Episode #193: Free-rider Friday - May 2018

Ed's Topics

• Groupthink on climate change ignores inconvenient facts. What do the Flat Earther’s call global warming?

• Immigration policy is your firewall, an idea from Conversations with Tyler (economist Tyler Cowen) podcast, Episode #39, and his interview with Balaji Srinivasan.

• New Studies Find Aliens May Well Exist in a Parallel Universe. What do the Flat Earther’s say?

• He Makes a Joke. She Isn't Laughing: 'Lingerie' Comment in Elevator Leads to Uproar Among Scholars

 Ron's Topics

“Why Is the EU Celebrating Karl Marx’s Birthday,” Daniel J. Mitchell, FEE, April 30, 2018

One hundred million people died under communism, as documented in The Black Book of Communism.

Jean-Claude Juncker, President of European Commission, will travel to Trier, Germany, to deliver a speech at the opening ceremony of the Karl Marx exhibition in the city.

An EC spokeswoman said: “I think that nobody can deny that Karl Marx is a figure who shaped history in one way or the other.”

So did Hitler.

Marxism and Communism is not treated same way as National Socialism. Six million dead vs. “the mistakes” of Communism or of Stalinism.

“Some assembly needed,” The Economist, April 21, 2018

In 1997, it was about computers playing chess; in 2016 it was playing Go. Now we have robots assembling IKEA furniture. Robots assembled a chair, STEFAN, which contains 19 components, in nine minutes.

Prior to the assembly, the robots spent 11 minutes scanning the environment and planning their movements.

The new idea: Machine learning by watching humans. Does mean that robots will eventually toss the screwdriver against the wall and reach for the Scotch?

Only in California

Elon Musk is not the only American build his own rockets. In the California Mojave desert, “Mad Mike” Hughes, a limousine driver, rode a homemade steam-powered rocket 1,875 feet into the air and descended successfully with a parachute.

The purpose? To see how the Earth looks from above, to disprove the false theory that the world is round [Mad Mike is a member Flat Earth Society]. Members crowdfunded the flight.

He could have done better on a tall building, climbing a mountain, or flying in an airplane, since 1,875 feet is not high enough to measure the curvature of Earth.

If he simply remembered his high-school geometry class, he would have realized…oh, wait, never mind.

Oh, and he’s running for governor of California.

“Jeff Bezos Banned PowerPoint in Meetings. His Replacement Is Brilliant,” April 25, 2018, Carmine Gallo, Inc.com.

Instead of bullet points, executives spend 30 minutes reading a narrative, which they then they all discuss.

Why storytelling is better than Powerpoint:

1. Our brains are hardwired for narrative (retention better, etc.)

2. Stories are persuasive—ethos (character and creditability), logos (logic), and ethos (emotion). When the metrics and anecdotes disagree, the anecdotes are usually right

3. Bullet points are the least effective way of sharing ideas—bullet points don’t inspire, stories do. Inform, illuminate and inspire.

“Catching the bitcoin bug,” The Economist, April 14, 2018

A Barclay’s bank study describes crypto-technology as a “solution still seeking a problem.”

It identified four challenges:

1. Trust (most trust govt currency)

2. Sovereignty—tax avoidance, financial control, govt not keen on

3. Privacy—not as anonymous as cash, purchase history revealed

4. Ability to undo transactions case of error/fraud

Existing alternatives work well.

Only 8% buy bitcoin for purchases or payments; most is speculation

It’s hard to model bubbles—Crypto through the tulips.

The study makes an ingenious parallel to an infectious disease. A small number of owners get infected, while new buyers are drawn in (catch the bug). A large share of population will never succumb.

The faster the price rise, the more infectious, but then it starts to slow as the price drops, and then the epidemic dies out. This fits the Bitcoin history pretty well, so far.

iTunes Review

My favorite podcast. by SMBcents

I love this show and wait all week for the next episode with well deserved anticipation. Ron and Ed are a perfect fit, their commentator styles definitely compliment each other. Guest speakers are always outstanding! Thank you guys!

Thank you so much, SMBcents.

Listener Questions

From Michelle in Australia. Do you prefer Chief Pricing Officer or Chief Client Value Officer?

