Friday, July 23, 2010

Small business fetishism

I can't quite wrap my head around what's so all-fired special about small business compared to his larger bretheren. Look fellas, all businesses start out small. That's as true for the mom and pop grocery store or the corner adult bookstore as it is for General Dynamics or Microsoft. You know how small companies get big? by delivering value, that's how. Come on now. The sad truth of the matter is that most small businesses, especially the ones that stay small just don't deliver all that much value. Yeah, yeah, there could be other reasons, like if you're in an industry that doesn't scale well (think granite quarrying or roofing services) but by and large, when policy favors small business it does one of two things:
  • it elevates the importance of relatively low-value-added enterprises
  • it promotes (again, relatively) excessive risk-taking by encouraging the formation and propagation of itty bitty ventures.

Don't get me wrong here now. Vigorous competition and the entrepreneurial spirit are critical for any vibrant economy, but siphoning talent from established providers of value destroys the creation of surplus, especially once you adjust for the inherent uncertainty of a startup.

Let's use an example to illustrate what I mean.

Hugh is an out-of-work chemical engineer. Now, it just so happens that Dow has a plant not too far from where he lives, but because Congress is offering hiring incentives to small businesses (for the sake of argument, let's say that this is defined by firms who have 20 or fewer employees), he's offered a compensation package that just edges out what Dow is offering. So Mr. Jass, Hugh, takes a job at Flybynite Chemicals, a small bioplastics firm bicycling distance from his apartment (the poor goofball's old house got foreclosed last year). He's all happy about his new job and is ten kinds of excited about getting to work on the thrilling project of turning corn into car parts. Six months later, and the enthusiastic but mostly incompetent amateurs who run the company go broke and have to lay everyone off. Hugh is out another job, and back on the dole.

On the margin, there could be lots of Hughs. Folks who would have been better off taking jobs with large firms, producing products that people want and supported by competent management. Instead, we have policy that champions one class of business over another, to the detriment of both the worker and the economy as a whole. Policy makers simply do not have the requisite information to judge whether or not employment with a large firm is less preferable than employment with a small firm. Only the workers themselves and the folks actually involved with the firm have the knowledge to make anything even approximating a best guess about the relative value of their resources (and yes people, labor is a resource. They call the hiring/firing departments in most companies Human Resources with little willy-nilliness involved). By pushing for more small business activity, we're shelving the valuable contributions made by big players, proven players, and taking risks with, yes, you guessed it, other people's money (well, maybe not money specifically, but with talent, time, and expertise, which are all worth a heck of a lot of money out there in the Wide World of Business). It's a recipe for misery and it's being sold to us in a cute perfume bottle as eau de economic recovery. Pathetic.

Thursday, July 1, 2010

Selection bias and educational efficiency

Ordinary civilian education tends to be mostly garbage. I'll admit that I've enjoyed most of the classes I've taken, but I'm also forced to admit that few of them in any way contributed to my workplace productivity (especially my lower-division classes). Of course, the natural underlying assumption here is that education is a capital good, not a consumption good, which may or may not be entirely defensible. I suppose one could make the case that the reason people (and by people, I mean non-arts majors here) sign up for film studies classes is to become better rounded individuals. Granted, I'm not sure why or how this justifies public assistance, but hey, who am I to complain about educational subsidies? Still, it's tough to justify many of the classes I took to get where I am on a cost-benefit basis, and that's just counting the cost to me, which is a fraction of the total real costs.

Then I look back at the classes I took in the Navy. Of those, close to zero were useless in my professional development. Perhaps the HTFF (heat transfer and fluid flow) class I had for a couple of weeks towards the beginning of power school didn't add too much to my ability to operate and maintain the reactor on my boat, but that's really the only one that crosses my mind.

As you might imagine, the public choice questions associated with this phenomenon race through my mind. Most obviously, the Armed Services have budget restrictions they have to justify to Congress, plus the people who teach classes are uniformed service members whose incentive structures don't encourage overconsumption of frivolous education. This is a bit unsatisfactory though. On the margin, there should be some slopover. If the civilian model drifted into the military, we would see crypto techs taking sonar courses and machinist mates taking boiler tech courses. To the extent that such courses contribute to a service member's productivity and professional development, this happens, but no one in uniform takes classes just for fun, at least not in my experience. I could be wrong. What you won't find is a soldier taking a Gender Studies or Modern Dance class during working hours.

Not, until that is, this soldier makes the move from the enlisted ranks up to O-gang. Once on the road to gentlemanhood, we see all manner of useless transcripts, filled o'erflowing with no-value-added humanities courses, forgotten social sciences lectures, and discarded out-of-major notebooks (mostly filled with halfhearted doodles). Why the discrepancy? If you would have asked me while I was still in the Navy, I probably would have cynically noted that officers don't really add much to operational efficiency, at least not afloat. I don't think I agree so much with that sentiment anymore. It's true that the crew knows very well how to operate the boat, but there really is a lot of coordination work that officers perform: work that makes for an efficient fleet (I can't directly comment about the ground forces, but I suspect that many of the same dynamics are present there as well). Whatever the details, the DoD throws piles of cash at useless education for officers, so long as the courses are provided in a university setting. What gives?

I can't give a truly satisfying answer, but it appears that the Joint Chiefs value the signal that a degree generates. Add to that a generous helping of institutional inertia, and kablammo, we have a whole mess of butterbars wandering around knowing stuff that doesn't do a lot to help them kill the enemy more effectively.

There's also the possibility that a university experience could help provide some civilizing effect on new officers. I'm skeptical about this as well. The wardroom civilizes faster and more thoroughly than the quad. Hm.

I wish I'd have more policy suggestions here. Let's say that (and this is being generous here, people) half of the classes your average officer takes can be applied towards operational performance, this is still a MASSIVE waste of fleet resources. Mind you, this is not just in terms of direct expenditures like salary, tuition, books, etc., but in lost productivity. I have to imagine that there's some efficiency enhancement we could make here. Maybe something like juicing up OCS to include one semester of military-specific education (military history, for example) and one semester of electives (computer science or something). That, or maybe keep the current system but force-waive garbage courses (you know the ones I mean).

I don't imagine that if I were an officer, or even a former officer that I would support any changes to the system (other than maybe closing the service academies). Military members retire relatively young, and to enter the civilian work force with an abnormal degree means entering the civilian workforce with a broken signal: not an encouraging prospect. Practically, as long as the college degree remains a valid signal for the population at large, it will remain an important signal for uniformed servicemembers. Ho hum.