Mainstream economics is not the cause of the current financial crisis – rather, the cause of the current financial crisis and the cause of mainstream economics being mainstream are the same.
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Author: mdegeorge Page 19 of 21
Matthew De George is a well respected management consultant focused on technology-enabled business transformation. He typically wont tell you what your strategy should be. But he'll "get it", and he'll help you execute. Matthew brings 20 years of experience in transforming business and customer-facing processes through the effective implementation of technology and information management practices.
Leadership is knowing what needs to be done before you see the ROI calculation
I’ve written a few short descriptions of the MWT Model over the years. I just submitted the following to ValueBasedManagement.net:
ManageWithoutThem is firstly a theory of how organisations actually behave, rather than how managers should behave. Secondly, it’s a redefinition of the management process so that it benefits the organisation as well as managers themselves. It re-intermediates management processes and refactors those processes without the implicit role of a separate management class.
Managers still exist in the organisation, of course. But the the principles of market analysis are applied to the inside of the organisation to allow greater transparency of operational activities without filtering all measurements through management hierarchies. Rather than flat organisations, the model allows for the accountability of hierarchy without the politics of hierarchy.
The ManageWithoutThem model redefines management as a technology that collaborating individuals share – allowing for the possibility of improving that technology in terms of efficiency, usability, and integration with other technologies.
Check out ValueBasedManagement.net – it’s filled with managemeent techniques, theories, and models. This isn’t a critisism of the site at all – but it makes you realise how fragmented and specialised management has become as a profession.
Just like there is always an excuse for more government spending, with such a wide range of management techniques available there is always an excuse to do some more ‘management’.
The term technical is often misused, and used only to apply to engineers, but the management profession itself has become technical in the true sense. Nobody would argue against the fact that much of that management knowledge, even when it’s correct and useful, is technical in nature.
This means that modern organisations are basically technocratic.
Management is not never having to say “this is bullsh*t”.
I’m reminded time and time again that the problem is not what you are managing it is how you are managing. It doesn’t matter if you add projects, communications, services, risks, etc, etc, etc to the list of things you are managing. All you are doing is increasing the amount of activity that requires a manager – or, in the worst case, increasing the amount of management activity proportional to other activities. You need to change how you manage!
Management is boring! It, in fact, should be boring. Not only that – you know something is ‘managed’ when managing it becomes boring. But the problem is that we all crave excitement and we all want to be the hero. So managers make management much more interesting than it actually should be.
Imagine, because this might never happen, you have just left work on a six week holiday and you are uncontactable. There are a number of small projects in flight which you have left behind. But you know these projects are okay because the management of them is now boring. When you discuss them with the team the conversation essentially follows patterns which include ‘we are doing the next step in the plan’, ‘we have an issue and it’s with the appropriate owner’, ‘some specific task is delayed because we were performing other more important activities’, or ‘some specific task is delayed so we are spending more time on it instead of some less important task we were going to be working on’.
Getting to the point were these patterns of communication could be used wouldn’t have been easy – it never is – but getting to that point was the real work, was the interesting work.
When management becomes interesting is when there are no shared understandings of the priority of tasks, so there can be no genuine communication regarding ‘more important’ tasks. Equally, management is interesting when as issues occur there is no shared understanding of the ‘appropriate owner’ so no communication at that level can occur. It’s really intesting from a management perspective to have to have a long detailed conversation to find the ‘appropriate owner’ in each individual case – but do we want it to always be that way?
The point I’m making is that when management is clear the actual process of managing isn’t very interesting. The problem is – when you’ve worked hard to become a manager you want your job to be interesting. You don’t want to just be shuffling paper, ticking boxes, etc.
But there are only a few ways to make things interesting: get into the work itself, or make the management process interesting by complicating it. But getting involved in the work isn’t always helpful, and intersting management, exciting management, frequently changing management, is usually always bad.
If you want to understand economics, the current state of the finance industry, and some of the corruption caused by bizarre inflationary money systems, it’s worth reading How an Economy Grows and Why It Doesn’t.