Ron votes for Chief Value Officer, since it is outward focused.

From Michael: The biggest issue with ditching timesheets is very peculiar and not something I’ve heard on TSOE before. Partners voiced a concern that without timesheets they won’t be able to track NON-CHARGEABLE hours.

Check out the new book by John Doerr, Measure What Matters, which details the use of OKRs—Objectives and Key Results.

Episode #192: Interview with Mary Ruwart

Death by Regulation: How We Were Robbed of a Golden Age of Health and How We Can Reclaim It

By Mary J. Ruwart PhD

Buy on Amazon

We were honored to interview Dr. Mary J. Ruwart, a research scientist, ethicist, and a libertarian author/activist. She received her B.S. in biochemistry in 1970 and her Ph.D. in Biophysics in 1974 (both from Michigan State University). She subsequently joined the Department of Surgery at St. Louis University and left her Assistant Professorship there to accept a position with The Upjohn Company of Kalamazoo, Michigan in 1976. As a senior research scientist, Dr. Ruwart was involved in developing new therapies for a variety of diseases, including liver cirrhosis and AIDS.

She is the author of Healing Our World: The Compassion of Libertarianism, published in 2015, and the focus of our interview is her latest book is Death by Regulation: How We Were Robbed of a Golden Age of Health and How We Can Reclaim It, published this year.

You can learn more about Mary and her work at: http://www.ruwart.com.

Ed’s Questions

Your book Death by Regulation is more horrific than a Stephen King novel, because it’s real. It all starts with children of thalidomide doesn’t it?

Before the 1962 Amendments a drug had to be “safe for the intended use.” But after the Amendments a drug had to show it was “safe and effective.” Why is this difference so important and what has it done for us?

Makers of water could not advertise that it alleviates dehydration [due to FDA regulations]. But how are Cheerios and cherries drugs?

Healthful snack or new "drug?" According to the FDA it is the latter. 

Even the Centers for Disease Control and the FDA contradict one another in some cases?

There’s so many therapies where you’re using your own cells, stem cells, etc., will these be regulated as a drug?

One of the things we’ve noticed about many leaders in business is that they treat data as if they have a substance abuse problem. Like drugs, they get a little data and they more and more. The FDA demands more and more data from every study. Does the FDA has a data substance problem?

Ron’s Questions

You write prescription drugs, properly prescribed, killed 106,000 in 1994 alone (the 4th to 6th leading cause of death in the USA). I guess drugs, even approved ones, are controlled poison?

You conservatively estimate at least half of the Americans who died since 1962 have lost more than a decade of their lives because of the 1962 Amendments to the Food and Drug Act. Unpack for us why researchers look at years off of live rather than number of deaths.

You discuss off-label use of a drug, such as aspirin to help prevent heart attacks and strokes, yet the FDA doesn’t allow drug companies to market this fact, or even to inform doctors. Is that right?

You discuss the high price of drug prices and how many people attribute this to greed, which is a terrible theory—like blaming gravity for airplane crashes. Greed and gravity are a constant, so we can’t blame change on a constant. You say the real culprit is the FDA approval process, and because of the 1962 Amendments the average price of drugs increased 40 times. Real drug prices fell 32% from 1949-61, prior to the Amendments. Drug companies are constantly maligned and impugned in the press, by politicians, the media, etc. You worked for Upjohn for 19 years, how did you put up with these negative accusations?

As you say, the first patent holder to market usually captures 90% of the market, so that approval is really important.

Another statistic you point out is how drugs lower other health care costs: $3.65 saved in medical expenses for every $1 invested in drugs. It’s something of which most people don’t seem to be aware.

The FDA can make two types of errors: approve a drug that kills people (like Vioxx), or not approve a drug that could save the lives of many people. One of the economists we interviewed, Steven Landsburg, proposes that the FDA commissioner be paid in pharmaceutical stock as a way to lessen the incentive to only commit the second type of error. What’s your take on that proposal?

Is the FDA more harmful than helpful? "Yes," according to Dr. Mary Ruwart.

