Specialization

Our modern, technologically-advanced, societies require very specialized knowledge and expertise to function.   In such societies, it benefits individuals to specialize. Despite the beliefs of management consultants and the old Bell System, it is not true that everyone can do anything.
In the 1950s and 1960s, for instance, the British Government successfully promoted the development of a highly-specialized cadre of nuclear energy physicists and engineers, able to design, build and operate nuclear power stations.  Once that  technology became mature, however, Government policy shifted and it was thought that country could purchase nuclear power technology “off the shelf”; the country had no need for the skills involved (it was argued) and thus de-skilled.  The French government took a different view, with the consequence today that young French nuclear engineers are in high demand in Britain.
Just as it benefits individuals to specialize, so too with cities and regions.  If there are many companies in the same industry near to one another, recruitment of specialized, skilled staff is easier, exchanges of ideas and business occurs more often, and collaborative partnerships and common campaigns are facilitated.   This is why, for example, the world’s leading commercial insurance companies operate near to one another in Trinity Square, London, and have done for centuries.  This is why Stamford, CT, is a similar centre for insurance companies.  This is why, despite the so-called abolition of distance by the Internet, the key US companies in telemedicine all operate within a few blocks of one another in Manhattan.   Michael Porter’s work on regional industrial clusters has been rightly compelling in explaining the causes and consequences of these phenomena.
But what of countries?  Most national borders are historical or geographic artefacts, contingent accidents of history that could well be otherwise.   So, prima facie, what is true of regions should also be true of countries:  it should benefit countries to specialize.  Since David Ricardo’s theory of comparative advantage in 1817, economists have believed that countries gain from specialization in the production of goods for which they have relative advantage (despite the theory’s flaws).    Why then do many people think it necessary for countries to NOT specialize, to have strong services sectors AND strong manufacturing industries AND a strong agricultural base?   Many Marxists seem to think this – that all countries should have large manufacturing sectors – and none I have questioned has ever been able to give me a good justification as to why.   (Perhaps believing that a proletarian revolution is a necessary stage of every country’s history leads one to believe that an industrial working class is also necessary, and hence a large manufacturing sector.)
Since the Great Global Recession of 2007-?, conventional public policy wisdom in Britain has been that the country’s economy needs “rebalancing” to reduce the role and proportion of financial and professional services, and increase the role of manufacturing.   But why?  Surely, most jobs in services are better paid, have better working conditions, and are generally more intellectually and emotionally challenging,  than the repetitive, dirty, noisy, foul-smelling, physically-demanding jobs of factories.  Of course, modern factories are often clean, quiet, and air-conditioned, because robots, unlike people and trades unions, refuse to work in any other conditions.   
Now, according to The Economist,  the British Government is planning to throw money at industrial sector strategy again – “picking winners” is the term of art.  Not only did this fail last time Britain did it (in the 1960s and 1970s), but even MITI – the once all-powerful Japanese Ministry of International Trade and Industry – failed at it.   Japanese attempts to enter the avionics industry were a bust, for example, despite MITI’s great desire, focus, power, and resources.
I can see a valuable role for government in overcoming problems of collective action – for example, when the actors lack knowledge of each other’s capabilities, beliefs or intentions, or when there are network effects or externalities associated to actions, or when it is in everyone’s interest to do something, but in no one’s interest to be the first to do that something. In these cases, government can can bring relevant actors or stakeholders together; it can convene; it can co-ordinate; it can develop common visons for the future; it can suggest, request, cajole, morally suade, and even harry participants to act for the collective good against their own self-interest.  But none of these government actions or policies requires the government to choose winning companies or perhaps even winning sectors or regions. And none requires vast sums of money.   
 

