Brad DeLong’s Hierarchy of Work

He writes,

We (1) move things with large muscles; (2) manipulate things with small muscles; (3) use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track; (4) via social reciprocity and negotiation try to keep us all pulling in the same direction; and (5) think up new things for us to do. The coming of the Industrial Revolution –the steam engine to power and the metalworking to build machinery — greatly reduced the need for human muscles and fingers for (1) and (2). But it enormously increased (3), for all those machines needed to be minded and all of that paper needed to be shuffled. Each improvement in machines made each human cybernetic control element more valuable as well.

Think of (1) as working without tools. (2) is working with tools, but without machinery. (3a) is working with machinery in large organizations. (3b) is working in middle management in large organizations. (4) is managing large organizations, but without creativity and innovation (I think of accountants, m. (5) is creativity and innovation.

Brad’s point is that over historical time, you can watch machines move up the food chain. Today, the computer revolution is in the process of taking away jobs at level (3). The question is whether it is possible to find matches at level (4) and level (5) for most workers, or whether they are instead doomed to a lower-level existence.

Along similar lines, see Kevin Maney’s column, which I arrived at via Irving Wladawsky-Berger (who writes that “larger numbers of people will have to invent their own jobs”) by following a pointer from James Pethokoukis.

Virginia Postrel on Crowdfunding

She writes,

“It’s a way to access capital, but what it’s also become is a market-testing and validation platform,” Ringelmann told the Dent the Future conference on Tuesday. “What we’re doing is creating pre-markets for ideas,” she said.

This makes sense to me. If I think of crowdfunding as angel investing, it holds no appeal to me at all. Angel investing by qualified investors is a dangerous game. Unless you are a whip-smart business lawyer, you can easily get hosed when the next investment round starts. I can’t imagine ordinary civilians making a profit at it.

But I am a very strong believer in test-marketing products. I like the idea of asking “Would you pay for this if I developed it?”

Pointer from Tyler Cowen.

Call Screening Device

Does this exist? If it does not, it should. The device should have a “white list” of approved phone numbers, meaning numbers from which I am willing to receive calls. There would be three ways to add numbers to the white list.

1. As a call comes in from a number I know, I push a button and it gets onto the whitelist.

2. When I call a number, that number is added to the whitelist.

3. I can enter numbers directly into the whitelist.

I can put the device into one of three modes:

1. Ring regardless of who calls.

2. Ring only if the call comes from the whitelist

3. Ring with one sound if it comes from the whitelist, with another sound otherwise.

I really am fed up with phone spam.

Cable Internet: What is the Problem?

Felix Salmon writes,

Americans really love their TV. They love it so much that cable-TV penetration is still substantially higher than broadband penetration. As a result, any new broadband company will not be competing against the standalone cost of broadband from the cable operators: instead, they will be competing against the marginal extra cost of broadband from the cable company, for people who already have — and won’t give up — their cable TV.

If you’re a cable-TV subscriber, the cost of upgrading to a double-play package of cable TV and broadband is actually very low; what’s more, there’s a certain amount of convenience involved in just dealing with one company for both services.

And yet Salmon argues that the lack of competition in offering broadband Internet is a problem. I am not sure why.

It has always seemed to me that what holds back penetration of broadband Internet is that there are a lot of “want-nots” among American consumers. The penetration rate for cable TV is somewhere north of 90 percent, and as Salmon points out, the marginal cost of adding broadband is low. So if more Americans wanted broadband Internet, they could have it.

The other technology that Americans really love is cell phones. My guess is that going forward the marginal value of bandwidth is much higher in wireless than it is in cable. Worrying about cable monopolies reminds me of the days when the government pursued an antitrust case against IBM for its monopoly in mainframe computers. In hindsight, that monopoly does not appear so formidable.

Pointer from Tyler Cowen, who is on my side, but for somewhat different reasons.

More on WhatsApp

1. From Sarah Lacey.

Facebook has grown into such a huge thing that we forget what the core always was: Photos. This was the reason Instagram was such a threat to its dominance. It was the next social network where the primary organizing and viral mechanism was photos. That’s why Facebook had to own it.

Read the whole thing. She points out that WhatsApp was valued at 10 percent of Facebook, which is a much higher share of the acquiring company that YouTube was relative to Google, for example.

2. From Peter Schiff.

It’s very easy to get customers when you don’t charge them, it’s much harder to keep them when you do.

Thanks to a commenter for the pointer.

I look at it this way. I would value WhatsApp at about $200 million. Like Schiff, I believe that it will start to bleed users rapidly as (a) it attempts to monetize them and (b) as competitors take them.