You recommend three remedies: 

1. Repeal the 1962 Amendments

2. Revoke FDA’s ability to approve new drugs. Instead, it makes reviews, recommendations, or certifications

3. Pass the Health Freedom act (HR 2117) to nullify court decision that making a health claim for a food or nutrient makes it a drug

You point out that desperate patients make drugs in their kitchens, enter the black market, or buy from foreign countries. You also point out that surgeons didn’t need FDA approval for knee and hip replacement surgeries, important innovations. Of course, there are downsides: cardiac bypass was overused, etc. But it leads to more innovation which ultimately saves more lives than it costs.

You quote Dale H. Gieringer, a Cato Analyst: “FDA regulation certainly cannot be proved ‘safe and effective,’ thereby flunking its own approval criterion.” I don’t know how anyone can read your book and not come to the same conclusion.

Science isn’t good enough no matter who the decision maker is—the FDA, patient, or doctor. The best we can hope for is an informed decision.

Episode #191: Interview with Phil Rosenzweig

Phil Rosenzweig is professor of strategy and international business. He is Co-director of Transition to Business Leadership, and is also Co-Director of the Dual Executive MBA Program with CKGSB. His areas of expertise include strategy, firm performance, and complex organization design. He is also author of numerous case studies on firms including Microsoft, Daimler Benz, Matsushita, and Heineken. More recently, Phil Rosenzweig has focused his attention on critical thinking and managerial decision making. His 2007 book, The Halo Effect and the Eight Other Business Delusions that Deceive Managers, takes a critical look at the errors that pervade much business thinking. It was named Best Business Book of the Year by get Abstracts, and was favorably reviewed in Harvard Business Review, the Financial Times, The Wall Street Journal, USA Today, and dozens of other newspapers and magazines. His 2014 book, Left Brain, Right Stuff: How Leaders Make Winning Decisions, extends research about decision making into the world of strategy and management. Prior to joining IMD, Phil Rosenzweig was assistant professor at Harvard Business School from 1990 to 1996.

Phil’s book, The Halo Effect…and the Eight Other Business Delusions That Deceive Managers, published in 2007, is one of Ed’s and Ron’s all-time Best Business Books.

His most recent book is Left Brain Right Stuff, published in 2014.

Ed’s Questions

You started your career at HP, how did you get  into academia?

What is the halo effect and what was the brainstorm that inspired you to write the book with that title?

During World War I, an American psychologist, Edward Thorndike researched the ways  of superior rated subordinates

If they were handsome, good posture, shoot straight, etc. These attributions were inferences he called the Halo Effect: The tendency to make inferences about specific traits on basis of a general impression.

In business, the Halo Effect is the tendency to look at a company’s overall performance and make attributions about its culture, leadership, value, and more.

In fact, many things we commonly claim drive company performance are simply attributions based on prior performance.

Does employee satisfaction lead to strong financial performance, or is it the other way around?

Shortly after I read your book, I was interviewed by Harvard Business Review and they quoted me: “Business ain’t science.” What are your thoughts on business benchmarking?

Often when leaders find out they are below the benchmark, they question the data. When they are above, they say, “We’re doing pretty good.”

Another guest from TSOE, Jules Goddard (Episode #27), said in his book, “Strategy is the rare and precious skill of staying one step ahead of the need to be efficient.” Thoughts on that?

Turning from the firm to the individual, do you have any thoughts on using personality profiles, especially in the hiring process?

Let’s discuss performance evaluations.

You talk about measuring customer satisfaction (such as NPS), or employee satisfaction. Financial information is looked at frequently (monthly or quarterly), should customer and employee satisfaction be looked at more than once a year?

The Halo Effect: and the Eight Other Business Delusions That Deceive Managers

By Phil Rosenzweig

Buy on Amazon

Ron’s Questions

You quote Richard Feynman: “Many fields have a tendency for pomposity.” Are most Business books overrated, or just wrong.

The best-selling business books seem to overstate their case.

You ask in the book, “Do business questions lend to scientific investigations?” And answer: “in many instances, yes.” What kind of things in business lend themselves to “scientific study?”

