Jonathan Lemon on Wealth of Humans — Part 2

By Jonathan Lemon | June 13, 2017

Jonathan Lemon’s read-along rolls along.

He continues listing his impressions while reading Ryan Avent’s The Wealth of Humans. (He’s experimenting with the third person today.)

He’s finished Part 2, which are Chapters 4-6.

(See past reviews for the Introduction and Part 1.)

Wealth of Humans, Ch 4

Impression #1

Page 82: The author writes the following sentence when discussing the internet boom of the 1990s: “But while the hype raged, a more important project was under way: the construction of the hardware and software infrastructure of America’s information technology networks…it was firms such as Cisco and Oracle that truly represented the heart of the technology boom.”

There is an important nugget in this sentence above. In previous chapters the author was presenting “society” as the entity that decides to move towards new technologies.
In the Part 1 review Jonathan thought it was strange to attribute decision-making to “society,” which is not an entity with a centralized decision-making organ. Rather, “society” is the sum of individual decisions. Even the government is composed of representatives elected by individual votes.
The sentence gives an affirmation that private firms are the drivers of technological investment. More importantly, adrenaline leaves Jonathan’s system as he reads something that aligns with his previous point. 🙂

Impression #2

Page 84: “Scarcity is one of the fundamental building blocks of economics: economics matters because people cannot have as much of everything as they want, but must accept trade-offs between one scarce item and another.”

This explicitly states what anyone who’s received a paycheck knows implicitly: I can’t afford $105 worth of stuff with $100.
Unfortunately, the laws of economics often get thrown out the window when it comes to entitlements. The intentions behind these benefits (healthcare, food stamps, pensions, etc.) are good. People in need should be helped. Unfortunately, the math isn’t adding up (see: unfunded liabilities). At what point does spending crush those it seeks to help?
The entitlement mindset overrides the scarcity concept. Politicians campaign promising benefits; how to pay for them is ignored. Thus, the public is presented a future where everything can be had for nothing.
So far, Jonathan has not seen the author talk about scarcity as it relates to government policies.
It will be interesting to see how—or if—the author reconciles scarcity to government spending, especially as it relates to one of his predictions of a possible future: where governments pay people not to work if their jobs are eliminated by technology.

Impression #3

Page 94: “These countries have managed to achieve high income levels with relatively low wage inequality…”

The phrase “income inequality” has appeared several times in this book (not to mention in many current political discussions).
The book presents as fact that income inequality is bad.
One might ask, “Why is income inequality inherently bad?” This question is not be answered with hard facts (e.g., income inequality caused poverty, poor health, etc.).
From what has been presented so far, at best we can say that income inequality might be related to the stagnation that has been seen in real wages over the preceding decades. However, facts are scant to attribute causation.
Jonathan will have to research income inequality further before he jumps on the inequality-is-evil bandwagon.

Wealth of Humans, Ch 5

Impression #1

Page 101: “A salary, then, is just as much a fee for the worker’s obedience as for their [sic] labour.”

The author makes an excellent point here. Jonathan could be the world’s best accountant and not be employed for long if he showed up in sweat pants every day. He’s expected to do accounting stuff AND obey the dress code.
Jonathan finds the following paradox interesting: one might think that as salaries go up, corresponding demands for obedience would go up. However, that is not always true. High-salaried high performers or rainmakers are likelier to receive less behavioral scrutiny and more leeway if they are integral to the organization. (See: Steve Jobs; warning, bad language present.)

Impression #2

Page 102: “Contracts [and outsourcing] are attractive when the quantity and quality of a worker’s output is easy to observe. Employment is more attractive when the specific contributions a worker makes are hard to measure.”

Stellar point from the author.
Outsourcing is, in effect, delegation. As a manager passes a task to a subordinate, a company passes a task to a contractor.
Delegation is faster, easier, and cheaper when specifics are involved (e.g., “I want X number of parts to these exact specifications.”)
More complicated tasks are harder to define in print and are more expensive to contract. For instance, today’s engineering service contracts can be 1,000 pages long and contain hundreds of additional pages of modifications. And these contracts are what result after extensive source selection processes.
The harder the nature of the requirement is to write down, the less likely it is to be outsourced. No one wants to risk paying for an ambiguous contract.

