Episode #26 - Interview with Adam Davidson

On Friday, January 9, 2015, Ron and Ed interviewed Adam Davidson, a journalist focusing on business and economics issues for National Public Radio. He is currently one of the co-hosts of the Planet Money podcast. Previously he has covered globalization issues, the Asian tsunami, and the war in Iraq, for which he won the Daniel Schorr Journalism Prize. His work has won several major awards including the Peabody, DuPont-Columbia, and the George Polk Award. Adam came to our direct attention when he mentioned the VeraSage Institute in his New York Times Magazine article, Welcome to the Failure Age!We discussed that article along with another one he wrote for The Atlantic, Making It in America, which profiles Standard Motor Products.

He did an interview with economist Russ Roberts on this article as well.

Learn more about Adam at his Wikipedia page.

We had an interesting discussion on innovation, manufacturing jobs, the history of accounting, failure, business models, creative destruction, and the Stan Shih Smile Curve.

smile-curve
smile-curve

Adam also discussed a book he's working on, and hopefully he'll return when it's published.

Thank you, Adam, for a fascinating discussion!

Here is Adam's TEDtalk on What we learned from teetering on the fiscal cliff.

Episode #9 - Interview with Rory Sutherland

Rory-Sutherland
Rory-Sutherland

We knew our interview with Rory Sutherland, Vice-Chairman, Ogilvy Group, UK, would be an exciting and exhilarating exchange of ideas. It’s safer to say it was an idea explosion, which will be difficult to summarize.

Because he mentioned so many useful ideas, as well as books, here are the major themes and highlights of our discussion.

Rory’s Career and Brief Biography

Pre Ogilvy (1988)

Did you meet David Ogilvy? Did you ever get to stay at his castle?

Rory’s book, The Wiki Man, which we quoted from throughout the interview.

Economics

While sick in bed, Rory read Steven Landsburg’s book, The Armchair Economist, one of Ed and Ron’s favorite economists. Rory also mentioned other economics books he’s read:

Rory discussed how Ludwig von Mises became one of his heroes. His book, Human Action, describes his theory of Praxeology, the study of human behavior, and prior science before economics, which is preoccupied with human psychology.

Ed then asked Rory: You wrote in The Wiki Man:

I think the pace of technological innovation is going to slow down. This is not a majority view, but I just think the fundamental innovations we can make just are not that huge.

But what about the driverless car, graphene, 3D printing, space travel, Bitcoin––are they disruptive or sustaining?

Ron challenged Rory on what he wrote:

I’m perfectly happy giving ideas away because an idea is worthless unless it’s executed.

Really? Thomas Sowell’s work, especially in Basic Economics, has convinced me that ideas are, always and everywhere, more valuable than their mere execution.

Try to execute a crappy idea: socialism, communism. As a creative, doesn’t the concept that “good ideas are everywhere” bother you? Good ideas aren’t everywhere, otherwise we wouldn’t get so many crappy movie remakes and TV shows.

Even you cited Henry Ford example in The Wiki Man:

Henry Ford’s reaction to a consultant who questioned why he paid $50,000 a year to someone who spent most of his time with his feet on his desk. 'Because a few years ago that man came up with something that saved me $2,000,000,' he replied. 'And when he had that idea his feet were exactly where they are now.'

For more on the idea that ideas are more valuable than execution, see Ron’s blog post here.

Marketing, Branding and Advertising

Ron asked Rory about Peter Drucker’s statement:

 Because its purpose is to create a customer, the business enterprise has two––and only these two––basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.

Rory wrote:

The purpose of marketing is to turn human understanding into business or social advantage.

On brands, you wrote:

I suggest it is by far the more valuable economic role that brands play: not to be a promise of ultimate superiority but a cast iron assurance of pretty dependable non-shitness.

And you said that you can’t understand brands without understanding “satisficing,” the Northumbrian term that means to choose the first option that is satisfactory; “good enough” (combination of Satisfy + Suffice).

Herbert Simon in his book, Models of My Life, describes “satisficing” and “bounded rationality.” Ron also mentioned Peter Drucker’s autobiography: Adventures of a Bystander.

‘Effing Debate: Efficiency vs. Effectiveness

Humans don’t like pure efficiency. Rory talks about Arithmocarcy and why the most dangerous technology is the spreadsheet.

Math requires calculate solution, then enact it. Hueristics allows us to do both in parallel—i.e., catching a ball.

