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When I’m 90

2013 February 26

I will always remember an old professor colleague of mine. I had not seen him in twenty years. He was the last person coming off the plane in Boston at midnight and looked quite old. He was disheveled, slowly dragging his oversized suitcase up the jet way, holding a half-open shoulder bag full of flip charts. He was still wearing the same patched-at-the-elbows rumpled suit, and his shirt was stained by markers ink. He saw me waiting for him, and a large smile illuminated his face.

“I’m just back from the West Coast”, he shouted at me from twenty feet away. “Three-day-workshop with a bunch of kids managing a high-tech start-up. Not so bad for a ninety-year old guy who does not even use Facebook”.

This image of my old friend’s triumphant smile has stayed with me all these years. The ancestral anxiety of any educator is irrelevance. This is particularly true those of us who teach innovation. I want to look like my old friend when I’m 90. I want to come off the plane, physically exhausted, but exhilarated at the thought of having just learned about a new industry. When my consciousness starts waning on my hospital bed, I want someone to whisper in my ear how neural networks and 3D reservoir modeling algorithms are built.

I’m not quite 90 yet, so I’ve got a bit of a head start. The front-end discovery part of any new business is by far where I have the most fun (I feel like I’m being paid to go to school). Writing-up success stories based on consulting work I have done and teaching them on the lecture circuit is the second best part. Everything in-between is just hard work.

I’m learning about six industries right now and feel like a butterfly in the orchard of knowledge. Three of them are fairly easy to grasp at the beginner’s level: we can all visualize how a grocery store, a hotel or a movie theater chain work. Three others have a higher educational bar: few of us have an a priori knowledge of flow cytometry, software-designed networks, or smart grid optimization tools. And even the “simpler” industries become complex beyond the basic level: there’s nothing trivial about figuring out how to manage the supply chain of a grocery store, optimize the occupancy rate of a hotel chain, or improve the average spending per spectator in a movie theater chain. As my synapses fire at decreasing speed, I pray that the wisdom of my years and the presence of younger brains around me cover for my reduced mental agility.

This is where the power of a cross-industry framework helps. In the co-creation business, one sees opportunities for new connections everywhere. Some people’s experiences can be connected together to form “chains of empathy” (for example, suppliers, employees and customers can all help a grocery store figure out what its strategy ought to be). One can fairly easily visualize data flowing across previously disconnected individuals and companies, and new insights being generated between them (in the medical, telecommunication or energy worlds, for example). I am like the Haley Joel Osment character in the movie the Sixth Sense: I see dead people.  Unlike him, though, I arrogantly think I can make them come alive.

If you one day see an old disheveled guy dragging heavy luggage and coming last off an airplane at midnight, do not feel sorry for me. My dream is being fulfilled.

 

 

Customers want to know how businesses make money

2013 February 3

 

Strange things grow in the darkness of many businesses’ economic models. If you think that businesses serve the needs of customers and make money by earning their trust, think again. Businesses are platforms balancing the needs of multiple constituencies, and their economic model is rarely what you think. More importantly, businesses don’t want you to understand how they earn their profits, because if you found out, you’d know many are not telling you the truth.

When you go to a grocery store, you assume the products being offered are those that the consumers want. You envision a customer democracy driving shelf space. But the grocery store is responding as much to the spiffing from suppliers as to the needs of customers. Customers matter some (the grocery store cannot really do without the brands that people love), but shelf allocation is really driven by the rebate terms granted by suppliers to the store, not by what you want.

If you’re an investor who’s placed money with a large bank (or even more so a private bank), you may naively believe your advisor has your best interest at heart. But in many cases, your advisor is investing into assets managed by the asset management division of the bank, with the asset management division “retroceding” a good chunk of its profit to the banking division. How can you trust your agent when you have no idea what incentives he responds to?

Why are investment bankers so despised? Because nobody understands how they generate their money. Given the darkness in which they operate, we assume they’re making tons of money (which is largely true), using reprehensible schemes (which is sometimes true). The inability to identify the real costs and risks involved drives a general suspicion. If we were to understand costs and risks, corporate CFOs and treasurers (and the public at large) could start trusting investment bankers again.