You write: “We have no satisfactory theory of effective leadership that is independent of performance.” I don’t know if you’ve read Jeffrey Pfeffer’s book, Leadership BS; do you think leadership is overrated?

Quick story: Shortly after your book came out, I gave a talk to a group who the next day was going to hear from the author of the best-selling book that you take to task in your book. I quoted George Anders of the Wall Street Journal who said that Good to Great offered a picture of business somewhere between Norman Rockwell and Mister Rogers. I presented a few of your critiques of the book, and recommended they read your book. I got slammed for this, so I can only imagine what you had to deal with. What was the response from the academic community to The Halo Effect?

You quote Michael Porter in the book who says that company performance is driven by two things: Strategy and execution, both fraught with uncertainty. We hear it all the time: We need to execute better; let’s all do a better job. It’s easier to blame lack of execution than a poor strategy. You write: “Whenever someone says ‘We have the right strategy, we just need to execute better,’ I make sure to take an extra-close look at the strategy.” What’s more important in your opinion, given that there’s no good way to execute a bad strategy?

You wrote a follow-up book to The Halo Effect, titled Left Brain Right Brain: How Leaders Make Winning Decisions. Would you provide us an overview of that one?

Left Brain, Right Stuff: How Leaders Make Winning Decisions

By Phil Rosenzweig

Buy on Amazon

Episode #190: Interview with Economist Michael C. Munger

Professor Michael Munger received his Ph.D. in Economics at Washington University in St. Louis in 1984. Following his graduate training, he worked as a staff economist at the Federal Trade Commission.

Early Career

His first teaching job was in the Economics Department at Dartmouth College, followed by appointments in the Political Science Department at the University of Texas at Austin (1986-1990) and the University of North Carolina at Chapel Hill (1990-1997). At UNC he directed the MPA Program, which trains public service professionals, especially city and county management.

More recently

He moved to Duke in 1997, and was Chair of the Political Science Department from 2000 through 2010. He has won three University-wide teaching awards (the Howard Johnson Award, an NAACP "Image" Award for teaching about race, and admission to the Bass Society of Teaching Fellows). He is currently director of the interdisciplinary PPE Program at Duke University.

We focused mostly on his latest book, Tomorrow 3.0: Transaction Costs and the Sharing Economy, published this year.

Tomorrow 3.0: Transaction Costs and the Sharing Economy (Cambridge Studies in Economics, Choice, and Society)

By Michael C. Munger

Buy on Amazon

Ron’s Questions

You say book grew out of conversation with Russ Roberts on EconTalk in 2014, one of our favorite podcasts. How did the book germinate?

The main thesis of Tomorrow 3.0 is: “Reduced transaction costs foster permissionless innovation to make more efficient use of, [and commodify] excess capacity.” Explain?

You date this approximately to 1997 with eBay, where we began selling not more stuff but reductions in transaction costs for access to existing stuff.

Uber and AirBNB don't sell taxi and hotel services, they sell reductions in transaction costs.

You describe three types transaction costs:

1. Triangulation—matching buyer with seller, agreeing terms

2. Transfer—of product/service and payment terms

3. Trust—Honesty, performance (ratings and brands fulfill this role, among other traits).

You make the excellent point that to the consumer, all costs are transaction costs: time, search, inconvenience, payment terms, trust, etc. A reduction by 10% is the same as a reduction in price of 10%.

From the buyer’s perspective: all costs are transaction costs. Consider Uber’s surge pricing: You either pay in money or time. The father of transaction cost economics is Ronald Coase.

The sharing economy is:

1. Entrepreneurship applied to reducing transaction costs rather than production costs (Biology active agent: natural selection; economics is entrepreneurship = imagine an alternate reality

2. Working through new software platforms

3. Operating on smart, portable hardware

4. Connected over the web

The Value Proposition is: selling access to excess capacity. In the US, Self-storage is roughly 50,000 facilities, containing 15 billion cubic ft. of stuff. The desire to “own stuff” could decline.

Cars and houses are obvious areas where there is excess capacity, but how about clothing (closet in cloud), appliances, etc. What will 3-D printing allow in the future?

This struck me: You believe Uber not a threat to taxis as it is to Amazon—the ability to reduce transaction costs of renting vs. buying.