Social forecasting: Doppio Software

Five years ago, back in the antediluvian era of Web 2.0 (the web as enabler and facilitator of social networks), we had the idea of  social-network forecasting.  We developed a product to enable a group of people to share and aggregate their forecasts of something, via the web.  Because reducing greenhouse gases were also becoming flavour-du-jour, we applied these ideas to social forecasts of the price for the European Union’s carbon emission permits, in a nifty product we called Prophets-360.  Sadly, due mainly to poor regulatory design of the European carbon emission market, supply greatly outstripped demand for emissions permits, and the price of permits fell quickly and has mostly stayed fallen.  A flat curve is not difficult to predict, and certainly there was little value in comparing one person’s forecast with that of another.  Our venture was also felled.
But now the second generation of social networking forecasting tools has arrived.  I see that a French start-up, Doppio Software, has recently launched publicly.   They appear to have a product which has several advantages over ours:

  • Doppio Software is focused on forecasting demand along a supply chain.  This means the forecasting objective is very tactical, not the long-term strategic forecasting that CO2 emission permit prices became.   In the present economic climate, short-term tactical success is certainly more compelling to business customers than even looking five years hence.
  • The relevant social network for a supply chain is a much stronger community of interest than the amorphous groups we had in mind for Prophets-360.  Firstly, this community already exists (for each chain), and does not need to be created.  Secondly, the members of the community by definition have differential access to information, on the basis of their different positions up and down the chain.  Thirdly, although the interests of the partners in a supply chain are not identical, these interests are mutually-reinforcing:  everyone in the chain benefits if the chain itself is more successful at forecasting throughput.
  • In addition, Team Doppio (the Doppiogangers?) appear to have included a very compelling value-add:  their own automated modeling of causal relationships between the target demand variables of each client and general macro-economic variables, using  semantic-web data and qualitative modeling technologies from AI.  Only the largest manufacturing companies can afford their own econometricians, and such people will normally only be able to hand-craft models for the most important variables.  There are few companies IMO who would not benefit from Doppio’s offer here.

Of course, I’ve not seen the Doppio interface and a lot will hinge on its ease-of-use (as with all software aimed at business users).  But this offer appears to be very sophisticated, well-crafted and compelling, combining social network forecasting, intelligent causal modeling and semantic web technologies.
Well done, Team Doppio!  I wish you every success with this product!
PS:  I have just learnt that “doppio” means “double”, which makes it a very apposite name for this application – forecasts considered by many people, across their human network.  Neat!  (2009-09-16)
Article in The Observer (UK) about Doppio 2009-09-06 here. And here is an AFP TV news story (2009-09-15) about Doppio co-founder, Edouard d’Archimbaud.  Another co-founder is Benjamin Haycraft.

Anti-Krugman on free trade

By chance, I came across again an essay by Paul Krugman I first read 3 years ago,  in which he seeks to understand why anyone could be opposed to the claims of mainstream economics in favour of free trade, particuarly anyone intelligent and informed.   Unfortunately, Krugman fails at his self-appointed task, because he resorts to arguments which are essentially ad hominem attacks on the opponents of free trade theories.
In the context of the assessment of alternative public policies I view ad hominem arguments as invalid and irrational, a sign that a proponent cannot provide substantive justifications for his or her claims.  (Such personalist attacks are not necessarily invalid or irrational in all contexts.)  I believe economists do themselves and their profession a great disservice by dismissing arguments against free trade on the grounds of ignorance or insufficient intelligence, or any of the other ad hominem arguments Krugman uses.
There is a perfectly respectable intellectual argument, not based on ignorance, against Ricardo’s argument. This is that his theory ignores the single most important question in the debate, which is: Where does a comparative advantage come from? A national comparative advantage is almost never, despite what many free trade advocates seem to think, an act of God. It is almost always the the result of human actions, witting or unwitting. The Republic of Korea (South Korea) has no “natural” reason to be a world-leading steel-producer or world-class large-ship-maker. But successive ROK Governments intended the nation to lead these industries, and the nation has in consequence succeeded in doing so: through direct government investment; through subsidies to Korean companies; through discriminatary trade practices against foreign companies; and through large-scale, concerted, long-term public and private pressure on private Korean companies to invest in particular ways, and not in other ways.
So, imagine you are a political leader of a country with an existing large-ship-building industry faced with rising Korean competition, for example the UK in 1980. Your chief economic advisor tells you that free trade is an unmitigated good, and that your markets should all be open, because the economic benefits outweigh the costs. These economic benefits may outweigh the associated costs or they may not in any particular case, and they may well fall differentially upon different stakeholders with different political power.  Even if the economic benefits outweigh the economic costs, the social cost-benefit analysis may be very different (eg, long-term unemployment; increased crime as a result of unemployment; the destruction of local communities; the dispersal or loss of a skills base; the loss of defence-related industries and companies; etc).
Whatever the cost-benefit outcomes, what really sticks in my craw is that the advice from economists is to do nothing to protect local industrial capabilities, so that others who have ignored such advice (eg, the Government of the ROK) should prosper.  You would think that, of all people, economists would have learnt some game theory!
The argument here is not between the ignorant and the wise, as Krugman seems to think, but between people with conflicting sets of values. My values tell me that economic theory should include discussions of political power, discussions of social, cultural and institutional structures, and discussions of the reasons for and the consequences of differing preferences over outcomes; most mainstream economists do not think these issues are part of economic theory. To be called ignorant because I have different set of values to an economist is not only an insult, and not only disrespectful of my rights as a stakeholder in the society in which I live; it is also revealing of the vapidity of mainstream economics, busy building abstract theories which ignore all the most important questions.
Economists have heard these criticisms of free trade theory since at least the time of Marx.  Is it recalcitrance or malfeasance that allows mainstream economists to write articles as if ignorant of such criticisms?