At Google.com, you may think the search results you’re provided are the result of some objective assessment of the relevance to the question you posed. But Google makes money from its advertisers, not from you, so whom do you think they cater to when you ask your question? They have resisted any probe from regulators on how their search algorithm works (most recently in Europe), which would be the only way to figure out whether the search is indeed honest, or whether it tilts results to Google-biased suggestions? As a result, many of us may use Google as the dominant option, but few of us trust them.

At Internet sites like Lending Tree, TV advertising urges you to come to them because they will get lenders to compete to lend you money. But what they really do is “source” you as a customer and bring you tied and gagged to one of their chosen (often second-tier) suppliers based on some pre-arrangement they’ve struck with them.

All of that is as old as business. Newspapers, radio and television have always been financed by advertisers, while pretending to be accountable to their readers, listeners, or viewers. Large cultural institutions like symphonies, ballets, and museums routinely raise more money from grants and donations than from people paying for performances or visits at those institutions. As a result, the editorial or content integrity of those institutions is constantly in question, since the economic model does not match the purported consumer-oriented intent.

So what’s wrong with that? The lack of transparency is what’s wrong. Customers should have the right to know the economics of the businesses they patronize. They should understand the motivation of the store being spiffed by suppliers, or how much money the asset management division earns from their business with the retail banking division. If they did, they might decide to not buy from those businesses, go to more transparent suppliers who do the same thing but make it transparent, or choose to engage directly with the other members of the ecosystem. After all, grocery stores increasingly invite customers to talk to their suppliers on issues of sustainability for example, so why not do it on price or profit issues? They might help small suppliers struggling to break into the store shelves’ line up without paying a ransom, or punish spiffing suppliers who over-buy space.

I have repeatedly found that people, when confronted with the economic reality of business, make intelligent choices. Customers want their businesses (and their businesses’ suppliers) to be successful. They’re often eager to participate in the co-creation of the business’ economic model. The only time where they want to punish businesses is when they’re not honest with them, as has happened with car dealers playing back-room pricing games: consumers have deservedly pushed the industry close to zero profit on the sale of new cars through the power of Internet transparency.

In the future, economic models will be increasingly the result of a co-creation between customers and suppliers, with businesses earning their profit through the intermediation they create between them. Making your business model transparent is the first rule in the new economic order.

At long last, I’m a tour guide!

2013 January 19
by Francis Gouillart

I always wanted to be a tour guide and last week, I got my chance. As a favor to a group of French retailers visiting the US, I took them on a tour of Wegmans, WalMart and Costco. Not too many international visitors pile up on a bus to visit New Jersey in mid-January, but we did. I had set it up as a Compare and Contrast exercise – teachers can’t ever organize anything without some pedagogical purpose– but one of my visitors suggested the trip should have an entertainment theme instead. “Like in Club Med” he suggested.  We toyed with a Soprano or Bruce Springsteen motif, but agreed the trip should be called The Good, the Bad and the Efficient (sorry, WalMart!).

At Wegmans, the quality of the food display earned great respect from my French colleagues, although I sensed some contempt for a culture that would deem food so unimportant as to be consumed inside a grocery store. When I suggested we should have lunch at Wegmans’ restaurant upstairs, I was told we needed “a proper place” instead. That place turned out to be the Bahama Breeze in Woodside, New Jersey. I learned this choice had resulted from a close call with the Olive Garden next door. We went for the not-so-tropical hamburger and fries, which everybody ate with exquisite fork-and-knife manners.

One of the greatest joys of being a guide for professional retailers, I found out, is to learn how to reverse-engineer anything you see into the store’s profit model. After a few minutes at Wegmans’, they concluded Wegmans could not earn investor-grade returns with such a high-quality, low-turnover food, particularly when served by such knowledgeable employees (they correctly inferred employees had to be trained and well-paid to answer customer service questions as competently as they did). Interestingly, few of the visitors spoke English, but watching employees answer my questions was enough for them to assess their competency. “I’d love to be a customer there” one of the French visitors concluded (although apparently not to the point of wanting to have lunch there), “but I would not invest in this store.” When they discovered the chain is private and only opens two or three stores a year (officially to control quality), they looked at each other with a knowing smile.

WalMart was deemed uninspiring, but cheap. “We used to have stores like that 20 years ago”, was the most favorable comment I heard. They pointed out everything that could be improved, from cleanliness to the spacing between screws on the hanging racks. There was an Apple table with a few iPhones on it, trying its best to look like a mini-Apple store, but there seemed to be few geniuses around, and even fewer customers.  We asked a friendly-looking clerk how big the store was. Her response was emphatic: “I have no ideaaaaaa!” I guess we were not at Wegmans anymore. My visitors were back in the bus within 30 minutes (Wegmans kept them interested for close to an hour).

