Market-Based Management®

MBM Readings

Frequent reader and commenter Tammy C asked in Ben's recent post: “I want to learn more about free markets/economics and how it can relate to me, as a manager…. What would you recommend to someone for their first book on how the idea of prospering societies was used to create the MBM philosophy?”

I thought this was an excellent question and one that others might experience, so I threw together a few thoughts.

Of course--as Ann mentioned--one of the best places to start is The Science of Success which succinctly lays out a myriad of philosophical ideas and how they apply to economics. 

 

Other than that, though, you have to do a little of the connection-making yourself.  We've found that pairing two readings--one philosophical and one managerial--is a good way to see how the big ideas impact the day-to-day.  Below are some thoughts on such pairings that Ann, I, and the rest of the MBM team have put together over the years.

• Incentives--Tocqueville's essay on “Interest Rightly Understood” and Adam Smith's thoughts on “Justice & Beneficence” discuss how individuals are self interested (both found in Boaz' The Libertarian Reader), and Sowell's Basic Economics discusses what motivates individuals in society (chapter 6 "The Role of Profits--and Losses" and chapter 9 "Productivity and Pay").  This can be paired with Abernathy's The Sin of Wages which looks at the problems with typical motivation systems in many organizations.
• Decision Rights--The importance of property rights are vividly discussed in both DeSoto's The Mystery of Capital or Anderson/Hill's The Not So Wild Wild West.  But how do feelings of ownership and accountability transfer over to management?  A good place to start is with Freedman's Corps Business (chapter on "Directing People," pg. 97).
• Knowledge Processes--I don't have a good reading about free speech and how that helps societies share knowledge, but Sowell's Basic Economics (chapter 2 "The Role of Prices" and 6 "The Role of Profits--and Losses") does a great job of explaining how prices, profits and loss share knowledge.  This could be paired with Senge's The Fifth Discipline (chapter 11 "Team Learning") about how you can help your team share and use knowledge productively.
• Virtue and Talents--Hayek's The Constitution of Liberty (this one is pretty dense) has a good set of chapters that discusses the concept of the Rule of Law and how important that is to creating stability and equality of treatment in societies (chapters 10-16).  In a similar way, we want productive cultures inhabited by employees we can trust--which creates organizational stability: a few good books could be Corps Business (chapters on "Developing Mangers," "Motivating People," and "Culture") and Collins' Good to Great (chapter 3 "First Who...Then What").
• Vision--The concepts of "creative destruction" (see Schumpeter's "The Process of Creative Destruction" in Capitalism, Socialism and Democracy (and if you're just starting out, I wouldn't suggest reading more than just that section)), "spontaneous order" (see Hayek's Law, Legislation and Liberty, chapter 2), and "experimental discovery" (see Hayek's essay “Competition as a Discovery Procedure” [PDF]) look at how free people interact and find ways to better themselves and others.  This can be paired with Senge's "Shared Vision" discussion (chapter 11) in The Fifth Discipline.  I see the connection as you want to create the boundaries in which your smart employees have freedom to act entrepreneurially in a way that no central planner could manage.

Of course, this is just our thoughts.  There are many, many other resources out there, and no book will ever take the place of simply going out and trying to apply MBM, but these can spark good ideas for how to better manage people and resources. 

Please let us know if you have other ideas or suggestions!

Hunches

How do you know when you should listen to a hunch?

I've been trying to work my way through Michael Polanyi's Personal Knowledge. It's a good read, but often makes my brain hurt! Anyway, Polanyi had a very interesting way of thinking about discovery and hunches. I've barely got my mind wrapped around some of his ideas, so consider this a preliminary lesson from Personal Knowledge and conversations about Personal Knowledge with my work colleagues.  

In short, I think we should investigate our hunches when we have personal knowledge about something.  I don't know anything about art, so if I view a work of art and have a hunch that something is fishy about it, it's probably not a good use of my resources to invest in my hunch. However, if you've read the book Blink, the introduction tells a story about a "Statue that Didn't Look Right." The art experts couldn't even articulate why they thought the statue wasn't an original. Those with deep knowledge about art had an instinct that something was wrong with it. In the end, the statue wasn't an original. 

With all that said, principled entrepreneurs don't blindly follow hunches even when they do have deep personal knowledge of the subject. I think personal knowledge increases the likelihood that a hunch is right, but we still have to use economic and critical thinking skills, be disciplined and make sure the risk is appropriate when investigating our hunches.