I want to go to the day after Tomorrow 3.0, what’s the threat to Uber? Couldn’t Blockchain, autonomous cars, and cryptocurrency disintermediate Uber completely?

Mike’s three predictions:

1. Third great economic revolution innovation in digital tools, reduce transaction costs, not creation of new products

2. Better use of excess capacity, sold rather than stored

3. People will collect “experiences”

You talked with Ed about permissionless innovation, and here in California the courts just ruled that Uber drivers are “employees.” You wrote that saying that is like saying Rotten Tomatoes makes movies. Are you worried that government regulations will slow down some of these innovations?

You write that the purpose of an economy is not to create jobs but consumer surplus.

Ed’s Questions

From another work of yours, you have this concept of Euvoluntary: it’s sort of voluntary, but not really. Philosophers believe people can be coerced by their circumstance, so transactions are only voluntary if there are many buyers and sells, and if the buyer is not desperate and has alternative choices.

Is Uber surge pricing, or hotel rooms during hurricanes, voluntary or Uvoluntary?

When we get into a market that significantly reduce transaction costs, do you think the government should do something about the short-term effects of this transition.

In Spain at the conference I’m at, the number one growth stock on the NYSE since 2010 is Dominos. The reason: because 60% of its sales come from its mobile application—a reduction in TCs. They are shooting for 100% in 3-5 years. Your thoughts?

Why is 19th century Governor of Pennsylvania Daniel Hastings a hero? Because Hastings vetoed an 1896 law that the Pennsylvania General Assembly passed—the "red flag" law, found in US and England. Any self-propelled vehicle be proceeded by a man on foot walking 50 to 100 feet in advance, waving a red flag in warning.

Of course, it was done ostensibly to “protect the people”—but in reality it was to save jobs related to horses. In 1915 there were 27 million horses in the USA and 100 million people, while in 1970 there were only 5 million horses.

What does company profit and a giraffe’s neck have to do with one another?

George Gilder labels profit as an index of your altruism. Comment on that point of view?

Episode #189: Free-rider Friday - April 2018

Ed’s Topics

North Korea

Beginning of peace, or false hopes?

Amazonlandia

By Ryan A. Ferguson. Amazon employs 500,000 people, making it the 171st largest country by population. Could Amazon start its own country, with its own digital currency?

Does coffee cause cancer?

California court ruled it does. See “Why California’s Lawsuit Industry Wants You to Think Coffee Causes Cancer,” Walter Olson, FEE, April 1, 2018

A Los Angeles judge ruled coffee shops face potential massive liability due to Acrylamide—a natural substance formed when food is browned or subject to high heat, such as grilled burgers, fried chicken, bread, almonds, potato chips—causes cancer in animals, in high dosages.

We can’t blame the judge, but rather Proposition 65 passed in 1986.

The Council for Education and Research on Toxics brought the lawsuit, asking for fines of up to $2,500 for everyone exposed to Acrylamide, since 2002.

Walter Olson, at CATO Institute, and also Overlawyered.com, has been covering Prop 65’s mandated warnings on scented candles, matches, brass knobs, light bulbs, playground sand, billiard cue chalk.

“Why the Girl Scouts Are Marketing Geniuses,” Brittany Hunter, FEE, March 22, 2018

It creates the dominance hierarchy of cookies, what we refer to as offering options. It creates an artificial scarcity (you can’t get them online, you have to interact face-to-face). Pricing: they are expensive cookies.

Juxtapose the Girl Scouts with Elon Musk, in an article from Inc. magazine. Tesla can’t keep up with the demand for its cars. Why doesn’t he raise the price of his cars to lessen the waiting list? Does Elon’s pricing suck?

“Which State Will Be the First to Suffer Fiscal Collapse?, Dan Mitchell, CATO Institute poll

 Ron’s Topics

“The End Justifies the Obscene,” Happy Warrior, Kyle Smith, National Review, March 5, 2018

The Haiti earthquake in 2010 for Oxfam meant party time! Oxfam set up brothels in Port-au-Prince, called “pink apartments.” There was a big expose in the British paper the Times.