Costco turned out to be the hands-down winner. “They must have about 4000 SKUs in here, probably about one thirtieth the number of WalMart” one of them estimated. We later found out they were right on the money. They estimated total sales for the store, sales per square foot, average ticket price for the store by looking at a few cards at the cash register, average demographics of the crowd, and split of brands vs. store brand sales. They even assessed the frequency of visits by building a quick model of yogurt and cereal consumption by an average American family buying two giant packages of each at every trip.  Beyond that, they concluded, an average American woman would no longer be able to push her cart all the way to the parking lot.

I hope I never have to teach or consult for those guys. Being a tour guide is a much safer profession.

I dream of Malden

2012 December 8

Lately, Malden, Massachusetts has entered my consciousness. I’m not sure why. Maybe it’s because a few of my Yelp friends from Boston have told me this is the “in” place for Ethiopian, Sri Lankan or Moroccan food. Maybe it’s because Business Week has made noise about Malden being a great place for kids to grow because of its diversity. Maybe it’s because a member of my family has some political responsibilities there? Or perhaps I’m just tired or organizing business communities in India, Latin America and Europe and want to come home in the evening?

I don’t yet know how to fit all the pieces in the co-creation puzzle, but I’m eager to figure it out. My typical gig involves finding a central business player eager to orchestrate the development of a mini-economy around itself: a large business, a bank, sometimes a public entity (although a profit-seeking business with a community bent provides the best anchor). Maybe Eastern Bank or one of the local savings banks could play that role? Banks – community banks in particular – can become great community co-creators since they make money by attracting local savings and lending that money back to mortgage customers and businesses. By connecting all the parties with each other around local growth and utilizing the physical branch as a local meeting place, one can drain a lot more savings and generate a lot more loans, often at below market rates, simply because people are passionate about making their community a better place. I have done that in Saint-Etienne, France and Guadalajara, Mexico, for example. Why not Malden? Eastern Bank, you look like a supersized community bank with a great community bent. I’ll bet we could significantly increase the income of your savings and your lending business in your Malden branch if we could make you the center of Malden’s renewal.

On the business front, Malden does not have a lot of manufacturing businesses, but has great ethnic food restaurants that could grow and become anchor points for local employment. Could Malden become the food capital of New England? Could it engender the development of an ethnic food supply chain with ethnic grocery stores and perhaps some local manufacturing or distribution centers from the mother countries? I dream of Malden as a mini-Ethiopia, mini-Sri Lanka, and mini-Morocco, a diversity showcase attracting hard-core Bostonians to eat and shop there. (Malden has the advantage of having the Orange line connecting it directly to the heart of Boston).

Maybe we could get the young foodies from downtown Boston who already come to Malden for food to help us orchestrate the growth of these communities? Many of them are idealistic Generation X and Millennials generating good incomes from financial services, healthcare or service firms.  Maybe we can have a “Food for Thought” program (one of them suggested that name to me), where these idealistic foodies become business activists who help Habesha scale its outstanding Ethiopian restaurant business, or supports Moroccan Hospitality Restaurant in attracting more passionate people to its tagines?

Beyond the business imperative lies a social one: Malden needs help because the poverty rate there is quite high at 12%.  It’s a  neighborhood not far from where some of Ben Affleck’s and Clint Eastwood’s tough movies take place (the Town, Gone, Baby, Gone, Mystic River). Maybe we could get local boys Ben Affleck or Matt Damon to sponsor our Malden business community program?

I dream of this program as a business proposition, however, not a bleeding heart volunteer activity. There is business to be made at the bottom of the pyramid, and it happens to have positive social outcomes. I want the core business that anchors this program to double its profits, the owners of the Malden restaurants to become affluent and the employees who work there to derive good incomes from the new jobs created. I want the politicians associated with this program to become stars and sell the program as a model for other Massachusetts, New England or US towns. Personally, I want my wife and kids to discover what I do for a living and get to sleep in my bed at night.

