’s no such thing as business ethics

It is common today to speak of “medical ethics,” “bio ethics,” “accounting ethics,” and so forth.  Yet some thinkers deny there are different ethical theories for these various functions. 

In his 1981 article in The Public Interest, “What is Business Ethics”?, management thinker Peter Drucker challenges the concept of a separate ethics for business:

If “business ethics” continues to be “casuistry” its speedy demise in a cloud of illegitimacy can be confidently predicted.  Clearly this is the approach “business ethics” today is taking. Its very origin is politics rather than in ethics.  It expresses a belief that the responsibility which business and the business executive have, precisely because they have social impact, must determine ethics––and this is a political rather than an ethical imperative.

What difference does it make if a certain act or behavior takes place in a “business,” in a “non-profit organization,” or outside any organization at all?  The answer is clear:  None at all.

Clearly, one major element of the peculiar stew that goes by the name of “business ethics” is plain old-fashioned hostility to business and to economic activity altogether––one of the oldest of American traditions and perhaps the only still-potent ingredient in the Puritan heritage.  There is no warrant in any ethics to consider one major sphere of activity as having its own ethical problems, let alone its own “ethics.”  “Business” or “economic activity” may have special political or legal dimensions as in “business and government”..., or as in the antitrust laws.  And “business ethics” may be good for politics and good electioneering.  But that is all.  For ethics deals with the right actions of individuals.  And then it surely makes no difference whether the setting is a community hospital, with the actors a nursing supervisor and the “consumer” a patient, or whether the setting is National Universal General Corporation, the actors a quality control manager, and the consumer the buyer of a bicycle.

Altogether, “business ethics” might well be called “ethical chic” rather than ethics––and indeed might be considered more a media event than philosophy or morals (Drucker, 1981:  22-23; 31; 33-35).

Other Drucker Books

Drucker’s Lost Art of Management, Joseph A. Maciariello, 2011. This book details Drucker’s calling management a “liberal art,” and linking it to the humanities disciplines.

A Class with Drucker, William A. Cohen, 2007

Drucker on Marketing, 2012

The Practical Drucker, William A. Cohen, 2014

People complained Drucker didn’t tell them “what to do” or “how to do.” Rather, he asked questions.

This book details 40 important concepts on:

  1. People
  2. Management
  3. Marketing and Innovation
  4. Organization

Peter Drucker: Shaping the Managerial Mind, by John E. Flaherty;

The Definitive Drucker, by Elizabeth Haas Edersheim

The World According to Peter Drucker, Jack Beatty

Disagreements with Drucker

He gave Frederick Taylor too much credit.

He believed CEO pay was too high.

He did refer to people as assets [but also volunteers].

He believed time is the executive’s scarcest and most precious resource, and organizations are inherently time wasters. We believe time is a constraint, not a resource.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #198: Free-Rider Friday - June 2018

Ron’s Topics

Fawning Press for Elon Musk

Elon Musk Just Gave the World’s Best Productivity Advice in a Single, Short Sentence: and we all owe him a debt of gratitude for pointing out the obvious. April 28, 2018, Geoffrey James, Contributing editor, Inc.com

Recent memo from Musk to Tesla employees proposes a number of actions to increase performance with Model 3 MFG:

  • Avoid large meetings and keep them very short
  • Avoid acronyms and company-specific jargon lest you confuse contractors
  • Ignore corporate rules if they are obviously idiotic

But this suggestion takes the cake: “Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value.”

In a related article, “Driving to the next circle of hell,” The Economist, April 7, 2018, on April 1 Elon tweeted: “We are sad to report that Tesla has gone completely and totally bankrupt.”

  • Tesla share price has fallen by 16% since end of February 
  • On March 23, a Tesla crashed and the driver killed
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The new Tesla Model 3

  • Price: $35,000
  • Range: 200+ miles
  • Deposits: Over 400,000

In July 2017, Musk claimed production would be 20,000/month by December 2017, however fewer than 2,500 were produced in entire 4th quarter. By April 2018 they had ramped up to around 2,000 a week was actual production. Tesla reportedly lost $2 billion in 2017.

The company boasted, “Model 3 assembly line is now providing the fastest growth of any automotive company in the modern era. If this rate continues, it will exceed that of Ford and the Model T.” The Economist replied, “Such bluster does not withstand scrutiny.”

Musk wants his factory to be a machine that makes machines. But auto companies have found a mix of man and machines is best.On March 17th, Moody’s downgraded Tesla’s debt. Others predict Tesla will need to $2.5B to $3b cash this year.