If $200 million is 10 percent of Facebook, then Facebook is worth $2 billion. Have a nice day.

What I’m Saying

I am a last-minute fill-in for Brink Lindsey at this event discussing the new book by Megan McArdle. The book is about failure, which is a fascinating topic. My talk should begin shortly after this post goes up. I will try to say that the best way to deal with failure depends on the institution.

An individual needs to fail with a fallback position. Megan discusses this in terms of job search and in terms of living within your means so that you can deal with illness or loss of a job. She also discusses the forgiving nature of the U.S. bankruptcy code.

A small startup firm needs to fail quickly. Find out that you need to rethink your concept after you have test-marketed a prototype that you built in three months, not after you have spent two years in stealth mode trying to implement your grand design.

A large, established firm needs to fail gracefully. Be able to kill the project without killing the company. You might think of Coca-Cola’s recovery from New Coke, but the real graceful failures are the ones we never even hear about. A large firm that fails ungracefully is denying that it is in trouble (Megan uses the example of Dan Rather and Mary Mapes of CBS News, who put out a story based on a forged document and just refused to back down from the story.)

Government cannot do any of these things well. Think of Obamacare. Fallback position? None. Quick failure? No, it is going to be long and drawn out. Graceful failure? No, it is a big, ugly failure.

At one point in Megan’s book, she writes,

There is a scientific name for people with an especially accurate perception of how talented, attractive, and popular they are–we call them clinically depressed.

For government, I think that the only solution is clinical depression.

I Do Not Understand

Joshua Gans attempts to explain WhatsApp, the small text messaging service that was acquired by Facebook for a combination of cash and stock reported as $19 billion. He writes,

WhatsApp experimented with various paid models from a paid up to a paid subscription to its now, try before you buy, option. Basically, after a year you pay $1 per year. It is dead simple and quite lovely. There are no gimmicks there either. You have to initialise the paid version. It doesn’t just kick in. There is something so refreshing in a service that just gets people to pay for it if it is worth something to them rather than exploit some failing in their rationality.

Among the things I do not understand.

1. I agree that the business model is refreshing. But I think that in this case it is also self-extinguishing. The service has value to people who are otherwise charged for sending text messages. As more people adopt the service, cell phone companies will obtain less revenue from charging for text messages. The end game is for them to obtain revenue in other ways and drop the charges for text messages (a lot of us in the U.S. already have plans with unlimited text messaging). At that point, the rationale for paying even $1 a year to WhatsApp will have evaporated.

2. I do not understand why, in a bidding war between Google and Facebook, if Google bids $10 billion, Facebook has to pay $19 billion. I would think that the minimum raise in this game would be a little smaller.

3. Reihan Salam reproduces some analysis by Tariq Krim that indicates that WhatsApp has a faster-growing user base than Twitter, which is valued by the market at $20 billion. (a) I think I understand what makes Twitter’s market advantage seem defensible, but I do not understand what is defensible about WhatsApp’s user base. (b) As an investor, I would not go anywhere near Twitter at its current valuation.

4. Reihan points to Ben Thompson, who writes breathlessly,

Still, it’s only recently that the killer app for this era, when the nodes of communication are smartphones, has become apparent, and it is messaging. While the home telephone enabled real-time communication, and the web passive communication, messaging enables constant communication. Conversations are never ending, and friends come and go at a pace dictated not by physicality, but rather by attention. And, given that we are all humans and crave human interaction and affection, we are more than happy to give massive amounts of attention to messaging, to those who matter most to us, and who are always there in our pockets and purses.

I do not understand why Thompson is so confident of this. I teach in a high school, so I think I have a bit of sense of what teenagers are up to these days. They are the natural market for this stuff, and a few students are really into messaging. There also are a few of them who are really into games. A few of them are really into music. And a lot of them are perfectly content to leave their phones in their pockets for the whole day.

Late in 1999, I started my first blog, which I called The Internet Bubble Monitor, to make fun of the stock valuations of that era. I shut it down about six months later, because there was nothing to make fun of any more. I think I might have to start it up again.

Clay Shirky on Technology Projects

Among many possible excerpts, let me pick

On a major new tech project, you can’t really understand the challenges involved until you start trying to build it. Rigid adherence to detailed advance planning amounts to a commitment by everyone involved not to learn anything useful or surprising while doing the actual work. Worse, the illusion that an advance plan can proceed according to schedule can make it harder to catch and fixed errors as early as possible, so as to limit the damage they cause. The need to prevent errors from compounding before they are fixed puts a premium on breaking a project down into small, testable chunks, with progress and plans continuously reviewed and updated. Such a working method, often described as “agile development,” is now standard in large swaths of the commercial tech industry.

