Market-Based Management®

In Praise of Money

I wanted to write about this story months ago, but held my fire because I couldn’t help but feel sorry for Mark Boyle—a man who planned to walk from England to India without any money, relying on the kindness of strangers. He did manage to make it as far as Calais, France, where he discovered to his surprise that people thought he was a wandering freeloader and promptly withheld their charity. Mr. Boyle doesn’t believe in money, and thus adds his name to long tradition of disdain for currency that probably began right after Croesus put his first stamp on a little bead of electrum.

Of course, there is something very natural about disliking the institution of money—people will assault, maim, and even kill for it. However, money is the handiest of inventions and paradoxically the very thing that makes the charity that Mr. Boyle so desperately needed to make his pilgrimage possible. Money is not something imposed on people, but an institution that arises naturally in society. Even if there are no notes or coins available, people will find something—anything—to act as a medium of exchange in order to compare apples to oranges. Native Americans (often erroneously cited as examples of non-market societies) used sea shells. Constantly starved for cash by the British, American colonists traded receipts for tobacco. Gold and silver are traditional favorites, but they have occasionally been supplanted by such commodities as salt, beaver pelts, peppercorns, and even chocolate. My personal favorite spontaneous money supply is the curious bi-commodic system of cognac (used for large purchases) and cigarettes (used for smaller transactions and to make change), which prevailed in Western Europe following World War II.

While disdain for money is certainly understandable, those who hold such views mistakenly forget why money exists. Strangely, money’s critics usually champion some sort of barter system, which is exactly what money is—a system of barter through a mutually agreed upon medium of exchange. Money allows division of labor and ease of exchange essential to prosperous society, and only a prosperous society can afford charity (or welfare for that matter, which is an institution unique to countries with market economies). Mr. Boyle may make it to India eventually, and he might even do so without any money; but he will not be able to do so unless the institution he despises paves the way with prosperity.

Dutch Invent Robotic Gas Attendant: Will probably be banned in New Jersey

As silly as it sounds, ordinary folks are not allowed to pump their own gas in some parts of this country. I tried to do so once on the New Jersey Turnpike and received quite a talking to. Having others pump my gas has always made me feel uncomfortable, but thanks to some clever Dutchmen, I can remain in the comfort of my vehicle and enjoy full service without the guilt.

The new robotic gas attendants cost about $111,000 (HT: Drudgereport), so it will be interesting to see if they end up being economically viable. However, profit margins in retailing gasoline are only a few pennies a gallon (gas station owners make most of their money selling all of the other things people buy while they fill up), but perhaps the lure of robotic attention will allow gas retailers to add a few extra pennies in margin. Considering the winter we are having, I would have been more than willing to drive out of my way and pay more for robotic service. Once again, the combination of entrepreneurship and technology has conspired to make human life much better.

The Inventor of “Franglais” Dies at 66

Miles Kington, the man who coined the term “Franglais” died at the age off 66 today. Mr. Kington had no official power over language. He could not tell people what to say, yet many people have adopted Franglais. I’m no sophisticate and don’t speak French, but I do mix in French words every once and a while when the 2.5 million words in the English language let me down or are inconvenient. For example, je ne sais quoi? is a lot easier than saying, “there’s just something about that person that I can’t put my finger on—do you know what I mean it’s just the way you know….?” Declaring détente with someone is a perfectly polite way of saying “I want peace with you but you’re still a jerk.” The French have more than returned the favor by adopting such English words as le weekend, le e-mail, and, most recently le rogue trader. However, such adaptations of the English language are not always flattering; I have heard that in France to get an American deal means you got swindled.

Mr. Kington’s death reminds me of Freidrich von Hayek’s description of language as spontaneous order. No one person or committee “invented” language, a lot of different people just kept experimenting with lots of different grunts and gestures, until they all used the same grunts and gestures. Eventually, people began assigning symbols to these grunts and gestures and voila!—written language. Mr. Kington picked up on how people tended to mix the two languages, wrote the phrases down or invented knew ones, and watched and listened as folks either ran with his ideas or rejected them. Franglais is a reminder that language is a product of ordinary people. The people decide what is a word and what isn’t—not the dictionary or the self appointed language police. For example, many people tell me that “incentivize” is not a word (spell check just did), but I think it is a word because a lot of people use and understand it. Rest in peace Mr. Kington, and thank you for your wit and insight into how the world around us really works.

Is There a Case for NOT Teaching Our Children Economics?