It’s a comic – which is kinda cool – and it was published in 1985 – which makes the parallels with the current financial [industry] meltdown kinda eerie. (Even the web site is old! It proudly declares ‘best viewed in Netscape’!)
The comic was written by Irwin Schiff, who is the father of Peter Schiff. Peter Schiff has been getting a lot of airtime at the moment as the (a) ‘Dr. Doom’ who predicted the crisis. He actually thinks things are going to get worse (for America) as the situation turns into a currency crisis (for America).
(On a side note – I like how America seems to be calling for a ‘unified approach’ to dealing with the global financial crisis. Well of course they are! If you are going to inflate your money supply you need every other country to do the same thing so that your country isn’t disadvantaged relative to other countries! Sheesh!)
I’m only up to page 70 of the comic (so may words, man!) – but it appears that’s also where the world is up too, or a least the public reporting of it. So I’m excited about reading what happens next!
Interestingly, while Peter Schiff is doing well his father Irwin, who developed the comic, appears to be currently in jail. He is some sort of tax denier who doesn’t only dislike tax but thinks it’s ‘voluntary’ – and has argued as such in court.
From what I’ve read his argument is wishful thinking – he seems to be finding the word ‘voluntary’ in various documents relating to the American federal tax system and reading into it that people don’t have to pay if they don’t want to. But I think what these documents are actually saying is that the tax system relies on voluntary compliance with the law as opposed to knocking on millions of doors and asking for tax (i.e. mandatory compliance).
Sure, if everybody stopped paying tax then the IRS wouldn’t have the resources to move to ‘mandatory’ compliance – but that doesn’t mean everybody wouldn’t be breaking the law. However, that wouldn’t mean everybody would be prosecuted either – it would mean a revolution, maybe blood would be spilt. I don’t want blood – let’s just continue to pay our taxes and complain.
Sorry Irwin – I could have saved you 12 years. That said – I like your style and agree there is something a little fishy (ah, get it? Fishy! – read the comic) about paying people so they can buy votes. But, as I said, always pay your taxes. If a mugger with a knife wants your wallet you give it to them right?
After my last few vague ramblings on the economy I wanted to hear what somebody who actually knew what they were talking about thought.
I found the ideal candidate: John Allison, former CEO of BT&T Bank (which hasn’t gone broke), speaking for the Ayn Rand Institute. Now don’t get me wrong, the folks at the Ayn Rand Institute can be a bunch of crazy mofos! But this guy was facinating and makes a lot of sense.
It’s a dense presentation (as in, there is a lot of content squeased into it) so follow the related slides and pause it often – as I did.
The talk and accomanying slides can be found here.
Exactly:
… what struck me most was Geithner’s repeated conflation of our “financial system” and our “institutions”. Mr. Geither’s unspoken assumption is the fixing our financial system implies ensuring that incumbent troubled financial institutions are “strong”. But that’s not right. Our financial system is composed, in part, of financial institutions, but it is supposed to be larger and more robust than any specific firm. Three years ago, Mr. Geithner would have readily conceded that financial institutions are supposed to come and go, rise and fall, succeed and fail as a matter of market discipline, and that our system is made stronger by that flow of creation and destruction than it would be if some state-manged cadre of crucial banks were at its core. Of course, we all knew three years ago that some institutions had become “too big/complex/interlinked to fail”, but we viewed that as unfortunate, and would have foreseen that if any of those banks got badly into trouble, the goverment would be forced to intervene and resolve the bank at some taxpayer cost, as it had in the case of earlier TBTF banks. Three years ago, no one would have suggested that the strength of our financial system and the strength of Citibank are inseparable.
– from Interfluidity
Everybody is citing the article in Wired on the Gaussian copula function. Apparently, everybody had been applying some clever maths to finance decisions so they thought they had a mathematically valid way of making accurate predictions while eliminating most variables. It probably was mathematically valid. But was it ever economically valid?