Malden is the modern version of the American melting pot. It is a microcosm of our future economy, with its huge problems and the opportunity created by its diversity. The future of America does not lie in setting up the right tax rates in Washington, DC. It lies in weaving vibrant business communities at the local level. With politicians, bankers, restaurants, downtown foodies and citizens, let’s go co-create Malden.

 

Why demographic segmentation is bad for democracy

2012 November 11

It is a bad outcome when the main lesson learned from the recent US Presidential election is that future political leaders will win through a better understanding of demographic segmentation. The conventional wisdom emerging from the recent victory of Barack Obama is that Republicans lost because they failed to understand that the United States is becoming more diverse, and consequently over-relied on older, white votes. Conversely, Democrats are deemed to have won the Presidency and gained seats in the Senate by energizing the vote of Latinos, African Americans, women and younger voters.

The problem with this argument is that it represents a static view of the situation (yes, the numbers are as advertised in the re-election of President Obama), but fails to recognize the dynamic role of political innovation in electoral success (no, there wasn’t any of that in the recent election). Like in business, political innovation does not reside in the ability to activate one’s traditional segment by honing in messages specifically crafted for them (the proverbial “red meat” for the equally proverbial “base”), but in rearranging the segments and building new creative coalitions among them. The name of the game should not be to grind out electoral victories through micro-segmentation and predictive modeling of votes county-by-county or citizen-by-citizen. The role of a political leader should be to engage a large electorate of diverse people in not only redefining their relationship to the candidate, but to each other. There is room for operational micro-segmentation processes as a second implementation step, but it is hardly a substitute for the broad democratic engagement process a candidate should orchestrate. In the election, both candidates had a lot of the former, and precious little of the latter (particularly if one compares Barack Obama’s 2012 campaign to 2008).

Successful campaigns are those where demographic frontiers get blurred and new relationships develop among supporters of widely varied ethnic, gender, sexual preference or age backgrounds, triggering new electoral coalitions. A campaign platform should be about drawing as many people as possible to become active members of the system and co-create with the candidate what he or she stands for. Voting is but the tip of the democratic co-creation iceberg, with day-to-day life in the community its underwater part.

Political campaigns should start in wide open form, not as manifestos. The pressure put by pundits on candidates to define their programs very early, down to the specific tax deductions they will eliminate and the energy programs they will support, is a negation of democracy, not an enhancement thereof. In a co-creative electoral system, there ought to be room for the much derided “listening campaign” of Hillary Clinton in her first senatorial run, or for the highly ridiculed etch-a-sketch views of Mitt Romney. Thinking that candidates should state their views once and for all, then execute them flawlessly once in office under penalty of becoming flip-floppers is as ridiculous as would have been to ask Steve Jobs to define the Apple strategy down to the scroll wheel of the next iPhone, all the while testing whether Latinos or women respond favorably to it.

The new leadership we need is not about ideas, but about process. It is not about reconfiguring party lines, or even bipartisanship from the top-down. It is about democratizing democracy at the community level, and reconstructing it piece by piece.

 

 

 

The silent voice of government employees

2012 October 14

I’ve been a private sector guy all my life. I like singing for my supper. I like fighting on any consulting proposal, executive education gig, or speaking platform. I consider myself a front-line warrior in an economic war, and I like the thrill of victory and (in moderate doses) the agony of defeat. I have created employment for others (with some inevitable ups and downs), brought back currency to the countries that have been my home, and have traditionally thought of myself as an entrepreneurial type that makes an economic contribution to society without expecting much social credit for it. Most of my fellow citizens seem to believe the wealth generated by entrepreneurial success should be my sole reward, and that’s OK with me. With most of my family members in France as civil servants of one kind or other – many teachers among them – I have run at a young age as far away from government employment as I could, even moving to America to be at the frontier of creative capitalism and avoid any public temptation.

Through the vagaries of consulting life, though, I have found myself in the last few years confronted with the challenge of helping large government entities transform. As is often the case, civil servants have morphed in my mind from abstract aggregates represented by predatory unions into real people of flesh and blood, many of whom I actually like. It was always easier for me to develop a fondness for “teachers, policemen and firemen”, these archetypical public servants US Democrats like for us to visualize when they talk about government employees. But I have discovered that people working in post offices, unemployment agencies, government healthcare or ministries can touch my heart as deeply as any private sector person trying to make a living. As naïve as it may be, I have discovered that government employees are people too.