In The Wiki Man he wrote:

…how, in their endless, dogged pursuit of a false efficiency, organisations can be rendered slightly useless. And stupid.

Remember that the word “dogged” is derived from the word “dog” meaning “energetic and stupid.

…belief in false efficiency is very simple; it comes from the belief that improvement comes from the elimination of apparent waste.

Rory also quoted Jules Goddard, professor at the London Business School and author of Uncommon Sense, Common Nonsense:

Strategy is the art of staying one step ahead of the need to be efficient. (Ed's note: This was the take away quote of the interview!)

Hourly Billing and Timesheets

Ed asks Rory about David Ogilvy taking responsibility for introducing the billable hour to ad agencies, in his book, Ogilvy on Advertising. Probably his biggest mistake.

Rory explains why he did it, and how entrenched hourly billing has become in ad agencies.

Last question for Rory: What’s he Reading now? Some fiction, and Super Cooperators by Martin Nowak. He also highly recommends The Origins of Wealthby Eric D. Beinhocker.

Two of Rory’s Presentations You Need to Watch

TEDtalk

Google Zeitgeist

Episode #4 - The Economy in Mind

How much does the economy weigh? Believe it or not, it weighs the same as in 1950, even though output is roughly five times larger. We are increasingly an economy driven by mind, not matter. Thomas Sowell explains how in his fantastic book, Knowledge And Decisions

After all, the caveman had the same natural resources at their disposal as we have today, and the difference between their standard of living and ours is a difference between the knowledge they could bring to bear on those resources and the knowledge used today.

Peter Drucker explained it this way:

We know that the source of wealth is something specifically human: knowledge. If we apply knowledge to tasks that we already know how to do, we call it productivity. If we apply knowledge to tasks that are new and different, we call it innovation. Only knowledge allows us to achieve these two goals.

Ed and Ron discussed the following topics during the show. For more information on this topic, see Ron’s book, Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth.

Five stages in society:

  1. Hunters & gatherers economy
  2. Agrarian economy
  3. Industrial economy
  4. Service economy
  5. Knowledge economy—often referred to as the “Information economy,” but this is a misnomer.

There’s an enormous difference between information and knowledge. Ever since Stewart Brand, founder of the Whole Earth Catalog quipped, “Information wants to be free,” commentators have confused information with knowledge.

Again, Thomas Sowell explains why knowledge, far from being free, is enormously expensive, and the most severe constraint facing societies:

… [T]he most severe constraints facing human beings in all societies and throughout history––inadequate knowledge for making all the decisions that each individual and every organization nevertheless has to make, in order to perform the tasks that go with living and achieve the goals that go with being human.

Data, Information and Knowledge

  1. Data. Factual information (as measurements or statistics) used as a basis for reasoning, discussion or calculation. There is no judgment, interpretation, context, or basis for action. It knows nothing of its own importance or irrelevance.
  2. Information. Root in Latin is formare, meaning “to shape.” Peter Drucker said information is “data endowed with relevance and purpose.” It has to have a sender and a receiver, and it is the receiver, not the sender, who decides if the message is information or not. “We add value to information in various ways: Contextualized; Categorized; Calculated; Corrected; Condensed.”
  3. Knowledge. The fact or condition of knowing something with familiarity gained through experience or association. To turn information into knowledge we need: “Comparison; Consequences; Connections; Conversation.
SCA_Slides_pptx
SCA_Slides_pptx

The Physical Fallacy: 

Brains trump brawn and Bits are more valuable than atoms.

Merv Griffin has made “close to $70 million to $80 million” in royalties from the Jeopardy! theme song, which he wrote in less than a minute.

YouTube was purchased by Google for $1.65 billion.

Disney’s Snow White video release generated $800 million in revenue, $500 million to the bottom line, from a movie made in the 1930s. Compare these supposedly ephemeral products to the value of an automobile from the same decade

Disney bought Pixar in January 2006 for $7.4 billion (Steve Jobs originally paid $10 million for it in 1986). One analyst talked about the importance of retaining two key individuals from Pixar, otherwise:

If two key people leave, Disney just bought the most expensive computers ever sold.

George Gilder likes to say that knowledge is about the past, while entrepreneurialism is about the future. Albert Einstein would have agreed:

I am enough of an artist to draw freely upon my imagination. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.

Self Sufficiency = Poverty

One professor of economics assigns his student the class project of building something they normally purchase. Many choose beer, or electronic devices.