Coolest Website of the Month

Here is one of the most interesting and useful websites I have come across in a long time.  Be careful, you may end up spending hours there. 

Quoting from Wolfram|Alpha's site:

"Today's Wolfram|Alpha is the first step in an ambitious, long-term project to make all systematic knowledge immediately computable by anyone"

Mathematica has grown into an awesome product.  This application of it is inspiring.

Enjoy.

Science

This article over at PBS shows cute letters from children to museum curators about the classification of Pluto changing from a planet to a dwarf planet. (I actually went to Wikipedia's Pluto article because I wasn't sure what Pluto is considered these day.) Many of the letters ask questions like, "Why do you think it's not a planet any more?" or flat out disagree with the scientists. 

These letters got me thinking, how did Pluto get changed from a planet to a dwarf planet? So, I did what any normal person would do and searched for images and  youtube clips!This video gives one explanation about the change in Pluto's status. 

What do you think about the idea of scientists coming together and voting on definitions? Is this just a modern day example of Polanyi's Republic of Science or Kuhn's scientific revolutions? Or, did something completely different happen? 

Thanks to Jayme for the link that inspired this post! 

Hit the Open Field... The Power of Stories.

Dateline Mendenhall PA:  It was death-by-powerpoint… Heads cranked back over the tops of chairs, mouths open, eyes rolled back…  We were listening to John Ryan from the Center for Creative Leadership lecture about transferring knowledge from conceptual learning to effective application in achieving results.

 

And then something miraculous happened:  he paused suddenly, as if at a loss for words.  A few snorts and coughs as all of us detected that maybe the talk was over and it was time to clap. (Okay – you get that I am exaggerating, right?  Ryan's actually a very good speaker.)

 

Then he started:

“When I was a kid learning how to fly jets in the Navy, to earn your wings you had to be able to land on an aircraft carrier…  Now, we started learning how to fly, conceptually, in a classroom – physics, equations - but almost daily we were up in those jets applying what we learned with an instructor in the back.”

He told us a story of getting the call to scramble his squadron for their first-ever aircraft carrier landing…  it was riveting – we were all sitting up, alert, leaning forward.  We heard about the postage stamp they called a 'ship' at 10,000 feet.  He told about the fear he felt -- and about one of the pilots who, unable to muster the courage, bugged back to base and eventually became a very successful commander… of a submarine.

 

Ryan finished his story with, “You know, I don’t know why I even told that story...” which is a testimony to Polanyi’s Personal Knowledge.  Then he drifted back to the slide clicker and more blah-blah-blah.  I don’t recall what he said before the story, or after – but I’ll never forget that story.

 

Later that evening in the Delaware countryside some friends and I were talking over dinner about the experience.  Roy said, “there’s only one speech I have ever really remembered – and it was because the guy told a story…”

 

It was at Harvey Mudd College and Douglas Adams was scheduled to speak at the commencement – but he died suddenly and they’d recruited at the last minute an alum who was a successful entrepreneur in the aircraft safety industry.  If I recall Roy’s retelling, the guy said something like this:

“Most of the time when a small plane crashes, it turns out that the pilot had available a large, safe landing area.  This used to drive us crazy – why all the crashes when there was usually a safe landing area nearby?  After years of research and investigation, we now think we know...’”

 

“When a pilot runs into trouble, he immediate looks for a safe landing spot, and he almost always finds one – typically a nice open field.  Now... somewhere in that field there’s usually a tree.  As the pilot approaches the field he starts telling himself, ‘don’t hit the tree… don’t hit the tree… don’t hit the’ – and BAM! – he hits the tree.”

 

“This is so common we have a term in the industry for it – we call it ‘Negative Target Fixation.’  And I want to leave you with this metaphor: as you get ready to go out there and find your way in the world,  you’re going to find lots and lots of opportunities – big open fields of opportunities.  And yes, there will be some scary risks that stick up like trees in those fields.  Don’t think about the trees.  Focus your attention on hitting the open field.”

 

What a memorable lesson – mainly because it’s told in the form of a story.  To emphasize the point, a friend from South Africa – Lesedi – saw us lively bantering and came over to visit.  He sat down with a big smile and said, “what are you talking about that is so interesting?”

 

Roy said, “It’s this really neat idea – Negative Target Fixation… you know, where you…”

 

Lesedi’s body language immediately morphed into, “oh no! – how can I extract myself gracefully and find an interesting table?”

 

The rest of us laughed and cut Roy off with, “No Roy!  Tell the story!!”

 

So he did.