The social net may be protecting them better than most, and there are undeniably stories of excess involving them, but I have lately found myself wondering what it feels like to only be described as a sector to be shrunk, a cost to be minimized, or a citizens service to be improved. Strangely missing is a discussion of their own professional experience, as if their life had become irrelevant to the debate, or could somehow be reduced to a collective bargaining discussion conducted on their behalf by their unions. The miserable nature of the public servant’s experience has become a bit more visible in a country like France where a wave of suicides has spread through the country when government employees have been pushed to adopt new private sector practices, as has been the case at France Telecom. At this level of distress, it becomes hard to ignore the emotional reality involved.

It strikes me that the process of transformation used by managers of public entities deserves a lot of the blame. To improve productivity and service, public managers typically set goals and cascade them down through a chain of command that pushes front-line employees to higher performance level. This top-down, process-based approach has the net effect of squeezing everybody into a tighter and tighter box, producing extraordinary pain for all involved, from top managers to supervisors to front-line employees.

The key to reversing this process is to initiate a chain of empathy that starts with the interaction between employee and customer. Front-line employees and customers know a lot more than their managers about what to do. Together, they will engage with their customers and reinvent the system at the level of each post office, each blood donation team, each unemployment office, or each ministry’s office. Out of self-interest, public employees and customers will co-create better interactions between them. They’ll even figure out how to migrate these new innovative practices from office to office through peer-to-peer mechanisms, because, believe it or not, they talk to each other on the phone or on Facebook. The French post office has done that with great success (public disclosure: I have worked with them on their transformation). If the French post office can do it, shouldn’t any other public or para-public entity be able to do it?

For this to happen, though, senior government people will need to let go. This is not how senior government managers have been taught at the Harvard School of Government in the US, or the Ecole Nationale d’Administration (ENA) in France. And yet, this is what they should do: their role should be to lay out a few top-level goals, make some central resources available, then get out of the way. From there on, local post office employees will figure out with customers how to lay out or manage the local post office. Local unemployment office agents will team up with people looking for jobs and local employers to figure out how they should work together. Local blood donation staff will figure out with blood donors when and how to schedule each session. There is nothing like the self-interest of local parties to come up with innovative solutions and migrate their solutions from place to place to solve the huge societal problems that plague us.

The time has come to reinvent government. Disappointingly, none of that is part of the current presidential campaign discussion in the US.

Business women of the world, unite

2012 October 3

 

Last night, I found myself watching the PBS documentary entitled Half The Sky: Turning Oppression into Opportunity for Women Worldwide. Hosted by the two journalists Nicolas Kristof and Sheryl WuDunn (his wife), and patterned after their book by the same name , it took me on a roller-coaster from utter despair (when a fourteen year old Sierra Leone rape victim gets expelled from her home for confronting her predator) to powerful hope (learning how innovative some of the militant women are who help young girls or women victims fight and survive).

Unlike Kristof and WuDunn, I am not in a position to write about women oppression of the physical kind (rape, mutilation, sexual slavery), but I do witness quieter cases of women’s moral oppression in global business every day.

I’m talking about you, anonymous Yemeni woman in my Dubai class of the London Business School last year. As often in the Arab world, I was instructed not to address you first. For three hours, you patiently listened to my challenging your male Middle-Eastern colleagues without engaging, eyes mostly down on your notes. In the last fifteen minutes, you found the courage to raise your hand and suggested a brilliant application for your bank of what I was trying to teach. I can still remember your dark eyes, glittering with the excitement of a new thought.  I would have liked to put you on stage and have you teach the next class with me. But I didn’t, because this is no place of a Yemeni woman.

I’m also thinking of you, bright young women I have known in academia or consulting over the years in the US or Europe, who never knew how good you were, and who settled for second best careers (or no career at all) because nobody told you you had the power to change the world. How I wish some senior woman in your department could have taken you by the hand and shown you the way! Images of workshops are dancing in my head, with ebullient Brazilian males listening to their head roar while women with richer experience would not dare speak, or post office women in France keeping silent on their experience of work while listening to their male superiors describing their life as if they were not there.

It’s not easy advocating for women in business when you’re a guy. I always feel a bit awkward, if not downright silly. When I timidly do, I immediately get haunted by images of male politicians discussing women’s health issues, or memories of top-level women’s sports teams coached by mediocre men. What do I know about a woman’s experience? And who am I to even try to help? And so I shut up, most of the time.

