Broken Symmetry

Waddell & Bodek on the Information Economy

Another quote from Rebirth of American Industry.  See here and here for earlier installments.

To the extent that information technology improves manufacturing, it is valuable to all Americans.  Information disseminated through books, newspapers, television, and the Internet may allow us to grow our knowledge and build our skills.  But unless the greater knowledge and skills are put to productive use, the knowledge gained cannot enhance the long term quality of our life...

This view has been under-appreciated for the past ten years at least.  But like the dream of an information economy, the dream of an agrarian or manufacturing economy can be taken too far.

Some services may, in fact, create value.  This is because demand is not a static function.  Utility functions, and the preference functions beneath them, are time-varying and interdependent.  Services that channel demand into more sustainable directions actually do "create value" in the sense that they free up value that is wasted on less sustainable products.

For example, government servants perform an important service to society by enforcing rules that require manufacturers to accurately represent the performance of their products.  Without that service, many corporations would simply redistribute wealth from customers to shareholders by spiking demand with false advertising, distributing dividends, and then declaring bankruptcy.  Similarly, lawyers perform an important service to society by lubricating negotiations between parties without personal relationships.  We rely on lawyers more and more for these services as cultural norms are replaced by legal norms (for example, in family law).  Similarly, investors and insurers liberate value by smoothing consumption patterns over long time horizons.  Last but not least, inventors liberate value by conceiving and demonstrating to the world that needs can be met better or at lower cost with an improved product or process.

But the Waddell & Bodek point about the importance of mining, agriculture, and manufacturing is under-appreciated in our current "knowledge" economy.

Human Capital Development on Small and Large Scales

I've read two great books in the past few weeks.  One is about management and institutional design.  The other is about personality and social psychology.  I believe that the theories presented in the two books are related.

Charles G. Koch, in The Science of Success: How Market Based Management Built the World's Largest Private Company, describes how his company has grown exponentially by harnessing its human capital through a culture that encourages experimentation, differentiation of individual skills, understanding of opportunity costs and divisions of labor, and transparency.  In a sentence, his view is that successful companies maintain growth by focussing on what and how they produce economic value.  In economists' jargon, "value" here means allocative efficiency.

Carol Dweck, in Mindset: The New Psychology of Success, describes how an individual's attitude toward hardship or adversity has dramatic long-term consequences for personal development (of skills and relationships).  The "fixed mindset" manifests as a need to achieve short-term goals for validation of the individual's self-conception as successful.  The "growth mindset" manifests as a need to be challenged and see improvement over the long-term regardless of whether particular short-term goals are met.

The affinity of these two theories is rather startling.  Individuals demonstrating Dweck's "growth mindset" would flourish in a company implementing market based management.  It would not be unreasonable to say that one way to live the "growth mindset," would be to apply market based management to one's day-to-day decisionmaking.