 

And Lesedi loved it.

Markets Fail When You Make Them

Ok, I made a bad prediction in my previous post about gasoline coming to Georgia in the wake of Hurricane Ike. I know it was a bad prediction, because I drove to Atlanta Airport on Sunday and did not see a single gas station with petrol (although news reports say about half do). So why was I wrong, and why has the market appeared to fail? First of all, my prediction was based on the premise that the market would be allowed to work. Gas can be found in the Southeast—just not in Atlanta. Why did every station I saw in rural Mississippi and Alabama earlier this week have gas, while those in Atlanta did not? The answer is that it would be illegal to sell the gas available in the country or suburbs in Atlanta proper. The American gasoline market is not a single unified market, but a deeply fragmented patchwork of markets where federal clean air mandates dictate what types of gasoline (called boutique fuels) can be sold where. Because of its air pollution problems, only a special boutique fuel can be sold in Atlanta. After hurricanes Katrina and Rita, the federal government wisely suspended these fuel mandates and momentarily recreated a national market for gasoline. While this measure did have a temporary effect on air quality, it prevented many of the shortages that we now see today. Unfortunately, the feds did not follow this policy after Ike, but kept the mandates in place, which is the reason that Atlantans wanting to fill up either have to wait for scant fuel deliveries or dive to the suburbs or country.

Another curious going on is that when there is gas in Atlanta, prices do not appear elevated and are roughly on par with those before the hurricane. So why with all this scarcity, are gas stations charging prices close to pre-hurricane levels? The answer probably lies in the overt threats from state and federal officials that they will go after price “gougers” for selling gasoline at high prices. As I mentioned in the previous post, the Georgia price “gouging” law is fairly toothless and not even currently applicable (the governor has to declare a state of emergency for the statute to come into force). I erroneously believed that the benign nature of this law would not impede rises in Georgia gas prices and subsequently encourage conservation and supply. However, most gas station owners are either only vaguely aware of this or think the feds will get them instead. The effect has been a de facto price ceiling on gas prices in the Atlanta area, which gives motorists the incentive to snap up gas when it is available, rather than weighing much higher prices (say $8 a gallon) and buying only a few gallons at a time. This is exactly what I—and everyone else ay my neighborhood station—did when a gasoline shipment arrived. As a result, folks who would otherwise drive around with half or quarter tanks fill them up (and top them off) whenever possible. I am running with a full tank right now but would have left more for my fellow Atlantans had the price been higher. Unfortunately, the situation has unleashed my (and apparently everyone else’s) inner speculator.

Why there will be Gas in Georgia

With the approach of Hurricane Ike, I started to wonder if I should fill my gas tank prior to the inevitable disruption in the nation’s refining network. However, a quick google search revealed that Georgia (where I am) has a very tame anti-price “gouging” statute, which only comes into force when the governor declares a state of emergency (unlikely considering the state of emergency is in Texas). At the same time I noticed that those states neighboring Georgia (primarily Tennessee, South Carolina, and Florida) have more strongly worded statutes, and their public officials have been making noises about enforcing them come the inevitable spike in prices. In a market economy, prices provide the knowledge governing production, distribution, and consumption. If you monkey with this system by implementing a de facto price control in the form of an “anti-gouging” law, then you recreate the foolishness of the price controls of the early and late 70s. Of course, the full impact depends on Ike, but even if some shortages occur in Georgia; we will certainly fair better than our neighbors to the north and south.

Not from the Onion but it belongs there

At first I thought Don Boudreaux over at Café Hayek had a hold of my leg with this post about the Onion Futures Act of 1958—until I noticed that he had linked to this Wall Street Journal article and a quick Google search turned up that there really is an Onion Futures Act of 1958. The Onion Futures Act bans futures trading in onions, and came into effect after onion farmers blamed “moneyed interest” and “speculators” for volatile onion prices. The act still remains on the books, and (as far as I know) no other bans on commidity futures exist. So with folks blaming oil prices on “moneyed interests” and “speculators,” what would a ban on oil futures do to the price? Of course onions ain’t oil, but since no other commodity has suffered the same ban, it remains the only example we have.

Despite the ban, onion prices continued to remain volatile. Actually, they became even more volatile after the prohibition of futures trading. Contrary to what had been believed, onion futures trading had actually helped to stabilize prices. Futures are an excellent hedge on risk and a valuable knowledge process. They encourage traders to do their homework and collect and vet mounds of information on what might be the future price. This allows consumers and producers to plan on these prices and respond accordingly. Hopefully, decision makers will come to understand the valuable knowledge provided by futures market and not repeat the onion mistake.