I’ll preface this post with a caveat: I believe that for the most part that there is not a lot of formal economic education in the United States, and one can often only find it in the higher levels of education. That being said, I do believe that Americans get a hearty education in economics throughout their lives—mainly through their own interaction with the world’s largest and mostly free-market economy. Most Americans may not read Smith, Von Mises, Hayek, Freidman, ect., but their day to day learning allows them to “get” economics anyway. I would argue that most Americans realize that if they produce things that others value, then they will be rewarded, and that those who succeed at this should be allowed to keep most of the value they create and entrusted with more economic resources. Furthermore, Americans tend to get irked when folks steal from one another (illegally and legally), and nothing upsets them more than hearing of someone who has lost their home to the unscrupulous misuse of eminent domain or otherwise failed to earn their windfalls without hard work and/or risk. Thus, I believe that Americans grow up and prosper with a hearty—and largely self constructed—respect for property rights, the profit motive, risk, incentives, and the rule of law.

Despite my own hearty respect for this culture economic self-teaching, I have always been a big fan of teaching economics to middle and high school students—7th grade seems a good place to start. However, comments on this article on the “economics education” received in some countries have been floating around the economics blogosphere, and I am starting to think that perhaps it might be better to forego any attempts at economic education and just maintain the current system of letting folks learn it in the marketplace. The reason being, that while some countries do provide economic education for their youngins, what passes for “economics” is not just wrong but rather disturbing.

P.S. The link from the Economist's article does (at present) not link to the full article in Foreign Affairs, but should hopefully soon be restored.

A Reminder from the Deep

A lot of people think that profit is a dirty word—and sometimes it can be. If Peter spends $500 dollars on a gun and robs Paul of $1,000, then his $500 profit is tainted. The same is true if Peter pays the authorities $500 to put his competitor Paul out of business. However, if Peter spends $500 creating something that Paul buys for $1,000, then Peter’s $500 profit is well deserved even with the very high margin. Paul has something that he values more than $1,000, Peter has an extra 500 bucks, and we have witnessed wealth creation.

The wonder of markets is that those seeking profit can only realize it by providing for others. Make something for $20 and no one will buy for more than $10, then you are not providing value for others and better find something that does—and quick. It is this motivation that takes human nature and channels it in to creating the free and prosperous society.

In many of the college courses taught by the MBM Institute, we like to start with the Introduction from How the West Grew Rich by Nathan Rosenberg and L.E. Birdzell. Although the Introduction offers many insights into the peculiar rise of prosperity is some parts of the world, one of the main themes is that the lessening of many different social, political, and religious conditions allowed European entrepreneurs to go forth and make profit. They responded by building businesses, seizing on innovations, and undertaking risky ventures and opportunities. Free from the risk of confiscation, price controls, or arbitrary government intervention, the entrepreneurs began talking the natural risks (weather, climate, etc.) that had for so long impeded human development.

I was reminded of the risks taken for profit by this article on a perfectly preserved 17th-century shipwreck recently discovered in the Baltic. It looks like a Dutch vessel—probably one of the hundreds or thousands that plied the Scandinavian timber trade. While the wreck is remarkable, I cannot help but think that the people on this ship probably died trying to provide for themselves and their families by supplying goods for other people—many of whom they neither knew and might not have even liked.

Who's in Charge Here?

I hesitate to post on this topic, because the MBM blog is no place for political endorsements.  So rest assured that it is not my intention to endorse any candidate to you, gentle reader.  Nevertheless, I would be remiss if I didn't comment on the fact that the 2008 Republican Primary is offering an amazing comparison of planned order and spontaneous order.  And the best part is that it's all happening at the same time in a single campaign: that of congressman Ron Paul.

The Paul campaign seems to have a real knack for putting together sorry advertisements and videos.  This ad for the New Hampshire primary was so bad that Paul's supporters were almost apoplectic in their criticism (see comments).  And this one managed to make the subject of campaign finances seem about as dull as, well, campaign finances.

But then there are Ron Paul's supporters, who appear to be among the most internet savvy participants in the Primary (at least at this early date).  Supporters' pro-Paul videos are ubiquitous on YouTube, to the point where Paul's total YouTube channel views are second only to Barack Obama, and more than five times the next runner up (Hillary Clinton).  Perhaps as importantly, Paul's supporters have been able to translate their creativity into cash for the campaign.  Weeks back a small cadre of Paul fans hatched the idea of encouraging people to donate $100 on November 5th.*  Through word of mouth, blog posts and email activism, the movement signed up over 18,000 participants, and yesterday the Paul campaign received roughly $4 million in donations.  And thanks to another Paulista's efforts, supporters can look at those (and other) fund-raising numbers in gory detail ad nauseum.

To his credit, Paul acknowledges that whatever strength his campaign can boast has come, thus far, from his supporters, and not from an inner circle of strategists.  "I have my shortcomings," he told Jay Leno.  But he insists that his campaign's message has none, and it is the spontaneous and decentralized actions of his partisans in support of that message that is gaining him a level of attention and notoriety unthinkable just a few months ago.