“Not Finished,” The Economist, April 28, 2018

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Finland ran a trial Universal Basic Income program on Jan 2017 whereby 2,000 people received $680/month. The experiment ended December 2018. It was planned to end after two years, but had hoped to expand it beyond, but the legislature denied funding. It was not universal as all recipients were unemployed, and no results have been published yet.

California Incubator Y Combinator in the USA is using randomized control trial for a UBI in Oakland, CA, and Kenya is launching one, run by Give Directly. There’s another in Ontario, with 4,000 participants in 4 towns, and one in Scotland, Glasgow and Edinburgh working on pilot UBI programs.

Is Adam Smith spinning in his grave?

“Thinking outside the police box,” Buttonwood, The Economist, May 12, 2018

In writing the his final column the author surmises "what useful knowledge would he impart if he could go back 12 years (550 columns)?"

Avoid confusing financial markets with the economy (S&P Index doubled from 2006)

  • The market has incredible resilience: corporate profits, pre-crisis levels rapidly regained, and surpassed 2008 levels.
  • Less competition means globalization of suppressed wages.
  • Never underestimate the power of central banks: quantitative easing did not cause expected inflation.
  • Relax about China!
  • Microeconomists are wrong about specific things, whereas macroeconomists are wrong in general. 

Ron would add professional pricers are getting better.

The Economist, Exclusive access, Special Report, Financial Inclusion, May 5, 2018

Mobile tech brought hundreds of millions into financial system, such as bKash in Bangladesh, began in 2011, with 30 million users, known as the collective mattress.

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In 2012, The World Bank created “Findex,” a financial inclusion index (the Gates Foundation funded). The Unbanked numbered 2.5 billion in 2011, 2B in 2014, and 1.7B in 2017.

Adults with a bank or mobile money account: 69%. Though access is not the same as inclusion, since 25% of all accounts are inactive.

Mobile tech also pays crop insurance (e.g., when rainfall is below a certain level).

Also, credit scores: GPS can tell is someone has steady job, permanent address, social media data, shopping data, etc.

A Findex survey asked this question: why do those 1.7 billion people remain unbanked? Two-thirds replied because of having too little money. Technology is essential, but obviously not enough.

Carved into the Post Office building in New York: “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.: A graffito was once scrawled alongside: “What is it, then?” It’s time to privatize the US Postal Service.

Updates on Venezuela

Venezuela’s Future—And Ours,” Kevin D. Williamson, June 24, 2018.

Venezuelans Shrugged. Ayn Rand Was Right,” Townhall, Marina Medvin, June 4, 2018

According to Newsweek, Polio has returned to Venezuela. Other reports now dispute this.

Ed’s Topics

In four years, should Ed buy his 12-year son, Sean, a car or give him an Über account with a $400/month allowance?

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Children of a couple who were Russian spies who lived in Canada are fighting to keep their Canadian citizenship. Will the FX TV show, The Americans, have a spin-off?

Should California be broken up into three states?

According to Bloomberg News, millionaires now control one-half of the world’s personal wealth, up from slightly less than 45% in 2012. Estimated world-wide wealth is $201.9 trillion. This does not mean that the poor are getting poorer, but that people are getting richer, especially in China.

ASKTSOE: Email Question from Listener

Dear Ron and Ed,

Hello from London UK.

Thanks for your eye opening programmes and books. I read your book on "Implementing value pricing” and I’m trying my best to implement your ideas in my business. I am a UX design consultant and in progress to build with a design consultancy.

One of the points I struggle with, isn’t the fixed price itself, but how to justify the direct relationship between business value (say revenue) and my services. See, the client is suspicious when I get too deep into their business model and think “this guy wants to see how much we earn to charge us more”. I see the suspicion in their face.

Wondering how you’d turn that perspective around. I’d appreciate giving us some hints on your podcast.

Best wishes,

Spyros Zevelakis
Director
www.2xUX.com

Digital Product Design

Ed suggested listening to our show on Consulting Theory, We Are All Consultants Now, Episode #40. The key is to recognize that ones purpose as a professional is to help people make the best possible decisions.

Ron suggested that we have to infer value through better questioning in the value conversation. Also, you must consider not just the materialist value (that which can be measured, such as cost savings, tax savings, etc.), but spiritual value—those things that cannot be measured. Relationship, brand, social capital, etc.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.