Oxfam was throwing big parties, with girls wearing Oxfam T-shirts, running around half naked. Oxfam executives concealed details from regulators and the public, while the UK government contributed some $40 million to Oxfam last year.

International-development secretary Penny Mordaunt said on the BBC that Oxfam had denied to her department any misbehavior. When the reporter asked her, “Was this a lie?” she replied: “Well, quite.”

Oxfam was also accused of employing locals as prostitutes in 2006 in Chad, while it was supposedly helping refugees from the civil war in Sudan.

A 15-year Oxfam employee said: “There is a fear that if we tell the truth, the reputational damage to the agencies will benefit the sections of the press and politicians who want to reform the sector.”

Reform? We can’t have that!

 “The old one-two,” The Economist, March 24, 2018

Forget taxing profits, the EU is proposing a 3% tax on locally generated gross revenue.

Pierre Moscovici of the EU said this was an “interim fix.” He denied that USA firms are targets, even though of the projected 120-150 companies that will be affected, one-half of them are American (Apple, Google, FB, etc.), and they will pay up quite a bit.

The tax will apply to companies with global revenues more than $920 million, and EU revenues more than $61 million. Digital firms pay an effective tax rate of 9.5% in the EU, compared to 23.3% for brick-and-mortar firms.

The tax could raise as much as $6.1 billion.

France president Emmanuel Macron pushed hardest for this tax and France, Germany, Italy, and Spain welcomed it, while smaller EU countries will oppose. Steve Mnuchin, treasury secretary of the US, said a gross tax is “not fair.”

Any tax changes in the EU require unanimity among the members. This proposal could be being made to make look more appealing another plan to tax digital profits for those with “digital presence,” defined as: Gross revenue exceeding 7 million Euros, or 100,000 customers, or more than 3,000 business contracts in a given country.

Brexit 2.0, anyone?

“Finland to end its universal basic income program by year’s end,” Edmund DeMarche,” April 25, 2018, Foxnews.com

Finland’s experiments gave a $685 monthly check, to 2,000 randomly selected jobless people, ages 25-58.

It’s implementing new measures to cut benefits for those who don’t actively seek employment, pursuing conditionality in public support, not unconditionality.

Proponents argue that Finland’s experiment was not comprehensive to gauge the merits of the idea, while critics complain that a full-scale UBI would require a 30% tax increase to fund.

See our Episode #95: A Check for Everyone? The Basic Income Idea.

“The last of Vaudeville,” The Economist, March 24, 2018

Sir Ken Dodd, comedian, died on March 11, age 90.

He holds the world record for most gags (think rapid one liners from the likes of Rodney Dangerfield, Henny Youngman, Phyllis Diller).

Dodd told 1,500 gags in 3 hours and 7 minutes (8 per minute).

“An official told my big aunt Nellie to come off the beach, because the tide was waiting to come in.”

Mother-in-laws: “I haven’t spoken to mine for 18 months. I don’t like to interrupt her.”

In 1989, the Inland Revenue found £336,000 in cash he hadn’t declared, and even more in shoe-boxes under the bed. “I told the Inland Revenue I didn’t owe them a penny, because I lived by the seaside.”

“Against a Weed Industry,” Jonathan Caulkins, National Review, April 2, 2018

Capitalism unleashes productive forces, lowers prices. But we don’t allow markets everywhere, such as selling organs, steroids, etc.

Caulkins argues since no modern nation has ever allowed large-scale commercial production—though Canada will be the first, on July 1, 2018—that we should restrict production to nonprofit organizations.

For example, in the Netherlands, only retail sales are legal, and elsewhere rights inure to individuals, not corporations.

Nonprofits with boards to protect public health could be established, and tasked with undercutting black markets but not promote greater consumption. A second idea is for co-ops that would supply their own members.

Self-Report usage of marijuana grew from 0.9 million in 1992 to 7.9 million in 2016. Approximately 60% of users have a high school education or less, which would be highly sensitive to falling prices.

He points out prices in Washington between 2014-2017 dropped from $23.50 per gram to $7.25. The THC content digested went from 0.032 grams per week to 1.3 grams per day, a 60 times increase.