Impression #3

Page 112: A firm’s culture dictates priorities when there are time constraints.

Jonathan is reminded of Parkinson’s Law and the T in SMART goals.
Jonathan adds the point that deadline usage is also a function of culture. Creating tasks lists is not hard. Determining and sticking to due dates is the hard part.
Without hard deadlines, the probability of a task getting completed in a reasonable time craters…if it gets done at all.
Priorities seem to be driven by what is received most recently, rather than what is most important (a FIFO mindset for all you fellow accountants). It takes discipline to ignore the most recent email and stick to the current task until it’s actually completed.

Impression #4

Page 113: “And that is what success within a firm means: learning about and thriving within the culture.”

This sentence encapsulates a good discussion about culture and disruption.
Once a culture is established, a path to success is laid out. Impress management by mastering the skills required for the level above you, and you get promoted. A low-risk, high-reward strategy.
There’s a much higher risk of failure in trying to design and implement a new business model for the company. People don’t like change. Management doesn’t like spending money on risky, untested initiatives. If the company goes for it and it doesn’t work, you’re on the hook for the failure.
As a result, start-ups are the firms poised to implement disruption. Established companies play catch-up.

Impression #5

Page 116: “Culture is easily confused with management initiatives.”

There’s a cliché out there that when the new boss comes in, something’s going to change. The new boss justifies his/her own existence with a new direction. If the same direction is followed, why was the new boss needed?
Good to Great by Jim Collins showed that management initiatives are not needed for superior results, and culture is distinct from initiatives.

Wealth of Humans, Ch 6

Impression #1

Page 126: The author includes an excerpt from historian Joel Mokyr: “The early industrial capitalists spend a great deal of effort and time in the social condition of their labor force, especially in Sunday schools which were designed…to make the workers more susceptible to the incentives that the factory needed…”

This claim is bizarre. Sunday school is a plot by capitalists to create docile labor for factory work? Umm, what?
Occam’s Razor time: if a factory boss wants a docile worker, tell him to follow the rules or he’s fired. The author previously stated that the Industrial Revolution was a time of labor surplus. Therefore, getting another job would be difficult and a displaced worker. Thus, compliance is incentivized. Jonathan finds this more likely than a secret Sunday school scheme.
Furthermore, did these capitalists design the current method of education? In modern classrooms kids are told to sit down, be quiet, follow the rules, don’t innovate, and take orders from teachers. Jonathan is skeptical that the American Federation of Teachers and the Department of Education are die-hard capitalists.

Impression #2

Page 130: “As technology advances…. The ease with which any one person can become an expert in multiple fields declines.”

“Expert” is not defined here, so it’s difficult to agree with this point.
When a term is ambiguous the definition can be changed so that a claim is never wrong. (For example, “I define ‘expert’ as someone with five Ph. D.’s and 15 years of practical experience.)
Jonathan has heard that all it takes to be an expert is to read three books in a field. That’s not a high barrier to entry.
In addition, it seems that advanced technology (and the transitioning economic focus towards social capital and away from physical capital) makes the ability to create capital more accessible to the average person. 150 years ago, it’s hard to build a factory…today anyone can build a web site or develop a product or build social capital. This is not mentioned.

Impression #3

Page 132: “When a group of people comes up with a brilliant business model, it does not show up in GDP.”

Great point. Often GDP growth is a proxy for economic health. It’s wise to consider other metrics for a healthy economy, such as the number of new businesses or IPOs. Such metrics might better represent future growth potential, as well as provide an indicator of the current environment’s ability to support business development.
Still, remember a bird in the hand is worth two in the bush. You can’t spend unrealized gains!

Impression #4

Page 132: Social capital is part of the value of the firm.

The author is correct that the benefits of selling social capital flow to the owners.
But is he correct when he says social capital is “collective”?
Jonathan speculates that social capital was initially created by the firm founders. The founders are normally the original owners. When new employees are brought in, they normally conform to the existing culture (see: social proof as well as page 113).
Page 133: “…People who come on board confront the new culture, internalize it and succeed, or don’t and don’t.” The sentence looks to be a tacit concession that most workers don’t create the culture, they conform to an existing one.
So who created it? The founders.