I have no doubt that the Paul campaign will ultimately fail in it's bid to propel him to the GOP nomination.  Depending on your politics you might consider that a blessing or a tragedy.  But I have to say it's a lot of fun watching grassroots activity gain serious momentum for Paul despite the missteps of his own campaign.  It's like watching the Keystone Cops trip over themselves while a crowd of bystanders nab the villain.

Oh, and a note to Ron Paul, if you happen to be reading: If you could somehow get the people who are raising your money to spend it for you as well, you might just have a shot at this thing.

*November 5th is Guy Fawkes Day, and marks the attempted bombing of the British Parliament.  Paul's supporters, though, were more interested in Guy Fawkes Day's use as a plot device in the graphic novel and movie, V for Vendetta, in which the protagonist successfully reenacts the bombing as a protest against a dictatorial British government.

Starvation in the Land of Plenty: how property rights saved America

On the occasion of America’s birthday, it is probably a good time to reflect on this nation’s troubled beginnings and pay homage to the institution of private property that made this country possible. As children we are all told that that the first English colonies in North America nearly failed because the colonists were gentlemen—fellows unfit and unused to labor and more inclined to games of bowls than hacking a new nation from the wilderness. True, the early colonists were lazy, but was it because they were gentlemen? You would think the prospect of starvation would stir even the most indolent Elizabethan dandy to fruitful labor. However, the truth of the matter was that the laziness of these early colonists sprang from their lack of property rights. The Virginia Company expected those it sent to North America to labor on common land and contribute to a central store, which would be shared out accordingly. Not surprisingly, as each individual colonist saw no benefit from his labor but could expect his share of the communal store, then he naturally tended towards idleness. In a desperate move to stave of starvation, the colony resorted to private property.

The historical record remains a little hazy, but the source of the land reforms appears to have been Sir Thomas Dale, who arrived in Virginia as high marshal in May 1611. Sometime in 1612 or 1613, Dale dismantled the system of communal ownership and awarded each man in the colony three acres to till as his own. Of course, the colony still had to pay for itself, so Dale levied a yearly “flat tax” of two and a half barrels of “corne” (wheat). These changes produced immediate effects. Colonists threw themselves into their work and set about innovating, improving their land, and taking up all manners of crafts. In short, they started acting like Americans. By 1616, the Virginia colony was not only out of the woods, but carrying on a brisk trade exporting food to many Native American tribes.

An almost identical situation prevailed in Massachusetts, where communal ownership produced nothing but starvation and conflict amongst “godly and sober men.” Governor Bradford responded by allocating families their own plots of land in the spring of 1623. He recorded the results soon after (updated for spelling and punctuation):

“This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better contentment. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.”

I took these examples from Tom Bethell’s superb book The Noblest Triumph: Property and Prosperity through the Ages. Private property is no tool of oppression, but, rather, the key to a free and prosperous society. Too often we forget exactly how important an institution it is, but without it we would have neither things to eat, nor a country.

A Challenge Lesson from the Jury Room

The jury is arguably the cornerstone of our legal system, and few rights are more ancient or precious than the right to have one’s guilt or innocence decided by one’s peers. A soon to be released study of 290 non-capital criminal cases claims that U.S. juries get the verdict wrong in one out of six cases. However, buried in this news article on the supposedly shocking study is the revelation that judges are even more fallible than juries. According to the study, juries mistakenly convicted innocent people 25 percent of the time, while judges did so 37 percent of the time. The difference is not so quite extreme when we consider acquitting the guilty. Juries acquitted the guilty at a rate of only 10 percent, compared to 13 percent for judges.*

Studies like this always strike me as a little suspect, and are inevitably ripped to pieces after publication; but let’s assume its conclusions are true. Ok, so juries are not perfect, but they have to go on what they are told, so we have no idea if these mistaken convictions and acquittals may have been due to prosecutorial misconduct, withheld evidence, or incompetent defense counsel. However, if you consider that judges are well-educated, experienced professionals, see additional evidence that juries do not, and manage to make more mistakes, then the jury still appears a preferable proposition. Of course, mistakes will be made, but that is why we have appeals, pardons, DNA testing, and Bill Kurtis (we found out about all these mistakes somehow).

So why do we entrust juries with such important decisions, when most countries place their faith in judges? My guess is that long ago our ancestors figured out that a jury of peers made an excellent platform for challenge processes. A challenge process is an MBM model by which employees are free to challenge the status quo, ideas, superiors, subordinates, and peers. While it is important to remain respectful, challenges are crucial to discovery and improvement. Effective challenge allows the firm to make more profitable decisions and avoid costly mistakes. The jury makes for a good challenge environment because it is a black box where words and ideas are expected to fly freely among peers and prying eyes are not allowed. Sure, there are likely to be instances of groupthink (where a group makes a hasty consensus decision without careful—or even any—analysis), but the fact that juries are drawn from all walks of life and ideological backgrounds, combined with a lack of strong leadership (the foreman is pretty much just a spokesman) makes groupthink in a jury much less likely than ,say in any President’s cabinet. Compare this to judges who, despite their greater experience and knowledge, are unlikely to challenge themselves in their decisions.