What they discover is it’s incredibly expensive, takes an awful amount of time, and doesn’t taste or work as well as what you can buy for a lot less.

Two works we highly recommend illustrate just how dependent we are on dispersed knowledge, in the heads of literally billions of people around the world. It takes millions just to make a simple pencil.

See I, Pencil, as told by Leonard E. Read. Also, The Toaster Project: Or A Heroic Attempt to Build a Simple Electric Appliance from Scratch, by Thomas Thwaits.

The Philosopher Alfred North Whitehead wrote: “Civilization advances by extending the number of operations we can perform without thinking about them.”

Think how much easier it is do perform many tasks that our ancestors spent far more time on.

Rival vs. Non-Rival Assets

Alvin and Heidi Toffler define characteristics of knowledge in their book Revolutionary Wealth:

  1. Knowledge is inherently non-rival
  2. Knowledge is intangible
  3. Knowledge is non-linear
  4. Knowledge is relational––ideas having sex
  5. Knowledge mates with other knowledge
  6. Knowledge is more portable than any other product
  7. Knowledge can be compressed into symbols or abstractions
  8. Knowledge can be stored in smaller and smaller spaces
  9. Knowledge can be explicit or implicit, expressed or not expressed, shared or tacit
  10. Knowledge is hard to bottle up. It spreads

Knowledge is like the dark matter of the cosmos—we know it is out there, but we cannot see, touch, or measure it.

Again, Thomas Sowell:

Many of the products that create a modern standard of living are only the physical incorporation of ideas––not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends. It is those ideas that are crucial, not the physical act of carrying them out. Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living. Quite the contrary. Yet the physical fallacy continues on, undaunted by this or any other evidence.

Three Components of Intellectual Capital (IC)

IC = Knowledge that can be converted into profits (or value); it’s an entity, not a process.

IC was classified into three categories by Karl-Erik Sveiby, in 1989:

  1. Human capital (HC). This comprises your team members and associates who work either for you or with you. As one industry leader said, this is the capital that leaves in the elevator at night. The important thing to remember about HC is that it cannot be owned, only contracted, since it is completely volitional. In fact, more and more, knowledge workers own the means of your company’s production, and knowledge workers will invest their HC in those organizations that pay a decent return on investment, both economic and psychological. In the final analysis, your people are not assets (they deserve more respect than a copier machine and a computer), they are not resources to be harvested from the land like coal when you run out; ultimately, they are volunteers and it is totally up to them whether or not they get back into the elevator the following morning.
  2. Structural capital. This is everything that remains in your company once the HC has stepped into the elevator, such as databases, customer lists, systems, procedures, intranets, manuals, files, technology, and all of the explicit knowledge tools you utilize to produce results for your customers.
  3. Social capital. This includes your customers, the main reason a business exists; but it also includes your suppliers, vendors, networks, referral sources, alumni, joint venture and alliance partners, reputation, and so on. Of the three types of IC, this is perhaps the least leveraged, and yet it is highly valued by customers.

There is such a thing as negative human capital, negative structural capital, and negative social capital. Not everything we know is beneficial.

Think of the IC a thief possesses; social loss they impose is a societal negative.

Examples of negative intellectual capital in an organization: cost-plus pricing, Industrial Age efficiency metrics, Taylorism, focusing on activities and costs rather than results and value, and other forms of negative IC that have embedded themselves into the culture.

Knowledge Workers

Knowledge workers are unique:

  • They own the means of production
  • Firms need them more than they need firms—balance has shifted
  • KWs have unique value, not jobs
  • Office is their servant, not their master
  • Effectiveness is far more important than efficiency
  • Judgments are more important than measurements
  • •Ultimately, they are volunteers

The World Bank: in two reports, Where is the Wealth of Nations (2006) and The Changing Wealth of Nations (2010) report that 80% of the developed world’s wealth resides in human capital.

Other books and resources mentioned

Dear Reader: The Unauthorized Autobiography of Kim Jong Il, by Michael Malice

Ronald Reagan, speech at Moscow State University, 1988

Text here. Ron believes this is one of his all-time best speeches. He’s basically telling the students, in a very polite way, their economy is headed for the ash heap of history, due to what he calls the information economy, but we are calling the knowledge economy.

Email us at: tsoe@verasage.com

Twitter: @edkless @ronaldbaker #tsoe