Wellington train strike: HR departments please note for next downsizing

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Bureaucrats address problems, entrepreneurs seize untapped profit opportunities

This distinction between the perspective of an entrepreneur and bureaucracy is essential to problem solving. Bureaucracies look for problems to solve through policy interventions. Alert entrepreneurs grasp for untapped opportunities for profit before others jump ahead of them to seize the day.

Luke Froeb discovered this crisp difference in organisational perspective between entrepreneurs and bureaucrats when his MBA students kept falling asleep when he lectured on market failures and the standard public policy responses. His teaching evaluations were so bad that the Dean of his Business School threatened to fire him if his student evaluations did not improve. This focused his mind.

Froeb repackaged market failures as a business opportunity. His students sat up and paid close attention. Froeb saved his job and later wrote an excellent MBA textbook (Froeb and McCann 2008).

Froeb and McCann (2008) started the problem diagnosing with market failure is an untapped wealth-creating opportunity. Froeb told his students that the first to fill these gaps in the market or be the market maker for the missing market stands to profit. Alert entrepreneurs make money by identifying unconsummated wealth-creating transactions and devise ways to profitably consummate them.

The art of public policy is looking beyond the immediate effect of a policy to trace its consequences not merely for one group but for all. Looking past what is under your nose is not good business. Much of entrepreneurial alertness is seeing what others do not see under their very noses (Kirzner 1997).

The art of business is identifying assets in low-valued uses and devising ways to profitably move them into higher values uses (Froeb and McCann 2008). Wealth is created when entrepreneurs move assets to higher-valued uses. Cost control such as in a mega-project is a standard entrepreneurial challenge.

Froeb and McCann (2008) argued that mistakes – opportunities are missed – for one of two reasons:

  1. A lack of information; or
  2. Bad incentives.

Rational, self-interested actors err because either they do not have enough information to make better decisions, or they lack incentives to make the best use of information they already have.

Froeb and McCann (2008) argued that three questions arise about all business problems:

  1. Who is making the bad decision?
  2. Does the decision maker have enough information to make a good decision?
  3. Does the decision maker have the incentives to make a good decision?

For Froeb and McCann (2008), the answers to these questions immediately suggest ways to fix them:

  • Let someone else make the decision;
  • Give more information to the decision maker; or
  • Change the decision makers’ incentives.

 

The robots are coming but innovation is getting harder too! What gives?

What is novel in the latest bout of technology anxiety is the public intellectuals are arguing not only that the robots are coming, but we have also at the end of growth.

This pessimism bias normally cycles from the robots are coming to stagnation is ahead but with a merciful interval in between that allows us sceptics to get back to our lives. It is unusual for so conflicting doomsday predictions to be in the headlines at the same time but they are.

The seeds of my renewed technology optimism is in of all places The End of Growth by American economist Robert Gordon. Reminiscent of Joseph Schumpeter, Gordon argues that technology comes in waves. Each wave is one big invention with ripples of secondary innovations to make each great invention into practical products. Economic growth slows between these waves of great innovation.

My digression is labour markets coped with the disruption from past waves of great innovation: steam and railroads, the telegraph, electricity, internal combustion engine, indoor plumbing, air conditioning, telephones, mass communications, aircraft, petrochemicals, antibiotics, computers, and now PCs, the web and smart-phones.

The labour market finessed the many past industrial revolutions despite most of the affected workers not finishing high school. Labour markets coped with growth miracles in Japan, Singapore, Hong Kong, Taiwan and now in China with ease with even less educated work-forces. Japan moved workers off the farm into factories and then offices and shops in one working life. China cruised through these same gales of creative destruction in half that time.

Workers displaced by robots are business opportunities. Innovation is not manna from heaven; it is a profit-seeking quest for untapped markets. The first industrial revolution was about profiting from moving ill-educated workers off the land into factories. An under-utilised worker is a profit opportunity to the entrepreneurs who discover how to employ them better.

The idea that innovation is getting harder has more legs than the robots are finally coming. American economist Ben Jones found that the age when Nobel prize winners made their great discoveries increased by 6 years in the 20th century. He also showed that scientists are spending longer at university and work in larger and larger teams because so much more must be learnt before getting started. The best years of our creative lives start later but finish just as early.

Jones called this rising educational burden of progress the death of the Renaissance Man. This narrowing of expertise and longer periods of initial study can slow the pace of innovation. There is a fishing-out effect too. All the easy inventions were discovered first. The next invention is more complex than the last and require more skill, effort and greater detail to master. Rising technological complexity retards technology diffusion because human capital, R&D efforts and on-the-job learning are spread thinner over a growing proliferation of new products.

Then there is the trend rate of GDP growth in the 20th century not increasing despite many more graduates and R&D workers joining the workforce. It is still about 2% per year in the US despite spending on intellectual property products rising from 1% of GDP in 1950 to 5% now.  Robert Gordon and Tyler Cowen (in his Average is Over) both say that we will eventually tap out on increasing the number of graduates as a way to maintaining GDP growth at 2%.

But peak innovation is not upon us. As in the past, we are in a race with the machines, not against them. Electrification and mechanisation were far greater technology disruptions than anything ahead of us. The next great inventions will come as much as a surprise as always. The big difference is we have a more educated workforce able to speed their diffusion. As for low-skilled workers, there are plenty of jobs for them as long as they are friendly and reliable. That is what employers look for.

Open markets, a lower company tax rate and less labour market regulation are the biggest contributions governments can make to maintaining the capacity to grow. Higher after-tax returns and the ability to easily hire and let workers go without legal fuss emboldens entrepreneurs to chance their arm on new-fangled technologies and untried market and catch-up with the disruptive technologies pioneered by entrepreneurs faster footed than them.