Old, beardy revolutionaries wielding spreadsheets

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If you were aiming to model global, 21st-century capitalism, the obvious place to start would not be with a model of the firm based on mid-Victorian Lancashire textile manufacturing companies.   Firstly, the textile industry developed in Lancashire in the 18th century because only here (and almost nowhere else) was the climate sufficiently conducive for the then leading-edge technology to operate successfully.  (The air needed sufficient dampness, but not heat, for the cotton fibres not to be broken by the early textile machines.)   Technology in most industries has progressed so much in the two centuries since that very few industries are now tied to specific climates.     So industries are mostly not tied to place any more.
Secondly, large swathes of  work – even most work undertaken in companies described as manufacturers – is not anything a Victorian economist would recognize as manufacturing.  Rather it would be better described as symbol analysis and manipulation.  A relative of mine recently embarked on training as a surface-materials mixer for a road-building company – a great job, all done inside in an airconditioned office, mixing different ingredients and assessing the results, achieved by moving graphic objects around on a computer screen.  Of course, some person still has to be outside moving and switching on the automated machinery which actually lays the road surface once it has been created, so not every task is symbol processing.     But mixing is no longer done by eye, by a man using using a shovel in front of a furnace.  The relevant attribute of symbol manipulation – unlike, say the operation of a loom – is that this too is something no longer tied to place, thanks to our global telecommunications infrastructure and to digitisation.  Thus, the processing of US insurance claims can move from Hoboken, New Jersey, to Bangalore and Mauritius, and then maybe back again, if circumstances so dictate.
Thirdly, for companies whose sole business involves symbol manipulation – eg, banks, investment firms, graphics designers, media companies, software developers, consultancy companies, etc – the economics of traditional manufacturing industry no longer applies.  Information is a product whose value increases as more people use it, and whose marginal costs of production can decline to zero with multiple users.  It costs Microsoft  between US$1 and $2 billion to develop the first copy of each new generation of its Windows operating system, but less than $1 each for the second and subsequent copies;  the cost of producing these subsequent copies comprises only the cost of the media used to store the product (a DVD or a filestore).   (Of course, I am not including the cost of marketing and distribution in this statement of the cost of production.)  Similarly, a well-crafted, well-timed IPO and financial plan may raise (to cite the case of one IPO whose writing we led) US$5 billion on the world’s capital markets if successful, and nothing at all if less-well crafted or placed at a different time.  These information-economy attributes also apply to those parts of so-called manufacturing companies which undertake symbol manipulation:  the design team of Mazda cars for example, which relocated from Japan to the UK because London is a world-centre of art, design and marketing, or the 2-man in-house forex-trading desk which two decades ago first enriched and then almost bankrupted Australia’s largest defence electronics firm, AWA.
So, although I do not share the sentiment, I think it fine for someone to express a personal dislike of an alleged bonus culture in our banks and financial sector companies, as Alex Goodall has done.  But to argue against this feature of our modern world using a micro-economic model based on mid-Victorian manufacturing would seem inappropriate.   Much as I admire Karl Marx for his startling and still-interesting contributions to the 250-year-old conversation that is economic theory, for his insightful criticisms of the world he knew, and for his desire to make that world better for all, his model of the firm describes almost nothing about the world of 21st-century business that I know.