If I ever find my voice on this topic, here is what I’d like to say: business women of the world, unite. I see you everywhere, full of talent, able to do things that guys cannot do as well as you, and yet you contort yourself into the male-dominated, individualistic, process-driven model of the business world that has been oppressing you for years. Break those shackles. Let your instinct take over: focus on the human experience, starting with your own. Build communities of business women inside and outside your firm. Unleash the forces of co-creation by shamelessly slanting the resources of your firm toward women. The business world will be a better place for it. Even for the guys. (As Dr. Seuss sort of said, the guys who mind don’t matter and those who matter don’t mind).

Women are alone in the business world. Their interactions remain mostly directed at men they try to please, because this is still often where the power lies. There are of course women’s business associations and support groups, but none of them can play the role of a company-centric community of women helping each other. Governments try to provide incentives to remove the glass ceiling, but they can’t do as good a job as your establishing yourselves into a community of powerful self-advocates.

Sometimes it’s OK to be biased. Women should also build communities outside their firm. They should buy from other women and sell to other women. Better be on the field than talk from the sideline. Use the resources of your firm for advantage. Support other women. Hire women. Promote women. Play to win. Be tough.

 

Cab drivers, the heart of every nation

2012 September 23

It is midnight in Mumbai and my cab driver knows two English words. He points to the huge traffic jam around the hotel caused by the festival and says: “shortcut”. I nod my head appreciatively, hoping he can get me to make my 3 am flight back to the US. As we dodge crowds of young children wandering in the shanties, he utters his second word: “tip”. Raised eyebrows tell me we’re now negotiating. For 20%, he gets me to the airport in less than an hour and I make my flight comfortably. This “tip for shortcut” value proposition is as concise as they come. Cabbies are the best small business owners.
It’s the second half of July in Paris. Traffic is slow, a surprise given that many French people are already on vacation. The problem is painters and plumbers, my Rumanian-born cab driver tells me. “They want to go on vacation in August, and in order to generate cash, they start three or four jobs they will finish in the fall, which allows them to collect multiple down-payments before leaving.” As we’re bobbing and weaving through traffic, he points to numerous double-parked vans clogging traffic. Cabbies are the best traffic analysts.
My London taxi driver hears me speak French on the phone. He asks me if I know the Armenian-born singer Charles Aznavour. As I tell him I do, he starts playing Aznavour’s song entitled “Ils Sont Tombés” (They Have Fallen), a stirring description of the Armenians uprising against Turks in the early 20th century. He’s not Armenian himself, but he has tears in his eyes as he barrels down the M4 to Heathrow. Cabbies are the conscience of mankind.
I am in Spain. Real Madrid is playing Manchester City at home tonight in the first game of the Champions League. We don’t have any language in common, yet we can communicate on whether Ronaldo is really sad (he thinks he’s a big baby), whether David Villa the Spaniard should be considered a traitor for playing for Manchester City (he thinks it’s OK because soccer is a global business), and whether Spain should dump the Euro (his position is no because Real Madrid could no longer attract big worldwide stars like Ronaldo, even though he’s a big baby). Cabbies are the best soccer economists.
As I head back home in Boston, my limo driver is Moroccan. He’s got opinions about everything, Obama vs. Romney, the Arab Spring, and the movie that is igniting protests all over the Middle East. “The problem is that there’s not enough American Muslim leadership to act as intermediary between the fanatics and the grassroots Muslim people”, he tells me, talking like a Harvard PhD. “Look how different this is from France or Germany where local imams in those two countries help tamper everything.” He dreams of playing a role like that someday. Cabbies are the best politicians.

10 Seinfeldian questions about experience

2012 August 12

  1. Do the children of NBC Olympic executives watch the delayed broadcasts at 8 pm?
  2. Have executives at the soon-to-be bankrupt Best Buy ever visited an Apple store?
  3. What would it take for my main course at Not Your Average Joe’s restaurant to not arrive on the first bite of my appetizer?
  4. What would it take for Skype to stop moving the “end of call” red phone on my screen so that I can cleanly conclude conversations with my mother (who never hangs up before I do)?
  5. Why is the freezer compartment on my GE refrigerator designed to break my back and why is it separated into bins that do not match the size of any commercially available food package?
  6. How can I get my GE washing machine to stop beeping at me when I load clothes into it?
  7. Why hasn’t any major oil company come up with a comfortable tire inflater at their gas stations (I often go to Exxon Mobil)?
  8. Could Microsoft and Dell tell me when my Caps Lock is on?
  9. Why do small TVs automatically have a bad sound (mine is a Toshiba)?
  10. Why do I receive two or three credit card offers from Capitol One every week, but my Bank of America small business banker never calls me?