Employees are often both reluctant to give and receive challenge, but this is usually because they work in an environment that is not conducive to the challenge process. So if you are reluctant to challenge or feel your work environment is not open to challenge just think that some of the most important decisions in our society—whether to deprive someone of life or liberty—are only made after a rigorous challenge process, which is why it is so important for employees to safeguard their livelihoods, and those of their coworkers, with adequate challenge.

*The article first says that judges were only wrong 12 percent of the time, while juries were wrong 17 percent of the time. However, data are then presented showing that judges convict the innocent and release the guilty at higher rates than juries. Without the study I cannot explain this contradiction, but since, according to the article, juries appear to have a higher accuracy rate at convicting the guilty and sparing the innocent than judges; then I can only assume a jury trial is arguably preferable to a bench trial.

You in the kilt—got a license for that?

Ah the kilt, the very symbol of every Scotsman’s freedom and virility. Unfortunately, under a new law proposed in Scotland, those of us partial to these manly skirts will have to obtain a license for sporrans, which are the fuzzy leather and fur pouches worn at the front of the kilt (where the frugal Scot hides his hard-earned money). The law is intended to protect endangered species such as otters and badgers, but I cannot help but feel that there is something very wrong and patently un-Scottish about having to have a license for a sporran. Perhaps if William Wallace had been picked up for carrying an unlicensed sporran, then maybe that whole “Scottish Wars of Independence” thing would have never happened.

While it is my hope that my countrymen may rediscover their freedom-loving ways and do something about this—rather than “standin aboot havering”—my feelings about the sporran license must be tempered by the MBM principle of compliance. Governments make plenty of rules and regulations that the people and businesses don’t like—many of which seem too superfluous, trivial, and/or pointless to bother adhering to. However, while grumbling about the rules is certainly everyone's right and seemingly favourite pastime, failing to comply with laws and regulations is simply not an option. Ten thousand percent compliance (100 percent compliance, 100 percent of the time) is not intended as a gimmick or to fit handily on a bumper sticker (although it does); it is an integral part of MBM, because non-compliance can cost the firm its life—no matter how well it excels in creating value for its customers and society. So while I say fie on the sporran license, if I ever get transferred to the Aberdeen office, then it looks as if I will be getting one.

P.S. The maximum penalty for possession of an unlicensed sporran is a $10,000 fine and six months in jail.

MBM Summit Stirs Memories of MBM Past

The second annual MBM Summit was held this week in Atlanta, Georgia, and it was great to finally meet many of the folks who teach MBM around the world—especially those who do so in German, French, Chinese, Spanish, and Portuguese.

Although we spent a lot of time talking about how hard it was to build an MBM culture, I couldn’t stop thinking about the first MBM class I ever attended as a sixteen year-old lab technician in Medford, Oklahoma (summer of 1994). Although by that time MBM had been simmering in Mr. Koch’s head for decades, the actual teaching of MBM to employees was pretty new. Looking back, those doing the teaching did a great job and really brought the lumber; it’s just that the lesson was heavy on straight shots of Hayek, von Mises, Polanyi, and Schumpeter. As these great thinkers often puzzle professors and graduate students, you can imagine the impact on a sixteen year-old kid and his colleagues involved in the storage and movement of gas liquids. Needless to say, the result was an excellent academic lesson that few people could understand, let alone conjure up ways to apply in their day to day jobs.

Now fast forward thirteen years to an MBM Academy I sat in on two weeks ago. Although the philosophy was the same—as was the invocation of the aforementioned great thinkers—the presentation was smooth, easy to understand, and peppered with teaching activities and examples of real life applications which did much to personalize the philosophy. Different employees from many different companies were nodding their heads in agreement and understanding, while the token few surly types who were obviously not happy to be there gradually got in to it and soon accepted the fact that this was worth their time.

I am in no way, shape, or form trying to disparage those who rolled out the first MBM classes for employees; they did a fantastic job and provided an ideal starting point. I just wanted to point out that as difficult as it is to build an MBM culture, those teaching MBM have done a tremendous job of refining and developing the courses over time. MBM Academy is light years ahead of where it was, and this is due to the people involved at every stage of the process. As employees leave academy today, they may not remember the philosophers’ names or who said exactly what, but they retain an understanding of philosophical principles that many academics take years to learn and, in many cases, often fail to completely wrap their heads around.

Understanding and applying MBM is not easy, but thanks to some of the tools painstakingly developed, I’d say the chances of eventually realizing a vibrant MBM culture are pretty good.