The strange disappearance of British manufacturing

lowry-ls-the-canal
The decline following World War II of textile manufacturing in Britain, home of the industrial revolution, has always puzzled me.  How could an industry that arose against great odds and survived successive wars and depressions have fizzled out so quickly?  Was it simply that the Lancashire textile industry depended on the suppression of rival manufacturers, first in English-occupied Ireland and North America, and then throughout the British Empire, and that the end of empire after 1945 also meant the end of British textiles?  This analysis seems somewhat too simplistic for me.   Once on a flight between Hong Kong and London in the mid 1990s, I sat next to a salesman for a small Lancashire company selling specialist dyes to textile manufacturers.   Although having fewer than 30 employees, the company was more than a century old and had managed to diversify its customer base to manufacturers in South and East Asia, while all its nearer customers went under.   Needless to say, its raw materials came from all over the world.  How could this small company survive and not its larger UK customers, I still wonder?
I have just come across the second-world war correspondence of American journalist A. J. Liebling, whose writing is simply riveting.   In an article called “The Lancashire Way” (first published in The New Yorker in 1941), he describes the supreme adaptability of British industry during war-time.   In a fascinating description of industrial resilience, technological flexibility and industrial-policy-on-the-hoof, Liebling records a discussion he had with an un-named British Ministry of Supply official:

I said that when I left New York a few months ago our armaments plants were working two or three shifts and we were building new plants as fast we could, and he answered, “Yes, that’s how we tried to do it at first.  We stopped depending on the obvious soon after Dunkerque.   Now when we need more cartridges, we don’t wait until we have built a new cartridge factory.  We get some from a man who used to make fountain pens and some more from a chap who once manufactured lipsticks.  We get shell fuses from a shop that once turned out prams – baby buggies, you know – and fuse components from costume-jewelry fellows.
. . .
In Westminster we have a candlemaker doing tank parts, for instance.  Some of the candlemaker’s lathes are a hundred years old. A fellow who used to make dental pumps – you know, those things the dentist puts under your tongue to draw away saliva – is now making an important part of the mechanism for the Bren gun.  Then the fellows who used to make the metal tops of soda-water siphons are very useful, so are beer-bottle-cap markers, who, with the aid of a little jiggery-pokery, change over to cartridge cases.  A lot of those small fellows are damned good mechanics. A man whose shop has only a couple of machines which he has been using for several different operations often proves more adaptable than a big-factory boy who has been used to ordering a special machine tool for each new job.
. . .
Lancashire, you know, used to be at least seventy percent textile before the war.  There were, of course, the textile mills.  Then there were the machine shops, which turned out textile machinery for the most part, and there was a good deal of miscellaneous light industry.  However, there weren’t any steel mills or locomotive plants or motor works.  It’s only twenty percent textile now, and it’s working full blast – harder than ever in its history.  Some of the mills are still making textiles required for the war effort and for a minimum civilian consumption; the others have been closed down.   But the machinery plants have been expanded and the textile labour has gone into them.   Most of the people have been weavers and spinners for a generation and never went near a lathe. There’s a sort of sense, though, that people acquire from being around any kind of machinery.  They get the swing of the new work much faster than, say, agricultural workers or white-collar fellows turned into a mill. The companies that are allowed to continue making textiles act as trustees for the whole industry.  The owners of the closed plants get an indemnity out of the profits of those that stay open.  The companies that stay open are pledged to protect the future interests of the closed ones – take care of the other fellows’ customers as well as possible during the war, for example.” (pp. 611-613 of Liebling 2008)
Reading this article, I kept thinking:  these are the grand-children of the people who created the industrial revolution, so none of this should be surprising.    What is surprising is that this history has not been celebrated in Britain.  And, it is hard to square such flexibility and resilience with the fate of UK industry after 1945.  I wonder then, in fact, if the organizational and financing structures involved in some manufacturing companies operating on behalf of others during the war did not in fact facilitate the exit of the owners of capital from British industry after it.  I can think of no other explanation of how such adaptability, resilience and applied technological intellect (what the Germans call Technik) should have disappeared so quickly.
References:
A. J. Liebling [1941]: The Lancashire Way.  The New Yorker, 22 November 1941.  Reprinted in:  A. J. Liebling [2008]: World War II Writings.  New York City, NY, USA: The Library of America, pp. 611-621.
The image shown is LS Lowry’s painting: “The Canal”.