The Austrian economics folks at the Mises Institute are basically saying that it’s difficult to imagine an Austrian economist, a reader of Human Action: A Treatise on Economics
My take is that the Misians are right (again) and this is a failure in the understanding of economics, not a failure in maths or the creator of the formula. But I don’t have to make any comments on this because ‘Andrew’ has already said all I want to say in his comment on Boingboing:
#7 posted by Andrew, February 24, 2009 1:19 AM
Economics is not formulas. Economics is not higher math. Economics is not experimental science. Economics is not even quantitative. Economics is logic applied to the choices that people, and business, make constantly. The logic of marginal value, opportunity cost, uncertainty, and all the rest is as good as it’s ever been — it’s universal as long as time and resources are finite. It’s when you start to say that the demand elasticity of natural gas times the velocity of money, minus the consumer price index, is correlated to the relative humidity in china with r^2=.83, that you’ve fucked up irrevocably.
What’s this got to do with management? In management terms, applying a formula is never the basis of a capability. Like another great ‘Andrew’ said in a comment to my last post, the banks appear to have been saying ‘yes’ to anybody who asked for money – and now they are saying ‘no’. This itself is the simplest of all formulas – and it doesn’t in itself give you that all important capability of being able to differentiate between good and bad risk. And if you use a formula long enough you’ll loose the capability itself (if you ever had it).
I’m becoming convinced that the financial system is completely broken. One of the reasons that managers didn’t put the breaks on use of the formula is sighted in the Wired article:
In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn’t understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
(See also comment here)
Note that they were ‘making too much money to stop’ and yet you might ask the intelligent questions raised here:
And one question:
I’d like for the knowledgeable people here to tell me what would have the banks done with all the money they had to lend if they wouldn’t have gone for the bad risk? Isn’t everybody so loaded with debt right now that there is very little good risk left? Was this crisis even avoidable?
These raise an interesting point – what do you do with ‘too much’ money? How, or why can there even be ‘too much’ money? If you are expected to make a certain return, to create a certain level of growth in any market conditions, then you need to spend or lend your spare money.
This is the obsession with growth that I think must end. We even define a recession in terms of a lack in growth – why does there always need to be growth? Also, if the government is fiddling with interest rates and indirectly providing cheap loans how do you as a business deal with sort of price eroding competition? Your forced to make dumb / risky decisions I guess – but perhaps you also start getting the wrong signals making it hard to make the right decisions.
The other point it raise is the different between earning money and creating value. The money that was risked on risky loans is now gone. Never mind the details but that value has been whipped from the economy. But the destruction of value coincided with the making of money. Again, something is wrong here. In this sense people were being paid for taking risks. This shouldn’t ever be the case – people should be paid for either creating value or because the risks they take paid off.
But there is more than one agent here. There are the employees of the banks and the banks themselves. Of course, you have to pay employees for turning up – even if they are risking money and eventually driving your business into the ground. So it’s not the financial folks themselves that are taking the risks. It’s the organisation. It’s the bank itself. It’s the process, structure, culture – in short, all the capabilities that make the organisation what it is – that by its very design choose the wrong people, had the wrong controls, gave incentives for the wrong behavior.
And yet – it’s the Banks that are getting bailout money! I can’t understand this. People don’t appear to realise that the institutional structure is temporary. The exact nature of who owns banks, who runs banks, the boundaries between banks, and the intermediation of different agents (existing or potential) is all we have when it comes to a financial industry. The only way a solution can possibly exist for any financial crisis is for the institutional structure that is overlaid over value to change. The only process that will cause universal (or at least, on average) improvement is to change this institutional and agent structure so that it works more effectively and so that more capable ownership and control exists.
Bailouts to banks will effectively allow the current owners of banks to continue to own the assets -despite- the fact that they have proved they can’t managed them effectively. This doesn’t stop at direct ownership – it also include the investors. If people have invested in banks that are not managing value correctly they have failed to invest wisely. A bailout helps them retain ownership -despite- making bad investment decisions.
If investors are investing in the wrong things, and if owners or corporations are managing assets ineffectively, or if risk is not being managed by a corporations capabilities the investment needs to not provide a return, the assets need to be moved (naturally, through sales) to somebody who can manage them, and different capabilities need to be engineered or given resources.
But – what is the magic formula for deciding all of this restrucing? Well there isn’t one – it just has to be allowed to happen doesn’t it?
PS. I’m not an economists so I don’t really know what I’m talking about.