We don’t know squat about economics

2012 July 30

 

We think of weathermen and stockbrokers as the two “often in error, but never in doubt” professions. Let me nominate a third: economists.

If stimulus or austerity policies worked, we’d know by now.  If Friedman and Keynes were right, our governments would long have adopted their policies, and our economies would be roaring like Formula 1 cars in the Monaco grand prix. The predictability of tax cuts or stimulus spending on economic growth has the reliability of Paul the Octopus forecasting soccer game outcomes: sometimes it works, and most of the time it doesn’t. Yet politicians everywhere hang on to these disproven theories as economic gospel.

What’s wrong with economics? To paraphrase Mitt Romney in one of his awkward statements, economics is people. Instead, we think economics is policies. From government to universities, we teach economics as a massively aggregated database from which we extract insights, then policies, at the level of a state or a country. This leads to lame assertions about interest rates, monetary mass, jobs, trade deficit, and vague concepts of rational expectations reputedly anticipating economic behaviors. If we understood the true causes and effects in the economic system, our Presidents would not be sweating the job numbers every month: they would tell us beforehand what to expect.

Do you wake up in the morning thinking about interest rates, inflation and trade deficit? Do you actually decide to buy a car, a house, or go grocery shopping on the basis of interest rate and inflation? Do you look at your Turbotax statement to decide whether the rise in the marginal tax rate just passed by Congress will authorize you to go to Wholefoods and buy the fresh organic tomatoes that day, instead of going to the regular grocery store where the tomatoes are cheaper? Of course not. Yet this is the micro-level at which the economy works. Unless we can begin to comprehend decisions at this individual level, we have nothing of value.

If I were an economist, I’d start by diving deep into understanding how five or ten of my neighbors experience the economy. I’d try to build a model of their income statements and their balance sheet, and figure out how they decide to patronize five or ten local businesses (say, restaurants, grocery store, day care, etc.), or why they decide to save and for what. I’d try to understand the economics of the five or ten local businesses my neighbors buy from, why these small businesses decide to expand and hire, or why they scale or shut down. If there were one or two big businesses in my local area (corporate headquarters, big hospitals, etc.), I’d try to understand how the success of those large businesses contributes to the local economy through local taxes and jobs. I’d then try to model how the local township or municipality benefits from all this, and what impact local people and businesses have on the finances of my town (school, public funds, etc.). If we could just model this microcosm of economic interactions, we’d have data on a real, living ecosystem of actual people and entities and begin to understand how a local economy is co-created through their interactions.

Would this be representative of the economy as a whole? Of course, not. There would be massive biases linked to local industrial fabric and wealth levels. To roll up this data into a state, national, or global economy, one would have to empower people to build their own model at the local level. Providing the structure and platform that allows this local modeling would be a great role for government, instead of pretending that it owns the economy or creates jobs. The role of government in economic policy should not be to build top-down expert models of the economy as a whole, but to empower local folks to build models of their local market and learn from their interactions.

Even more importantly, if we began to understand causes and effects at the local economy level, the “economic agents” involved would be able to do something about the economy, rather than passively describe it. Individuals could change their relationship to local businesses, for example, by forming communities around them. Local businesses could mobilize those communities by setting up platforms that better connect them to their local customers (for example, I’d love to rally a few of my local friends to help a local hotel improve a few things in their menu and rooms, and we’d collectively bring them our out-of-town business). If local officials were to facilitate this dialogue, this would do more to create jobs and get them reelected than repeating hackneyed Republican or Democratic theories of austerity or stimulus.

Unfortunately, the scarcest commodity in economics is humility. Witness for example the recent Business Week article on the discussion between Paul Krugman and the President of Estonia and on the value of austerity in running a country. I will not venture an opinion about who’s right or wrong in this debate, but getting rid of the condescension conveyed in this dialogue seems to me to be job 1.

I, for one, would like to understand the economics of my village.