The whole essay is here.

Another excerpt:

NASA didn’t figure out how to put a man on the moon in one long, early burst of brilliant planning; it did so by working in discrete, testable steps. Many of those steps were partial or total failures, which informed later work. In digital technology, such an incremental, experimental approach is called “test-driven development.” It has become standard practice in the field, but it was not used for Tests on that site were late and desultory, and even when they revealed problems, little was changed.

Shirky’s essay is ok as far as it goes, but I think that what needs to be emphasized is that the Obama Administration was launching a business. Call it a health insurance brokerage business if you like. It is just as important to take “an incremental, experimental approach” in launching a business as it is in creating a web site. Also, when a business gets launched in the market, its failure causes little notice. For every spectacular success, there are dozens of just so-so businesses and hundreds of total failures. When the government uses its monopoly power to launch a business that everyone is “mandated” to use, this precludes the learning that takes place in markets.

The failure of Obamacare is larger than the failure of the web site. Treating it as a technical failure allows progressives to avoid facing that fact.

A Robot-Friendly Environment?

I am still reading The Second Machine Age. The section on the improvements in robotics made me think about creating a city that is robot friendly. Imagine a city with “self-driving car lanes” comparable to bike lanes today. My guess is that self-driving cars could be more efficient without humans.

But why not go further? Instead of making robots adapt to the human environment, why not put RFID’s on every object and surface, to make it easier for robots to operate. The place to try this out might be at an expensive resort or a cruise ship. You could be in your room and say to your phone or wristband, “I am ready for lunch.” You listen to a menu, you make your choices, and robots assemble and deliver your meal. If you are at a golf resort and are ready to play, you could summon a self-driving golf cart to take you around the course. Maybe each hole could adapt to your level of skill, with the location of the pin and various sand traps moving while you come toward the tee.

Two Findings in Search of Explanations

1. Yihui Pan, Tracy Yue Wang, and Michael S. Weisbach find that

disinvestments are fairly common in the early years of a CEO’s tenure, and that these disinvestments decrease with tenure. Investments, on the other hand, are relatively low in the early years of a CEO’s tenure and increase over time. As a result, the firm’s assets and employment grow more slowly early in the CEO’s tenure than in later years.

Pointer from Timothy Taylor, who speculates

the analysis makes CEOs sound a bit like coaches of sports teams: they arrive to clean up the mistakes of the past regime, but over time many of them gradually drift into their own set of mistakes.

This analogy would suggest that whatever the incumbent’s excesses (too much investment, too little investment), the new CEO would do the opposite. But instead the pattern seems to be that the incumbent eventually tends to over-invest.

The authors’ preferred explanation is that the CEO wants to over-invest, and only over time does a CEO gain control of the board and carry out the over-investment. When the CEO exits, the new CEO is more subservient and understands the need to pare back.

My proposed explanation may be the least dramatic. My thinking is that major projects go through a long gestation period. A new CEO needs to get comfortable before he/she can approve major new projects, so major new projects get put on hold for a year or two. Meanwhile, existing projects wrap up, so you get a lull. My explanation would predict that you would not see a burst of investment just as a CEO is getting close to exit. Rather, you would see low investment when a CEO starts, then ramping up to a higher level that is maintained until the CEO exits.

2. Alison Jane Rauh writes,

While blacks of the second generation have equal or higher education and earnings levels than the first generation, the return on their unobservable characteristics is converging to that of native blacks…Convergence across generations is mostly driven by low-educated second generation blacks that drop out the labor force in greater numbers than low-educated first generation immigrants do. Similarly, convergence within a generation is mostly driven by low-educated blacks who immigrate when they are young dropping out of the labor force in greater numbers than those who immigrate when they are older. A social interactions model with an assimilation parameter that varies by age of immigration helps explain this phenomenon. When making their labor force participation decision, immigrant men of all races, but not women, generally place more weight on the characteristics of natives the earlier they immigrate.

Pointer from Tyler Cowen. Both he and the author embrace a “peer effect” explanation, in which black immigrants start out trying to achieve, but assimilation leads them to see achievement-orientation as acting white.

An alternative explanation is that first-generation immigrants of all races are more willing to strive and sacrifice than are their children. However, suppose that there are differences in average ability by race, and that even high-ability first-generation immigrants are hampered by lack of cultural background. As immigrants assimilate, differences in outcomes start to reflect differences in ability.

I am not saying that my alternative explanations are necessarily correct. My point is that these are both papers that strike as presenting interesting findings that might have many possible explanations.