The Importance of Vetting Knowledge

MBM talks a lot about collecting and sharing knowledge. However, we sometimes don’t stress the need to understand exactly what that knowledge means. Often what appears a clear connection is really quite meaningless. I was reminded of this by an article in today’s Arizona Republic (HT: Coyoteblog). The article complains that consumers are being “gouged” by faulty gas pumps. Apparently, about 9 percent of Arizona’s inspected gas pumps failed tests by the State’s Department of Weights and Measures. The article is full of innuendo and numbers implying there is something rotten in the state of Denmark (or at least Arizona). Despite the tone of the article, the fourth sentence begs some curiosity:

Half of those [pumps] were malfunctioning to the detriment of customers.

Faulty pumps are not good, and people getting ripped off is not good; but if half of the malfunctions cause detriment to customers, then what about the other half? Are some of the good people of Arizona getting a little free gasoline? Of course, I do not doubt the need for governments to standardize and inspect weights and measures (the practice dates to the Magna Carta (clause 35) in the Anglo-American tradition), but the little nugget on the impact of these inaccuracies tells us that this situation is probably happenstance or, at worst, neglect on the part of the pump owners. Interestingly, the article also mentions that it can cost up to $800 to recalibrate a pump, which considering the thinness of margins in retailing gasoline (only a few pennies on the gallon), is probably incentive enough to recalibrate infrequently—as opposed to deliberately fiddling the pumps. Furthermore, as the fine for a first time offense is only $300, it makes perfect sense for the gas station owners to have the state come out and do the inspections for them (paying the fine and fixing the affected pumps should be much cheaper than constantly re-calibrating of all of them). So, while malfunctions of 1 out of 11 inspected pumps causes us to quickly jump to conclusions, a little vetting of information reveals nothing more than perhaps the nature of pumps, happenstance, poor incentives, or the combination of all three—meaning only a few lines tell the whole story, and they don’t match the rest of it.

Do You Have a Bad Job?

Of course, whether you have a bad job or not is not something I can answer, but luckily some folks think they have figured out as to what a “bad” job really is. This article in the Arizona Republic (HT: Coyoteblog and apologies as I basically parrot his post), cites an unnamed study, which classifies 35% of Arizona jobs as “bad,” because they pay less than $17 an hour and offer no benefits. On the other hand, 22% of Arizonans apparently have “good” jobs, which the study defines as making more than $17 an hour with health insurance, retirement plans, and various other unnamed benefits. Unfortunately, as there is no link or naming of this study, I have no way of determining the “goodness” or “badness” of the remaining 43% of Arizona jobs, which exceed $17 an hour but fail to include all the “good” job basket of mystery benefits (however, considering the percentages of insured/uninsured most of these “limbo” jobs presumably come with the big benefit—health insurance). The 43% would also include entrepreneurs and the self-employed who cannot technically offer themselves any benefits. This also begs the question as to whether any of those in "bad" or "limbo" jobs happened to fall under the benefits of parents or spouses with "good" jobs.

Confusion over percentages aside, the whole idea of measuring “good” or “bad” jobs is pointless. For starters, a person’s evaluation of his or her job is their own. I know lots of folks who make great money with fantastic benefits and positively despise their jobs. I know others, who make little and get by without health insurance (usually because they are young and healthy), who are overjoyed by their work and overall existence. Furthermore, as Coyote points out, retirees (and there are a few of them in Arizona) who work part time in leisurely, but relatively low-paying jobs, would still hold “bad” jobs despite possessing insurance coverage through Medicare and probably already well stocked in the retirement plan department. The same goes for teenagers or college students who may work part time while remaining covered under their parents’ health insurance with no real need for a 401(k) or employer subsidized life insurance. The best (see “bad”) job I ever had was in grad school, when I also happened to be flat broke—but living fairly well in my statistical poverty and misery.

There also remains the “compared to what” issue. Ten bucks an hour ain’t a bad racket if you have no skills and may not even speak the language. Had this study been conducted in China, it would have found nothing but “bad,” jobs even though Chinese factory workers may earn wages thirty times better than their previously “bad” job of starving peasant. The lesson here is the power of subjective value. Whether it is compensation, working conditions, music, movies, or dinner, different folks value different things differently, at different times, places, and situations; making defining “good” or “bad” jobs from the standpoint of a third party a waste of time and effort in addition to communicating little useful knowledge.